Time to adapt

Steven Miller

Nevada's tourism-based economy, it is widely recognized, rises or falls with the condition of the national economy.

But the prospects for the latter's recovery, any time soon, are not good.

Though the longest recession since WWII is now reported as over, that report was merely a technical artifact. The Business Cycle Dating Committee of the National Bureau of Economic Research — the recognized arbiter of when economic recessions begin and end — ignores whether or not the economy returns to real health. It merely defines a recession as the period in which economic metrics continue declining. Even if the economy then remains in the dumpster for years, NBER won't count it as a recession so long as those metrics don't hit even lower lows.

The question on most Nevadans' minds, of course, is less about technical definitions than when we might see recovery to just the levels of a few years ago. And there, also, the answer is not encouraging: The hospitality industry almost certainly faces years of very slow economic growth. American consumers have abandoned the free-spending ways that for decades allowed Silver State resorts to prosper. Now consumers are much more interested in saving their way out of debt.

As the often-prescient economist Gary Shilling wrote this month, "the 25-year consumer borrowing and spending binge" is now being "replaced by a saving spree" that, along with "persistent business spending restraint, will continue to retard jobs in leisure and hospitality."

Shilling has to be taken seriously. Widely respected, he, in January 2007, was far ahead of other analysts in warning of the bursting of the housing bubble later that year. He also predicted, accurately, many of the economic consequences for the nation and the world that would follow.

In his September 2010 letter to clients, Shilling notes that he is "on record for a 50 percent or higher probability of a second dip or another recession, whatever it would be called." Adding weight to this call is the fact that the consensus forecast of other economists — as measured in the Wall Street Journal's monthly poll — is increasingly moving in the same direction.

The huge shift from spending to saving that Shilling identifies within the American public adds up to a profound cultural change. It has not as yet attracted attention in precisely those terms, but when a "25-year consumer borrowing and spending binge" comes to a screeching halt, it is a watershed.

Twenty-five years, after all, is a generation. Anything that could bring such a powerful trend to an emphatic full stop must necessarily also be quite powerful. And given that this Great Recession already constitutes the deepest downturn since the Great Depression, that clearly is the case. Contemporary Americans are going through something comparable to the searing experience of members of the generation that came of age during the Great Depression. That experience marked members of that generation for the rest of their lives. It will be the same with this generation.

Since the fourth quarter of 2007, American households have lost $12.2 trillion in net worth, according to the Federal Reserve's latest Flow of Funds report. That is a huge loss of wealth — years and years of household income, simply vaporized. Clearly traumatic for American families, such a shock cannot be anything but transformative.

Although Washington refuses to acknowledge it, Americans and people around the world have undergone a civilization-wide learning experience on the dangers of highly leveraged debt and its tendency to implode and destroy lives. This new understanding drives the deleveraging by American consumers and businesses. It also provides a major conceptual element of the associated cultural shift, which could significantly diminish the client base for Nevada's hospitality industry. 

At the same time, Washington reveals itself as economically clueless. Indeed, what Americans are seeing from the nation's capital flies directly in the face of the harsh economic lesson that citizens themselves have so recently had to absorb. The precise policies that destroyed their personal household and business wealth, they find, are what the current leadership in Washington, D.C. — the White House, the Congress and the Federal Reserve — continues to madly pursue.

Moreover, recent data shows that, under the policies of the current administration in Washington and the current congressional leadership, the public's travail continues. Indeed, the Fed's Flow of Funds statistics show the loss of wealth re-accelerating: Although U.S. households had regained some ground, financially, in the last three quarters of 2009, in the second quarter of 2010, those households' net worth again turned negative.

All this reveals prolonged economic maladministration of the country at the national level and thus no respite for residents of the Silver State. In years to come, our hospitality industry is almost certain to find less demand for its services, both nationally and internationally, than in decades past. That means an industry downsizing, with weaker competitors being winnowed out.

It also means that state lawmakers in the upcoming legislature — if at all serious about their fiduciary responsibilities to Nevadans — must reject any tax or regulatory changes that would make the Silver State less attractive to the new entrepreneurial businesses we need to attract.

Nevada is entering upon a new era in which its future will depend upon a welcoming and low-tax, business-friendly climate that allows genuine economic diversification — which does not mean politician-arranged corporatist subsidies.

It will be the job of responsible and honest state lawmakers to make this happen.

Steven Miller is vice president for policy at the Nevada Policy Research Institute. For more visit http://npri.org/.

Steven Miller

Senior Vice President, Nevada Journal Managing Editor

Steven Miller is Nevada Journal Managing Editor, Emeritus, and has been with the Institute since 1997.

Steven graduated cum laude with a B.A. in Philosophy from Claremont Men’s College (now Claremont McKenna). Before joining NPRI, Steven worked as a news reporter in California and Nevada, and a political cartoonist in Nevada, Hawaii and North Carolina. For 10 years he ran a successful commercial illustration studio in New York City, then for five years worked at First Boston Credit Suisse in New York as a technical analyst. After returning to Nevada in 1991, Steven worked as an investigative reporter before joining NPRI.