Paying the Piper

Economist Paul Brewbaker says the biggest risk to our prosperity is not national or global, but Hawaii's overburdened infrastructure

photo: Jimmy Forrest

Like any good economist, Paul Brewbaker has no shortage of graphs, and no shortage of enthusiasm for them. In his office, in the Bank of Hawaii downtown headquarters, Brewbaker spins his laptop around to show one of his favorites, a graph of the ups and downs of the housing market over the past several decades. Brewbaker energetically points to the last section and the sudden absence of jagged lines running up and down.

“That’s the Alan Greenspan era,” he says, referring to the former chairman of the Federal Reserve.

Brewbaker says that, in the mid-’90s, the Federal Reserve mastered setting monetary policy and the net result was a removal of the volatility of the housing market, or, as his graph colorfully demonstrates, the jagged ups and downs of the investment cycle were largely flattened out. That’s good news for the future economic health of Hawaii: Even as the housing market cools, the fundamentals are strong, he says. Brewbaker also points out that the global economy has shown encouraging signs of stability and more widespread growth.

However, as the conversation lengthens, Brewbaker says that, while national and global economic indicators are good, he is still concerned. Because Hawaii just might throw a monkey wrench in its own good fortune by failing to build the proper infrastructure needed to foster responsible growth. He cites the 48-million-gallon sewage spill in Waikiki as a prime example.

Brewbaker, though, has a fix.

HB: What makes you believe that the national economy will remain strong?
PB: If you look at GDP, the big pieces are consumption, 70 percent of the economy is consumption, then investment, which is about 15 percent, and government, which is about 15 percent. So consumption is huge, but it turns out consumption is pretty smooth. The reason consumption is smooth is people actively do that, in good times or bad, they go to the supermarket every week. They don’t feast or famine. When they lose their jobs, they use savings as a buffer, so that allows consumption to be pretty smooth. So of the remaining one-third of the economy, half of it is government, which doesn’t move around a lot. It is kind of like a supertanker.

The remaining piece is investment, but the problem is that historically, you have all this smoothness in consumption and government, and you have this tiny piece that goes [up and down]; so to the extent that GDP is moving, it is all because of [investment]. But a big part of that investment piece just went flat. We have learned how to do monetary policy.

HB: So what can we expect in Hawaii given those fundamentals?
PB: So we are seeing the housing boom unwinding at this point, but the thing I wouldn’t expect and what we used to see historically, going from a housing boom to housing bust, where the whole economy goes into a recession.

HB: So we are on a steady climb up?
PB: There will still be variation, in housing in particular, but not the amplitude we had in the past. The whole economy is moving in a much narrower bandwidth of variation, from year to year.

HB: But despite all this good economic news, you believe infrastructure is falling behind locally?
PB: When those guys made the decision to build the Pali Highway, the Likelike Highway andÉ the freeway complex, they were making a decision about the infrastructure capacity for the next half century. I infer from the data [on public construction investment] that the decision has been made not to invest in bandwidth for the next half century.

If you push up to capacity, then it blows up and spews sewage all over the beach. The harbor (in Maui) is another perfect example.

>> FAST FACT:

Paul Brewbaker began doing research in the Bank of Hawaii international banking division as a student in 1981, joined the bank’s economics department as an economist in 1985 and became chief economist in 1995.

HB: Why are we not seeing that public sector infrastructure investment needed to sustain a healthy economy?
PB: The people have kind of got this mythology institutionalized that more freeways mean more homes, which means environmental degradation. How does a freeway per se create more housing? It doesn’t. It only does if you let it. Doesn’t the jurisdiction already have the discretion to not allow development where it is not appropriate? So the outcome is we are not going to build any more houses and we are not going to build any more freeways, because that is the only way we can manage stewardship of our environment.

I think that is just false. Because the idea that we are going to have to do all the heavy lifting to improve our infrastructure and our natural environment with our existing levels of [tax] income is absurd. If the pie is not growing, the only way for its share to increase is to take it away from somewhere else and I don’t see that happening politically.

If you grow the pie, a share of the new growth could be dedicated to building better infrastructure. So, for me, growth is an opportunity.

I can tell you how much we are going to devote to the environment with this level of income: What you see is what you get and it is not that good.

HB: But people don’t see the positive connection with growth and an increased tax base?
PB: That’s right. We are not even at the point where we are recognizing the opportunity created by infrastructure improvement to generate some of these external benefits.

I remember sitting in a meeting in Maui and people said ‘If we lengthen the runway on Maui we are going to let more people on Maui and increase the risk of invasive species.’ You are not doing anything about the existing planes so what does adding planes do? So it is not about planes, it is about interdiction. You can have more planes and use them to pay to make it better.

So the next 20 or 40 percent increase in gross state product gives us the opportunity, now that we have solved most of the big problems in building our social infrastructure. It is that next 20 to 40 percent in gross state product, over the next several decades, that we dedicate to really building infrastructure necessary to managing our environment.

To me, it is impossible to ever find oneself in a position to actually do anything significant about these things without growing the pie, and dedicating an increasing fraction of that growth to addressing these problems. And you are not going to have the growth without the infrastructure.

The pipeline is blowing up and it is spewing sewage on the beach. It is old, it is decrepit and it has no backup. That is a metaphor for the entire economy, in several different ways, including ones I will not underscore.

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