Written by: Luka Todorovic
Introduction
In the 1920’s, the United States went through a period of time known as Prohibition, where the passage of the 18th Amendment banned the manufacture and sale of alcohol in the U.S. (Olson & Gerstein, 1985). Though passed as the result of a larger temperance movement to attempt to get Americans to stop consuming alcohol, at least in large part, an interesting problem arose from this law. With the illegalization of alcoholic beverages, the regulation and taxation of alcohol was also gone, making alcohol much more difficult to control (Olson & Gerstein, 1985). This creates a paradox that may be applied throughout the modern world. When something is legal, it is marginally easier to regulate and control, and it can be taxed to generate government revenue. However, when it is outlawed, then these regulations are meaningless and almost anything is fair game. A similar idea can be attributed to the temporary legalization of illicit drugs in Oregon in 2021 (Oregon Governor Signs a Bill Recriminalizing Drug Possession, 2024). For the sake of simplicity, this paper will be denoting this concept as a ‘Prohibition Paradox’. The paradox comes from the idea that making something legal would make its usage more widespread and more difficult to control, but in reality it may be that making something illegal makes it as such. Hence the contradiction, when something is banned, it should, in theory, decrease its occurrence and make it easier to control, but when the opposite occurs then it is a paradox.
This brings up the question of if the prohibited industry or practice in question is more harmful than good for the national economy. The practice in question may be a common cause of financial hardship or physical harm for many people, so it might be beneficial on both a micro and macroeconomic scale to ban it. But the idea of a Prohibition Paradox calls into question if we are better off legalizing it to mitigate the damage. Because of this, researching the effects of the legalization on the sports betting industry is vital to understand the net benefit of permitting the industry.
This provides a restrictive method to either confirm or deny the idea of a Prohibition Paradox. If the practice in question is legalized and increases substantially enough, then there could be evidence that there is not a Prohibition Paradox taking place. However, if regulation and legalization causes the opposite or no effect at all, then there would be evidence in favor of a Prohibition Paradox. Because of this, two important pieces of information can be extracted. The first of the two is that the best way to determine if there exists a Prohibition Paradox is to legalize the practice and wait for the results. The second notion is that it is vital to analyze the potential micro and macroeconomic effects this legislation could have.
Minnesota’s Case
Though a seemingly simple concept intuitively, these paradoxes are not always so obvious to spot or confirm in reality. An interesting modern example of a potential Prohibition Paradox would be sports betting in Minnesota. According to the Financial Times, as of early 2024, Minnesota is the only Midwest state to have not legalized sports betting (Barnes, 2023). Despite this, according to a study by the National Association of Administrators for Disordered Gambling Services (NAADGS), between 2021-2023, Minnesota had the sixth highest annual investment average in problem gambling services (National Association of Administrators for Disordered Gambling Services, 2023). Problem gambling itself refers to an “addiction” to gambling that leads to an impact on an individual’s life, finances, and career (FAQs, n.d.). In 2022 alone, its investment was the fifth highest per-capita (National Association of Administrators for Disordered Gambling Services, 2023).
This funding towards problem gambling services is a potential indicator of a lack of regulation leading to more of a problem: the only state with a higher average aggregate than Minnesota is California, which has barely a fifth of the per-capita investments (National Association of Administrators for Disordered Gambling Services, 2023). No state without legalized gambling other than Minnesota was in the top ten in terms of per-capita investment (National Association of Administrators for Disordered Gambling Services, 2023). A further observation of the data reveals that of the states with above the national average of $0.38 per-capita investment in problem gambling services, Minnesota is the only state with a sports team in all five major sports leagues: The Minnesota Vikings in the NFL, the Minnesota Timberwolves in the NBA, the Minnesota Twins in the MLB, the Minnesota Wild in the NHL, and Minnesota United FC in the MLS (Major League Sports Franchises Distribution by City, n.d.). The next closest state to satisfy both of these conditions is again California (National Association of Administrators for Disordered Gambling Services, 2023; Major League Sports Franchises Distribution by City, n.d.). The only other state to satisfy both of these criteria is Texas, which did not provide any funding for problem gambling services whatsoever (National Association of Administrators for Disordered Gambling Services, 2023). When considering the data at large, the top nine largest aggregate spenders on problem gambling services have at least one team in all five of the aforementioned major leagues (National Association of Administrators for Disordered Gambling Services, 2023). With this in mind, Minnesota continues to present itself as somewhat of a statistical anomaly.
This creates a strange precedent. The two most populous states according to the 2020 US Census, Texas and California, are matched entirely both by market size as well as aggregate problem gambling spending (National Association of Administrators for Disordered Gambling Services, 2023; US Census Bureau, 2020). These factors may lead an observer to question whether regulations of some kind might be beneficial to the Minnesota economy, and whether or not the lack of legalization of sports betting may be hindering efforts to control it. Because of this, the question that is going to be guiding this paper is ‘To what extent does quantitative and qualitative evidence suggest that there is a Prohibition Paradox in Minnesota’s sports betting market, and what might the economic effects be?’. This paper will not draw any specific conclusions, but rather as a literature review will analyze the existing evidence and suggest possible ideas on what can be done to further investigate this topic.
The Sports Betting Industry
Before diving into the prospects of a Prohibition Paradox in Minnesota, it is important to develop a conceptual grasp on what the sports betting industry is. According to Britanica, sports betting is any form of gambling that wagers on sports, so we can reasonably define the industry as the private market for sports betting (Thompson & Luebering, 2024). Corporations in this market using forms of sports betting such as online, through sportsbooks, in casinos, etc.
A Pew Research Center study in 2022 found that in the past year, about 19% of American adults admitted to having wagered on sports (Gramlich, 2022). Breaking this down further, 15% admitted to doing so in private, 8% at a kiosk or casino, and 6% on an online source or sportsbook (Gramlich, 2022). As more states have since legalized gambling, it is very likely that these numbers have grown and will continue to do so.
To further understand the market, it is necessary to understand the size of the market as well as its reach to consumers. Since the beginning of regulation of the industry in June 2018, sportsbooks and casinos in the United States have seen a total amount wagered of over 335 billion dollars and just over 28 billion dollars in revenue (Ramsey, 2024). Of the states where sports betting is legal and regulated, the leading state is New Jersey with a handle of almost 50 billion dollars, closely followed by New York, which is expected to surpass it by 2025 (Ramsey, 2024). This has generated over 5 billion dollars in tax revenue for the state and federal governments (Ramsey, 2024). A monthly breakdown of the national data also shows that, unsurprisingly, the market is seasonal and has expanded to over 100 times the initial size it was in 2018 (Ramsey, 2024).
With this information in mind, it is important to understand what the government’s interests might be in permitting and regulating this market. This empirical data suggests that with a rapidly expanding market, governments and businesses might want to jump on the opportunity to generate revenue. This increased tax revenue and business revenue could theoretically boost the economy in the United States, as the government having more revenue could mean more expenditure, or less pressure of crowding out in the loanable funds market.
However, conversely, economists run into an interesting problem. According to John Kindt, a professor of business and law at the University of Illinois, “In the context of legalized gambling, Nobel-Prize Laureate Paul Samuelson emphasized that gambling creates ‘no new money or goods’ and ‘subtracts from the national income.’ The economic multiplier effect of ‘consumer dollars’ is negated or otherwise substantially diminished when consumer dollars are diverted into gambling dollars” (Kindt, 2021). Kindt goes on to cite a separate 2021 study that found that billions of dollars from the 2.2 trillion dollar stimulus package for COVID-19 relief was lost due to improper usage of unemployment payouts spent on gambling and lotteries (Kindt, 2021).
The Odds of a Prohibition Paradox: Minnesota
Given some information about the market, we run into an interesting problem about trying to determine whether there is a Prohibition Paradox taking place in Minnesota: Because sports betting is not legalized and regulated, we don’t have any official data from the state. Because of this, we have to look elsewhere. Two potential sources of information would come from the funding to problem gambling, as higher funding could potentially be correlated with a larger gambling problem, as well as comparing Minnesota to a similar state as a ‘control’.
As previously discussed, Minnesota is in a unique category as one of only three states with illegal sports betting and a sports team in all five major sports leagues. Beyond this, it is the smallest in terms of population in this category. Yet despite this, Minnesota had marginally higher funding for problem gambling services comparatively, clocking in at $0.99 per capita compared to California’s $0.22 per capita, Texas spending no money at all (National Association of Administrators for Disordered Gambling Services, 2023). Furthermore, with the exceptions of Oregon and Maryland, the states with the most problem gambling have at least four major sports teams, further highlighting the extent of Minnesota’s sports betting market (National Association of Administrators for Disordered Gambling Services, 2023). Yet despite this, the only two states in the top ten that don’t have legalized sports betting are California and Minnesota, the latter having almost five times higher per capita spending with about a tenth of the population (National Association of Administrators for Disordered Gambling Services, 2023; US Census Bureau, 2020).
Michigan: A ‘Control’
When analyzing the data, there is an interesting case that may be interpreted as a potential comparison to Minnesota both politically and economically that might provide us with further insight as to the chances a Prohibition Paradox exists in Minnesota: Michigan.
Though it could be argued that Ohio might be a better comparison to Minnesota, as Ohio is in the category of states with a team in all five major sports leagues and Michigan not yet having an MLS club, there are a few reasons why Michigan appears to be in better control. A good control should have certain characteristics that would create a similar economic conditions and sports culture to Minnesota, such as geography, politics, and population. In terms of geography, they are obviously both in the Midwest, but beyond this, politically they are states that in the past several decades have been more democratic leaning generally (Historical U.S. Presidential Election Results, n.d.). Furthermore, Ohio ($0.55 per capita) is further away from Minnesota ($0.99 per capita) in both aggregate and per capita funding for problem gambling services than Michigan ($0.68 per capita) (National Association of Administrators for Disordered Gambling Services, 2023). Finally, Michigan’s population, although much larger than Minnesota, is closer to Minnesota’s population than Ohio’s population (US Census Bureau, 2020).
With these facts in mind, the most important factor to analyze would be the per capita spending on problem gambling services of both states. Minnesota, as previously mentioned, is ranked fifth in the nation, whereas Michigan is ranked eleventh (National Association of Administrators for Disordered Gambling Services, 2023). This is surprising, as Michigan is ranked fourth in aggregate spending on problem gambling services and Minnesota is ranked sixth (National Association of Administrators for Disordered Gambling Services, 2023). This suggests that there might be a much larger gambling problem overall, and thus with sports gambling, in Minnesota than there is in Michigan. This could be a potential indicator of a Prohibition Paradox in Minnesota.
Challenges to a Prohibition Paradox
This is where we run into an argument about the legitimacy of a sports betting Prohibition Paradox: it is illegal in Minnesota, meaning that websites and other mediums for sports betting can’t operate within the state. However, there is a simple counter to this argument. The idea of a Prohibition Paradox is that regulation is more difficult, and there is evidence to support this notion. Modern VPNs are widespread and can be used to hide or change location to indicate that someone in Minnesota may not be in that state, thus allowing them to Gamble. A study by cyber security expert and VPN specialist Brett Cruz conducted in collaboration with Security.org, a professional trade organization that analyzes online security and statistics, found that roughly 46% of Americans use VPNs and trends suggest that number is rising substantially (Cruz, 2024).
This along with illegal sports betting websites may provide the important piece of a Prohibition Paradox: inability to properly regulate. A study from Vanderbilt University reveals that experts believe that billions of dollars both before and after the Supreme Court decision that left sports betting laws to the states rather than the federal government are invested in illegal sports betting websites (Malnar, 2020). With caveats to get around the law becoming more and more widespread and accessible, it’s not an unreasonable claim to state that there is the possibility of a Prohibition Paradox in Minnesota, yet more research would need to be done to make an affirmative conclusion.
The Policy and Politics of Minnesota’s Sports Betting
With these factors in mind, it is also important to understand why Minnesota has not yet legalized sports betting and what the arguments for and against it are. Most recently, a bill was introduced in 2023 that is being debated in Minnesota’s legislature as of April 2024 (SF 1949 Status in the Senate for the 93rd Legislature (2023 – 2024), n.d.). The most common argument for the legislation cites issues such as the lack of government capability to regulate without legalizing sports betting, and claiming that people are easily able to wager on sports despite its illegal status (Zochodne, 2024). Additionally, Minnesota’s governor has come out in support of the bill, claiming he would sign the bill into law (Zochodne, 2024).
Most of the opposition comes from those working in problem gambling (Zochodne, 2024). These opponents cite knowledge of the high amount of people in Minnesota that currently struggle with problem gambling, and that legalization might make the problem more widespread and harder to treat (Zochodne, 2024).
The Potential Economic Effects
As stated previously, there is a stark contrast between the potential micro and macroeconomic effects for legalizing sports betting. There is a large amount of money in Minnesota put into problem gambling services (National Association of Administrators for Disordered Gambling Services, 2023). This suggests that there is a noticeable problem with the sports betting market in Minnesota despite its illegal status. However, there is also the possibility that easier access to sports betting might cause this problem to grow (Zochodne, 2024).
Something of note is that there is a difference between problem gambling and simply wagering on sports. A Pew Research Study conducted in 2022 found that at the time roughly 19% of American adults had admitted to having wagered on sports in the past year (Gramlich, 2022). This suggests that there might not be an association between legalized gambling and problem gambling, implying that the claims of problem gambling affecting 250,000 Minnesota residents may not be related to sports betting (Zochodne, 2024). However, a 2016 study conducted by researchers at the State University of New York, University at Buffalo found that “there is a clear pattern of increased gambling behavior and problems in states with more types of legal gambling,” suggesting that legalizing sports betting may make the already existing problem of problem gambling in Minnesota worse (Welte et al., 2016). Given that the study was conducted before the legalization of sports betting in states beginning in 2018, this study alone is not enough to confirm increases in problem gambling due to sports betting. However, a 2023 University of Toronto study found that there is an association between problem gambling and sports betting, though the impacts of legalization is not studied in this study either (Vieira et al., 2023).
Furthermore, a microeconomic understanding of the motivations of sports betting is vital to infer the potential impacts of legalization. A Transilvania University study found that the number one motivator of sports betting is financial gain (Bulboaca & Tierean, 2021). This potentially suggests that people may not be as affected by the legalization if there are no financial ramifications. This could imply that legalizing sports benefiting and taxing it heavily might be a potential regulatory tool to use against problem gambling expanding.
Given the complex nature of the potential effects on a microeconomic scale, it would be intuitive to infer that there is also a complex relationship on a macroeconomic level as well. As previously mentioned, Professor John Kindt claims that banning gambling and lottery all together may actually end up stimulating the economy, citing evidence of lost COVID-19 stimulus funds that lead to a weaker economic impact and output (Kindt, 2021). Specifically, Kindt cites the fact that funds from the stimulus package were used in sports betting and lotteries led to less of the stimulus money being pumped into the economy, effectively weakening the aggregate macroeconomic output and stimulation that resulted from the stimulus (Kindt, 2021). However, it is important to note that there has been billions of dollars of tax revenue that has been collected as a result of sports betting, and this revenue may in fact be multiplied by tax multipliers, potentially balancing the losses (Yi et al., 2023).
Additionally, this may mean that governments may be able to stimulate other areas of the economy with more tax revenue. Being able to address government deficits, for example, may mean that loans may be more readily available, thus leading to more investment and thus more output indirectly.
Beyond this, there have been numerous studies that have reaffirmed the positive impacts on a local economy that legalization of gambling might have. Notably, a study conducted by the Department of Economics at the University of Louisville found that there are significant tax benefits and local economic impacts that come with opening casinos that may enable sports betting and other forms of gambling (Lambert, 2023). Because of this, there is an argument to be made that the legalization of sports betting and its positive or negative economic effects may be entirely dependent on the structure of the market and economy as well as which effects would outweigh others.
There is a positive outlook for legalizing sports betting on both a micro and macroeconomic level. A study in Australia found that in one of the highest problem gambling nations in the world, Australia, legalizing recreational gambling actually had positive economic effects on both a macro and micro level (Dietrich & Raj, 2023). Furthermore, a Vanderbilt study found that potentially the most important factor of reaping positive benefits for legalizing sports betting would be taxation and regulation (Malnar, 2020). These studies suggest that as an overall net effect, the benefits of legalization of gambling may outweigh the negative effects on a macroeconomic level, as well as minimizing the microeconomic effects, so long as proper regulations are put in place. This points directly at the possibility of a Prohibition Paradox being present in Minnesota as well as other markets.
Recommendations for Future Research
Due to the economic factors associated with the legalization and regulation of sports betting, as well as the statistically extreme situation presented in Minnesota, there is reason to believe that there may be a possible Prohibition Paradox. Because of this, future research into other states and looking at data before and after legalization legalizing sports betting took effect would be beneficial. Additionally, cross-tabulation of the effects of specific regulations and their economic impacts may provide useful insight. As to see if there is a Prohibition Paradox in Minnesota, the most effective way to determine this is to legalize gambling and decide on regulations, analyzing the effects after the fact. However, it may be wise for legislators and policy makers to first wait for further research to come out before coming to a decision.
References
Gramlich, J. (2022, September 14). As more states legalize the practice, 19% of U.S. adults say they have bet money on sports in the past year. Pew Research Center. https://www.pewresearch.org/short-reads/2022/09/14/as-more-states-legalize-the-practice-19-of-u-s-adults-say-they-have-bet-money-on-sports-in-the-past-year/
US Census Bureau. (2020). 2020 Census Results. Census.Gov. https://www.census.gov/2020results