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This is the testimony submitted by the Grassroot Institute of Hawaii regarding HB2200, HD1, aka the Supplemental Appropriations Act of 2020, for consideration by the Hawaii Senate Committee on Ways and Means at its meeting on Monday, May 11, 2020.
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May 11, 2020
10:30 a.m.
Hawaii State Capitol
Auditorium

To: Senate Committee on Ways and Means
Sen. Donovan M. Dela Cruz, Chair
Sen. Gilbert S.C. Keith-Agaran, Vice chair

From: Grassroot Institute of Hawaii
Joe Kent, Executive vice president

Re: HB2200, HD1 — RELATING TO THE STATE BUDGET

Comments Only

Dear Chair and Committee members:

The Grassroot Institute of Hawaii would like to offer its comments on HB2200, HD1, which relates to the state budget.

The Grassroot Institute of Hawaii recognizes the need to shrink the state budget, as tax revenues have fallen sharply following the coronavirus lockdown. State planners will need to focus on cuts, just as businesses and workers struggling in the private sector already have had to do.

Room to cut

Hawaii’s fiscal 2021 general fund budget is $8.72 billion.[1] In fiscal 2015, the budget totaled $6.98 billion, adjusted for inflation,[2] which means today’s taxpayers are paying an extra $1.74 billion annually to provide public services for fewer people.[3]

This suggests that there is plenty of room to reduce spending, since even the fiscal 2015 budget could’ve been trimmed, as we noted at the time.[4]

Had Hawaii’s state government been cutting in previous years and saving for a rainy day, which we have recommended many times,[5] the savings would have enabled the state to better cope with the current coronavirus crisis. Instead, the state whittled away a $1 billion surplus on growing department budgets, payroll increases and other nonemergency items.

Now, spending advocates are arguing to borrow up to a maximum of $4 billion dollars from the federal government and repay it over two years by implementing temporary additional future taxes on Hawaii residents.[6]

This would only swell Hawaii’s already dangerous total of $88 billion in unfunded liabilities over the next 30 years[7] — as well as put billions of dollars of additional weight on the backs of struggling Hawaii taxpayers, discourage entrepreneurs from doing business here, and possibly prompt more residents to flee for the mainland because of the state’s ever-increasing high cost of living.

Kicking the can down the road

A legislative plan in the works would scrounge up about $1 billion from special funds, vacant positions, the state’s rainy day fund and by borrowing to fill the budget shortfall.[8]

However, this strategy relies on the rosy assumption that the economy will bounce back quickly, and that Hawaii’s government can continue its bloated operations during a recession. But Hawaii’s tourism economy is likely to recover slowly,[9] which is why lawmakers should pare spending, such as by reducing department budgets and payrolls and contracting more with the private sector to deliver public services.

Reducing spending could also create wiggle room for lawmakers to reduce taxation, which could provide relief for Hawaii’s struggling taxpayers and breathe new life into the economy.

The mythical ‘multiplier effect’

Some people commenting on this issue have alleged that state spending should not be cut because a so-called multiplier effect magnifies benefits of government spending. They say that every $1 of government spending produces $1.50 of economic activity in Hawaii.[10]

However, many economists dispute this notion of a multiplier effect, holding that government spending more typically hinders economic growth because it reduces private savings and crowds out private borrowing, both of which depress capital investment by the private sector — the true source of economic growth.[11]

As economist Milton Friedman famously used to say, “There ain’t no such thing as a free lunch.”[12] The money that a government spends has to come from somewhere. And if it isn’t obtaining it directly from the taxpayers, it’s borrowing it for taxpayers to pay in the future, with interest.

Of course, if you are the federal government, you also can simply print money out of thin air, but that causes inflation and reduces the purchasing power of money for everyone — a hidden tax, essentially.[13]

So basically, asking our cash-strapped federal government to lend us money — which it would have to do through borrowing of its own and printing money out of thin air — is basically a beggar-thy-neighbor policy that would shift some of the burden of our spending to people in other states, in exchange for higher future taxes, both state and federal, and the hidden tax of inflation nationwide.

Not only that, when Hawaii’s state and county governments spend, they often do so wastefully — on megaprojects such as the over-budget, behind-schedule Honolulu rail, on bureaucratic bloat, or on inefficient services that the private sector could be delivering at a higher level of quality for lower cost.[14]

That’s why tax cuts can boost an economy, because the dollars are kept in the private sector and used more productively.[15]

Spending advocates counter that the boost from $1 of spending is more than a $1 tax cut because the taxpayer being allowed to keep his or her own money will save a portion of that, and saving is bad because it is “leakage” from the economy.[16] They argue that a dollar saved is a dollar wasted or, at least, a dollar not spent in the economy.

However, this ignores the fact that savings are not hidden in people’s mattresses. Savings are borrowed by investors, and thus spent in productive ways for future growth, rather than immediate consumption. Savings help the economy in the long run because the money is directed toward more productive activity. For example, saving for a future college education might be more productive for an individual than spending now on a surfboard.

Economist Dan Mitchell even argues that the multiplier effect of government spending is actually negative, since many government actions hinder economic growth of the economy through regulatory barriers.[17] This should compel lawmakers to cut regulations swiftly so as to reduce economic hurdles.[18]

Time to cut

It’s time for Hawaii’s government to face the hard fact that cutting government spending is the only way to put money back into the economy without saddling taxpayers with extra burdens.

Shrinking Hawaii’s government spending by 20% would still allow for satisfactory public services for residents — especially if private contracting of public services were encouraged[19] — while keeping enough money in taxpayer pockets to sustain economic growth now and in the future.

Thank you for the opportunity to submit our testimony.

Sincerely,

Joe Kent
Executive vice president
Grassroot Institute of Hawaii

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[1] “The FY 2021 Executive Supplemental Budget,” Hawaii Department of Budget and Finance, Dec. 16, 2019, p. 3, https://budget.hawaii.gov/wp-content/uploads/2020/01/Budget-in-Brief-FY-21-BIB.pdf.
[2] “State of the State Budget 2020,” Grassroot Institute of Hawaii, March 2019, p. 32, https://www.grassrootinstitute.org/wp-content/uploads/2019/03/State-of-the-State-Budget-2020.pdf.
[3] “Annual Estimates of the Resident Population for Counties in Hawaii: April 1, 2010 to July 1, 2019,” U.S. Census Bureau, Population Division, March 2020, https://census.hawaii.gov/wp-content/uploads/2020/03/co-est2019-annres-15.pdf.
[4] Malia Hill, “A Troubling Excess Of Optimism: Examining the Hawaii State Budget,” Grassroot Institute of Hawaii, May 20, 2015, www.grassrootinstitute.org/2015/05/a-troubling-excess-of-optimism-examining-the-hawaii-state-budget/.
[5] “State of the State Budget 2020,” Grassroot Institute of Hawaii, March 2019, p.5, www.grassrootinstitute.org/wp-content/uploads/2019/03/State-of-the-State-Budget-2020.pdf. See also, “State of the State Budget 2017,” Grassroot Institute of Hawaii, Spring 2017, p. 3, www.grassrootinstitute.org/wp-content/uploads/2017/03/State-of-the-State-Budget-2017.pdf.
[6] “Avoid public sector cuts at all costs during a recession,” Hawaii Budget and Policy Center, April 2020, https://hibudget.org/2020/04/avoid-public-sector-cuts-recession; Carl Bonham, et al., “Tap Fed Lending Facilities to Support Local Economy,” The Economic Research Organization at the University of Hawaii, April 21, 2020, https://uhero.hawaii.edu/tap-fed-lending-facilities-to-support-local-economy; “HSTA, AFSCME, HGEA offer governor 15+ alternatives to public worker pay cuts,” Hawaii State Teachers Association, HSTA.org, April 23, 2020, www.hsta.org/News/Recent-Stories/hsta-afscme-hgea-offer-governor-15-alternatives-to-public-worker-pay-cuts; and letter to Gov. David Ige, from Randy Perriera, executive director of the Hawaii Government Employees Association, April 21, 2020, www.hgea.org/Media/4227/lettertogovigeapr212020.pdf.
[7] Marcel Honore “$88 Billion: A New Price Tag For Fixing Hawaii’s Infrastructure And Retirement Systems” Honolulu Civil Beat, Oct. 16, 2019, www.civilbeat.org/2019/10/88-billion-a-new-price-tag-for-fixing-hawaiis-infrastructure-and-retirement-systems/.
[8] Blaze Lovell “Legislative Deal In The Works Would Use Untapped Funds To Dodge Budget Cuts,” Honolulu Civil Beat, May 9, 2020, www.civilbeat.org/2020/05/legislative-deal-in-the-works-would-use-untapped-funds-to-dodge-budget-cuts/. See also, Kevin Dayton, “Tax collections tank as Hawaii lawmakers plan budget fixes to avoid public worker furloughs” Honolulu Star-Advertiser, May 9, 2020, www.staradvertiser.com/2020/05/09/hawaii-news/tax-collections-tank-as-lawmakers-plan-budget-fixes-to-avoid-public-worker-furloughs/.
[9] Carl Bonham, et al. “COVID-19: Developing Economic Recovery Scenarios for Hawaii” The Economic Research Organization at the University of Hawaii, May 4, 2020, https://uhero.hawaii.edu/covid-19-developing-economic-recovery-scenarios-for-hawaii/.
[10] “Avoid public sector cuts at all costs during a recession,” Hawaii Budget and Policy Center, April 2020, https://hibudget.org/2020/04/avoid-public-sector-cuts-recession; Carl Bonham, et al., “Tap Fed Lending Facilities to Support Local Economy,” The Economic Research Organization at the University of Hawaii, April 21, 2020, https://uhero.hawaii.edu/tap-fed-lending-facilities-to-support-local-economy; “HSTA, AFSCME, HGEA offer governor 15+ alternatives to public worker pay cuts,” Hawaii State Teachers Association, HSTA.org, April 23, 2020, www.hsta.org/News/Recent-Stories/hsta-afscme-hgea-offer-governor-15-alternatives-to-public-worker-pay-cuts; and letter to Gov. David Ige, from Randy Perriera, executive director of the Hawaii Government Employees Association, April 21, 2020, www.hgea.org/Media/4227/lettertogovigeapr212020.pdf.
[11] Olivier J. Blanchard and Daniel Leigh, “Growth Forecast Errors and Fiscal Multipliers,” National Bureau of Economic Research, February 2013, www.nber.org/papers/w18779; Scott Sumner, “Why the Fiscal Multiplier is Roughly Zero,” Mercatus Center, George Mason University, Sept. 11, 2013, www.mercatus.org/publications/monetary-policy/why-fiscal-multiplier-roughly-zero; and Dan Mitchell, “The Impact of Government Spending on Economic Growth,” The Heritage Foundation, March 15, 2005, www.heritage.org/budget-and-spending/report/the-impact-government-spending-economic-growth. See also “Crowding out (economics),” Wikipedia, https://en.wikipedia.org/wiki/Crowding_out_(economics).
[12] Stephen Moore, “The Man Who Saved Capitalism,” The Wall Street Journal, Aug. 1, 2012, www.wsj.com/articles/SB10000872396390444226904577558882802335216.
[13] “Definition of Inflation Tax,” Financial Web, 2018, www.finweb.com/taxes/definition-of-inflation-tax.html, accessed May 9, 2020; Kevin Mercadante, “Inflation Is A Hidden Tax — What Can You Do About It?” Investor Junkie, https://investorjunkie.com/economics/inflation-hidden-tax.
[14] “Government expenditures simply divert private expenditures and only the net excess of government expenditures is even available at the outset for the multiplier to work on. From this point of view, it is paradoxical that the way to assure no diversion is to have the government spend the money for something utterly useless — this is the limited intellectual content to the ‘filling-holes’ type of make-work.” Milton Friedman, “Capitalism and Freedom,” University of Chicago Press, Chicago, 1962, pp. 80-81, https://tinyurl.com/ya23p6zx.
[15] Dan Mitchell, “The Impact of Government Spending on Economic Growth,” The Heritage Foundation, March 15, 2005, www.heritage.org/budget-and-spending/report/the-impact-government-spending-economic-growth.
[16] Robert F. Mulligan, “The Central Fallacy of Keynesian Economics,” Mises Institute, Nov. 19, 2014, https://mises.org/library/central-fallacy-keynesian-economics-0.
[17] Dan Mitchell, “The Impact of Government Spending on Economic Growth,” The Heritage Foundation, March 15, 2005, www.heritage.org/budget-and-spending/report/the-impact-government-spending-economic-growth.
[18] Joe Kent, “18 Ways To Get Hawaii Back On Its Feet Again” Honolulu Civil Beat, April 18, 2020, www.civilbeat.org/2020/04/18-ways-to-get-hawaii-back-on-its-feet-again/.
[19] Aaron Lief “How to revive contracting as a policy option in Hawaii,,” Grassroot Institute of Hawaii, March 2019, https://grassrootinstitute.org/wp-content/uploads/2019/03/Konno_Decision_Report.pdf.