When New Jersey legalized gambling in 1978, observers thought Atlantic City would inevitably eclipse Las Vegas. For 35 years Atlantic City had a pretty good ride. But that ride is over. Casinos are closing, with Trump Plaza being the latest.
As a gambling and entertainment center the city is going to get smaller and there simply isn’t anything Atlantic City or New Jersey can do about it. Right now, it’s a matter of slowing the bleeding. The decline and fall of Atlantic City is a cautionary tale not about the ills of gambling, but about a failure to understand how free markets work and cartels fail.
When New Jersey legalized gambling in Atlantic City, it created a cartel. The state placed strict limits on who could get a license (to keep out organized crime – a good idea) and the size and type of casino (limiting supply and entry – a bad idea). The result was a huge burst of construction and openings as the cartel got up and running, followed by a long period of stagnation and now, decline.
And that decline is well-deserved. Comfortable in its east coast monopoly, the Atlantic City cartel offered gamblers high table minimums to go with terrible drink service, awful food and surly staff, not to mention sky-high weekend room rates and weak entertainment options. Essentially, the cartel (like all cartels) was plenty happy with its high monopoly profits and felt no need to invest, expand and provide a better product. Atlantic City itself remained a dump as money paid into a development fund for the run-down city disappeared into a black hole of corruption. Atlantic City politicians and the casinos got fat, lazy and complacent.
When New Jersey legalized gambling, Las Vegas was at an enormous disadvantage. The most isolated city of its size in America, sitting in the middle of a desert, it should have slid into a permanent second place to Atlantic City. The city’s very existence is utterly nonsensical. But Las Vegas had a major advantage: it was not a cartel, it was wide open.
No requirements to build hundreds of empty hotel rooms. No restrictions on hours. No corrupt government putting obstacles in place of land acquisition and permitting. No special city authority “managing” development supposedly to protect the public. By the late 1980s, if you were clean and had the cash, you could build. The result was not just good for Las Vegas; it was good for all gamblers. You don’t have to be a high roller in Las Vegas. There are cheap tables, expensive tables and everything in between: High end, low end and free entertainment, tons of rooms, restaurants for any taste and budget. Wide open, competition built a gambling and entertainment center for everyone.
Atlantic City is learning a hard lesson: The problem with cartels is they don’t last. New competitors seek a slice of the cartel’s profits. New entrants outside the legal reach of New Jersey entered the picture. And Las Vegas was not going to sit still. With cartelized, expensive Atlantic City too difficult to enter, investors went elsewhere. From 1989 to 2003 twelve (12) states legalized casinos. In the same time period, Las Vegas opened 14 major resort casinos (and several smaller casinos), while Atlantic City only opened one.
Once the competition from Las Vegas and East Coast newcomers like Foxwoods started to bite, Atlantic City’s response was pathetic. Instead of opening up and really competing, it built an outlet mall and a minor league baseball stadium (both taxpayer-subsidized). Casears and the Tropicana developed weak imitations of Vegas retail.
Only when Atlantic City was truly reeling did New Jersey loosen up its rules to allow smaller casinos to open up. But even then the state followed up with a colossal blunder. The state subsidized Revel, a new mega-casino that was built in the teeth of the Great Recession to the tune of $261 million. Revel has proceeded to go through two bankruptcies and cannibalize a weak market.
For cities around the United States the lesson of Atlantic City is that coddling cartels and raising barriers to new investment and innovation is very costly. When cities are closed and protect incumbent interests, they stagnate. To jump-start development they have to resort to public subsidies, gimmick projects and desperate throws of the dice. In the long run, a closed process can lead to stagnation, stifling investment and opportunity. Attempts to “manage” development get mired in petty politics, higher costs, or kill investment outright.
The costs of corruption and lost opportunities from cartels can be difficult to calculate and hard to perceived from day to day, but they add up. Unfortunately, in the contest between taxpayers and cronies, the cronies always win. But in the end, just like in Atlantic City, everyone loses.