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.