CRAIG T. KOJIMA / CKOJIMA@STARBULLETIN.COM

Hawaii's efforts at bettering
its economy may only end up
hurting it, a writer says

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By Russ Lynch
rlynch@starbulletin.com

Hawaii can't do much to help its economy, but can do everything to hurt it, says economist Christopher Grandy.

His new book, "Hawaii Becalmed, Economic Lessons of the 1990s" ($13; University of Hawaii Press; 131 pages) tells how decades of rapid economic growth from the 1960s turned flat and even negative in the 1990s.

Hawaii is almost totally dependent on outside influences, Grandy said in an interview, and as the rest of the world goes, so goes Hawaii.

But moves such as raising the state minimum wage, providing tax incentives for hotel reconstruction and giving preference in bidding for state contracts to Hawaii construction firms all had the effect of turning those needed outsiders against Hawaii, he said.

"I'm optimistic about the future of Hawaii," Grandy said, but he said he is concerned that "in our desire to make things better, we don't screw it up."

He is not entirely negative. Keeping taxes from rising and constantly looking at business regulations to make sure they are really needed are essential, he said.

"And in education, it makes sense to look at competition for what is an existing monopoly," Grandy said.

Leroy Laney, a professor of economics at Hawaii Pacific University, and a close observer of the Hawaii economy for more than 12 years, agrees with Grandy's major points.

While he said he has Grandy's book but hasn't read it, "I basically agree that we are very dependent on outside influences and a lot of people here don't realize that.

"We are a very small economy and a very open economy" and Hawaii has been seriously affected by outside influences such as the Gulf War and the recession in Japan, Laney said.

"We have to avoid doing the things that would hurt," he said.

Grandy said intellectual honesty requires considering all the costs of public policies along with the benefits.

"Unfortunately, lots of times the benefits are trotted out and there is little or no discussion equal to what the costs might be," Grandy said.

His book cites the work of Gov. Ben Cayetano to cut personal income tax rates and, after hard fights and compromises in the Legislature, to at least start an attack on the way Hawaii's general excise and use taxes pile up in pyramid fashion.

The immediate result was a set of budget problems.

Positive things were done at the same time, Grandy says in his book, such as taking tourism promotion funding essentially out of the budget and making it directly covered by the hotel room tax.

Having worked as an associate professor of economics at the University of Hawaii and for several years in the state Department of Business, Economic Development and Tourism, Grandy said he played a small part in some discussions of what happened in the 1990s.

Grandy is now back at the university but out of economics as an associate professor of public administration.

His overall message is that Hawaii's economy is solidly attached to what happens on the mainland and in Asia, a situation that cannot be changed, but efforts to change the economy internally by protectionist measures can hurt.

"On the one hand, it is not very likely that there is much we can do to significantly improve Hawaii's economy but we can very easily mess it up" by introducing measures that reduce state income or make it harder to do business in the islands, he said.

In his book, Grandy says Hawaii had an economic boom for many years, based largely on rising tourism numbers, but then "the curtain came down" due to three factors.

>> The outbreak of the Gulf War in 1990 "frightened overseas travelers and raised Hawaii's oil-dominated energy costs."

>> At the same time, the U.S. economy slipped into recession, bringing a drop in visitor travel from Hawaii's main market, the U.S. West Coast, a much worse effect on Hawaii than the war.

>> By the late 1990s an economic crisis in Asia plunged Japan into a recession, hurting eastbound travel to Hawaii.

Meanwhile, Hawaii's state government became largely "out of control," the book says. Cayetano made what Grandy sees as a surprising but welcome move to make the first real cuts in the state job total in decades.

But as the state economy stagnated in the 1990s Hawaii was riddled with denial, Grandy says in the book.

"One of the most blatant examples of denial" was the "Thumbs Up!" campaign sponsored by businesses led by Bank of Hawaii and First Hawaiian Bank, the book says.

"While the leaders of the 'Thumbs Up!' campaign no doubt had their hearts in the right place, the economic situation was not simply a matter of insufficient consumer confidence," Grandy wrote.

Outside influences were too strong.

But the Council on Revenues, the panel of economists charged by state law with devoting their own time to predicting what state tax revenues will be, was repeatedly upbeat in the 1990s until the extent of Hawaii's economic woes was clear, the book says.

Grandy's opinion is that it is too easy to believe that Hawaii's relative prosperity will last and those in power and the people who elect them too often fail to recognize the dangers of policies based on appealing words such as "family" or "local business" or "tradition."

Grandy says Hawaii "built its wealth on open exchange with the rest of the world" but demands from leaders in the community continue to refer to the need to "protect local business" or preserve local jobs or, even more vaguely in his opinion, to "keep Hawaii Hawaii."

Too often those phrases mean outside competition is too stiff, or that local businesses don't want to be disturbed too much, the book says.

Grandy's book says Hawaii is so dependent on outside influences that local policy makers can do little but "tinker at the edges of our economic engine" to try to make improvements.

And he has these warnings:

>> Regulating gasoline prices, airline fares and health-care premiums will end up as a form of industry protection that ultimately does not work in favor of the consumer.

>> Exempting food and rent from the general excise tax could distort economic incentives just as tax subsidies to specific industries would, requiring government to raise taxes in other ways, to the detriment of the economy.

>> While it might be a "slight exaggeration" to say that diversifying Hawaii's economy by legalizing gambling would be like diversifying by legalizing narcotics, the indirect costs to the community and the economy need to be considered.

And Grandy said the state might want to look at deregulating some industries, such as trucking, to reduce their costs and make them more efficient.