The short answer is both, but I think Tyler Cowen may underestimate the role of demand shocks:
The article is here and it details other grim aspects of the city’s economy. This is a simple yet effective example of the current non-separability of aggregate demand and structural problems. Demand in Las Vegas is ailing and businesses are complaining of low sales. Yet this is a sectoral shift as well, resulting from especially bad local housing problems, lower travel demand from outsiders, and a growing desire for investment safety rather than gambling risk. Las Vegas needs for the United States to have higher real asset values, not just higher nominal aggregate demand.
Vegas suffered greatly after the sub-prime bubble burst in late 2006. I agree with Tyler’s view than more nominal demand would not solve that problem. But I think Tyler underestimates the role of falling AD in the hard hit Vegas tourism industry. Sectoral shifts often occur gradually, as when tastes change over time. The decline in Vegas tourism has been abrupt. Admittedly an abrupt sectoral shift could occur if the underlying causal factor was sudden and dramatic. Tyler argues that the sudden loss of wealth in America depressed the Vegas tourism market. I agree, but think the wealth decline was mostly due to falling AD.
This data on Las Vegas tourism shows that 2007 was a record year for revenue (up over 5%) and number of tourists. Hotel occupancy exceeded 90%. Then tourism dropped off sharply in 2008 and 2009. In my view the housing bust of 2007 destroyed relatively little wealth and had little impact on Vegas tourism. In contrast, the sharp drop in AD in 2008 had a severe effect on tourism. (High gasoline prices might have also hurt, but that problem quickly went away.)
I think Tyler errs when he implies that nominal demand and real asset prices are two different things. The sudden stock market crash of October 2008 was not caused by housing problem, it was caused by sharply falling expectations of NGDP growth. That’s an AD problem. Remember, nominal demand affects real asset prices because wages are sticky. This causes nominal shocks to have real effects on output, real stock prices, real commodity prices and real commercial real estate prices.
Unfortunately for Vegas, they rely heavily on the alpha males who form the entrepreneurial backbone of America. Meek, mild-mannered teachers like me have sticky wages and do OK during recessions. But we don’t do much gambling. The brunt of the impact of lower AD falls on domestic businessmen (not multinationals), ranchers, developers, entrepreneurs, etc. When they have a good year, they do what every red-blooded American male wants to do–go to Vegas and gamble. But ever since the Fed adopted the tight money policy in 2008, they have not been doing well.
- Structural problems: The first half of the Vegas housing crash
- Aggregate demand problems: The second half of the housing price decline, the commercial property crash, the sharp fall in stock and commodity prices, and the fall in RGDP that began in mid-2008.
I’d guess that two thirds of Vegas’s problem is in the second category, and that if NGDP had kept growing at 5% then Vegas’s tourism industry would have only taken a modest hit.