The National Gambling Impact Study Commission (NGISC) has over the last two days heard from some of the most outspoken, strident opponents of gaming in the United States today.

Faced with the reality that their moralistic arguments against gaming have been ineffective with the American people, gaming opponents have concocted unproven and untested economic theories in an effort to bolster their anti-gaming agenda. Earl Grinols, Ricardo Gazel and John Kindt, in their testimony before the NGISC, have continued to perpetuate these erroneous theories, despite the fact that official statistics, data and proven facts from gaming jurisdictions invalidate their theories.

The American Gaming Association hopes that the Commission members will look past the contrived rhetoric of these individuals and focus on the actual history and facts regarding gaming and its proven success in the jurisdictions in question.

Following is a detailed analysis of the aforementioned false economic theories perpetuated by Grinols, Gazel and Kindt.

Circle of Disinformation

Over the last five years, a small group of anti-gaming university professors have created, out of whole cloth, a series of economic models which purport to show that any economic benefits from gaming will be exceeded by the social costs caused by the industry. These professors, whose theories cannot stand the test of academic peer review, have created a circle of disinformation wherein they continually cite each other as sources to validate their erroneous theories. Three of the professors are from the University of Illinois and have testified before the National Gambling Impact Study Commission (NGISC) in Chicago. They are: Earl Grinols, Richard Gazel (now with the Federal Reserve Bank but formerly was Grinols’ assistant) and John Kindt. Their economic arguments boil down to two fundamental assertions as follows:

1. Gaming is a predatory industry that does not generate new money into an economy but merely cannibalizes from existing businesses.
2. If gaming comes to a community, gamblers will lose their money and either go into bankruptcy or commit crimes or suicide, thereby burdening that community’s society with costs of maintaining them in prison or maintaining their families on the welfare system or both. These costs will exceed any economic benefits realized.

Two economic studies completed in 1996 and 1997 by Arthur Anderson LLP clearly and unequivocally destroy the social costs arguments of the professors in question. The macro economic study (Economic Impacts of Casino Gaming in the United States Volume 1: Macro Study, December 1996) shows the tremendous economic stimulus that the industry has provided by way of jobs, capital investment and tax revenues across the country. The micro study (Economic Impacts of Casino Gaming in the United States Volume 2: Micro Study, May 1997), which examines in detail three new jurisdictions (Biloxi/Gulfport, Mississippi; Shreveport/Bossier City, Louisiana; and Joliet, Illinois), clearly validates the fact that unemployment, Aid to Families with Dependent Children, food stamps, and crime (in most places), have all decreased since gaming was introduced.

The micro study also clearly establishes that capital investment, retail sales and general economic growth have boomed in these new jurisdictions since gaming was introduced and have not in any way been negatively affected by the alleged social costs.

In addition to Grinols, Gazel and Kindt, the NGISC has heard from Tom Grey and other gaming opponents, including an entire panel of representatives of Focus on the Family’s local chapters in Illinois, Iowa, Missouri, Michigan and Indiana. It is certain that the statements made by all of these individuals were based on anecdotal experience or upon so-called research done by Grinols, Gazel, Kindt or Robert Goodman, who testified before the NGISC in Boston.

While there is not much that can be offered in rebuttal to isolated anecdotal stories, there is overwhelming statistical data drawn from official governmental records to countermand the unsubstantiated theories of Grinols, Gazel and Kindt. Despite their dire predictions of doom as a result of gaming, they cannot point to any jurisdiction or local community that has introduced casino gaming in the last six or seven years where their predictions have been confirmed. In fact, the testimony that the NGISC has heard from mayors, city managers and official representatives of those cities and jurisdictions demonstrate just the opposite. Outlined below are analyses of some of the basic arguments of Grinols, Gazel and Kindt.

A. Earl Grinols, Professor of Economics, University of Illinois.

Professor Grinols refers to gaming as a “directly unproductive profitseeking” activity. By that he means anything that makes a profit but produces no goods or services that add value to society. Grinols’ work is frequently criticized as being inaccurate and employing faulty methodology, as described below:

“The arguments presented by Professor Grinols border on sophistry. They draw upon mysterious sources without citations, carry heavy innuendo of lurking evils, and present unsubstantiated ‘findings’ to reach their conclusions in a clear attempt to strike out the spread of gambling.”

Dr. William Eadington, Professor of Economics/Director of the Institute for the Study of Gambling & Commercial Gaming, University of Nevada, Reno; Calling the Bluff: Analyzing the Legalization of Casino-style Gaming. A Comment on ‘Bluff or Winning Hand? Riverboat Gambling and Regional Employment or Unemployment,’ Institute for the Study of Gambling & Commercial Gaming, University of Nevada, Reno, 1995.

“Numbers are chosen selectively, recalibrated, and combined with other numbers. The procedure is not explained, and the reader is not informed of all numbers used. Therefore, calculations cannot be verified.”

Dr. Christian Marfels, Professor of Economics, Dalhousie University, Halifax, Nova Scotia, White paper on the paper Development or Dreamfield Delusions? Assessing Casino Gambling’s Costs and Benefits, 1995.

In most of his work, Grinols makes two main arguments as follows:

“Research has shown in the case of casinos that generally over 40% of revenues in the long run come from the approximately 4% of the population who are problem and pathological gamblers. In some cases the figure is over 50%.”

Earl Grinols’ testimony before the Indiana Citizens Commission on Taxes, April 14, 1998.

Response: Although most economists support the principle that a large percentage of the revenues of any business derive from a small percentage of the customers, Grinols cites no independent research to support his claim as it pertains to casinos. In fact, Grinols’ statistics apparently have been created by him from work done by Charles Clotfelter (a witness at the Boston meeting) in 1986 on lottery players. Clotfelter’s research alleged that 10% of lottery players spent 65% of the lottery dollars. Grinols offers no evidence of any research as to how he reached his percentage conclusions. Moreover, this argument assumes that those players who spend more of their disposable income, whether they play the lottery or go to casinos, are in fact problem and pathological gamblers. No research has yet been able to quantify any such assumptions.

“Applied to the population of the U.S. aged 20 and up, these figures convert to social costs of $39 to $145 billion annually. This makes gambling equivalent in magnitude to social problems such as drug addition or alcoholism.”

Earl Grinols, Journal of Law & Commerce, University of Pittsburgh, Fall 1996, pg. 57.

Response: The wildly exaggerated claims of social costs can be traced to a small study of pathological gamblers conducted in 1981. Politzer, Morrow and Leavey studied 28 male pathological gamblers in treatment and published the results in 1985. In 1993, Dr. Rachel Volberg was asked to estimate possible social impact numbers. She took Politizer’s 1981 numbers, combined them with problem gambling rates from a 1991 study she had conducted in Connecticut, and social cost estimates from studies of alcoholics and estimated a social cost figure. This unscientific estimate was then modified again by then urban planner Robert Goodman who extrapolated that number to a nationwide estimate. Grinols uses Goodman’s final product as the basis for his social cost calculations.

Dr. Rachel Volberg herself, upon whom Grinols relies, has publicly stated that her figures, have “acquired a reality that I do not believe it merits … it is not based on actual data on the costs of pathological gambling in any reliable sense … I wouldn’t stand up in a peer-reviewed panel and try to defend this approach.”

In a just released analysis by the Wharton School at the University of Pennsylvania, the Politzer work that Grinols relies on is also discounted as a basis for reliance:

“The fundamental limitations of Politzer et al’s work for analysis of the social costs of problem gambling is clear. Their lost productivity estimates represent gross approximations based on clinical judgements of individuals “likely” to have lost their jobs due to gambling, but who may not have been unemployed. Further, both real and phantom productivity losses are highly dependant on the salary level of gamblers, and it is unlikely that such a small sample of gamblers in treatment sixteen years ago is representative of the U.S. population. Also, both gambling expenditures and family loans are treated as costs, most likely double-counting the loans. Final-year gambling data are not annualized, overestimating losses in other gaming years. From an economic perspective, social costs, individual costs, and transfers are commingled. As a result, this work is unsuitable for policy application to casino cost benefit analysis.” (emphasis added)

Drs. Lisa Megargle George, Brent Ambrose and Peter Linneman,

The Wharton School, University of Pennsylvania, What We Need to Know About Casino Development, Wharton Real Estate Review, Spring 1998, pg. 59.

Additionally, in a recent article analyzing social costs of casino gaming, researchers from the University of Auburn and Louisiana State University found that:

“It is rather difficult to find a recent gambling study that has an original estimate of the social costs caused by compulsive gamblers. Most studies simply repeat previous dollar estimates, without explaining what costs are included in the estimates (and why) or the underlying methodologies used to derive them.”

Dr. Andy Barnett, Professor of Economics, Auburn University and Dr. Doug Walker, Professor of Economic, Louisiana State University, The Social Costs of Casino Gaming Reconsidered, May 1997, pg. 6.

B. Ricardo Gazel, Economist, Federal Reserve Bank of Kansas City.

Gazel was a research assistant for Earl Grinols. He argues that casinos are not a real economic engine unless they attract customers from outside the area, otherwise all local spending is merely cannibalized from other local businesses. According to Gazel, any spending by locals in a casino has a “direct negative economic impact” along with the costs for regulation and social impact. His view of gambling can be summed up as follows:

“…[W]ith a few exceptions, many state and local economies in the United States have, most likely, experienced net monetary losses due to casino gambling in their jurisdictions. One of the major reasons for such negative impacts is the strategy of the monopolistic or oligopolistic market structure chosen by the new jurisdictions. These market structures resulted in low ratios of non-local to total visitors and high ratios of casino profits to total revenues.”

Economic Impacts of Casino Gambling, Annals of the American Academy of Political Science, Vol. 556, March 1998, pg. 83.

Response: A 1998 survey of patrons conducted by the Illinois Gaming Board showed that 62% of visitors to Illinois casinos are 25 or more miles from the casino, thus challenging the assumption that riverboats draw primarily from the local population. As the Arthur Andersen micro study established, riverboats can have a positive economic impact as demonstrated by retail sales figures for Bossier City, Louisiana in 1994 and 1995 which increased by 24 percent and 11 percent, respectively; in Biloxi, Mississippi, retail sales growth rates increased from an average of three percent a year from 1990 through 1992 to approximately 13 percent between 1993 and 1995; and in Will County, Illinois, between 1992 and 1995, retail sales increased 25 percent.

In negatively reviewing The Monetary Impacts of Riverboats Casino Gambling in Illinois, a study done by William Thompson and Gazel, the Wharton School concluded:

“Finally, and most important, although accounting studies such as the one prepared by Thompson et al can help illustrate the behavior of severe problem gamblers, this type of study ultimately offers no way of linking behavior exhibited by members of treatment groups (such as Gambler’s Anonymous) to problem gamblers in the general population. For example, gamblers in treatment probably exhibit more than the 3-5 affirmative answers required by Volberg for classification as a problem gambler. Without a link to prevalence surveys, social cost estimates derived from gamblers in treatment cannot reasonably be applied to problem gamblers undergoing treatment, let alone to the development of new casinos.”

Drs. Lisa Megargle George, Brent Ambrose and Peter Linneman, The Wharton School, University of Pennsylvania, What We Need to Know About Casino Development, Wharton Real Estate Review, Spring 1998, pg. 59.

Additionally, in reviewing the aforementioned Illinois study by Thompson and Gazel, the WEFA Group concluded:

“Our objective in this report, however, is not to determine whether or not the Illinois riverboat casinos have been a net positive to the state and localities in which they are located, it is to review the analysis of Drs. Thompson and Gazel. Our conclusion is that the approach and application of survey results, the manipulation of data, the formation of assumptions, and the use of the RIMS II multipliers are all flawed and consequently the results and conclusions reached by the authors are not empirically valid.” (emphasis added)

Dr. Andy Moody, Executive Vice President, WEFA Group, A review of “The Monetary Impacts of Riverboat Casino Gambling in Illinois,” June 14, 1996, pg. 5.

C. John Kindt, Professor of Commerce & Public Policy, University of Illinois.

Kindt has written at least 10 law review and journal articles on the negative impacts of legalized gambling. He describes legalized gambling as a threat to the very foundation of the United States economy. He states, for example:

“Throughout the United States, a summary of the field research indicates that for every dollar legalized gambling activities actually contribute in tax revenues, taxpayers are really losing three dollars or more.”

Legalized Gambling Activities as Subsidized by Taxpayers, Arkansas Law Review, Vol. 48, No 4, 1995, pg. 898.

Response: Not surprisingly, Kindt has no independent research to support this claim. In fact, in the above-noted Law Review article he cites as his sources: himself (twice)—once on the “700 Club” and once in Congressional testimony; noted anti-gambling activist Valerie Lorenz (also a previous witness before the NGISC); and a report from the Florida Governor’s office which includes numerous inaccuracies such as the “40% of all white collar crime” allegation. As stated earlier, Goodman, Grinols and Kindt have developed a virtual cottage industry citing each other as sources while introducing no new independent research or studies. There is no valid research or peer-reviewed work done by Kindt or others to validate the 3-to-1 ratio assertion.

Kindt also argues that when gambling is legalized, there is a 100 percent to 500 percent increase in “addicted” gamblers which causes enormous new social costs as well as “lost consumer dollars,” i.e., money spent by gamblers that could have been spent elsewhere.

Response: Notwithstanding the fact that no social scientist has ever found such an increase in either the number of diagnosed pathological gamblers or in social service spending, Harvard’s research on prevalence completed in 1997 states as follows:

“There is no significant regional variation in the rates of gambling disorders identified across regions of Canada and the United States.”

Shaffer, Hall and Vander Bilt, Estimating the Prevalence of Disordered Gambling Behavior in the United States and Canada: A Meta-analysis, Harvard Medical School Division on Addictions, December 1997, pg. iv.

Harvard’s conclusion casts serious doubt on the argument that the introduction of casino gaming in the new jurisdictions has led to any increase in disordered gambling.

As shown above, in discussing some of Grinols’ social cost arguments, the facts from official records show that in no jurisdiction have the social costs exceeded the economic benefits of gaming. In fact, studies such as the Arthur Andersen micro analysis show that in most new gaming jurisdictions the actual social costs have decreased after the advent of gaming: welfare, Aid to Families with Dependent Children and food stamp payments have consistently gone down after gaming has arrived in a community.

Kindt also argues that “(b)usinesses prefer locating in gambling-free states because of their lower taxes and better community and business environments.” (National Coalition Against Legalized Gambling web page, “Gambling Information II”.)

Response: National data easily refutes this claim. Nevada has led the nation in job growth since 1994, tripling the national average in 1997. Moreover, the Arthur Andersen micro study demonstrates that gaming has helped many previously moribund local and regional economies in the South and Midwest revitalize their economies, as shown by the growth in indicators such as retail sales taxes, housing starts, and declines in unemployment, crime and welfare statistics. In many cases, gaming taxes have funded capital improvements, improved credit ratings, provided for job grants and helped communities lower taxes–notwithstanding the large tourist draw–all of which contributes to a favorable business environment.

In an analysis of Kindt’s article, “The Economic Impacts of Legalized Gambling Activities,” Dr. Jon Donlon states:

“The Economic Impacts of Legalized Gambling Activities should have carefully dealt with a very complex and potentially dangerous circumstance: the growth and expansion of the legalized gaming industry in the United States. Presumably because of zeal and enthusiasm, the article failed to serve its readers. It did not carefully present an evenhanded examination of the phenomena at hand.”

Dr. Jon Donlon, Director, Center for the Study of Controversial Leisure, “Excessive Zeal: a Response to John Kindt’s The Economic Impacts of Legalized Gambling Activities”, Gaming Review, Winter 1997, pg. 546.

Conclusion:

As stated earlier in this paper, the actual data and statistics, as shown in official governmental records, disprove the economic models and articles propounded by Grinols, Gazel and Kindt and their collaborator Robert Goodman. In one of the most recent studies of the social costs of legalized gaming, Professor Peter Reuter concluded:

“There is a surprising consistency in both the statistical and interview data. Casinos have had quite modest effects on the measured social problems of the cities in which they have been introduced to in recent years.”

Dr. Peter Reuter, School of Public Affairs, University of Maryland, “The Impact of Casinos on Crime and other Social Problems: An Analysis of Recent Experiences,” January 1994, pg. vi.

The Circle of Disinformation

“Over the last five years, a small group of anti-gaming university professors has created, out of whole cloth, a series of models which purport to show that any economic benefits derived from gaming will be exceeded by social costs caused by the industry. These professors, whose theories cannot stand the test of academic peer review, have created a ‘Circle of Disinformation’, wherein they continually cite each other as sources to validate their erroneous theories.”

- Frank J. Fahrenkopf, President and CEO of the American Gaming Association, May 21, 1998.

Current Positions

Rachel Volberg, Director, Gemini Research, Roaring Spring, PA Robert Goodman, Adjunct Professor, University of Massachusetts Earl Grinols, Professor of Economics, University of Illinois John Kindt, Professor of Commerce and Legal Policy, University of Illinois