Recession an opportunity for a new Nevada?

By Buck Wargo (contact), In Business reporter

Fri, Mar 12, 2010 (3 a.m.)

Nevada has a chance to redefine itself during this recession and its future is bright once the national and global economies improve, according to the chief economist for Wells Fargo & Co.

“You will recover again. It is a nature of the game,” said John Silva, who was the featured speaker at the March 2 Nevada Taxpayers Association’s annual meeting. “You had your first accident, and now you have a choice ... Are you going to learn from your first accident and be more cautious, be thoughtful and think ahead a little bit? Or are you going to drive like a teenager all over again and get into another accident? That is the challenge you have going forward.”

The state doesn’t know what its strengths and weaknesses are and what direction it is heading, and the biggest challenge is deciding what Nevadans want the state to look like in the next 20 to 30 years, Silva said.

Silva said Southern Nevada would see its population grow once the economy recovers, but the region must decide how it is going to control that development with limited resources such as water.

“You are like a teenager who has not grown up,” Silva said. “You are not the same Nevada you were 20 years ago, but you are not sure who you are and where you fit in the world. You have mining that works here and construction that works here and gaming that works here, but you are not sure how it all fits together.”

Bill Anderson, chief economist with the Employment Training and Rehabilitation Department, said there are signs that the national economy is emerging from the recession, which in turn will bolster Nevada. But he warned people not to expect a repeat of the boom conditions that the region enjoyed in recent years. Job growth won’t occur until the end of 2011 or 2012, he said.

“We think the worst is likely behind us, and we will start to see gradual improvement, not in terms of outright growth but simply as a moderation in the rate of decline,” Anderson said. “What is likely to emerge is an economy that grows at a more moderate or modest pace and one that is more sustainable over time.”

Jeremy Aguero, a principal at Applied Analysis, was a bit more pessimistic. He said much of the spending in Southern Nevada’s economy was based on an unsustainable level of credit from sources such as refinancing homes.

“That money is not coming back anytime in the foreseeable future,” Aguero said. “It is a lot easier to spend money you don’t have than pay back money you don’t have.”

Everyone acknowledges the recovery will be defined by job creation.

People follow jobs and population growth will depend on that, Anderson said. About 140,000 Nevada jobs have been lost since December 2007 to give the state the second highest unemployment rate in the nation after Michigan. Nevada lost 27,000 construction jobs and 22,000 hospitality jobs in 2009 alone, and it will take time to recover, especially with no major resort development expected in several years, he said.

“We should not have any illusion of who we are as a community,” Aguero said. “People are not moving to Las Vegas or Southern Nevada for social services or quality of education. They are moving for economic opportunities, and when that is gone, so are they.”

Silva dismissed suggestions by some national pundits that difficult times remain ahead for Nevada over the long term. As long as the state has air conditioning, people will show up even though Nevada is sensitive to the ups and downs of the business cycle, he said.

“As soon as the global economy picks up a lot of momentum, you are going to end up with just as much traffic as you did three years ago,” Silva said. “The fundamentals are positive for population growth. If you look at your character long term, you see expansion.”

Although job growth is needed to lure people to the state, affordable housing is luring second homebuyers and retirees, Silva said. Nevada has other opportunities as well, he said.

The California economy will rebound, but it has lost its competitiveness and businesses will be looking for opportunities out of state, Silva said. California keeps raising its taxes and is going to be less competitive, he said.

“That is a tremendous advantage to you as long as you don’t do anything stupid,” Silva said. “They are pricing themselves out of the world. You are in great shape.”

How Nevada deals with its budget woes will define the state for the next 30 to 50 years, Silva said. Since the state’s economy is cyclic, it needs to consider setting up a “rainy-day fund” in which it puts money aside to prepare for future downturns, he said. It’s part of “understanding your character.”

Aguero said the state faces many uncertainties about its finances with the Legislature facing a $2.9 billion deficit on a $6.6 billion general fund budget when it returns to session in February.

Aguero defended the Legislature for its interim budget fixes until the regular session, saying it had difficult choices. If the state eliminated every school or let every prisoner out of jail, it wouldn’t solve the budget problems. Difficult decisions have been put off for a long time, he said.

Aguero said he’s not saying the state would have been better off with a gross receipts tax or corporate income tax because the budget would still have had deficits.

“We have an economic problem first and fiscal problem second,” Aguero said in citing a decline in state revenue.

The sales tax system was designed in 1960 and needs to change because the goods people bought back then aren’t the same as today, Aguero said. It’s also difficult for Clark County to subsidize the rest of the state, he said.

The cap on property taxes installed in 2005 will limit the growth of revenue when values rebound and relying on the gaming tax is difficult because gaming is a smaller share of the economy than it was a decade ago, Aguero said.

“If you have a portion of the economy subsidizing the balance of the economy, and it’s getting smaller and smaller, it is difficult to continue that into perpetuity,” Aguero said. “We choose not to make adjustments when times were good, and now we are forced to make adjustments when things are at their worst.”