Las Vegas: Is the problem structural or cyclical?

The short answer is both, but I think Tyler Cowen may underestimate the role of demand shocks:

 The article is here and it details other grim aspects of the city’s economy.  This is a simple yet effective example of the current non-separability of aggregate demand and structural problems.  Demand in Las Vegas is ailing and businesses are complaining of low sales.  Yet this is a sectoral shift as well, resulting from especially bad local housing problems, lower travel demand from outsiders, and a growing desire for investment safety rather than gambling risk.  Las Vegas needs for the United States to have higher real asset values, not just higher nominal aggregate demand.

Vegas suffered greatly after the sub-prime bubble burst in late 2006.  I agree with Tyler’s view than more nominal demand would not solve that problem.  But I think Tyler underestimates the role of falling AD in the hard hit Vegas tourism industry.  Sectoral shifts often occur gradually, as when tastes change over time.  The decline in Vegas tourism has been abrupt.  Admittedly an abrupt sectoral shift could occur if the underlying causal factor was sudden and dramatic.  Tyler argues that the sudden loss of wealth in America depressed the Vegas tourism market.  I agree, but think the wealth decline was mostly due to falling AD.

This data on Las Vegas tourism shows that 2007 was a record year for revenue (up over 5%) and number of tourists.  Hotel occupancy exceeded 90%.  Then tourism dropped off sharply in 2008 and 2009.  In my view the housing bust of 2007 destroyed relatively little wealth and had little impact on Vegas tourism.  In contrast, the sharp drop in AD in 2008 had a severe effect on tourism.  (High gasoline prices might have also hurt, but that problem quickly went away.)

I think Tyler errs when he implies that nominal demand and real asset prices are two different things.  The sudden stock market crash of October 2008 was not caused by housing problem, it was caused by sharply falling expectations of NGDP growth.  That’s an AD problem.  Remember, nominal demand affects real asset prices because wages are sticky.  This causes nominal shocks to have real effects on output, real stock prices, real commodity prices and real commercial real estate prices.

Unfortunately for Vegas, they rely heavily on the alpha males who form the entrepreneurial backbone of America.  Meek, mild-mannered teachers like me have sticky wages and do OK during recessions.  But we don’t do much gambling.  The brunt of the impact of lower AD falls on domestic businessmen (not multinationals), ranchers, developers, entrepreneurs, etc.   When they have a good year, they do what every red-blooded American male wants to do–go to Vegas and gamble.  But ever since the Fed adopted the tight money policy in 2008, they have not been doing well. 

To summarize:

1.  Structural problems:  The first half of the Vegas housing crash

2.  Aggregate demand problems:  The second half of the housing price decline, the commercial property crash, the sharp fall in stock and commodity prices, and the fall in RGDP that began in mid-2008.

I’d guess that two thirds of Vegas’s problem is in the second category, and that if NGDP had kept growing at 5% then Vegas’s tourism industry would have only taken a modest hit.


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34 Responses to “Las Vegas: Is the problem structural or cyclical?”

  1. Gravatar of happyjuggler0 happyjuggler0
    4. October 2010 at 09:04

    If the fall in Las Vegas housing prices hadn’t been accompanied by a national drop in AD demand, then it arguably would have boosted their economy because workers could more easily afford to live there, increasing the potential workforce, and thus enabling local employers to hire workers they might not otherwise have taken on, thus creating more services for tourists, thus increasing tourism on the margin.

    Not to mention (oops, too late) that lower housing costs which increase the population also increase demand for goods and services for residents as well.

    Lower housing costs, via free market mechanisms instead of via government fiat, are a thing to be celebrated, not mourned or opposed by federal alphabet bureaus.

  2. Gravatar of Morgan Warstler Morgan Warstler
    4. October 2010 at 09:07

    Good lord, the problem in Vegas is that too many people live there….

    The demand for gambling and entertainment and real estate boom caused a massive influx of people from 98-07, we need policies that make our labor supply mobile:

    1. Liquidate housing, so people have no reason to stay where there are no jobs.
    2. Tie UI after 26 weeks to people being wiling to move to take work.

    Even when AD goes up pretending it will reflate Vegas enough is ridiculous.

  3. Gravatar of Benjamin Cole Benjamin Cole
    4. October 2010 at 09:17

    As a sometime horse player who has sojourned to Vegas, this blog may be the only time in my life I have been referred to as an “alpha male.”
    I’ll take it.
    An excellent blog by Sumner. LV’s problems are mostly ones of demand, like the problems of America.
    Demand, demand, demand!
    Bring on the monetary bulls!

  4. Gravatar of Indy Indy
    4. October 2010 at 10:23

    I think we can all agree that Vegas is at least a little bit a special case. It’s economy circa 2006 was uniquely dominated by national and international tourism flows and also the local construction industry.

    I think it’s right that the decline in each of these industries, has their own period of being a dominating influence on the Vegas economy, maybe a Structural phase, and an National and Global AD phase, and some mixture in the middle and in the aftermath. It’s hard to dis-aggregate the relative influence of each force.

    However, we should be able to do a little local-economy regression analysis between some metric of housing situation insanity (Correction Price Drop? Inventory Overhang? Percent Ultra-Toxic Mortgages? Average Back-End Ratio?) and some other metric of lingering damage to the local economy (Change in Unemployment Rate? Local-GDP? Sales-tax revenues?).

    Calculated Risk puts out a nifty local price-correction chart and my impression (hunch) is that that chart correlates very well with what has happened to the local economies in those regions.

    Of course there’s a chicken-and-egg effect here – but you could easily see which is the better correlation – housing or sales. This would tell us some more about the whole “Structural vs AD” question. Someone with time – do this please – I bleg of you!

    In other CR news, he says today, “This speech suggests to me that the Fed is prepared to embark on QE2 (subject to incoming data), and the program will be incremental – and persistent – and the amount of QE announced at each FOMC meeting.”

    I think this is correct (I’m biased, this has been my own prediction for a while). It’s a shame it didn’t happen two years ago, but better late than never, I suppose.

  5. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. October 2010 at 10:23

    Scott wrote:
    “I’d guess that two thirds of Vegas’s problem is in the second category, and that if NGDP had kept growing at 5% then Vegas’s tourism industry would have only taken a modest hit.”

    I concur.

    The data for Las Vegas (Shiller) and Nevada (unemployment):
    Month Shiller Unemployment
    2006/7 233.07 4.4%
    2008/7 154.37 6.7%
    2010/7 100.92 14.4%

    Sixty percent of the decline in housing prices had occurred before the great NGDP implosion, but only 23% of the runup in (mass) unemployment. But in the final analysis nominal demand and real asset prices are very intertwined.

  6. Gravatar of Indy Indy
    4. October 2010 at 10:25

    Oh, and in other news, remember that whole Bank of Japan currency devaluation intervention where they put their reputation and credibility on the line by telling the whole world that they would put a hard ceiling on the appreciation of the Yen vs the Dollar?

    Yeah … about that … how’s that working out for you? Looks to me it’s just about back to the all-time high.

  7. Gravatar of Luis H Arroyo Luis H Arroyo
    4. October 2010 at 10:51

    I agree. in any case, I don´t see any risk in rise AD! We are facing two risk: deflation & Inflation; the second is much less probable than the first one for a long time.

  8. Gravatar of marcus nunes marcus nunes
    4. October 2010 at 10:57

    More “mild mannered” fed presidents like Charles Evans are skeptical about the “structural” problem view:
    “It is also possible that the shocks that reverberated through the economy created a mismatch between the skills sought by employers and the skills the unemployed workers have. For instance, it is conceivable that the recession affected the different regions and sectors of the economy unevenly. Moreover, the recession may have severed an unusually large number of long-term employment relationships, making for an especially difficult transition for affected workers. The unusually long spells of unemployment experienced during the recent recession and potential erosion of skills during that time are additional factors that might have magnified labor market frictions. The sharp decline in home values and tight credit conditions might have reduced the ability of unemployed workers to sell their homes and move to regions where jobs are available. Taken together, these developments might have eroded the efficiency of matching between workers and jobs, and raised the natural rate of unemployment”.
    The whole thing is here:
    http://www.chicagofed.org/webpages/publications/speeches/2010/10_01_bank_of_france_speech.cfm

  9. Gravatar of lat lat
    4. October 2010 at 11:17

    the terms “real shock” and “nominal shock” get thrown around quite a bit and i haven’t had any luck finding a definition for them (lost my econ textbooks long ago). can somebody do me big a favor and define these or provide examples? i understand real v nominal gdp/prices, but i’m having trouble figuring out what a real v nominal shock would be. thanks in advance for any help!

  10. Gravatar of Scott Sumner Scott Sumner
    4. October 2010 at 11:19

    happyjuggler0, Very good point.

    Morgan, Yes, there needs to be some adjustment. But I predict that Vegas will boom again at some point in the next 10 years.

    Benjamin, I prefer to use inflammatory and controversial stereotypes where ever possible. It is a blog after all.

    Indy, Yes, I agree the Fed will act, but it will be too little too late. I hope I am wrong and that they surprise us with a bold act, but I doubt they will. They really need a higher inflation or NGDP target, not just another $100 billion on top of the $2 trillion already out there.

    Mark, Thanks, that data is very revealing.

    Indy, Yes, the BOJ is pathetic. Maybe they should ask the Chinese how it’s done.

    But I thought it was the central government that tried to stop the yen from rising, not the BOJ?

    Luis, I agree.

    Marcus, Yes, the recession has caused a lot of structural problem, and if we get out of the recession, many of those structural problems will become less severe.

  11. Gravatar of ssumner ssumner
    4. October 2010 at 11:22

    lat, A nominal shock is a sudden change in NGDP grwoth. A real shock is something that causes RGDP to change even if NGDP is growing at a steady rate.

  12. Gravatar of lat lat
    4. October 2010 at 11:24

    thank you Professor for such a speedy and simple response, it’s much appreciated.

  13. Gravatar of marcus nunes marcus nunes
    4. October 2010 at 12:10

    “Fun reading” larry Summers plays Gordon Gekko on “University Street”!
    http://chronicle.com/article/Larry-Summersthe/124790/

  14. Gravatar of Morgan Warstler Morgan Warstler
    4. October 2010 at 12:21

    And in ten years, people can MOVE BACK…

    This works in a nation of renters. We want lots of landlords and lots of people moving.

    Housing is a consumable, nothing more. It has to be treated as such, or we will have problems on going.

  15. Gravatar of azmyth azmyth
    4. October 2010 at 14:18

    I like the paradigm you are developing that treats monetary policy as endogenous in a much more systemic way than other economists. So, for example, I have spent a fair bit of time worrying about the effects of asset prices on AD through Pigouvian effects and debt-deflation, but the bad part of those things is the reduced AD. If the central bank plods right along maintaining AD, lower asset prices will just translate into higher wages and more money spent on other things. Recalculation will still be a problem, but a general glut will not. Recalculation should not be avoided – without change there will be no growth. Anyway, much effort is wasted trying to figure out the affect of on AD. I don’t think many economists see the world as you do – that central bankers should neutralize all AD shocks.

  16. Gravatar of Benjamin Cole Benjamin Cole
    4. October 2010 at 15:07

    OT, but always worthy of note….

    “More Asset Purchases Could Boost Economy, Bernanke Says Text

    By LUCA DI LEO And SUDEEP REDDY-DJ News Service, WSJ

    PROVIDENCE, R.I.—Federal Reserve Chairman Ben Bernanke said Monday he believes further asset purchases by the central bank could help the economy, a signal that the Fed is likely to make the move if the economic outlook remains weak.

    Bernanke: Additional Asset Purchases Could Ease Financial Conditions

    Speaking to college students, Mr. Bernanke said that even after the Fed cut short-term interest rates nearly to zero, it was able to lift the economy by buying $1.7 trillion of U.S. Treasury and mortgage-backed bonds in what he described as an “effective program.”

    “Additional purchases have the ability to ease financial conditions,” he said. Fed officials at their policy meeting last month said they were prepared to take further steps to aid the recovery if the economy remains sluggish. The most likely move would be to buy more U.S. Treasurys.

    Mr. Bernanke’s comments follow indications from other Fed officials that the central bank is increasingly likely to move ahead with more asset purchases, perhaps at its early November meeting, barring a surprise improvement in economic data.

    –30–

    BTW, a photo of Bernanke made him look very haggard. Not sure what that means.

  17. Gravatar of Joe Joe
    4. October 2010 at 15:32

    Professor Sumner,

    You’ve said that a fall in NGDP by necessity represent tight money. What about a fall in Aggregate Demand. If that happens, must it represent tight money? How else?

    Mankiw’s textbook treats the 2001 recession as just a case of falling AD in response the tech bubble, 9/11, and Katrina. According to everything Rowe has written in the last year, it must have secretly really been tight money in response to these events? Md went up and AD fell before the Fed was able to increase the Ms.

    Right?

    Best,

    Joe

  18. Gravatar of marcus nunes marcus nunes
    4. October 2010 at 17:26

    Economics is a “generous mother”. It takes everyone under its protective fold, even “orthogonal” arguments.
    “For some the government is doing too little too late” while for others it is “doing too much too often”! See here:
    http://www.economist.com/economics/by-invitation/questions/what_are_risks_long_period_economic_stagnation

  19. Gravatar of marcus nunes marcus nunes
    4. October 2010 at 17:44

    Tonight Bernanke “changes the subject” and dabbles in fiscal sustainability. I wonder why!
    http://www.federalreserve.gov/newsevents/speech/bernanke20101004a.htm

  20. Gravatar of Greg Ransom Greg Ransom
    4. October 2010 at 18:04

    Scott, the selling price of my house model on my little cul de sac dropped by $500,000 — half its value — in 2 years.

    Explain to me how a drop in AD is to blame — and the Fed could have permanently given a floor to that selling price without creating a more massive artificial boom and unavoidable depression.

  21. Gravatar of Greg Ransom Greg Ransom
    4. October 2010 at 18:10

    In So Cal, women are big fans of going to Vegas. I live in the top foreclosure ZIP in Orange County, CA.

    Lots of the jobs lost here were in sales and finance — housing sales, mortgages, car sales, car finance, etc., etc.

    Others were doing jobs related to the housing construction boom and home furnishing, and luxury items for the home, etc.

    And these are the people who are losing their homes — and no longer trekking to Vegas every month.

    As I say — is economics was a science it would do field research like the biologist and geologists, and we would know many of the specifics of this, with something close to a full population accounting, consequently skipping the need for most of the computer and math games of oh, so “scientific” econometrics.

  22. Gravatar of johnleemk johnleemk
    4. October 2010 at 18:29

    Scott,

    Not directly related to this post, but I was talking with my girlfriend today, who is taking macroeconomics in her sophomore year of college about the Fed’s approach to monetary policy. She was bombarding me with questions like (virtually verbatim) “Why isn’t the Fed just lending more money to the banks?” and “Why is the Fed so stupid, can’t they just stop paying IOR?”

    These aren’t questions I wouldn’t have been asking as a sophomore (I’m a senior now); talking to her, it doesn’t seem like she has even the faintest idea of the Fed’s only policy lever being the interest rate, while this is the only thing lot of textbooks I saw could conceive of, just a few years ago. If even a sophomore can grasp these issues (she talked also about how it’s just a simple matter of boosting AD, and all the inflation hawks are just being silly) it’s pretty ridiculous that we still have a dithering Fed and a bunch of right-wingers ready to pounce on the slightest sign of easing up on inflation.

    And while it may be a bit hubristic to attribute this to you, I feel a bit doubtful this sort of thinking would be out there, trickling all the way down to the undergraduate level, if not for you, Scott. Your blog may not be the most accessible for undergrads (I once sent it to her and she left completely puzzled), but it reaches academics at least, and they can translate it for those they teach.

  23. Gravatar of Greg Ransom Greg Ransom
    4. October 2010 at 18:38

    Scott, I know people who were taking out second mortgages, on houses that had doubled in price — and were using the money on trips to Vegas, Atlantis, Hawaii, and were buying TVs, cars, all sorts of things.

    Field research would could give us a near full population accounting of a mass of such details — if economists were scientists who did research, like biologists, geologists, oceanographers, etc., etc.

  24. Gravatar of scott sumner scott sumner
    5. October 2010 at 05:27

    Marcus, I’m not fan of Summers, but that’s not really being fair to him. He never said women were inferior to men, and his comments on discrimination refer to a free market economy, so the history he cites is not really relevant. And how did “privatization” cause this crisis? I must have missed that one.

    I also fail to see how the repeal of Glass-Steagall created the crisis—were sub-prime loans illegal before the repeal? I’ll have to remember not to see the film Inside Job, if that guy’s the director.

    Benjamin, I’m not surprised he’s haggard-looking, it’s been a difficult several years.

    Joe, Katrina happened long after the recession was over (in 2005?) The recovery started in November 2001, so I don’t think 9/11 was decisive either. The bursting of the tech bubble led to much lower interest rates. This increased Md, and caused the recession. The Fed partly offset the effect, enough to keep the recession mild. But they needed to be a bit more aggressive. Still they did a much better job that time around. Ironically some now blame them for blowing up the RE bubble, which caused them to be too timid this time around.

    Marcus, I’m somewhere in between. Too little monetary stimulus and too much interventionist policies.

    Bernanke was the one who called for fiscal stimulus. He should have opposed it, and instead got the Fed to do the stimulus.

    Greg, The value of my house hasn’t change in the past 2 years. For the US as a whole, prices are down about 20%. The first 10% was the sub-prime bubble bursting, the second 10% was NGDP falling sharply below trend.

    Greg, Nice anecdote but not very scientific. Vegas had a record year in 2007, despite a horrible RE market in the southwestern US. That suggests the sub-prime bubble bursting wasn’t their main problem. It was falling NGDP.

    azmyth, Well put. Recalculation does occur, but it’s generally not enough to create a recession. One exception might be right after WWII, but even that recession wasn’t particularly severe.

    I think something will definitely happen in November. How much can the economy improve between now and then? The meeting occurs before the October unemployment rate is released.

    Johnleemk, Thanks for the support, I appreciate it. It’s gratifying to hear that the message is getting down to undergraduates.

  25. Gravatar of Morgan Warstler Morgan Warstler
    5. October 2010 at 06:34

    johnleemk,

    It is horrifying that your girlfriend is a liberal, and doesn’t worry more about making sure we benefit the right kind of people – the ones that won the last round of skee ball tickets and STILL are not getting to buy up all the prizes.

    Scott, once more, though I doubt you’ll give this a real answer…

    SINCE the Tea Party is in political ascendancy, and you what you want is political action, WHY don’t you come up with a form of QE that puts the new money directly into the hands of the local wealthy – not the bankers, but instead takes all the guys with cash in the bank and says to them…

    “yes, you won the last round, and you should be getting to buy everything CHEAP… since we’re going to do QE, we’ll give you the new cash, so you STILL get to BUY UP all the hard assets.”

    The only moral way to do QE, is by ensuring the winners STILL get the hard assets.

  26. Gravatar of Morgan Warstler Morgan Warstler
    5. October 2010 at 06:40

    Also, Scott your #’s on 2007 are mis-read…. everyone thought the housing fall off was cyclical in 2007, they thought it would come back…

    The tourists were sill coming, but even then the flow of dollars couldn’t keep up with the over-building from before 2006.

    Your read is wrong. I have friends thick in mortgage biz there, “local entrepreneurs” still had hope even as they couldn’t find anyone to rent their 4th house.

    Continued growth of NGDP to ensure Vegas keeps / kept growing is dumb to even discuss.

  27. Gravatar of Greg Ransom Greg Ransom
    5. October 2010 at 07:46

    Scott, once again, your reply is besides the point.

    SoCal is Las Vegas’s largest market — try driving the 15 from Los Angeles to Las Vegas on a Friday afternoon.

    “Greg, The value of my house hasn’t change in the past 2 years.”

  28. Gravatar of Greg Ransom Greg Ransom
    5. October 2010 at 07:50

    Again, I’m suggesting economics should imitate the genuine sciences, and do some field research and some population studies.

    I’m sorry to say this straight up and without baby bumpers, but .. you’re an economists and you’re telling me to be scientific?

    Scott wrote,

    “Greg, Nice anecdote but not very scientific.”

  29. Gravatar of Greg Ransom Greg Ransom
    5. October 2010 at 07:53

    In 2007 many in my ZIP were still partying like is was 2006.

    Watch “The Real Wives of Orange County” on cable — you might not consider it “scientific”, but it tells the truth about what was going on in the country better than much of the fake science pursued by much of the economics profession.

    Several of the “cast” members have lost their homes — you see them in 2007 spending money like there is no tomorrow, then in the last season or two, they’ve lost cars, homes, etc.

    These are people I see in the stores here in my area.

  30. Gravatar of Greg Ransom Greg Ransom
    5. October 2010 at 08:04

    I think this really does get to the giant elephant in the room pathology of creating a model of the economy which has no production goods, and no structure of production, and no time structure of production.

    Because Scott necessarily can never see this — it is excluded from his “scientific” model by mathematics fiat. And in Scott’s world, it is the math which makes the model “science”.

    Of course, its fake science. But its what the journals and the grad schools demand.

    Morgan writes:

    “Continued growth of NGDP to ensure Vegas keeps / kept growing is dumb to even discuss.”

  31. Gravatar of Morgan Warstler Morgan Warstler
    5. October 2010 at 08:04

    Greg, Scott has no clue about any of the markets where stuff blew up.

  32. Gravatar of scott sumner scott sumner
    7. October 2010 at 05:32

    Greg, The reason they were still partying in 2007 is because sub-prime crashes are a very small problem compared to NGDP drops. So your evidence refutes your model.

    Morgan, Money goes into the “hands” of whoever sells bonds to the Fed. And it makes no difference.

  33. Gravatar of Greg Ransom Greg Ransom
    7. October 2010 at 19:44

    Very few subprimes in my ZIP — the #1 foreclosure ZIP in OC.

    Looks like you are working with old data on the subprimes in any case.

  34. Gravatar of ssumner ssumner
    8. October 2010 at 15:14

    Greg, Fine, but it has zero effect on my argument. The RE crash didn’t hurt Vegas in 2007, whether it was a subprime or non-subprime crash.

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