Nevada faces a longer recession than most states

“There’s nothing more disconcerting than to watch your neighbor get rich. And people make all sorts of bad decisions. A lot of people did, and they got caught.”

Economist Tom Cargill is talking about the practice of treating one’s house like an investment instead of a home, and the pitfalls of that habit in an age of bad mortgages. No state suffered more from that habit than Nevada, which has the nation’s highest foreclosure rate. That’s old news, of course, but many Nevadans have not let go of the notion that the state will recover more quickly than other states, as it used to do.

For many years, Nevada bragged that it had a “recession proof” economy. It didn’t really, of course—whenever there was a national recession, Nevada always had a downturn. The difference was that while the economies of North Dakota or Arkansas stopped growing during a recession, Nevada’s rate of economic growth was so terrific that its rate of growth slowed—but growth continued. “It was more like what we call a growth recession, which is not an actual decline in employment but a slowdown in growth,” said Cargill.

And a slower rate of growth is always better than no growth at all.

“That changed dramatically in ’80, ’81 and 82,” according to Cargill. “Because that’s the first time that the Nevada economy really felt a real recession—gaming revenue, taxable sales declined, unemployment went up to, I think, over 10 percent.”

The resilient Nevada economy was no longer something the state could brag about.

Nevada’s past prosperity has always been tied closely to the construction rate, and not just its own. It exists in a West that depends on the same positive economic factor, making it to some extent dependent on what is happening elsewhere.

“I believe most of the states on the West Coast are dependent on construction,” said Heritage Bank of Nevada president Stan Wilmoth. “Not just Nevada, but Arizona, probably Oregon to some degree. … Denver. Colorado.”

Most of all, though, there is California. Nevada has often been an economic adjunct of the Golden State, with overlapping commerce and media. And California provided Nevada with most of its gamblers.

“I think the thing on the horizon that makes people nervous would be, how sick is California’s economy?” said economist Glen Atkinson.

That’s a particular concern in Northern Nevada. “We’re more affected by California than Las Vegas,” he said.

Cargill says Nevada’s economy is distinguished from that of nearby states in at least four ways, and the first one is that the state’s economy is still—after decades of work to try to attract other types of businesses—mostly reliant on the gambling industry.

“We’re not as diversified. That’s one thing that sets us aside,” Cargill said.

“We don’t have a very flexible fiscal system, since there are no income taxes.

“A third thing related to that is that we rely on taxing outsiders. We have a parasitic tax structure—at least a parasitic tax mentality. That’s one reason why voters didn’t have any problem in raising the room tax, because they naively believed it’s only on visitors. And all taxes impact residents one degree or another.

“And I think, fourth, government spending in Nevada has grown in a very, very rapid rate.”

Wilmoth agrees with Cargill about the state’s tax structure. “We need to get a source of tax revenue here that’s more predictable,” he said.

Atkinson considers the scene so bleak that he can identify only one bright spot.

“The two major industries, I think, are still down, being gaming and construction,” Atkinson said. “It’s mostly mining that’s still looking pretty good.”

A Californian now has a choice he didn’t have 30 years ago—casinos closer to home than Nevada. Some Nevadans are not good at adjusting to a different gambling world. For instance, Cargill said, gamblers other than addicts have an option if they get the sense they’re being milked: Drop gambling as an activity altogether. In a world in which casinos are everywhere, its forbidden allure is gone.

And there is a point where Nevadans’ efforts to keep paying their government bills with the money of tourists produces a diminishing return.

“How big it is, I don’t know, but I do know [from] case study after case study, eventually the outsiders will go away,” Cargill said. “They’ll go somewhere else. By itself, raising the room tax probably is not that big of a deal. But combined with everything else that’s going on, you know.

“A visitor from California, in looking at coming to Nevada [in a recession], the only thing that changes—now he’s got to pay $3 more for a room—probably wouldn’t have much of an effect. But what else is going on is the value of his house is declining, he’s got more uncertainty about his job, maybe he’s even lost his job, and now that $3 or $4 per room does make a difference.”

A moderate amount of tourist taxes is one thing, Cargill said, but relying on it heavily is a mistake. For one thing, it can’t produce enough “to really support a diversified state economy.”

Casinos in Northern Nevada were already in decline when the recession got underway. Tribal gambling has been draining off customers from Reno casinos for years. The California casinos have had less impact on Las Vegas and Lake Tahoe, but Cargill says erosion is likely accelerating in those areas, too. And there have been rumors about Las Vegas-style megaresorts on the drawing boards of California tribes.

Nevada got serious about diversifying its economy in 1983, creating new and more elaborate tourism and economic development programs. But the casino industry’s growth has, until very recently, kept pace with those development efforts, with the result that diversification of the economy never really happened.

The current recession is unlike previous ones in that one of its causes—mortgage foreclosures—strikes directly at one of the engines that has driven Nevada’s past economic growth: Construction. Nevada has the highest foreclosure rate in the nation, and no one is willing to venture a guess on when construction will revive.

“There’s such an inventory of housing and commercial structures on the market, there’s not much construction going on,” Atkinson said.

And economic factors are interwoven with each other. “We need to see unemployment start to turn to where it either flattens off or starts to [drop] before we’re going to see housing start to recover to any degree,” Wilmoth says.

But can the unemployment rate improve before construction begins to recover? Nevada’s jobless rate rose to 11.3 percent statewide in May, the highest in record keeping history.

Nor is the other engine that has driven Nevada’s prosperity—rapid population growth—as certain as it once was. The state has fallen out of its traditional ranking as the fastest growing state in the nation. Nevada’s role as a Mecca for retired people is being undercut.

“Some demographic shifts are happening here that are all tied in to this. … Who’s going to be coming to Las Vegas if their portfolio is down, and their house price is dropping, and gas prices are going up?” asked Atkinson.

Nevada is, then, faced with something it has not faced in the lifetime of anyone living—profound depths of economic troubles that strike right at things that were previously state strengths. Even during the depression of the 1930s, Nevada is reported to have done better than some states. Not since the long depression between the decline of the Comstock Lode and the 20th century mining booms in Tonopah, Goldfield, and White Pine County, has the state seen a situation quite like this.

Wilmoth thinks that the end of the recession will not come until the first half of 2010, and he thinks of that as a pessimistic prediction.

“I think we’re into the remainder of this year and maybe sometime in the first quarter, second quarter of next year.”

But he’s more optimistic than many. Atkinson believes Nevada could be in a recession into 2011.