Powerball: Winning numbers could earn a $1.35 billion jackpot

At 10:59 pm Eastern time, the winning numbers in the Powerball lottery will be announced, with the current jackpot up to a record high of $1.5 billion after the past several drawings have failed to produce a winner.

Lottery jackpots have grown in recent years, with all 10 of the biggest nominal hauls coming since 2012 and inflation adjustments making little difference to the overall rankings.

Perhaps the most important thing to know about lotteries in the United States is that the winner of a $1.5 billion jackpot doesn’t get $1.5 billion. Instead, what he or she gets is the choice between an annuity that pays out a total of $1.5 billion over the course of 30 years or a cash prize of $930 million right away. And that’s before taxes. Depending on where the winner lives, he or she will actually end up getting around half of that.

Most winners choose the lump sum of cash, but most people who do so are making a poor financial decision. (In general, playing the lottery is a poor financial decision, so this is perhaps unsurprising.) As Josh Barro argues, the annuity benefits from what amounts to favorable tax treatment of investment income and will likely come out ahead of any reasonable conservative strategy you could take with your lump sum. A risky investment strategy might work well, but risky investment strategies are, well, risky, and lottery players do not have a great track record of managing risky investments.

Total spending on lotteries amounted to a shocking $70 billion in 2014, which amounts to about $300 per adult. As Derek Thompson wrote last year for the Atlantic, there is tremendous state-by-state variation in lottery spending, with Rhode Island and South Dakota spending huge sums on a per capita basis while North Dakota and Oklahoma spend relatively little.

The lottery is a famously regressive source of state government revenue, with the poor spending a much larger share of their income on lottery tickets. But a 2003 study by economist Emily Oster suggests that massive lottery jackpots may be more egalitarian in their distributive impact. Oster found that the regressive nature of the lottery as a revenue source is driven by the downscale demographics of very frequent lottery players. When jackpots get bigger, more people are induced to play, and the regressivity diminishes — though it doesn’t vanish.

Oster found that, hypothetically, a jackpot of about $806 million would likely be large enough to make the lottery progressive. At the time of her study, no jackpot of that level had ever been recorded, so the analysis was purely speculative. But now that we are actually well above the threshold she posited, future researchers could and should do follow-up analysis to see if rich jackpots really do lead to a more equal outcome.