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September 16, 2014

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Lessons Las Vegas can learn from the Rust Belt

As Detroit is to automobiles and Pittsburgh was to steel, Las Vegas is to tourism — a one-industry town. How Las Vegas can make like Pittsburgh and grow beyond its roots

The Rust Belt

Vacant properties such as this house north of downtown Detroit are prevalent in a city that has lost about half its population since its peak in 1950. The steady decline of the U.S. auto industry is largely to blame for the exodus. Launch slideshow »

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The images streaming from Las Vegas during the past two years — foreclosed homes, long unemployment lines, unfinished eyesores on the Strip — must be shocking but also achingly familiar to many Americans.

For although they’ve come to expect, from media images and their trips here, a dazzling Las Vegas of perpetual change, growth and prosperity, at the same time they know all too well the signs of economic decline.

These are Americans from the Rust Belt — the string of cities from the Northeast to the upper Midwest, whose industrial decline began after World War II and continues today.

Residents of places such as Cleveland, Buffalo and Detroit have grown accustomed to the latest news. Another factory headed overseas. Another drive-by shooting in a forsaken part of town. A late-night comedian using the city as a punch line. And, perhaps most painfully, a friend, a neighbor, a son or a daughter joining hundreds of thousands of others and leaving town — usually for the Sun Belt.

Las Vegas residents could afford to look back on those cities, for many of them home, with an air of pity and smugness.

A combination of good weather, affordable homes, plentiful jobs, a live-and-let-live attitude and minimal taxes and regulation had created — seemingly — recession-proof prosperity.

Goodbye to all that.

The recession has hit here harder than just about anywhere else. The depressing data are familiar: Unemployment has topped 13 percent, and is much higher when part-time workers and those who have quit looking for work are included; Las Vegas has more foreclosures than any other large city in America, and our home values have utterly collapsed; the largest foreclosed commercial building in the country is on Las Vegas Boulevard, and, most shockingly, after being the fastest-growing city in America for the better part of two decades, a net of at least 28,000 people have left Las Vegas since summer 2007, according to recent estimates.

Nor are the near-term prospects at all comforting. There are too many hotel rooms, too much commercial real estate and too many empty houses for any kind of building boom to return, and economists say Las Vegas should learn to live with diminished expectations.

We can no longer be sure that we are the city of the future. Like it or not, we’ve got a little bit of Detroit and Cleveland in us.

Keith Schwer, a UNLV economist, has collaborated with a University of Michigan colleague, George Fulton, examining how similar Las Vegas and Detroit are in their heavy reliance on one industry — travel and tourism here, cars in Detroit.

“Lo and behold, now we see how similar they really are,” he says sheepishly. “Before, they were always two economies going in different directions, and now they’re going in similar directions.”

The question facing Nevada’s elected officials, business leaders and civic activists: How do we stop the slide and secure long-term, sustainable prosperity?

How do we avoid becoming Detroit or Cleveland or Buffalo — once prosperous cities now deeply scarred by decay?

More pointedly, what can we learn from their failures? Also, what can Las Vegas learn from those Rust Belt cities that have transformed themselves and are now thriving — cities such as Boston and surprising gems like Pittsburgh?

The Sun interviewed a bevy of urban economists and economic development experts, mostly from the Rust Belt.

Here, the lessons learned.

Get your head out of the sand

Denial is a common reaction to economic upheaval, stagnation and eventual decline.

And nothing is more dangerous, the Rust Belt veterans say.

“Face reality. Face facts — not what you would like to see happen, but what is happening,” says Donald Grimes of the University of Michigan’s Institute for Research on Labor, Employment and the Economy.

Detroit, he says, has never faced the new reality, even as foreign automakers began to make deep inroads in the domestic car market in the 1970s and as the city’s population was halved by declining job opportunities and social decay.

Cleveland has been similarly foolish, says Andrew Welki, a professor of economics and finance at that city’s John Carroll University.

“There’s no doubt there’s an unwillingness to accept the fact that the world has changed. Whether you like it or not, it’s not coming back,” he says.

So has the world changed for Las Vegas?

That depends on whether Las Vegas is suffering because of the business cycle — in which case, we can expect things to return to normal soon enough — or if our economy is structurally flawed, in which case, we have much bigger problems.

Most experts say it is a combination of the two. On one hand, forecasters expect a modest uptick in travel and tourism next year, albeit not matching the go-go years.

Americans are in the process of what economists call “de-leveraging,” paying down debt. They are saving, chastened by the crash and suddenly remembering the lessons of youth — save, save, save and don’t buy what you can’t afford.

Pacific Investment Management Co. strategic adviser Richard Clarida says the U.S. savings rate may soon exceed 8 percent, according to Bloomberg.

That in turn will mean less spending on items such as trips to Las Vegas.

“What’s more discretionary than a trip to Las Vegas?” says Ross DeVol, director of regional economics at the Milken Institute.

Although tourism will recover slowly, the second leg of the Las Vegas economy — construction — will not return soon.

So is Las Vegas in denial?

It is too early to tell, but there are discouraging signs, including endless assurances from city fathers that the light at the end of the tunnel is nearly visible.

“There’s a lot of inertia,” Schwer says.

“These types of events should serve as a wake-up call,” DeVol quips, “but sometimes, the recipient is dead drunk.”

But presuming we wake up from that stupor, then what?

You’ve got a good thing — now build on it

The reason Detroit has suffered such decline, notes Grimes, isn’t because people stopped buying cars. Rather, the automakers’ cost structure was such that Detroit was unable to deliver cars that could compete with foreign offerings in price or quality. Some of that was out of its hands, but he adds that the automakers never had a long-term strategy for controlling costs or improving or diversifying their product mix.

David Champion, director of auto testing at Consumer Reports, takes a harsher view, writing in The New York Times: “In the 1970s, Detroit car company executives failed to grasp that foreign car companies made inroads because car buyers were fed up with products that offered poor gas mileage and appalling product quality.”

The lesson here for Las Vegas is to evolve its core industry — continue working hard to be a premier value destination for travel and conventions, a lesson that seems to have sunk in for the city’s main industry and elected officials.

Las Vegas continues to add new attractions, convention space, airport capacity and the like, positioning the city to become highly competitive with other destinations here and abroad.

Still, experts believe Las Vegas can do more to leverage its travel and tourism. Schwer says we could develop a cluster of companies that support the industry — say, more software and professional services firms.

Mark Muro and Rob Lang of the Brookings Institution have suggested that Las Vegas’ real strength comes from the convention industry, which could lead to more permanent business opportunities.

Cleveland, for instance, has been trying for three years to create a “Medical Mart,” a convention center and hotel complex that would host specialty medical trade shows, the foundation of which would be the famed Cleveland Clinic.

According to Welki, however, the idea has stalled because of bureaucratic infighting and inertia.

We’ve developed something similar with our permanent furniture trade show at World Market Center, but the Medical Mart seems a plausible idea for Las Vegas, especially now that the Cleveland Clinic has opened a subsidiary in the city.

But building on what you have is more than just developing your core industry. It’s also using the fruits of that industry — both private profits and tax revenue — to build other, new industries, says Bill Flanagan, vice president of corporate relations for the Allegheny Conference on Community Development, the parent organization of Pittsburgh’s chamber of commerce.

(In the Detroit area, by contrast, governments and nonprofit organizations failed to use the resource they had — the auto industry cash cow — to build a new future. They didn’t develop an electric car or build up Wayne State University, for instance.)

For decades, Pittsburgh’s well-paid, unionized steel workers — living in a conservative town during a time when Americans saved more — socked away money, which went into regional banks. Strong regional financial institutions helped anchor the city’s new industries such as health care. Taxes from the city’s older companies, which included not only steel but also Westinghouse and Mellon Bank, were used to clean up the air and water and build good education and health care infrastructure.

Barons of steel and other older industries plowed profits into the city’s two large research universities, Carnegie Mellon University and the University of Pittsburgh, as well as the region’s massive philanthropies, all of which drove growth in more sophisticated manufacturing, and in health care, energy and information technology.

Pittsburgh now has 201,300 jobs in education and health care, or “eds and meds,” as its transformation is known. That’s a 100 percent increase from 30 years ago, in two highly valued employment sectors.

Pittsburgh’s unemployment is two percentage points below the national average and nearly six percentage points below that of Las Vegas; more than 30,000 jobs currently need filling.

Its commercial real estate market is the healthiest in the country; although it never had a real estate boom, it hasn’t had a crash either.

Pittsburgh, which struggled for years after the collapse of steel, now has a diverse economy with high-skill, high-productivity jobs.

How did a declining steel town become one of the most thriving cities in America?

Build a culture of education

As Schwer notes, there are a few ways for a region to grow wealthier: Sell more of what you currently produce, which in our case is the Vegas experience; figure out a way to sell something else to the world, or start producing at home what you once had to import, like, for instance, the Cleveland Clinic’s contribution to cutting-edge medicine here.

How do you achieve these goals and become more prosperous? The answer is simple: You have to produce something fresh and new, such as a renewable energy technology that will blow the doors off the marketplace, or a resort so incredible — like the Mirage in 1989 — that tourists just have to see it. That, or you produce the same goods you’ve always produced but for less money.

In either case, you have to innovate.

Where does innovation come from?

In part, from sheer entrepreneurialism.

“Develop an entrepreneurial class. They’re going to determine where the future is,” Welki says.

Detroit, with its large unionized, heavily bureaucratic companies in one industry, has struggled to develop a culture of entrepreneurialism and has been far too resistant to change, DeVol says.

On the one hand, Las Vegas is now home to a few large, unionized companies that dominate the market, which could stifle creativity.

On the other hand, we nurture a culture of risk-taking here.

Sheldon Adelson, after all, had the good sense, when he opened the Venetian in 1999, to imagine Las Vegas not as bunch of gambling halls but as a convention town where business people would come and pay $200 for a hotel room.

But there’s almost always another component of innovation, experts say: education. There’s just no getting around it. Welki says Cleveland failed to see that overseas competitors could make the same goods for less money. The only way out, he says, is to innovate by creating new products or inventing new, more efficient methods for making the same products.

Education is usually the path to that kind of innovation, Welki says.

“So now your workforce is going to require a more sophisticated level of education, and though you pay them more, they add value.”

Although it may be nice that bellhops with high school diplomas can make good wages here, a whole city of bellhops and cocktail waitresses and cabdrivers will always struggle to innovate.

And though conservatives are right to point out that spending lots of money is no guarantee of educational success, it just so happens that Rust Belt cities that have evolved have also dumped money into creating a culture of education.

As Harvard economist Edward Glaeser notes in a paper on Boston’s history of economic crisis and reinvention, “In 1980, Boston was a declining city in a middle-income metropolitan area in a cold state.”

Boston was going the way of its northeastern mill town brethren, forgotten cities like Lowell, Mass., and Waterbury, Conn.

In some respects, Boston just got lucky, Glaeser notes.

Once higher education became imperative at the dawn of the information economy in the early 1980s, Boston was well situated to capitalize because it claims some of the world’s best universities, several of which are at the forefront of rapidly evolving computer science, biochemistry and advanced physics.

Today, Boston leverages that resource, and in large part because of its highly educated populace, the city is a leader in biotechnology and health care, information technology, financial services and higher education.

Nevada’s mediocre K-12 and higher education systems will mean an inability to innovate either in its core industry or in the development of new industries, experts fear.

“There’s a relative paucity of super high-powered innovation inputs at this point. You don’t have a massive, patent-driving R&D university,” says Muro of Brookings. “And they know they have a lot of work to do on that.

“Well-educated places are productive places.”

Laissez faire isn’t always the answer

Angie Schmitt, a graduate student at Cleveland State and a proprietor of the blog Rustwire, points to an intriguing paper from the Federal Reserve Bank of Cleveland. It draws a comparison between two socio-economically alike, low-income, mostly black neighborhoods — one in Cleveland, one in Pittsburgh.

How is it that the Cleveland neighborhood had a foreclosure rate of 20.75 percent in 2007, four times as high as the Pittsburgh borough’s rate of 5.2 percent?

The paper posits that the answer comes in Ohio’s more laissez faire attitude toward subprime lending, and a failure to enforce predatory lending laws.

If this sounds familiar, it should. Nevada regulators failed to adequately oversee mortgage companies, according to a legislative audit released last year. Not surprisingly, law enforcement officials here can’t keep up with the mountains of mortgage fraud that occurred during the boom. This has worsened the real estate crash and continues to be an expensive mess.

Other areas of regulatory success and failure in the Rust Belt are also instructive. For decades Cleveland dumped its industrial waste into Lake Erie, which prevented what could have been a source of prosperity — lakefront development. When the Cuyahoga River caught fire, the city’s image as an industrial wasteland was set in stone. Both waterways have been cleaned up, to a large extent, but too little, too late.

Pittsburgh, on the other hand, has acted more aggressively. Flanagan says it was likely one of the most polluted cities on the planet during World War II.

But the city’s business community, including Big Steel, got together with government leaders and helped clean the skies beginning in the 1940s and ’50s.

Same with the city’s famed rivers, which are now safe for drinking, swimming and fishing.

Will the same be true of Lake Mead? And where will we get our water in 30 years?

Not just a place to work, a place to live

If an educated, entrepreneurial populace is the key to an innovative and, thus, prosperous economy, then Las Vegas has to either grow its own or recruit those people to come here.

In either case, it will need to create a place in which college-educated people want to work, and live.

Pittsburgh reclaimed its riverfronts and built a network of parks and trails. It built a theater district and two sports stadiums. Next up, a new home for the NHL’s Penguins, in the first LEED Gold Certified, environmentally friendly arena in the country. (This is just the latest in a series of green-building triumphs — the building community enthusiastically took up the cause after a push from the foundations, delivering another economic skill set Pittsburgh can export.)

Rob Stephany, executive director of the Urban Redevelopment Authority of Pittsburgh, said the city had reclaimed all but one of the hulking, shuttered manufacturing plants, and turned them into commercial, retail and residential developments and parks.

Flanagan says the low unemployment rate, and myriad amenities and diverse neighborhoods of the city, have combined to retain the young people who once left Pittsburgh in droves.

Cleveland has tried to revitalize its downtown with sports stadiums and the Rock and Roll Hall of Fame, but the flight to the suburbs has continued apace. The continued loss of jobs, as well as urban blight and crime, have continued to make the inner core a difficult sell.

In the area of creating a livable community, Las Vegas has some natural advantages. The weather is excellent roughly nine months a year. The Strip offers all kinds of entertainment, dining and night-life options. The region also offers great outdoor activities within driving distance. And there seemed to be great progress in the livability category the past two decades, with the art museum, the symphony and proposals to create urban, walkable neighborhoods downtown.

But that progress has been decimated by the crash. The film festival CineVegas announced a one-year moratorium, the Vegoose music festival shut down, the art museum closed, and the symphony is financially struggling.

As Schwer notes, the Smith Center for the Performing Arts will be a step in the right direction.

Cultural amenities and a more diverse streetscape are just part of what’s needed, though. Educated professionals also look ahead to the future, consider raising a family here and then ask themselves: Will Las Vegas provide good schools and a healthy environment? It’s an open question.

A civic culture that will build for the future

Jimmy Dimora, the smooth-talking former janitor who until recently ruled Cleveland’s Democratic machine, now faces a wide-ranging federal corruption investigation. For Cleveland residents, business leaders and civic activists, the episode has been demoralizing and led to paralysis, Welki says. Corruption can infect an entire community, ensnaring otherwise ethically sound businesses and making progress on important public projects all but impossible. It’s difficult to ink deals that require public approval when it’s not clear the person in charge isn’t headed to prison.

“It’s a political machine without any of the benefits,” Schmitt says.

Welki says the alleged corruption in Cleveland has created inertia and stalled the city’s attempt to leverage the Cleveland Clinic and the universities to benefit the entire economy.

Detroit Mayor Kwame Kilpatrick, on whose shoulders many hopes rested, had the cash-strapped city lease a luxury SUV for his wife and then wound up in jail after a salacious affair and cover-up.

Experts say cities that thrive are those with a clean political system and a civic culture that encourages cooperation and giving back. (Chicago is an obvious exception, though for what it lacks in the former, it makes up for in the latter.)

Pittsburgh, by contrast, has a history of civic engagement and cooperation — and none of the corruption of its Rust Belt counterparts. “By and large, our business leaders are Republicans,” Flanagan says, “but they have a tradition of working with Democratic mayors to make the city a better place.” That tradition goes back to cleaning up the air pollution, and continues today across a range of efforts, from neighborhood revitalization to economic development, from environmental cleanup to support for arts and culture.

Money flows into the big philanthropies, and while Pittsburgh businesses aren’t thrilled with their tax burden, Flanagan says in the early 1990s the region enacted a one-cent sales tax for a series of strategic investments that have since paid off.

Stephany says the city’s dozens of neighborhoods each have councils that meet monthly, so that even when Pittsburgh faced decline during the 1980s, neighborhoods were maintained.

Can Las Vegas achieve this kind of civic culture after no small amount of apathy, corruption, cronyism and favors to the favorite industry during its young history?

It goes back to that earlier question: Is Las Vegas ready to confront reality, lest we become like those failed cities so many of us left behind?

Time will tell.

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