David Hughes

Newscom

It's never quite accurate to describe Las Vegas as a ghost town. Even at five in the morning on a Tuesday, it's liable to be more lively than your average main street or shopping mall. But when I arrived there for a brief getaway last November, it was not the same bustling town I'd been used to. My flight from Houston was barely a third full. There was no line at the taxi stand, and my cabbie told me that several of his friends had recently been laid off from construction work on a variety of new developments, many of which had been halted in midstream after financing dried up. And when I arrived at Las Vegas Boulevard in the heart of the Strip, I found as many locals handing out postcards for dodgy escort services as tourists.

None of this, I suppose, should have been surprising: November was the nadir of the worst recession since the Second World War. Nevertheless, conventional wisdom has long held that gambling is recession-proof. In Las Vegas, it's been anything but. Gaming revenues received by local casinos were down 12 percent in 2008 as compared with a year earlier. (This figure and all others in this article are reported on an inflation-adjusted basis.) And 2009 will be even worse: So far, revenues are off almost 15 percent from 2008's already depressed figures. The recession, then, appears set to cost Las Vegas more than a quarter of its business.

This is sobering news not just for those who have purchased property in Las Vegas economist Tyler Cowen recently stated that the real estate market would not recover there for another twenty years but also for cash-strapped state legislatures that are turning to casino gambling as a way to raise revenue. Delaware, which already offers horse racing and slot machines, now plans to extend its law to permit table games like blackjack and, more controversially, sports betting. In July, Ohio governor Ted Strickland signed an executive order to permit slot machines at horse tracks, while California began to allow offtrack betting on horse races for the first time. Philadelphia will soon become the largest American city to permit casino gambling within city limits, although play will initially be limited to slot machines. And in Texas where, ironically, no legal game of Texas hold 'em is available gaming advocates are hoping that Kay Bailey Hutchison will defeat gambling-averse incumbent Rick Perry in next year's governor's race, which would empower the state legislature to consider casino gambling there.

But desperate state governments looking to casinos to bail them out of their budget nightmares are likely to be disappointed. The same may be the case with trying to tap other "sins" for revenue. Nationally, sales of alcohol for off-premises consumption were down significantly last year, an unprecedented 9.3 percent in the fourth quarter, according to the Commerce Department. The largest previous drop had been just 3.7 percent, between the third and fourth quarters of 1991.

Alcohol consumption can at least be expected to bounce back a bit right? but a lot of the potential customers of the new casinos may be tapped out. The year 2008 was the first time in history that total casino gaming revenues declined throughout the United States (by about 5 percent according to industry estimates). In most jurisdictions, gambling revenues max out quickly. In Atlantic City, for example, which opened for business in 1978, gaming revenues were no higher in 2008 than they were in 1986, and 2009 is on pace to be the slowest year since 1983. Gambling revenues peaked in 2002 in Illinois, in 2000 in Mississippi, and in 2006 in Detroit, which had only begun to permit gambling ten years earlier. The boom years in Vegas, when revenues nearly doubled, between 1989 and 2006, might have led states to misread casino gambling's upside potential.

What we've witnessed, indeed, is something of a race to the bottom. Shortly after President Reagan signed the Indian Gaming Regulatory Act in 1988, which expressly permitted Indian tribes to open casinos under tribal-state compacts, states like Mississippi, Illinois, and Colorado seeing no reason to split their profits with the Seminoles or the Cherokee decided to permit their own state-run facilities. Neighboring states, worried about losing their customers across state lines, then followed suit: Louisiana a year after Mississippi, Indiana and Missouri three years after Illinois, Michigan two years after Ontario, Canada. Meanwhile, the Indian tribes continued to up the ante, their casino revenues approximately tripling from 1997 to 2006.

Map by Ken Leung; Source: American Gaming Association

We have now reached the point at which residents of seventeen of the twenty largest metro areas are within a three-hour drive of a blackjack table. And Washington, D. C., will make it eighteen once Delaware permits blackjack, leaving only Dallas and Atlanta. Just about everyone who wants to gamble in the United States is already a morning's drive away from being able to do so; with the possible exception of isolated Texas, states that open new casinos will mostly be stealing customers from one another.

Las Vegas managed to buck the trend for a while by promoting itself as a luxury destination for wealthy adults. And the higher-end clients were willing to make bigger bets: Las Vegas gamblers spend about three-and-a-half times more per visit on gambling, for instance, than customers on the riverboats of Mississippi.

But it may have been that same formula that rendered Las Vegas especially vulnerable to the recession. Gambling receipts in Vegas didn't suffer much in prior recessions like the 1990-1991 bout, but the Las Vegas of 2009 has become much more reliant on a relatively small number of higher-end customers who are self-consciously looking to splurge.

Map by Ken Leung; Sources: Nevada Gaming Control Board and New Jersey Casino Control Commission

Still, the outlook there may be brighter than in other gambling destinations. With all due respect to Philadelphia, tourists aren't likely to flock there once they can play slots any more than they did before. The sort of customers these lower-end casinos attract, moreover, may be exactly the sort who shouldn't be spending their money on gambling. A 2005 study by the Federal Reserve found a statistically significant relationship between proximity to casinos in Mississippi and bankruptcy rates in the region, which includes impoverished states like Alabama and Tennessee. As someone who has spent more than a few hours at the blackjack table and has a libertarian streak to boot I have absolutely no business telling states they shouldn't open more casinos. But as much as they'd like to, they're not likely to find a lot of money there.

Nate Silver runs the political Web site FiveThirtyEight.com.

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