#171 © Copyright 2011, I. Nelson Rose, Encino, California. All rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I. Nelson Rose, www.GamblingAndTheLaw.com.

We are in what I call the Third Wave of Legal Gambling. Twice before in American history, legal gambling has spread across the nation, only to crash down in scandal and complete prohibition. The prior crashes left legal debris, which is still on the statute books.

The First Wave of Legal Gambling started even before there was a country, with lotteries in England helping to fund the colonies. The most important pieces of legal debris from the fall of the First Wave in the 1840s and ’50s are the state constitutional bans on lotteries. So much time has passed that sometimes the meaning of the term “lottery” has been lost or warped to include other forms of gambling, creating enormous problems for proponents of bingo, parimutuel wagering and casinos.

Amending a state constitution is difficult, requiring a vote of the people. A century-and-a-half after the anti-lottery provisions were written in, long after the memory of the scandals that led to their creation had died away, proponents of state lotteries were able to win constitutional elections in more than three dozen states.

Proponents of casinos have not fared as well. Voters have almost always rejected amending their state constitutions to bring in high-stake casinos. However, many state legislatures have been able to legalize casinos, where no vote was required. These include some of the leading casino states, including Nevada, Mississippi, and now Pennsylvania, where the constitutional ban on “lotteries” has been interpreted as being limited to true lotteries, enabling state legislatures to legalize casinos, without a statewide vote.

The Second Wave began with the Civil War and the continuing expansion of the western frontier. The South turned to state-licensed lotteries as a painless way to raise revenue. Legal gambling is often seen as a voluntary tax. This is the reason we are seeing so many attempts at expansion during the current Great Recession.

The most important legal debris of the crash of the Second Wave were the federal anti-lottery laws passed in response to the Louisiana Lottery scandal, and other problems in the late 19th century associated with legal lotteries licensed by various states. These were later incorporated into the federal radio and T.V. statutes, and still exist in the U.S. mail laws.

I am not allowed to mail a lottery ticket from my home in Encino to a friend in Las Vegas, because federal law does not want the good people of Nevada hearing about the evils of California’s legal gambling.

We are now in the Third Wave, which started with the Great Depression: In 1931 Nevada re-legalized casinos. Every year since then there has been an expansion of legal gambling: horse tracks reopened in the 1930s, charities gained the right to operate bingo legally in the 1940s, social gambling was mostly decriminalized in the 1950s. Then New Hampshire rediscovered the state lottery in 1963. And 13 years later, New Jersey became the second state to have legal casinos.

Imagine telling someone from 1909, when there was virtually universal prohibition on legal gambling in this country, or even a visitor from the America of President Dwight D. Eisenhower, that there is a state in the United States that has the following forms of legal gaming:

• Casinos
• A state lottery
• Video poker machines in nearly every bar
• Racetracks and parimutuel betting on horse racing and dog racing
• Internet betting within the state and across state lines on racing
• Charity bingo
• and the State itself takes bets on sports events

and that that state is not Nevada, but Oregon. Nevada’s State Constitution prohibits all lotteries, except charity raffles. And there are no operating race tracks in the Silver State.

The impact of the Third Wave on the established forms of gambling has been dramatic and devastating. Horseracing had a monopoly for 50 years. Now, the only thing that is preventing many tracks from closing is off-track betting and the introduction of slot machines, creating racinos.

It is widely believed in this Third Wave of Legal Gambling that anyone, including governments, can get rich quick. All one needs to do to grab a piece of the action is to own, operate, or tax some form of legal gambling. An endless flow of instant, unlimited wealth will follow. This is actually true, as long as the rest the world cooperates and lets the operator have a monopoly.

Suppose Prohibition of alcohol had just been repealed. The hypothetical owner of the first and only liquor store in a state would make a fantastic return on investment. But soon, if there were no government controls, there would be liquor stores throughout the state, as there are few barriers to entry. Excess profits would disappear and returns on investment would descend to normal levels, after a large number went bankrupt and that over-supply disappeared.

Government makes the situation worse. The fantasy that there is an infinitely inelastic demand for gambling seems to hit politicians harder than entrepreneurs.

Sin taxes are always the easiest to raise. Casinos, like liquor stores and tobacco retailers, are easier targets than more politically acceptable businesses. Government’s thinking is that people should not be gambling anyway and they will continue to make wagers, no matter how much the cost. So, even though a quarter of the gaming establishments in a jurisdiction might go bankrupt, the state continues to consider raising taxes on gaming.

The explosion of legal gambling has finally settled the question of whether availability creates demand. The metropolitan area of Biloxi-Gulfport-Pascagoula, near the Mississippi casinos, has a population of slightly more than 100,000. Yet it ranks as one of the most important feeder markets for casino gaming, far above much more massive cities like Houston and Seattle.

Although availability creates demand, that demand is not endless. Even a casino in New Orleans will fail, if Louisiana and Mississippi are already saturated with competing forms of gambling.

Technology is the wild card. Although it is possible to see the general trends and cycles in gambling, it is impossible to predict how exactly it will develop, because the games are so much dependent on technology. The development of the Internet in general and online gaming in particular, illustrate how invention creates a demand that did not formerly exist, because the technology itself did not exist.

The most potent machines spread throughout and dominate everywhere they go. Every form of gambling can now be played on a computerized video screen.

Inventions expand experience — technology creates its own demand. One of the most popular forms of gambling in 2011 is on video poker machines: Did anyone want to play video poker, before it was invented?

So, it is easy to predict, in general, what will happen over the next few years: more legal gambling.

But just as no one in 1909, or even 1959, could predict that Oregon would have more forms of legal gambling than Nevada, it is impossible to know what invention will take the place of the video poker machine in the year 2029.