Joe Manno
April 22, 2009
Topic Paper: The State of Nevada
The state of Nevada, like the rest of the country, is going through a very rough economic cycle. The current condition of the state is bad from almost all angles. Nevada is a state that is highly dependant on tourism and gambling. In fact, Nevada does not have an income tax—it earns all of its income from a sales and gambling tax. However, due to the economic recession that our country is currently in, tourism is severely down. According to the state’s Governor, Jim Gibbons, visitors have declined by 3.5 percent. Moreover, the falling prices of copper, and the decrease in construction because of the banking industry failures all lead to state revenues falling by 30 percent.
Nevada was directly affected by all these national shocks which directly led them to the situation they are in now. Nevada is dealing with unemployment that has peaked at 10.4 percent this month. Before this recession, Nevada’s full employment was somewhere between 4.2 and 4.6 percent. According to the Bureau of Labor Statistics, between March of 2004 and March of 2007, the average unemployment in the state of Nevada was 4.4 percent. Simultaneously, between 2004 and 2006 Nevada saw an average growth rate of 11 percent. In 2004 its GDP was 100,209 million dollars, in 2005 it was 112,451 million dollars and in 2006 its GDP was 123, 054 million dollars. According to the most current GDP statistics which come from 2007, Nevada’s GDP was 127,213 million dollars. If one were to assume that Nevada’s average growth rate was 11 percent in order to keep it at full employment, then the 2007 GDP should have been 137, 048 million dollars. As one can see from the data, Nevada is clearly in a very large Recessionary Gap. Unfortunately, there is a slight information lag when dealing with state GDP information because the most recent GDP that has come out is the 2007 GDP. There is not a 2008 or 2009 state GDP that has come out yet, so the 2007 data is all there is for now.
(Graph was hand drawn per professor’s request)
The above graph shows the planed expenditure for the sate of Nevada. Nevada is currently at Ye which is 127, 213 million dollars. Full employment for Nevada is shown at Yf which is represented by a GDP of 137,048 million dollars. The graph clearly represents a recessionary gap of 9,835 million dollars. Using a simple multiplier, and assuming that the MPC in Nevada is consistent with, or very close to the national average of 0.8, one can predict that Nevada will need a spending injection of 1,966.4 million dollars (1/.2=5; 9835/5= 1,966.4). Thus, Nevada would need some sort of expansionary fiscal policy in order to bring its state back to full employment.
(Graph was hand drawn per professor’s request)
We can also observe this economic crisis from the Aggregate Demand Aggregate Supply graph. The graph above shows that Nevada’s current macroeconomic equilibrium is not at full employment. In order to shift their demand and/or supply to equilibrium they will need an expansionary fiscal policy, as the planned expenditure model shows. To shift AS closer to towards equilibrium they would need to do something like cut taxes. To shift AD towards equilibrium they would need to do something like increase government spending; or, they could do a combination of both to shift the curves to equilibrium.
Although the planed expenditure graph shows that Nevada would need an expansionary fiscal policy in order to bring their GDP back to full employment, the state must run a balanced budget. One problem with using an expansionary policy is that state revenues have fallen by 30 percent, thus the state is running a very large deficit. Currently, Nevada has a budget gap of 1.5 billion dollars, and must do something to fill the gap and bring the state back to a balanced budget. One problem, though, that the state is doing by returning to a balanced budget is that it is using a contractionary fiscal policy, which is the exact opposite that its economy needs to return to full employment. The state has proposed 575 million dollars in tax increases, along with cutting the budget by 2.2 billion dollars, and is even planning budget cuts up to 20 percent in the near future in order to deal with the loss of state revenue. The problem with this contractionary policy is that it may actually lower the states GDP, and this may actually increase the recessionary gap by lowering the government component of the states GDP. Moreover, as the AD/AS model shows, the state is actually shifting its aggregate demand and aggregate supply curves farther away from equilibrium. It is shifting its AS to the left by increasing taxes and shifting its AD to the left be decreasing the government spending component of its GDP, as seen at the bottom of this page. As shown by both graphs, PE and AD/AS, the state is doing the exact opposite of what it should do.
The state could initiate alternative policies, such as increasing taxes but still increasing government spending, that would stimulate the economy and still help to bring the state back to a balanced budget. This would work because when G=T, the economy is still being stimulated more by the government spending. However, the policy they are currently taking by raising taxes and lowering government spending will actually lower the GDP, and take Nevada further away from its target GDP rate of full employment. The hope for Nevada, however, would be that as the Nation reaches its target GDP rate, and it reaches full employment, the tourism industry will pick up and Nevada will once again be able to generate more money from taxes and then run an expansionary policy. As for now though, it seems that Nevada is only hurting its economy, and if it continues this policy will have to wait for the U.S. economy to turn around in order to bring back the tourism losses and construction losses that crippled the state.