Las Vegas in Crisis?


The Economist struck an unusually pessimistic tone in their recent commentary on Las Vegas, titled “Party Over” (pasted below).


I think things will turn out a bit better than they suspect.  I still believe the world’s ending, but I’m very optimistic about the future of vice, and I think

this will work in Las Vegas’ favor.


There are a couple of strange macro factors that have had a strongly positive influence on Vegas lately.  First, the casino business in Asia is on fire, and, as a result, the cash flow (and stock prices) of the Western casino companies (especially WYNN and LVS) are far, far better than they otherwise would be.  Las Vegas Sands would likely be bankrupt without the Asian market.

Second, the emphasis of economic policy in the US over the past couple of years has been asset price support (for Treasuries, mortgage securities, home prices, and equities).  The result is that many of the very rich have stayed very rich, after a brief swoon in Fall 2008 and Spring 2009.   As in the Great Depression, the strong downturn that started in 2008 has acted to exacerbate wealth inequality.   The poorest in Las Vegas, as in the rest of the country, are faring terribly, but the exorbitantly priced food/beverage/entertainment sector has held up fairly well.

Nevada ranks with California and Illinois as having some of the worst state government finances in the country.  Nevada actually makes California’s situation worse than it otherwise would be because, during the long real estate boom, hundreds of thousands of wealthy Californians bought homes in Nevada (Nevada has no state income tax) and established residency there to avoid California state income taxes (many of these people continued to live and work in California).

To me, the big question for Las Vegas is whether it holds the fort socially.  Will people feel safe there?  Will they feel that the police are effective?  Will they feel they can get good health care if they need it?  If it can remain socially healthy, I think Las Vegas will whether any economic storm reasonably well.  A decline in social health (a big uptick in crime, for instance) would be destructive for Las Vegas because it would set off a vicious cycle whereby the ratio of thugs to friendly tourists is continuously on the increase.   Las Vegas has always had its deviants, but in good times their numbers are dwarfed by friendly, rich tourists.  If fewer tourists come b/c they feel unsafe or otherwise uncomfortable, the ratio of deviants to tourists increases, causing fewer tourists to come, and so on.

A big question mark for the long future of Las Vegas is oil.  Few cities are hurt more by a big uptick in the price of oil.  Las Vegas is just  the epicenter of waste when it comes to oil (well, not quite the epicenter — that would be the indoor ski slope in Dubai).   Brightly lit, heavily air-conditioned hotels in the middle of the desert; employees living in desert houses driving twenty miles to work; tourists flying in from all over the world — all of it makes for extremely intensive use of oil.  One would think that an oil price of around $130/barrel (the July 08 price) would be deadly for Las Vegas.




Party over

The city’s troubles are part cyclical, part existential

Las Vegas in crisis

Dec 29th 2010 | LAS VEGAS | from PRINT EDITION

    A palace somewhat short of Caesar’s

    AS MAYOR of Las Vegas for almost 12 years, Oscar Goodman has made it his mission to personify what he calls this “adult playland” in the desert. He prances through the casinos with scantily clad showgirls draped on each arm (although he is happily married). He claims to drink a bottle of gin every night (but “never before 5pm”). In his office he sits on a carved throne and gives visitors a symbolic gambling chip that depicts him, with his trademark Martini glass, as “the happiest mayor of the greatest city in the world”.

    Alas, much of this, like most things in Las Vegas, is purely show. This is not merely because the famous Strip of hotels and casinos that accounts for more than half of all gaming in the state is deliberately (for tax reasons) just outside the city limits, and thus beyond Mr Goodman’s remit. More important, few residents of Las Vegas would any longer agree that their city is either great or happy.

    Nevada has America’s highest unemployment rate. In Las Vegas, unemployment has risen more this year even as it has flattened in the rest of the country; it peaked at 15.5% in September. Nevada also has America’s highest foreclosure rate. In Las Vegas more than 70% of homeowners with mortgages owe more to the bank than their houses are worth. This desert valley, which once represented the most extreme pleasures in American consumerism, now has the most severe hangover.

    There are signs of recovery, but they lag those in the rest of the country. Whether house prices, visitor numbers or gambling revenues, “the numbers are bumping along the bottom”, increasing in some months and flattening again in others, says Stephen Brown, director of the Centre for Business and Economic Research at the University of Nevada, Las Vegas.

    The question is whether there will ever be a complete recovery, or whether something more fundamental has changed, threatening the existence of places that rely directly or indirectly on gambling. (Nevada has no income tax, for example, financing its services largely from gaming and sales taxes paid mostly by tourists.) Mr Goodman, typically sunny, says “We’re heading back to where we were.” Others have their doubts. Las Vegas “needs easy money and easy virtue” to prosper, says Eric Herzik, a professor at the University of Nevada, Reno. Well before the last boom the state was built on excess, and with Americans and foreigners (ie, most potential tourists) “down on excess, our whole model is now being questioned.”

    Once the famous Comstock Lode ran out of silver in the 1880s, Nevada made legalised sin its new foundation. It started with prizefighting, illegal elsewhere in an era of bare-knuckle boxing. Then—in 1931, conveniently pre-empting the Great Depression—the state introduced the country’s laxest divorce laws to attract frustrated spouses. On the very same day it legalised gambling, which has been the mainstay of its economy ever since. It is supplemented by complementary industries, from prostitution (legal in the rural counties and allegedly available in Las Vegas) to gourmet cuisine.

    Las Vegas also “thrived on irresponsibility” in a second, related, way, says Michael Green, a historian at the College of Southern Nevada. Just as the booming gambling and tourism industries provided new jobs, the parched but spacious valley provided new housing. Thus the population of Clark County, the area around Las Vegas, quadrupled between the 1980s and 2008 (before shrinking slightly in 2009), as people from southern California, in particular, fled overpriced houses and moved to Las Vegas. This caused one of the biggest construction booms and housing bubbles in the nation.

    Then, in 2008, all these bubbles popped. Whether in or out of state, Americans, who had recently felt rich because of their inflated house values, suddenly felt poor and out of luck. They stopped coming or, if they came, sat for less time at the tables and gambled less. They became “gun-shy,” says David Schwartz, the director of the Centre for Gaming Research at the University of Nevada, Las Vegas.

    Tourists are now returning, but in numbers too small and with mindsets too cautious to help Las Vegas much: they are spending less on each visit than before the bust. Two huge and glitzy casino-hotel complexes, both conceived before the bust, opened recently, adding yet more rooms to the city’s already dire overcapacity and forcing other hotel operators to discount even more. And yet, even though Las Vegas has become “a bargain”, as Mr Goodman says, many tourists who want to gamble increasingly ignore the city (and intimate airport pat-downs) altogether by patronising Mississippi river boats, Indian casinos or the internet.

    Mr Goodman, who insists that the city’s only big problem is the term limits that are forcing him out of office next year, rejects all such pessimism. He wants people to be aware of the cultural offerings he has brought to the city, from classical music to a new mobster museum due to open soon (a lawyer, Mr Goodman once defended alleged mobsters in court and even starred in the film “Casino” in that role). He dreams, too, of attracting a big sports team. A new hospital has opened, and Mr Goodman predicts a boom in “medical tourism”, as boomers come for new hips while their families have fun on the Strip.

    Las Vegas has never been much good at diversification. It is good at one thing, and for now the zeitgeist has turned against it. But one day flamboyant sin will be back to help Mr Goodman and his city out. Just not very quickly.


    One Response to “Las Vegas in Crisis?”

    1. 1 Steffen

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