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.

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