Ask Dr. Christopher Labor Economics "Life After Money" Part 1

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Periodical

Life After Money

Part I

I. Labor Economics

Exporting Unemployment to Nevada

Where some of the unemployed are crazy like a fox!

“I missed the bus on the first day of school and never went back”

One Hot Summer 4^th of July in Louisiana many years ago we were engaged in conversation regarding accusations that Japan was dumping steel. An associate asked what does “dumping steel mean” We responded that the Japanese were selling their steel products at below the cost of production. She said “Why would they do that?” We stated: “To export their unemployment”.

Most recently the Chinese are accused of dumping steel pipe in Canada, Europe and the United States their fierce rebuttals to said accusations the lone tell of the necessity to walk the penalty gauntlet of sanctions, tariffs and recriminations the price for maintaining social stability in a declining economy. Reports have surfaced that China is warehousing many of their finished goods for some future delivery and recently completed high end deserted shopping malls abound, their affordability beyond the reach of the masses. China like Las Vegas winding down from a huge construction boom soon to displace many times the skilled labor now unemployed and residing in Clark County, Nevada. [13] China steel pipes.

To that end we can reflect on the current stubbornly high unemployment rate of Nevada or more specifically Las Vegas and Clark County, Nevada; seek to learn the reasons for this crisis and offer an assessment of the future of the labor market therein.

Lynnette Curtis of The Las Vegas Review Journal offered a glimpse of a single affected family in her article: The Face of Joblessness [1]. The Story describes a man who had worked at a Texas Steel Mill for twenty years averaging $13.00 an hour when he departed for Nevada where he retained gainful employment within weeks after arriving in Las Vegas his new wage $24.00h. “He worked cutting metal for a company that supplied titanium metal products worldwide”. [2] He was recently laid off though: “Now his family is subsisting on $400 a week in unemployment benefits, food stamps and rapidly diminishing hope.” [3]

In Texas he earned $13.00h before taxes which equates to a gross monthly income of two thousand and eighty dollars {$2,080.00} assuming a straight forty hour week. When he arrived in Nevada he earned $24.00h or {$3,840.00} per month gross. By relocating to Nevada he improved is quality of life in wages by two dollars shy of a {100%} one hundred percent premium. But the best was yet to come. Rendered unemployed after working for two years in Nevada he qualified for {$1,600.00} in monthly unemployment benefits plus food stamps. We are not privy to the value of the food stamp benefit amount but in this situation we learned he is providing for his family of six {wife and four children} which could approximate minimally $50.00 to $100.00 per week.

This steel worker escalated his wage earning capability by almost 100% by relocating to Las Vegas and although unemployed remains at parity with the same annual income he generated for twenty years {20} at a Texas steel mill. He and thousands of others are crazy like a fox as the government seems intent on continuing to subsidize unemployment for the foreseeable future compliments of the Nevada taxpayer and small business owner.

Since our steel worker left his job, his former employer needed to replace him with another person who probably already resided locally as few persons would relocate to Texas for thirteen dollars an hour with the exception of Mexicans, Central Americans or other immigrants seeking to improve their standard of living in the United States. The net effect of the great building boom in Las Vegas was to bid up the price of unskilled, semi-skilled and skilled labor drawing them by the tens of thousands from virtually every state, Canada and Mexico too.

A. This Double Bubble spells Big Trouble!

The owners of the Casinos in unparalleled synchronicity bet the house on demand for sustained viability for the love of the vice of gambling and embarked on the largest single industry expansion in history concurrently as the industry consolidated. The risk was compressed among fewer and fewer players increasing the potential for catastrophic failure of a once thriving metropolis should one of the remaining players fail. All while under the watchful eye of the local gang of seven and the gaming commission. A dozen or so properties in rapid succession reached skyward, the ugly bust now differentiated by and between those completed, staffed and open for business, those completed and mothballed, those built but without roofing exposing their interiors to the elements, and those with steel skeleton frames rusting or wrapped under tarp.

The Casino building boom was accompanied by a residential housing boom of new construction both horizontal and vertical. Homeowners cashed out equity to buy additional homes for turn and burn profit. Others spent their equity for deposits on condos in yet to be built towers their belief resting on a sales pitch, blue prints and if lucky miniatures. School teachers and skilled laborers rented and commuted from Nye County as affordable housing was almost non existent in Clark County.

The Clark County Commission routinely rezoned land against the will of the people to promote additional residential construction. We wondered when one of the adults would hit the pause button but no one ever did. We were certain that our leaders like Yvonne Atkinson Gates and Rory Reid would heed the warnings of the water district and curtail or apply some type of moratorium on growth to slow the depletion of the precious life giving resource of water in this drought stricken community but they and the other commissioners including Tom Collins and Bruce Woodbury all experienced simultaneous tone deafness and the building boom intensified.

Tom Collins recently filed a civil complaint {lawsuit} stating that he never agreed to abstain from voting for a paving contract. Tom Collins initially voted for the higher bid which was some $4m four million over the lower bid. A Federal Judge ultimately awarded the contract to the lower bidder. Let’s see $4m/$400.00wk =10,000 weeks of unemployment benefits for one person or 1,000 weeks of unemployment benefits for 10 people or 100 weeks of unemployment benefits for 100 people or 10 weeks of unemployment benefits for 1,000 people or 1 week of unemployment benefits for 10,000 people and you would still receive the paving job from an approved contractor and now by a margin of 4-3 the Clark County Commission has voted to appeal the decision of the Judge to the Ninth Circuit Court of Appeals. They want to do it their way no matter the cost. Their rebuttal argument is that a Federal Judge shouldn’t tell them who to hire for a project. That’s the problem with corruption of elected officials they don’t know when to call it a day. Why don’t they at least spend their personal wealth for this bogus appeal rather than soak the taxpayers or better yet cancel this project altogether as the current road system should be sufficient to handle the daily volume of traffic including the projected exodus of people and vehicles departing Clark County. So why does this clown Tom Collins remain in office? Others voting with Mr. Collins include Steve Sisolak and Chris Giunchigliani. We are uncertain as to who represented the tiebreaking vote; although we applaud Susan Brager and Rory Reid for voting “NO”.

B. The Day the Music Stopped!

The first hint of trouble was years prior to the main event. The Aladdin was a quaint cool place to hang out. We attended several concerts there including one of our favorite musicians of all time Carlos Santana! Then management tore it down and rebuilt a Mega resort in its place. We returned to watch the Trans Siberian Orchestra and dine at their buffet. One day we read that the property that was built for $1.2b was sold for $400m and re-branded as Planet Hollywood. Quite a discount! They blamed it on the architecture saying there was no entrance facing Las Vegas Boulevard or that the casino was not easily assessable since one had to ride an escalator to the main floor. We reasoned that maybe the real culprit was over supply and that just maybe the spot inventory now exceeded the demand for rooms on any give night in Las Vegas.

One by one these mega projects were mothballed or failed. Boyd gaming had imploded the Stardust now stopped work on the Echelon, slated to restart sometime in 2010, but with their efforts to acquire some prime properties with an offer of $900m recently increased to $2.5b or so for the whole enchilada from the now lingering bankruptcy of Station Casinos may not complete the Echelon making amends, for the horribly bad decision to demolish a paid for plant and recreational stomping ground for generations of fun seekers playing at the Stardust, by rescuing some of their former competitors prized portfolio of resort casinos.

C. Timing is everything!

In this case the timing of the construction of so many overlapping resorts escalated the costs of almost all projects concerned as contractors and subs competed for materials and scarce labor increasing the costs of both. The most flamboyant case of overruns in the history of Las Vegas is graciously awarded to the Fountainbleau which at 63 stories tall and now post bankruptcy requires funding including a roof to seal off the tower and protect the 3,800+ rooms from the elements. The resort apparently would require an additional $1.5b to complete. [4] An offer of $150M was allegedly proffered by our value oriented friend Carl Icahn the new owner. Congratulations to Mr. Icahn!

The Cosmopolitan is slated for completion by Deutsche Bank the international Universal Bank [5] who foreclosed on the previous owner and threw him out the window when he failed to cough up additional capital to compensate for his sinking land based collateral. The bank has recently put forth several executives for a gaming license with the State of Nevada. The Cosmopolitan is apparently slated to open sometime in 2010. This resort remains the most viable to succeed due to the backing of a world renowned banking sensation with an excellent business plan, a breath of fresh air in an otherwise pungent decline.

D. Converting Equity to Debt {bad}

Converting Debt to Equity {good}

Station Casinos and Harrah’s each went private moments before the stock market and economy tanked. So instead of allowing their stockholders to eat the losses they bought out the shares at high prices financing their purchases with mucho debt. Station couldn’t maintain the payments of the enormous equity converted to debt and declared bankruptcy. Their case is dragging along while management maneuvers for time and favorable terms as the legal fees add up and reduce the value of any final resolution.

Harrah’s is scheduled to make a series of escalating debt payments in the next several years the amounts of which would render a small sovereign nation insolvent but in an unorthodox move this company has purchased some of the outstanding debt of Planet Hollywood the former Aladdin the very resort which may be subjected to yet another bankruptcy filing or transfer of ownership to the “bank”. Is this really a good move for Harrah’s to assume debt from a struggling competitor to gain control an uninterrupted flow of casino traffic along part of the East side of Las Vegas Boulevard? We think not!

E. Marathon Men and Women Break the Tape!

MGM the part owner of City Center has completed a massive undertaking now valued at half of the build out value. With brave faces they opened the hotels one at a time and welcomed their first paying customers. We read that the walls of these magnificent buildings are adorned with over $40M in art.

Encore and Palazzo are both open for business; Two of the first properties to reach completion under such stressful conditions. The Exterior only of the Octavius tower at Caesar’s Palace was completed and the project is now stalled {mothballed} due to lower demand. The project cost an estimated $1b. [6]

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2010.01.17/2010.02.04/2010.03.20 2010.07.15 2010.8.15 updated <><