Katrina and the Gulf States Casino Industry Douglas M. Walker (College of Charleston) and John D. Jackson (Auburn University) Paper presented at the 2007 Southern Economic Association Conference, November 19-21, 2007, New Orleans, LA.

Background Katrina hit along the LA-MS border in Aug. 2005. Rita hit near the LA-TX border in Sept. 2005. The casino industry in LA and MS was devastated, since much of the industry was located in hurricane affected areas. Our analysis is of the relationship between the casino industry and state-level personal income, and how this relationship was affected by Hurricanes Katrina and Rita.

Figure 1. Maps of casino locations in Louisiana and Mississippi Source: American Gaming Association (2006b)

The casino industry in LA and MS LA and MS are relatively isolated markets for commercial casinos They attract tourism Isolation Situated on state borders/rivers, or in tourist cities Casinos may drive state-level economic growth Walker and Jackson (1998) found a significant short-run effect using 1991-96 data, for all U.S. states with commercial casinos But our 2007 paper found no significant long-term effect, using 1991-2005 data Econometric studies of the effects of casino gambling are still rare

Table 1. Casinos damaged by Katrina and Rita Damaged by Katrina (Aug. ’05) Damaged by Rita (Sept. ’05) New Orleans area Mississippi Gulf Coast Lake Charles, LA Bally’s (Lake Pontchartr.) Boomtown (Harvey) Harrah’s (New Orleans) Treasure Chest (Kenner) Beau Rivage (Biloxi) Boomtown (Biloxi) Casino Magic (Bay St. Louis) Casino Magic (Biloxi) Copa Casino (Gulfport) Grand Casino (Biloxi) Grand Casino (Gulfport) Hard Rock (Biloxi) Imperial Palace (Biloxi) Isle of Capri (Biloxi) Silver Slipper (Biloxi) The New Palace (Biloxi) Treasure Bay (Biloxi) Grand Palais Isle Lake Charles Harrah’s Pride Harrah’s Star L’Auberge du Lac

Figure 2. Nominal casino revenue, N. O Figure 2. Nominal casino revenue, N.O. area casinos affected by Katrina (millions of $) Source: Louisiana Gaming Control Board

Figure 3. Nominal casino revenue, Lake Charles area casinos affected by Rita (millions of $) Source: Louisiana Gaming Control Board

Table 2. Mississippi Gulf Coast casino slot machine positions, casinos affected by Katrina Casino \ Slot Positions July 2005 Dec. 2005 Oct. 2006 Beau Rivage (Biloxi) 2217 - 2017 Boomtown (Biloxi) 1052 1388 Casino Magic (Biloxi) 1177 Copa Casino (Gulfport) 1354 Grand Casino (Biloxi) 2610 838 Hard Rock Casinoa (Biloxi) 1500 Hollywoodb (Bay St. Louis) 1206 915 Imperial Palace (Biloxi) 1484 1885 1999 Island View Casinoc (Gulfport) 2060 1032 Isle of Capri (Biloxi) 1184 728 1333 New Palace (Biloxi) 1189 827 849 Silver Slipper (Biloxi) 860 Treasure Bay (Biloxi) 973 228 Total Slot Positions 17366 3440 10599

Our question The previous tables and charts indicate the how quickly the casino industry rebuilt. Would such a strong recovery in this industry have an impact on the states’ post-Katrina (and Rita) economies?

The data We use real quarterly LA and MS personal income and casino revenue data. Quarterly data are used rather than annual, in order to maximize the number of observations. Post-Katrina annual data are limited Our casino revenue data exclude non-casino video poker and slot machines. Indian casinos are excluded because data are not publicly available.

Data, cont. We use personal income rather than per capita income to measure economic growth. Before and after Katrina there was significant migration from New Orleans and the Biloxi/Gulfport area. Migration may not be accurately reflected in per capita income data. Personal income data are available quarterly; state-level per capita GDP data are not.

Data, cont. Data set begins in 1997.1 We want to avoid picking up the initial stimulus effect we found in our 1998 paper. The Louisiana Gaming Control Board was created in 1996; previously the State Police reported data. Beginning in 1997 allows us to use data from only one agency. Aside from these reasons, beginning in 1997 is a nice balance to the post-Katrina data available.

Data, cont. The data end in 2006.3, the last period for which personal income data were available (as of the paper writing). 39 quarters of data on each variable for each state, for 78 total observations. Katrina and Rita were both in 2005.3. 34 observations in each state are pre-hurricane (1997.1-2005.2) 5 post-hurricane observations (2005.3-2006.3)

The model Personal income (t0) = b1 Constant + b2 Personal income (t-4) + b3 Casino revenue (t0) + b4 Casino revenue (t-4) + b5 Katrina dummy + b6 Katrina * (Casino revenue) + b7 State dummy + e (t0) Personal income one year prior is an explanatory variable since annual personal income is a random walk. A four period lag for casino revenues was chosen after an analysis of the correlogram. Current values for casino revenue appear not to be affected by immediate past quarters’. The fourth lagged period of casino revenue significantly affects current period’s. Probably an annual cycle. State dummy is included (1 for MS, 0 for LA) Katrina dummy (1 from periods 2005.3 through 2006.3; 0 otherwise) includes effect from Rita

Model, cont. Katrina – revenue interaction term will pick up relationship between casino gambling and personal income above and beyond that explained by revenue t0 and t-4 This should tell us how the effect of casino revenues on income enhances (b6>0) or detracts (b6<0) from economic recovery. Omitted variables include… Seasonal dummies: insignificant, and didn’t affect other coefficients Time trend: insignificant and didn’t affect other coefficients FEMA relief, other federal or state relief, and insurance settlements were not explicitly accounted for in the model BEA indicates that these are accounted for in the 2005.3 personal income data

Coefficient (t-statistic) Table 3. Regression results. Dependent variable: Personal income (adj. for inflation) Variable Coefficient (t-statistic) Constant 60134*** (7.19) Personal income (t-4) -0.006 (-0.42) Casino revenue (t0) -1.30e-5 (-0.62) Casino revenue (t-4) 4.25e-5* (1.83) Katrina dummy -32093*** (-3.29) Katrina * (casino revenue) interaction 0.0001*** (3.30) State dummy -32489*** (-6.89) R2=0.924, Adj. R2=0.918 Note: *** indicates significance at the 1% level, ** at the 5% level, * at the 10% level.

Conclusions Clearly, the hurricanes devastated personal income in LA and MS The hurricane dummy is strongly negative The interaction term is positive, indicating that increases in casino revenues have a significantly greater expansionary effect on personal income after the hurricanes than before them. This result is consistent with our earlier findings (1998) of at least a short-term growth effect from casino gambling. Capital investment, labor flows, etc., may explain this. Copies of the paper available at: http://www.cofc.edu/~walkerd