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A Diverse Economy

Does Hawaii need one? How should we get it?

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According to Brewbaker, this sort of tax credit can only distort the behavior of investors. He emphasizes this with a parable: “Suppose you and I wanted to set up a company with Bernie Madoff that guaranteed investors would never have to pay state income taxes for as long as they lived, and might, in the process, actually get a return on their investment. We could loot them for millions of dollars and spend it on ourselves. The investors would probably get nothing in return, but they would still be no worse off than if they had given the same amount of money to the state.”

Of course, the whole idea of these kinds of tax credits is to change the equation of risk and reward for the investor. Sometimes, the credit is designed to make some desirable kind of investment (clean energy, low-income housing) pencil out, offsetting some of the cost for the investor. Some credits, like 221, effectively shift the risk from the investor to the state. Brewbaker’s point is that investors need a true metric of risk and reward — economists call it risk-adjusted returns — in order to act efficiently. “Act 221 isn’t just inefficient; it’s outright pernicious,” he says.

Some See a Broader Problem

Ted Liu, director of the Department of Business, Economic Development and Tourism, is one of those who don’t think capital alone will work. Where Watumull says, “Capital comes first, then, the other pieces of it (education, workforce development, infrastructure) will come along later,” Liu believes those other pieces are a big reason there’s no capital in the first place. “I don’t think it’s capital driven,” he says. “Capital will go to places where it can be used.” The key to diversification, according to people in this camp, is not tax credits for wealthy investors, but an emphasis on things like science, technology, engineering and math education programs; worker training; infrastructure, like wet labs and incubators; and even lifestyle issues such as the arts and cultural festivals. Liu poses the question: “Why isn’t the private sector providing the capital now?” The answer, he says, is that “there are better opportunities elsewhere. If we want them to invest here, we have to make those opportunities better here.”

This broader view of diversification has currency in surprising places. Among the leadership of Enterprise Honolulu, for example, there seems to be a general agreement that the process will have to be more comprehensive than simply replacing Act 221 or creating a fund of funds. Board member Mark Ritchie likes to use the example of Ireland, a country that, within a generation, went from last in per capita income in the European Union to first. But the so-called Irish Miracle required an extraordinary level of conversation and consensus within the country. There’s the rub.

Pono Shim, the kahu and new president of Enterprise Honolulu, says this is the challenge facing Hawaii today. “Can we have a simple, open, honest conversation about who we are, where we are and where are we going? Until that happens, there will be no economic development that’s going to span Hawaii’s future.”

Enterprise Honolulu’s leaders are, from left,
Managing Director Mark McGuffie, Executive Director Pono Shim
and past Executive Director Mike Fitzgerald.

Outgoing Enterprise Honolulu president Mike Fitzgerald agrees. “Until and unless a new community discussion can take place here among the stakeholders – not just business, not just government, not just unions, not just environmentalists, not just the university, but bring those forces together and have citizens have a stake – this place has marooned itself.”

But Fitzgerald remains stubbornly optimistic. “Just think of these challenges facing Hawaii right now: First, I would argue that it’s the most vulnerable place on the planet because of imported oil and imported fuel.” Hawaii, he says, is also disproportionately impacted by any hiccup in the world economy. “All that said – and those are all challenges – Hawaii has a better set of real assets to deal with these than almost anywhere on the planet: every renewable energy asset, 365 days of growing capacity, clean, blue water for ocean research.” Just solving our own problems, in other words, will create a clean, sustainable, diversified economy.

Of course, according to Brewbaker, this all misses the point. Like most economists, he believes diversification is the wrong goal. According to the theory of comparative advantage, specialization is the better plan for a small, open economy like Hawaii. “The idea,” Brewbaker says, “is that, through production specialization in an economy’s comparative advantage, welfare will be maximized.” It’s best, he says, to simply trade what you do well for all the cheaper stuff we can import from others. Economically speaking, if Hawaii can’t attract venture capital or produce an educated workforce or a modern infrastructure, maybe technology isn’t our proper specialization.

“Tourism seems like the obvious choice to me,” Brewbaker says.

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