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Paul Brewbaker on what ails Hawaii’s economy — and how to fix it


August 15, 2015

Tina Yuen
Paul Brewbaker

Staff Pacific Business News

Known for his tell-it-like-it-is style, Paul Brewbaker is a go-to source for predictions about Hawaii’s economy. The former chief economist for Bank of Hawaii now heads his own firm, TZ Economics. He talked story with PBN about the local economy, what ails it, and what he thinks should be done to fix it.

What do you see happening as far as the economy and unemployment in Hawaii go? The challenge is that tourism, federal government and construction all declined or did not rise during the past 18 months, and this pause has started to slow the growth of employment. The expectation is that an investment-led second wind will pick up economic growth where tourism-led recovery tapered off in 2013.

However, this scenario of transition to investment-led growth — we’re talking about construction — has failed to fulfill expectations for several years now. The construction upsurge failed to appear and, yet again, the expectation is that it will — next year. I believe the scenario is plausible, but I think it is important to understand that policymakers such as housing regulators, the legislators who banned buildings taller than Walter Dods’ First Hawaiian Tower and the whiners who, even after rail won a referendum several years ago, continued to delay its construction with lawsuits until recently being overruled. The Hawaii economy stopped growing as fast because some people jammed it up.

What can Hawaii do to encourage and lure more businesses? Honestly, are we still talking about this? Small business creates most jobs, but small business extinguishes most jobs. Large corporations are not going to headquarter in Hawaii — indeed, the obvious trend is towards their disappearance, not their growth. I think the emphasis on encouraging and luring more business is entirely the wrong focus for economic policy in the state.

The problem is that so many bad policy initiatives have been adopted in the name of business development that it is actually, in Hawaii, impairing economic development. Hawaii gives to film productions one-quarter of their production cost — also known as their equity — without getting any equity in the resulting intellectual property, also known as movies and television shows. What idiot provides all the equity for a film production, and doesn’t get any other residuals? Answer: the state of Hawaii.

Hawaii subsidizes the installation of renewable-energy equipment that, if it actually produced electricity more cheaply, on an all-in basis, than oil-fired power plants, would not require a subsidy. Panels don’t work at night. Because we still need the power plant at night when the sun don’t shine, and any time the wind don’t blow, the state’s energy policy has increased the price of electricity, just as requiring that imported ethanol be added to imported petroleum derivatives, gasoline, in order to make liquid fuels more expensive. The government’s solution to the affordable housing problem is to subsidize the developers, not the renters. Are you serious?

Tourism export receipts have been shrinking outright for 25 years, not to mention shrinking as a share of Hawaii’s gross domestic product, making people worse off, and all the state can say is “we’re going to keep doing the same old things, fill in the shoulder seasons and get more conventions.” Tourism has been declining ever since we built the Hawaii Convention Center. Correlation is not causation, but when do we get our refund on that loser?

So, after dropping the “B” from the Department of Business and Economic Development, the state should get on with policymaking that removes distortions like transfers from the poor to the wealthy that comprise subsidies to special interest groups, redouble its efforts at public infrastructure investment and stop being an obstruction to new residential and commercial development. That means letting the City and County of Honolulu grow upward, vertically. Density is proximity, and it’s a complement to mobility, all of which are needed to make the city productive and to keep the country country. Moreover, urban density and urban open space are not mutually exclusive, an important fallacy in Hawaii thinking.

How about tourism and what can be done to increase it? There are fewer tourist accommodations on Oahu today than there were in the 1990s, and the net change in accommodation inventories on the Neighbor Islands is of an order of smallness rendering it meaningless in terms of the capacity change that would be necessary to increase tourism. Tourism remains Hawaii’s principal export, but populist politics and public policy have conspired to reduce outright its economic contribution to Hawaii for the past 25 years.