How to diversify Hawaii’s economy

We’ve heard the mantra for many decades: Hawaii’s economy needs to diversify.

But lately we’re hearing it even more, thanks to the collapse of our state’s biggest industry, tourism, due to the coronavirus lockdowns implemented in March that continue to this day.

The idea of diversification, of course, has merit. It’s clearly not a good idea to put so many of our eggs in one basket. In years past, when the pineapple and sugar industries were dying in Hawaii, we heard much the same thing.

But just as government cannot shut down an economy and turn it back on as if it were an engine, so is it risky to let government get involved in specifying exactly how our economy should diversify.

In fact, according to Seth Colby, an economist with the state Department of Taxation, diversification could actually make us worse off, depending on how it’s achieved.

“If we were just trying to get more industries into Hawaii, we could actually have a decline in income,” he said last week in a presentation to the Hawaii Economic Association. “If all of us had to go back and work in the agricultural sector, we’re not as productive in that, and we would lose income.”

Instead, he said, the key is to focus on what you’re good at, and, “In the case of Hawaii, we’re very good at tourism.”

Thus, we probably should continue to focus on tourism — though, I would add, we should stop subsidizing it, since that has undoubtedly contributed to our overreliance on one industry.

But we can still encourage diversity, and the key to that, Colby said, is improving Hawaii’s business environment.

“We have one of the highest tax burdens for high-income earners and most of the time, entrepreneurs,” he said. “We have the second-highest income tax brackets in the country. We have one of the highest regulatory burdens. We’re at the bottom of all the business rankings all the time. Rather than focusing on a specific industry, what if we just focus on moving up Hawaii as this place to do business?”

What if, indeed!

Colby also talked about reliability for investors. Large investment projects like the Thirty Meter Telescope or the Superferry typically run into significant local opposition, sending a signal to businesses that Hawaii is a risky place to invest.

Finally, there are practical issues, he said. Hawaii is geographically remote. Real estate is expensive, as is energy, shipping and nearly everything else. If you’re thinking about setting up a new business, you have to have a reason to choose Hawaii over another location. For many industries, it doesn’t make economic sense.

But logic hasn’t stopped the state from trying to create new industries through government action. Over the years, we have seen millions of taxpayer dollars poured into initiatives meant to diversify Hawaii’s economy. There have been tech parks, farm co-ops, research centers, space industry incentives, an attempt to create a stock exchange, and dozens of other programs, tax breaks and grants, all of which promised to diversify the economy.

But that’s not how diversification happens. Even if they have the best intentions in the world, our lawmakers cannot create a Silicon Valley in the islands through just tax breaks, incentives and grants.

The only way to diversify an economy is to let it happen organically, by removing the barriers to innovation that have been built up over the years. A few examples: Cut taxes and regulations, reduce government spending and borrowing, allow more competition in currently protected industries, increase labor mobility, rely more on the private sector to provide public services.

Such an environment would appeal to outside investors, while the businesses already established here, being able to keep more of their profits, would be able to invest in new enterprises — ones that the entrepreneurs, not the politicians, believe could succeed here.

Tourism likely will always remain Hawaii’s most important industry. But by all means, let’s encourage sustainable diversification as well. And the way to do that is to just have our state and county governments get out of the way.

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