‘Hawaii’s economic crisis and how to solve it’

As Hawaii’s coronavirus lockdown measures continue, its economic crisis is worsening and inquiring minds want to know what can be done about it.

That’s why Johnny Miro of H.Hawaii Media featured Keli’i Akina of the Grassroot Institute on his Sunday morning radio show, to talk for 20 minutes about how Hawaii can recover and even excel after the coronavirus lockdowns. The program is heard on the company’s five Oahu radio stations: Shaka 96.7 FM, Retro 97.1 FM, Nash Icon 107.5 FM, K-Rock 101.5 FM and KORL Oldies 101.1FM.

Akina, institute president, made it clear that much of the current crisis is due to the harsh coronavirus restrictions. But he also talked about how the state suffered from a “lack of business friendliness” even before the lockdowns, making it more vulnerable to the economic shock that began in March.

Looking forward, he recommended our policymakers follow the institute’s “Road map to prosperity,” issued in May. The report, he said, has a list of prescriptions based upon best practices across the country and the world that can be applied here in Hawaii.

“While we can’t deny the poor economic indicators,” he said, “we can approach them in a better way, looking for long-term solutions that will turn our economy around. That’s very important.

“What we’re saying is, avoid the immediate solution of borrowing more money and spending more. Tighten our belts and take a look at what operates our government more efficiently, more effectively and at lower cost. That will help a lot. Let’s help the economy be more receptive and hospitable to businesses, so businesses will find Hawaii a business-friendly place to stay.

“We really do have the opportunity to change the preexisting conditions that made Hawaii a tough state for business and innovation.”

Listen below; a complete transcript follows.


Keli‘i Akina with Johnny Miro on H.Hawaii Media radio network

Johnny Miro: The views and opinions expressed on this public access programming do not necessarily represent those of the H. Hawaii Media family of radio stations. It’s time for Sunday morning public access programming on this H. Hawaii Media radio station. 

Good Sunday morning today, I’m Johnny Miro. This is H. Hawaii Media’s Sunday morning public access programming heard on our five radio stations here on the island of Oahu: 96.7 FM, 97.1 FM, 107.5 FM, 101.5 FM, and of course, 101.1 FM.

This morning, we’re once again talking to the CEO, Dr. Keli‘i Akina of the Grassroot Institute of Hawaii. Many ways to find out all about them on social media. Speaking with Dr. Keli‘i Akina about the economic crisis we’re undergoing, we have been undergoing — the new numbers just came out — and how to go about solving that. We wish you a very good morning, Dr. Akina, this Sunday.

Keli‘i Akina: Well, good morning, Johnny. Aloha to you and all the listeners. Great to be back with you again.

Miro: Yes, same here. Well, we know that the pandemic has been hard on Hawaii’s economy. How bad is it, actually?

Akina: Well, for our side, Hawaii has been hit by the pandemic lockdowns harder than any other state in the Union. For example, we now have the worst unemployment rate. We had the best one, but now we’re at 14.3% — that’s worse than any other state. Hawaii’s tourism, which is our No. 1 industry, fell by more than 95% during the lockdown. It’s not projected to come back or recover until 2025.

All of this affects state government. Our tax revenues are projected to fall by $10 billion by 2026 fiscal year. If you put it all together, our economic outlook is pretty bleak, Johnny.

Miro: All right. Can we blame it all on this lockdown? Is it fair to say that maybe there were warning signs before the pandemic?

Akina: Well, for many, many years, Hawaii has been noted for its lack of business friendliness. With high levels of government interference, our economy is rated pretty low in terms of what we would call economic freedom: the ability of businesses to operate without interference from the government. For example, the Fraser Institute’s Economic Freedom of North America report for 2020 ranked Hawaii 45th in the country in economic freedom.

That was done by evaluating our taxes and regulations from 2018. Hawaii experienced three straight years of population decline recently, according to the UH Economic Research Organization. They say that we’re expected to lose another 20,000 people by 2023. Obviously, people are fleeing for greener pastures.

We launched a project at the Grassroot Institute called “Why We Left Hawaii,” and have collected large numbers of stories of people who are leaving. One thing in common when I read these stories and listen to their videos: They have cited economic concerns, like the lack of opportunity and the high cost of living. It’s pretty bleak for many of them.

Miro: We’re talking with Dr. Keli’i Akina of the Grassroot Institute of Hawaii. If we’re looking at a recession, the possibility of that, shouldn’t the government be prepared, then? Wasn’t there a budget surplus to overcome this?

Akina: Well, the fact is, we’ve had many good years economically, and that has benefited the state government. It’s true that the state general fund had a surplus of about $1 billion as recently as 2016, but the problem is that our lawmakers didn’t hesitate to use those reserves, instead of saving them for a rainy day. 

Now, that’s left us in this rainy day, and that’s really an understatement. It’s left us without enough money to get through the recession. State lawmakers are now looking at doing something that would be very bad for the state, which is borrowing heavily to keep the state going, because ultimately, that borrowing will have to be paid back, and it affects our own bond ratings, which I can share with you a little bit later on.

Miro: That sounds like the state government would be going into debt in a big way.

Akina: Well, it would be fair to say that the state is looking at going into an even greater level of debt than it has already gotten itself into. It looked like the recession was moving even before the lockdowns, and that has damaged the economy even more. Now, the state government is in panic mode, and the debt is mounting.

Let’s consider, for example, the EUTF, which is the Hawaii Employer Union Trust Fund. It provides healthcare benefits to Hawaii state and county employees, and retirees. It already had $12.4 billion in unfunded liabilities before the pandemic crisis. Now, because of the emergency, lawmakers are skipping making payments that they promised to do.

Currently, they’re planning not to pay that $1.8 billion. That’s going to affect the fund tremendously. The Legislature waived the state constitutional debt limit, and its borrowing record amounts to balance budget shortfalls. It’s simply not good.

Miro: All right. This has to mean you’ve got to get that money back somehow, some way. What does that mean for the average person, when the government, as ours right now, goes  into this kind of a debt?

Akina: Well, we’re in an environment where the state is drowning in debt, and that should concern every individual, because the money to pay it ultimately comes from individuals. It has to come from the taxpayers. The state’s debt is taking over the state budget.

Let’s, for example, consider the big pie chart. Look at a big circle, and half of it is 50%. Fifty-two cents out of every dollar of taxpayer spending goes toward government worker benefits — not salaries, benefits — and debt. Half of our government spending is on benefits and debt. That’s the state budget.

That level of debt has affected our state’s bond rating. Fitch, for example, downgraded Hawaii to AA from a AA-plus. Moody’s downgraded Hawaii to AA2 from AA1, saying it was partially based on suspending payments to pre-fund the EUTF. Standard & Poor’s rating says Hawaii’s economic outlet is now negative.

This lower bond rating affects everybody, because it means that even more taxpayer money is going to debt service instead of to productive things like public services. That’s a terrible imbalance. It’s going to keep us from recovering economically for a long time.

Miro: We’re talking with Dr. Keli’i Akina with the Grassroot Institute of Hawaii. I’m feeling, and I think, and you’re going in this direction — will this mean the taxes will have to go up despite what’s going on in the recession?

Akina: That should be a real concern of everyone. In fact, one tax hike is already on its way. The unemployment tax is set to triple next year. That’s explosive. This has come as a surprise to our small businesses. They’re down now because of the economic crisis of the COVID response. But now, they’re going to be hit by an increase in unemployment taxes.

Let me tell you what that means in terms of some numbers. Right now, the average business pays about $534 for an employee in terms of unemployment tax. Next year, in 2021, it’s going to go up to $1,757. Let me describe that for you a little bit. Take a small little business that has five employees. They’re paying about $2,600 in unemployment taxes now. They’re going to pay nearly $9,000 next year. Or if you have 10 employees — if you’re a restaurant, or if you are a storefront — if you’re paying $5,000 now, this year, you can expect to pay nearly $18,000 next year.

This tax is going to go up even more on businesses that recently had to lay off workers due to the pandemic crisis. That means hotels and restaurants, which have laid off large numbers of people who’ve had to use the unemployment benefits, will pay the highest tax rates next year. It’s a very, very tough time for businesses to survive.

Miro: Now, you would think, why would the government at this time triple the unemployment tax on businesses that are already getting hammered?

Akina: It wasn’t a conscious decision that was made now. It was an increase that was the result of an automatic rule based on how much money is in the state’s unemployment fund. When the unemployment fund is filled up and full of money for a rainy day, tax rates are low. But when the fund goes down and becomes negative, the tax rate automatically goes up.

We in Hawaii have been borrowing hundreds of millions of dollars to pay unemployment benefits. For example, we started the year with $600 million positive, in the black, in our unemployment fund. And now we’re more than $600 million in the red. Now, that makes the tax level go up to the maximum amount under law.

One thing I need to note is that the government is attempting to respond to this situation. The Ige administration is looking at unspent CARES Act money, and considering putting maybe $500 million of that into the unemployment fund. We think that’s a good idea at the Grassroot Institute. But I think we have to be aware that that will not solve the problem, because it is not enough money to get rid of the debt, for one thing, and it will also be subject to the fact that businesses will still have to pay higher rates of taxation next year.

Everyone should expect a high tax rate hike in terms of unemployment taxes next year. The ultimate downside of that is not only that businesses will suffer, but they will not hire people, or they will not retain people. As a result, we’ll have more unemployment, and that’s going to affect everyone on the street.

Miro: I don’t think too many businesses are aware of this, and I’m glad we’re putting this forward right now. Dr. Akina of the Grassroot Institute, Keli’i Akina, Dr. Keli’i Akina. 

Now, is the state’s spending the only thing residents here, Hawaii residents, need to worry about in terms of slowing the economic recovery.

Akina: Unfortunately, no. There are a lot of other problems and question marks, as we look at the economic outlook. For example, take the rail, which everybody knows about because of the recent news. It’s now projected to cost $11.2 billion, and it’s going to be delayed until 2033. A lot of people think that those are underestimated figures, as a matter of fact.

Take shipping between our islands. The Young Brothers rates are hiked now by 46%. That’s a huge increase, and it’s going to hurt neighbor island businesses and residents that are so dependent upon that transport. We’ve got a lot of issues to deal with, not just the unemployment bond.

Miro: It’s sounding kind of hopeless right now. What can we do to help the economy bounce back? Is there any way?

Akina: The Grassroot Institute warned lawmakers earlier in the year that they were looking at the economic situation through rose-colored glasses. One of the first things that can be done is to be realistic with where we’re at. Apparently, the government is acting. For example, Gov. Ige is implementing 10% furloughs to balance the budget beginning next month. That’s necessary and shows how dire the situation is, but it may not be enough.

There are other areas in which cuts are necessary. Will there be additional lockdowns in the future? That’s a big question, and that uncertainty creates the lack of stability for businesses to do planning. It’s more realistic to say that it will take many years for the economy to recover, and the measures we need to take should be long-term in their direction, not just short-term putting out of fires.

Miro: What can we do? Because the cost of living, of course, hasn’t slowed down one bit. What can we do to help lower the cost of living to prevent folks from packing up and leaving here? Because we need the residents for the businesses and also that tax revenue.

Akina: Well, a lot of the problem we’re facing now is because of our situation before the coronavirus crisis, and what we need to look at is long-term solutions. This is a great opportunity in which we can correct the way that we run our government and run our economy.

We issued a report at the Grassroot Institute before the pandemic crisis, called “Roadmap to prosperity.” It’s just as relevant now, and it’s available free of charge on our website grassrootinstitute.org. It has a list of prescriptions based upon best practices across the country and the world that can be applied here in Hawaii.

We really do have the opportunity to change the preexisting conditions that made Hawaii a tough state for business and innovation. One of the things we can do is learn from states that have had a better recovery, and start with policies that lighten the burden of taxation and regulations on businesses and entrepreneurs.

To talk about those regulations: Did you know that you need a license in Hawaii to open a lemonade stand? I’m not kidding. Hawaii needs to reduce this kind of regulation on businesses. One easy step would be to get rid of some of the over burdensome requirements, like licensing and permitting for home-based businesses. Another thing we could do is to allow occupational licensing reciprocity, so that people who are licensed in one state can easily find work in the islands.

Miro: Housing, that’s also a big issue. Is there a way to make housing more affordable for the average Hawaii family?

Akina: Oh, absolutely. One of the things to recognize is that we have very convoluted land-use and zoning laws. They can be reformed to help increase the supply of housing and land available for construction. People don’t realize that Hawaii zones 95% of the land statewide as open space. We only develop on 5%.

We could increase that percentage just slightly without damaging the environment or agriculture, and we’d have a greater supply, bringing down the cost of housing tremendously. That would help not only developers, but it would help affordable housing tremendously. 

You earlier asked what measures we could take to lower the cost of living. One thing that’s important is reducing the general excise tax, or at least giving an exemption on medical services and food. That would help a lot of people. 

We can also reform an ancient shipping law, the Jones Act, which costs us at least $1.2 billion a year. There are lots of things we can do in addition to making housing more affordable by increasing its supply.

Miro: A few more questions for Dr. Keli’i Akina of The Grassroot Institute of Hawaii, grassrootinstitute.org. Of course, those budget woes —, how should the state be dealing with the budget woes?

Akina: I’m glad you’re asking that question because a lot of times, as individuals and taxpayers, we don’t pay a lot of attention to the cost of government in Hawaii, which is exorbitant. We really, bottom line, need to reduce government spending and its tax impact upon businesses and individuals. 

One thing we could do, for example, is just take a look at where we were in 2015. We had a larger population in Hawaii, and our state government was spending less. Let’s take a look at that budget and see if we could actually take advantage of going backward in terms of our spending. That would provide some wiggle room to reduce taxes such as the unemployment tax. 

In addition, we could change Hawaii law to allow for privatization of more government services, which could help the state and counties save money while boosting local businesses.

Very often, we find ourselves in a situation where our government is running businesses that it’s not efficiently capable of doing. If we can allow the private sector to run those businesses, that would help a lot in terms of saving money.

Miro: We always hear about this one: Several states are battling through this — or maybe not; they’re trying to avoid the inevitability. Can we do anything about the state’s unfunded liabilities?

Akina: Absolutely, we can. There are many states that have tackled that problem and developed best practices. Currently, Hawaii’s public pension system is $14 billion in debt, and the health benefits system is $12 billion in debt. That’s $26 billion we owe our public sector workers that we simply don’t have. Reforming these systems could save public workers from underfunded benefits and save taxpayer money, too.

The key thing to recognize is that it’s not about union or nonunion. Everybody will benefit by reforming these systems. The reason everyone will benefit is because the cost falls on all of us. If we can reform our pension and our public-worker healthcare systems and follow best practices, that will make the system more sustainable for our union workers.

We’ve addressed this at Grassroot Institute in a report called “How to Resolve Hawaii’s Public Pension Debt Crisis.” Anyone can go to our website at grassrootinstitute.org, and see this report with a series of different approaches to reform, and creating hybrid plans and protections against pension spiking, and other abuses that ultimately hurt everyone in the system.

Miro: Finally, there’s some optimism in there. You’re saying that we can still turn around the state economy despite, currently, this bad outlook we’re undergoing right now.

Akina: While we can’t deny the poor economic indicators, we can approach them in a better way, looking for long-term solutions that will turn our economy around. That’s very important. 

What we’re saying is, avoid the immediate solution of borrowing more money and spending more. Tighten our belts and take a look at what operates our government more efficiently, more effectively and at lower cost. That will help a lot. 

Let’s help the economy be more receptive and hospitable to businesses, so businesses will find Hawaii a business-friendly place to stay.

After so many months in lockdown and so much uncertainty, it will be a long time before we recover. But I’m optimistic because there are things we can do to speed up the recovery and come back more quickly. There’s an opportunity to clear away barriers to business and innovation that were a problem before the pandemic. We can hit the reset button and build the kind of economy and relationship of government to the economy that actually serves business and results in profits in all sectors. With the right ideas, we won’t just come back to the status quo, we can do much better and create an economy in which all people prosper.

Miro: Thank you for your time. That’s Dr. Keli’i Akina of The Grassroot Institute of Hawaii, grassrootinstitute.org. Thanks for joining us this Sunday, of course, part of this great Thanksgiving Day weekend here throughout the US of A.

Once again, Dr. Keli’i Akina of The Grassroot Institute of Hawaii. Mahalo for tuning in and informing our audience of the outlook we have for our state. Hopefully, yes, we can have something positive to say, in a positive outlook in the near future. We hope to talk to you soon. Have yourself a great Sunday.

Akina: Johnny, aloha to everyone.

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