Diversifying Nevada - The Economist

There has to be a better way

IN THE desert near the Las Vegas airport stands a structure the size of 11 football fields. Security guards dressed in ninja style, all in black and with tasers strapped to their thighs, confiscate the identity cards of visitors, then lead them through a series of gates into the so-called SWITCH SuperNAP. Every part of the datacentre was custom-designed for optimal temperature control, with blue vents for cool air, red ones for warm, and everything looking futuristic. Computers, stacked neatly in cages, stretch out in long rows. They belong to the government, to eBay and Google, and to a growing number of other companies who could put their servers anywhere, but choose this spot in Nevada.

Brian Sandoval, Nevada’s governor, is enormously proud of the SuperNAP, which is built by a young private firm called SWITCH. The SWITCH SuperNAP, says Mr Sandoval, is proof that Nevada can attract and nurture businesses that have nothing to do with the handful of industries that Nevada is famous and infamous forâ€"chief among them, gambling. Other examples he cites include Zappos, a big online retailer that moved to Nevada from California in 2004, and a big potato-grower. But the list is not long.

Nevada’s reliance on gambling and its contiguous industries is in fact what has made it so vulnerable to economic shocks. Gaming and tourism caused the phenomenal boom during the decade leading up to the crash of 2007. It pulled in people, and those people needed housing, thus causing a construction boom and a subsequent retailing boom. This cluster of industries accounts for about half the jobs in the state. Throw in mining in the north and that’s about it. Nevada has the least diversified economy in America, after the District of Columbia (which relies on government), and Alaska (oil and gas).

That may explain why Nevada now has the highest unemployment rate in America, at 13%. When the recession struck, gaming and tourism declined (and may not recover to 2007 levels until 2015, according to forecasts), and construction all but stopped. Nevada lost more than 10% of its jobs between 2007 and 2011, and home prices have fallen by more than half. Where neighbouring California, also hit hard, at least had technology and other “knowledge industries” to fall back on, Nevada has almost nothing.

This is why Mr Sandoval, upon becoming governor last year, made diversification his priority. As a Republican in today’s party, he put himself in a precarious position. Nevada already has low taxes (and no income tax at all) and lean regulations, so current Republican orthodoxy would suggest that the rest should follow by itself, since government must not meddle. But I “can’t sit back and do nothing,” says Mr Sandoval. “I don’t want this state brought to its knees.”

So he commissioned a big report by the Brookings Institution and SRI International, two think-tanks. Then he signed a law that elevated economic development to a cabinet position and set up a few funds to attract new companies. Admittedly, those funds are small in comparison to those of neighbours such as Utah.

And next? Mark Muro, the main analyst behind the think-tank report, has identified seven industries and some 30 smaller niches that Nevada should coddle. These include datacentres such as the SuperNAP; call centres, warehouses and logistics hubs; and medical services for retirees (who currently tend to go to California for surgery). Northern Nevada might redouble its efforts in geothermal energy production. There also happens to be a lot of test bombing and flying of unmanned aeroplanes in Nevada because the armed forces uses its vast empty spaces. This local expertise could, perhaps, be turned into a centre for aerospace know-how.

At times, the advice sounds almost French, and certainly un-Republican. Thus Mr Muro urges Mr Sandoval to anoint “sector champions to spearhead cluster development”, seeming to veer off into industrial policy. That sort of thing might land Mr Sandoval, an up-and-coming sort (and one of only two Hispanic Republican governors), in trouble in the future. Just think of the flak Mitt Romney has got for his health-care reforms in Massachusetts.

But as Mr Sandoval sees it, diversification is intertwined with education and is thus a legitimate conservative cause. Nevada’s schools and universities are between mediocre and bad. It produces too few knowledge workers to attract the gee-whizz industries. It also does too little research on its campuses to seed start-up companies as, say, California’s Silicon Valley does. According to Mr Muro, Nevada produces only 40% as many doctorates per head as the country as a whole, and publishes half as many scientific papers.

Since money is tight and Mr Sandoval insists on balancing the state budget with only cuts and no tax hikes, this means everything rides on reforms. In the public schools (which all three of his children attend), he has signed bills to eliminate teacher tenure and pay by results. In the universities, he wants to attract some star professors and get deans to design more relevant curricula, in stem-cell research for example. Nevada’s reputation for sin may not be an asset in this endeavour. But as the engineers bustling around in the spaceship chic of the SWITCH SuperNAP demonstrate, that can be overcome.