The Economic Review: Lotto & Other Long Shots + The Federal Deficit

Wed, 14 Aug 2013

After extensive – and erroneous – analysis, I did not win the lottery. However, a number of other long shots do seem to be paying off. The federal budget deficit is declining. And several notable economic laggards are showing signs of rebounding.

 

Powerball

I like figuring things out in my head, with a little help from my cell phone calculator. While waiting to order my sausage and mozzarella pizza at my favorite New Haven-area pizzeria, (name supplied upon request) I calculated which size was the best buy. I did this by comparing the area of the pizza (pi times the radius squared – pun intended) with each price to obtain the cost per square inch.

 

Answer: large. I then moved on to bigger things: the Powerball Lottery. I’d read that the odds of getting all six numbers right was 175 million-to-1! But the payoff recently went close to $600 million. So far, this looks like a good bet but you have to make some adjustments. The $600 million was the total paid out over 30 years. The lump sum payout option, which would be about $375 million, approximates the “present value” of the prize. Then there are taxes. After paying them, the lump sum is about $225 million which still seems like a good deal in terms of the odds of winning. So I bought a handful of “quick picks” at the local variety store, confident that this was a “no brainer.” Even if I didn’t win, I was at least making a rational economic/statistical decision.

 

However, as I got into my car, I realized that since each ticket cost $2, the payoff per dollar was only half as large as the $225. And by the time I pulled into my driveway, it occurred to me that I might have to share the top prize with one or more of the other people lined up at the variety store. This was getting far too complicated for me so I searched the Internet and found that some statistician with far too much time on his hands had figured that I had paid $2 for the prospect of winning only about $0.75 – not a good bet at all. He also pointed out that if you have to drive a mile each way to buy the tickets, the odds of being killed in an auto accident were 6 times greater than those of winning the jackpot ...

 

The Federal Deficit

Who would have bet just a few short months ago that the Federal Deficit would be shrinking faster than practically anybody thought? It is falling so fast that the dreaded “debt ceiling” – which was supposed to be hit in May – has now been postponed to sometime in the fall.

 

The deficit, which had been running more than $1 trillion during each of the past several fiscal years, is now projected to be a “mere” $642 billion during the current fiscal year which ends September 30. Some of this improvement reflects lower spending as a result of the sequester and other actions. It also embodies higher revenues as businesses and individuals rushed to take income and dividends ahead of anticipated tax increases. There were also large dividend checks sent by Fannie Mae and Freddie Mac to the Treasury in partial repayment for the huge bailout by the government a few years ago.

 

What does this mean? The significantly lower deficit does take some of the pressure off Washington to make additional cuts. This might be a good thing if you are among those who feel that excessive budget tightness is holding economic growth back as evidenced by high unemployment. Without further action, however, the improvement is largely temporary since the deficit is expected to rise again in a few years thanks largely to Social Security and Medicare costs.

 

The deficit is the annual amount the Treasury must borrow because spending exceeds revenues. As such, it is the annual increase in the amount of

outstanding government debt – the total amount owed by the federal government. The smaller deficits mean that the debt will grow at a slower rate – but it will still grow.

 

Where do we stand relative to that 90-percent ratio of debt to GDP that is supposed to lead to slower economic growth? Right now, outstanding federal debt is around 75-percent of GDP and is expected to be stay above 70-percent but not get near 90-percent. Note: this is the “publicly held” portion that excludes debt owed by one federal entity to another. It does, however, include the debt held by China and the Federal Reserve.

 

Besides, it turns out that the authors of the influential study that linked debt levels to economic growth made some serious errors in their computations. Upon recalculating, high debt is not so bad after all. So I don’t feel so bad about my Lotto faux pas.

 

Musings & Amusings

 
Improbability.
  • A recent statistical study showed that celebrating birthdays is healthy. Those people who celebrate the most birthdays become the oldest.
  • All probabilities are really 50% ... either something happens, or it doesn’t.
  • Try this simple probability test: flip a coin, over and over again, calling out “Heads” or “Tails” after each flip. Half the time people will ask you to please stop.

 

 
Economic Review is published by Webster Financial Corporation. The opinions and views in this publication are those of Dr. Nicholas Perna, Webster’s economic advisor, and are not intended to provide specific advice or recommendations for any individual. Consult professional advisors with regard to your individual situation. For more information or to submit a story idea to Economic Review, contact Bob Guenther by telephone at 203-578-2391 or by email at rguenther@websterbank.com.

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2 comment(s).

chris
August 29, 2013 at 2:36 am
how funny you talk about the lottery in the mail i got a check over $3,00.00 from this bank WEBSTER BANK the company that wrote the check said I won a mega jackpot lotto it called HPC FOODSERVICE in south windsor,ct what am trying to fine out is this a real check is it good what should i do I want to call the company and the bank to see if it's for real or a scam I feel it a scam but i need to fine out if you have any ideals email me and if its a scam and this company dose not know i hope i can help out by leting them know there useing there name in a scam thank you chris
August 30, 2013 at 1:39 pm
Hi Chris, Thank you for posting this. Our fraud team is aware of the fraudulent checks that are going around from HPC FOODSERVICE and asks that everyone NOT cash or deposit the check. You can also send us an email with any other fraud questions or additional information to reportfraud@websterbank.com. Thanks, Dawn