Revel closes its doors today as the latest casualty in the ongoing travesty that is the Atlantic City gambling industry. There are two ways to see this. Either we can mourn it and bemoan the current state of gambling in the United States and worry about the future of the industry, or we can see it as a natural consequence of the breaking of gambling monopolies, healthy creative destruction. I believe the correct way to see it is the latter.
The clear culprit is Pennsylvania. It is no coincidence that casino revenue in Atlantic City topped out in 2006, the very same year that Pennsylvania’s very first casino opened its doors. Since then, Pennsylvania has outpaced Atlantic City in terms of total gaming revenue. Atlantic City may be failing, but demand for casino gambling is clearly not going away. It is simply being spread out. This is confirmed by last year’s AGA report showing the gambling industry as a whole achieving its highest growth rate since the Great Recession.
Part of the consequences of building your capital structure based on a local government granted monopoly is that if and when that monopoly is ever broken, the resulting overinvestment or malinvestment in Austrian economic terms, will become obvious. This is exactly what is happening now in Atlantic City.
The district was built on monopoly gambling prices which have now been broken, to a certain extent. Atlantic City will not die, but it will shrink requisite to the actual demand that exists. This should not be mourned, other than by the actual people that are losing their jobs in the Revel and Trump closures, but should simply be seen as a more equitable distribution of casino revenue thanks to governments finally saying people can, to a degree, do what they want with their own money.
As a simple thought experiment, what would happen is, say, Congress passed and the President signed a bill that gambling and betting in any form is now legal in all 50 states with zero licensing or regulatory restrictions whatsoever? We’d have to be crazy to say that this would be bad for the gambling industry as a whole. Clearly it would be fantastic. But for the Las Vegas Strip it would be absolutely devastating, because Las Vegas was built on the assumption of the maintenance of a local monopoly. The supply of gaming would skyrocket and the price of gambling would plummet. Casinos built on the previous price structure would collapse just like those who bought a house at the top of the government induced housing bubble went bust, too.
It’s just another form of the boom/bust business cycle caused initially by government intervention in the form of restriction of the gambling market, followed by the removal of that restriction.
In any case, what happened and continues to happen in Atlantic City is not unique to Atlantic City. It can and will happen to any local monopoly if competition gets too close and breaks that monopoly. If California governor Jerry Brown were to suddenly pass a state law like our thought experiment above, Las Vegas as we know it would no longer exist. Yes, there would still be gambling there, but a lot less of it. It would have to dramatically shrink to meet the new conditions, but the combined gambling revenue of California and Nevada would still grow.
So let’s talk about the legalization front. First, a note to politicians and mainstream economists: gambling can never grow the economy on net. If by grow the economy you mean add to humanity’s global stockpile of material wealth, then gaming cannot do that. On net, it can only provide entertainment satisfaction, which is not a material good. Otherwise it only shuffles wealth around. It does not create it.
Of course, if more legalized gambling means attracting more wealth from outside whatever arbitrary boundary one wishes to draw (outside Las Vegas, outside Nevada, outside the US, outside the western hemisphere, outside the planet etc.) then anything inside that boundary will gain at the expense of anything outside that boundary due to foreign investment in entertainment services, but this is still not net growth.
Anyway, here’s what’s been going on recently on the legalization front. First of all, it is noteworthy if not very interesting that the amount of states that have legalized some form of land-based gambling (22) is nearly identical to the number of states that have legalized some form of marijuana (23). I find that fascinating. The legalization rate is also picking up on both fronts. 10 states have legalized gambling in the last 6 years, and 11 states have legalized marijuana in the last 5. I don’t see this as entirely coincidental. There’s a liberalizing trend going on here that is clearly picking up steam.
But there are still setbacks. Voters in Massachusetts will decide this November in a referendum if they want to repeal a law legalizing gambling that was passed in 2011, this before any casinos have actually been built in the State. Another temporary setback in California where a bill to legalize internet poker was dropped for 2014, but will probably pop up again next year for another shot. And of course, Chris Christie recently vetoed a bill that would have legalized sports betting in Atlantic City.
Nevertheless, the little guy is still popping his head up. In Boise, Idaho, residents are pushing for legalized gambling to try to help revitalize the city and attract visitors. Whispers of poker legalization are now showing up in Wisconsin.
If Massachusetts voters keep gaming legal and California legalizes poker next year, it will be two big victories in an already long series of victories over the last 6 years. Let’s root for Boise, too.
