What Can We Do to Improve Hawaii's Economy?
Price of Paradise · Hawaii Public Radio · aired 1993-07-01
Guests: David McClain (Professor, University of Hawaii); Leroy Laney (Chief Economist, First Hawaiian Bank)
Duration: 0:34:22
Note: music outro 525 s

[00:00:00] Randall Roth: Good morning. I'm Randy Roth, host of the Price of Paradise Radio show. Our guests today are David McClain, the Walker Professor of Business Enterprise and Financial and Economic Institutions at the University of Hawaii, and Leroy Laney, Vice President and Chief Economist at the First Hawaiian Bank. David, let's start with an easy one. Is it good or bad that Hawaii is so dependent upon tourism?

[00:00:23] David McClain: Well, I guess the answer to that, Randy, is that it's neither good nor bad, it's just the way it is. Uh, I in an ideal world, uh, an economy would be uh, completely diversified, but there are very few economies like that. Most regions, most cities, are in fact dependent on one industry or another.

[00:00:39] Randall Roth: So diversification is is good?

[00:00:41] David McClain: Well, it's a desirable goal to pursue, and I think what makes us think of it more and more these days is the fact that the tourism market is off a bit, and it would be nice if we had something else to turn to.

[00:00:52] Randall Roth: I see. Leroy, do you agree that diversification at least as a goal is that important?

[00:00:58] Leroy Laney: I think diversification is very good. Uh, I think that an economy that is as small as Hawaii's is, as David mentions, is it's rather hard to diversify an economy like that. Diversification will not save an economy. Uh, take an example of Hawaii of California's economy, which is in very serious trouble now, and which is probably as diversified as any state in the Union.

[00:01:21] Randall Roth: So, the big question then, how do we diversify, David?

[00:01:26] David McClain: Well, I think what we need to do if we think about what we say to corporations, we teach uh in in our corporate strategy classes, corporations should diversify in areas related to their core competence. Uh, and that what that means is don't do things far afield, do things that build on the strengths you already have. For us, what that means is, I think, to diversify in areas that are related to, although not the same as, as tourism.

[00:01:50] Randall Roth: What specifically do you think we should do?

[00:01:52] David McClain: Well, one of the things that follows from this notion that we should do we should diversify in areas that are related to our core competence is that we should should certainly have a convention center. I mean, a a destination like ours is not doing nearly as much as it should to attract business travelers to come to Hawaii. If those business travelers come, some of them will stay and add to the skill base of the state, and others will just uh raise the level of economic activity here. Without a convention center, which many, many other cities have, um, we're not going to be able to do that. So this is some this is an idea whose time has come and and I hope it hasn't gone.

[00:02:28] Randall Roth: So you would say it's it's a no-brainer that we really don't have to study it anymore, we simply have to do it.

[00:02:33] David McClain: I really would. I mean, I think of course the HVB numbers are are going to be overly optimistic about how many visitors we're going to get. That's a that's a natural bureaucratic fact of life. But even if you take the HVB numbers and deflate them by a factor of two or three, um considering what it costs uh and considering who we are, the unique place we are, a convention center makes a lot of sense.

[00:02:54] Leroy Laney: I think that the convention center is a very good example of other things that we consider here, and we talk about a good bit over a period of of years, or perhaps even decades, and don't undertake. Uh probably the underlying problem with the economy is that we don't have a sense of urgency about doing things. And I think probably a good bit of that is is due to the fact that if you look back over the years, and over the decades, at least here in Hawaii since statehood, we have not had a really serious economic downturn. We haven't had serious economic times hit us like hit uh Texas and the Southwest in the mid-1980s, or like hit California more recently or New England more recently. Um, and I think to an extent we've been lulled into a sense of complacency, and have been spoiled to not having to work for those kinds of things, and perhaps having the luxury of debating things to death rather than actually getting off the dime and and doing something about it, like building a convention center.

[00:03:52] Randall Roth: Are things bad enough today, or will they be bad enough in the near future that we'll get serious about these things?

[00:03:58] David McClain: I think that uh, they could get worse than they are now. And I think that a good bit of what is going on now in the state transcends what we normally conceive of as the business cycle. That is, um, something that would be over in a year to 18 months. I think that the the entire world, certainly the nation, the United States may be doing better than than Europe or Japan is doing nowadays, but uh as we have gone into the 1990s, we've had a big economic slowdown that's continuing to affect this economy as well as all other economies, and I think that that probably is going to continue for several years. It's not something that is going to be over in in the very short term.

[00:04:36] Randall Roth: I see. Well, what else can we do, David?

[00:04:39] David McClain: Well, another area that builds on our core competency, it seems to me, is to emphasize the exports of educational services. We have uh world class educational institutions here. The East-West Center has a truly global reputation. The University of Hawaii is very strong in certain areas of science and technology, international business, our specialization at the College of Business. Um, and we we are already exporting a lot of those services. We have a lot of international visitors who come here to consume those services. The same is true in health, and sports medicine and [unintelligible — audio glitch] that sort of thing. So, there are a number of initiatives that we can take that we're we're not currently taking to emphasize our our strengths.

[00:05:21] Randall Roth: How would we do that? Who would take the first step in terms of making this a regional medical center?

[00:05:28] David McClain: Well, we need to um focus on the fact that the world doesn't know as much about our our abilities and skills in that area as it needs to. Um, if you look at how much Hawaii spends per visitor uh compared with uh maybe a comparable place like Bermuda. We spend about a 10th per visitor uh compared with what they do. We just don't put uh the money in the in the area of telling the world about what we do, and that doesn't mean just [unintelligible — audio glitch] sand and the sunshine. It means all the things that Hawaii has to offer.

[00:05:59] Randall Roth: Right now, almost everything that the Hawaii Visitors Bureau spends comes from the government. Is that as it should be, and are what you're suggesting that the government should provide more?

[00:06:10] David McClain: It I think that is inevitably as it has to be. Uh, when you're talking about promoting uh an entire an entire state, clearly the government has to play a major major role. And I think the government has to put more resources in that in that direction.

[00:06:24] Randall Roth: Should the government be controlling the Visitors Bureau, HVB? Well, it's the taxpayer's money. So, in that sense, of course the government should play a role. Now, what we hope is that the government plays an enlightened role and and that historically has not always been the case, and I think all for a lot of the reasons that that Leroy mentioned, that we've been able to to be rather complacent about things because we've we've caught several waves of economic development. We haven't had to really live by our wits. Now we do and we need government officials that are that are used to living by their wits, and I'm not sure there's a strong tradition of that yet in this state.

[00:06:58] Leroy Laney: Leroy, do you see any way that the Hawaii Visitors Bureau could be strengthened? Not that it needs to be strengthened, but to improve upon whatever is there now? Well as you know, the HVB is now going through a search for a a uh for a new leadership and I think that everybody probably that follows the economy has got some kind of opinion on on um what kind of individual should be in that job. I I think that a good bit of it is going to have to do with with uh what Dave says. I think you're going to have to have somebody who is who markets the state. I frankly think that it has to be somebody who has given their own uh head and given some independence in doing it. And um we're talking about something that uh accrues to the overall community. Certainly a lot of the tax base here is related to um visitor expenditures. So you you've got government involvement. Government knows that it has some interest in it. We're not necessarily talking about something that um is market failure. That is an externality that has got to be patched. It could be something that could be uh it could have some public funds involvement, but it it could be something that's largely privatized in terms of of the leadership that's involved. And I think that that um uh the individual who uh comes into the job should be someone who is is aware of those things whether they come from outside the state or within the state or whatever.

[00:08:17] Randall Roth: You're listening to the Price of Paradise Radio show. I'm Randy Roth, and our guests this week are David McClain, UH professor of Business Administration, and Leroy Laney, First Hawaiian Bank's chief economist. David, what about golf courses? There are some people who think that golf courses will be the the savior so far as our economy is concerned and then there are other people who worry that we're going to end up with wall-to-wall golf courses. Where do they fit into the plan?

[00:08:42] David McClain: Well, I think they're really an important component of um of our future development. Uh, I know that uh some people are concerned about the water that golf courses use. Uh, you know, when you think about that, uh compared with the water that agriculture uses, it's it's really uh really not nearly as much. And we are going to have an incredible incredibly large amount of agricultural land coming on the market in the next several years. Uh, sugar is is really uh not going to be sustainable at current levels. Um, and the question comes, what do we do with that land? Uh, golf courses, I think are one responsible use of it because once again, golf courses play to our core competence in tourism. They build on something we already do well.

[00:09:24] Randall Roth: Uh, someone once asked what's Hawaiian about golf courses? Isn't there um a legitimate complaint that we shouldn't be competing with Mexico or or other locations on their level, we should be building on our own strengths? That's a false choice though. I mean, just because you have golf courses doesn't mean that you can't also promote and uh the Hawaiian culture. It is certainly true and it's been said many many times that that is what makes the state unique. Having said that, people will come to Hawaii for the culture but they will also want to do other things and I don't I submit that I don't think that you can take all of the land that's likely to become becoming available in uh the years to come um and develop taro patches on it. I I just don't think that people will be interested in coming to experience that. You've got to do a high value added activity, something that really has appeal uh throughout the world and uh golf courses are are one such thing.

[00:10:20] Leroy Laney: Leroy, I know not too long ago, uh golf course development was slowed down considerably by at least discussion of very, very high fees that people would have to pay before they could develop a golf course. What's the status on that now? And how do you feel about charging uh $100 million or whatever for each golf course? Well, Randy, I I think that regardless of what you think about it, I think those days are over uh now. I I think that uh the the shoe is really on the other foot. I I think that there's a tendency here, uh in Hawaii to try to get what you can out of foreign investors, and I think we played that game for a long time. We we tried to extract some kind of tax from them in order to invest here. And as long as the market would bear that, and for a while it did, uh, it it worked, but uh it's going to be a long, long time before those kinds of fees are even raised again, I'm afraid.

[00:10:59] Randall Roth: Did that do any damage?

[00:11:11] Leroy Laney: Oh, I think that it it probably did some, yeah. I think that uh it it may have uh caused some over-investment uh in terms of the price that was paid for some properties, and some of that was incorporated in the price of certain properties uh both commercial, non-residential and residential properties uh that changed hands in the late 1980s. But uh, as I say, I think that when foreign investment does come back in force to Hawaii, and I I think that it will be a sometime uh at least a period of years before it does, perhaps not a decade, but it will be uh some finite amount of time before it does. Uh, when it does, it will come back in a somewhat different incarnation and uh if the Japanese come back, they will be a good bit more cautious uh with that kind of thing. Uh, and uh, [unintelligible — audio glitch] predict that you will not see those kinds of exorbitant fees raised. Those kinds of impact fees probably will not be something that is discussed as much as it was last time.

[00:12:09] Randall Roth: Mhm. Well, what about foreign investment just in general? Um, most of our hotels are owned by foreign interests and a lot of uh the other property in Hawaii is owned by foreign interest. Is that good or is that bad or is that something that we have any control over? There's there's one uh, it's not bad. Uh, there's nothing wrong with foreign investment. Foreign investment is good. Free flow of goods and uh capital over international borders uh to just about any economist uh is a good thing and I think it's good for Hawaii as well as uh any other economic uh region or or nation and I think that it brought a great deal of economic growth to the state when it was in force in the late 1980s. Um, it's not something that uh we can or should do anything about. I think market incentives will will try to um allocate resources most efficiently internationally. And uh, we've got a resource here. That resource is the environment. It's it's our um uh, beautiful islands and it's something that uh will attract domestic as well as foreign investment.

[00:13:11] David McClain: I think it's important to point out Randy, you know that that from the point of view of a of a Boston, Massachusetts or a Louisville, Kentucky or a Denver, Colorado um, there's there's always a lot of quote foreign unquote capital coming in and and funding development in those areas. Um, capital from outside of the locale, um that's inevitably the case, and I think those here in Hawaii who say that we're unduly influenced by outside forces, and I don't mean just forces from uh non-US but but from from the mainland too, just don't realize that economic development everywhere involves an extraordinary amount of interdependence. Uh, we have some have said we have a flow through economy. Every place has a flow through economy here [unintelligible — audio glitch] the 1990s. And the art here is to be open to that flow through process and to be able to deal with it in an intelligent way. We've always said for uh three or four decades that that we're special, and we are special culturally, but we don't want to be special in the sense of uh not paying attention to best practice outside the islands and being open to those influences and being sophisticated in dealing with them.

[00:14:21] Randall Roth: You you say we need that in order to have economic growth. What do you say to the people who say we've got too much economic growth, we should stop growing?

[00:14:31] David McClain: Well, I I know that there's uh there's been a recent publication uh of a book called A Green Hawaii, which is subtitled a sourcebook for development alternatives and in there um, my colleague at UH uh Ira Roter in the political science department claims that we can have the same standard of living with only 2 million tourists. But unfortunately, that book really doesn't lay out for us in any, in any uh, careful way, analytically strong way, how we could get from the the 7 million uh tourists that we have now down down to 2 million and and still have the same standard of living. It's simply not true that tourism jobs uh are are low paying jobs. Uh Tom Hitch, Leroy's predecessor, once removed at at First Hawaiian in his book, Islands in Transition demonstrates fairly convincingly uh that when you allow for the ripple effects of tourism and the kinds of jobs that are associated with servicing the tourism industry, uh there's there's really a negligible difference between uh if any, between uh the level of Hawaiian wages and the level of wages on the mainland because of of tourism. Uh so I, you know, my my call on this is that uh we turn our back on economic growth at our peril. And in today's uh parlous environment, uh I I just can't believe that that's a wise a wise course. It's it's a superficially attractive course, um, but it reminds one of the uh utopian socialist of the 19th century of the the Luddites who who smashed the machines because uh, you know, you have to gear up, you have to live by your wits in a in a uh, more technologically sophisticated age. Um, we can't go back. We might like to go back, we can't go back, but uh we have to to face the world as it ends.

[00:16:09] Randall Roth: Randy, if I could just add to that, I I think that if we need anything here in the state, it's a greater appreciation of what economic growth can bring. Uh I think there's and you know, we get out, the bank uh gets out and does economic surveys throughout the states. We just got back from Maui doing one over there and I'm taking off next week to do one on the Big Island. Uh we'll do Kauai later, and we've already done Honolulu uh county uh this year. And if you encounter anything, I think here, relative to some of the other places, some of the other regional economies and states where I've lived and worked and and analyzed, I think here in Hawaii there is an insufficient appreciation of what economic growth can bring in a positive sense to one's lifestyle and to one's uh just simple standard of living. Why is that? Why would we not appreciate it as much here as it's appreciated elsewhere? I I don't I think, again, I would come back to the fact that we have probably been spoiled. We haven't seen hard economic times. If you go back over the uh 32 odd years since statehood, we've had two recessions, uh two contractions in the annual number of real gross state product, which is the only real way we can measure a recession here. Uh, those two years were 1974 and 1982, which corresponded to the two most serious national recessions at the time. But the nation has had six recessions during that period, four of which didn't reach Hawaii at all. Uh, in those two episodes, we did not experience as serious a downturn here as a lot of areas on the mainland or throughout the world, in fact, did. Uh, we just simply have had good times here. The last really serious economic downturn that Hawaii had was uh in the late 1940s with the military wind down after World War II. We had a about a four year very serious uh uh contraction here. But there are not a lot of people around today that are living and working in in Hawaii's economy that remember those days. And since we've just been uh, I would say spoiled.

[00:18:05] Randall Roth: Is it blind luck or or do we know what we're doing?

[00:18:08] Leroy Laney: Oh, I think a lot of it is is uh, it's more luck than uh knowing what we're doing. I think we've been blessed here. We've been very fortunate. Well, if you think about uh uh the technology that has come our way, the the development of the jet engine, the telecommunications and all that, Hawaii had nothing to do with that and in in fact again Tom Hitch makes the point in in his book that uh, you know, um government might think that it that it controls economic development, but really most of what happens is the result of forces that occur outside the state. And the best government in the state will be a government that adapts cleverly to those forces because they're certainly not under our control. You're listening to the Price of Paradise Radio show. I'm Randy Roth, and our guests this week are David McClain, US professor of Business Administration at UH, and Leroy Laney, First Hawaiian Bank's chief economist. David,

[00:19:00] Randall Roth: What about gambling? Should Hawaii adopt some form of gambling?

[00:19:06] David McClain: Well, I I have two comments on that, Randy. First of all, um even if we didn't have the special culture that we have, we'd really have to ask the question, uh is gambling the sort of thing that can really make a difference to our our tourist population? Um my my fear would be that uh if we were to to start gambling here, uh the kind that we auto aspire to, again, leaving aside the special issues of Hawaiian culture for a moment. The sign the kind that we auto aspire to is the the Monte Carlo, uh the Monaco, the really upmarket style of gambling that would preserve um a high-quality reputation for Hawaii.

[00:19:46] Randall Roth: And you're assuming casino gambling right now as opposed to horse racing or lotteries or something like that?

[00:19:50] David McClain: I I am, I am. And you know, it's not really possible to to create that kind of an experience. Um given that fact, and and given the fact that in in places like Australia where they have gambling up on the gold coast there of Australia, people I've talked to say that really it's mostly local people who wind up uh doing the gambling. It's really not the tourists. Um those two facts, coupled with the third fact that we do have a very special Hawaiian culture and and I think gambling is really not congruent with that culture, says to me that, you know, it's a nice it's a nice thought. It's a natural thought. We have 35 states that have lotteries, um but I think it would really damage our image and we really have to be careful about that.

[00:20:43] Randall Roth: Leroy, do you agree with that?

[00:20:45] Leroy Laney: I agree 100%. I I think that uh casino gambling here with the intent of attracting visitors from outside the state would uh even if it were successful, very much change the ambiance of the state of Hawaii. And I think that it's something that would certainly transform any conception that we have of the Aloha spirit or [unintelligible — audio glitch] conception that we have of Hawaii as a tourist destination. Uh as far as lotteries are concerned, I I think that the thing you have to remember with respect to a lottery is that uh it really is a form of taxation. It's a very regressive tax. In fact, uh some uh serious work that's been done by economist uh Charlie Clotfelter at Duke being one of them, some of his colleagues, indicated that the uh regressivity of a lottery in the instance uh on the economy is greater than uh sin taxes such as alcohol or tobacco, or is more aggressive than a gasoline tax.

[00:21:38] Randall Roth: What what do you mean by regressive?

[00:21:40] Leroy Laney: It falls disproportionately on uh poorer income uh categories than on uh any sales tax tends to be regressive in the sense that uh the the proportion that a poor person pays relative to what a rich person pays in the grocery store is greater relative to their income. But a tax normally is something that that you have no choice over. You have to pay it. And isn't this just a form of entertainment and it's voluntary and therefore don't we let people spend their limited resources however? That's quite true. I mean, it it's voluntary. We're not forcing them to pay the tax, but I but a lot of the people who are induced to play lotteries do so without having their eyes open to what it's really doing. Uh if you look at those states, those 30-odd states that now have a lottery and you take an average of those states, uh some 50% of the the take on a lottery goes to the state coffers. It it's goes into the state government.

[00:22:36] Randall Roth: So the odds are definitely with the house, and the house is the government.

[00:22:38] Leroy Laney: If you play blackjack in um Las Vegas, the house will take about 3%. If you go to [unintelligible — audio glitch] horse racing uh track and you bet on a horse, uh the um paramutual paramutual betting is about 19% is what the house take is. Government's take in a state-run lottery, and they are all state-run lotteries, is about 50%. So that's that's much larger than anything, probably, except the numbers game which is illegal. So. The odds don't sound good to me.

[00:23:08] Randall Roth: Leroy, I know you recently put out uh a booklet on the military's impact on Hawaii's economy. Um, the Cold War is is over. Uh, government is cutting back in the defense area. Um we've got bases being closed down, there's discussion of uh pullbacks here in Hawaii. How concerned should we residents of Hawaii be about all of this?

[00:23:31] Leroy Laney: We're very vulnerable, and I don't think we should ever forget that we are vulnerable to the military. If you if you look at the um military dollars, the uh defense dollars that are spent here in Hawaii, we rank higher than any other of the other uh states with respect to the proportion uh relative to the state economy that uh is spent here. We've come up we've come off quite good uh in the most recent round of cuts. Uh, just seeing um Barbers Point closed is is something that uh, you know, we could have been hit a lot harder than that. Uh there were people that were worried about Bellows, they were worried about Kanoi. Uh, we we are are have been blessed in that regard also. But I think that it's something that uh uh we're going to have to look at uh increasingly in the future. The military share of the state economy has been declining for years, and it probably will continue to. Uh, let's just hope that it's a slow process rather than a a sudden process like is probably going to hit the San Francisco Bay area or Charleston, South Carolina, or some of the areas on the mainland that uh have been hit harder in the in the most recent exercise.

[00:24:36] Randall Roth: David, we've got about one minute left. The question for today's program was what can we do to improve Hawaii's economy. You and Leroy have offered a number of suggestions. How would you sum up this discussion?

[00:24:47] David McClain: I think the key thing is that we have to live by our wits. We have to have a mindset that says uh we have to be open to outside influences, we have to realize we can't control them, but we might be able to benefit from them and in influence them if we're we're clever enough. What that means in terms of a diversification strategy is to build, it seems to me, on our core competence. Uh, what it means in in terms of um uh uh being aware of some of the risks that that Leroy mentioned as far as as defense means taking care of the industries that are our major sources of uh of income to the state at this point. What it means in terms of our government officials is we we need leadership. We need vision. We can't consider ourselves so special that we pay no attention to outside forces anymore. That that's not really permitted. Our culture is special, we should never forget that, but that doesn't mean we can't pay attention to outside influences.

[00:25:37] Randall Roth: Thank you both very much. You've been listening to the Price of Paradise radio show. I'm Randy Roth. Our guests this week were David Mclean, US Professor of Business Administration, UH Professor of Business Administration, and Leroy Laney, First Hawaiian Bank's chief economist.