Monday, February 1, 2016

Escorting the Gorilla from the Room

If you have paid attention to the Las Vegas economy for any period of time, you have heard of the city’s economic Holy Grail … Diversification! We rely too much on the hospitality industry, and must diversify if we are to survive. Never mind the fact that we’ve gone from a population of about 5,000 people to around 2 million people in the last 100 years fueled by hospitality (they called it gambling back in the day), the future holds nothing but heartbreak if we do not diversify.

Of course, there is some truth to this. A more diverse economy would certainly boost Southern Nevada’s fortunes in the face of another economic downturn or a terrorist attack that struck the tourist industry. Diversification, though, is not necessarily easy. Industries operate in places not only because those places want them, but because those places offer a competitive advantage for them. The steel industry didn’t spring up in what we now call the “Rust Belt” because the local city fathers or chambers of commerce invited it. It arose where there was a ready supply of iron and coal and an efficient way to transport those raw materials to the foundries and the finished steel to its customers. A competitive advantage can be created by governments. Gaming predominates in Southern Nevada because Nevada made gaming legal. Southern Nevada also has lots of sunny days and nice weather – another boost to tourism. Government can also create a competitive advantage by offering financial incentives, but that is a very expensive way to attract new businesses to a region.

The other day, I decided to conduct a little experiment. I wanted to discover just how “un-diverse” the local economy was compared to other large cities. To do this, I decided to compare Las Vegas to another economy that is dominated by a large industry, in this case Houston, Texas.

The experiment was simple. Using the official employment numbers for the Las Vegas MSA and the Houston MSA, I backed out each community’s 600-pound gorilla – hospitality for Las Vegas, “mining & logging” for Houston (which includes the oil industry), and then looked at the percentage of jobs in the other employment categories. Here are the results:

The main differences between the economies are more manufacturing in Houston than in Las Vegas (possibly stimulated by the petroleum industry and Houston being a port city), and more trade, transportation and utility employment in Las Vegas than in Houston (possibly stimulated by the hospitality industry). Had I done this comparison several years ago, Las Vegas would have also shown a predominance of construction jobs – not surprising in a city as young as Las Vegas and one growing at such a rapid rate.

The bottom line – Southern Nevada, like many cities, is dominated by an industry that has found it a particularly competitive place to be located. Outside of that industry, Southern Nevada is not terribly different from Houston in terms of how people there make a living. As Southern Nevada grows older, the economy will likely grow more diverse, or at least as diverse as it needs to be.

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