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Military Spending

The reach of military dollars in Hawaii is far greater than you think. But can it protect us from a recession?

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State of Hawaii Defense and Visitor Industry ExpendituresU.S. Congressman Neil Abercrombie says it’s a win-win situation for everybody. “It took the military families out of the nonexistent rental market so that military family and civilian families, especially on Oahu, were not competing with one another,” Abercrombie says. Even though the contracts for construction went to bigger international developers, they subcontracted work to local companies. For the military, it no longer needed to appropriate funds from MILCON.

Some of the current big-ticket projects that can bolster local companies include projects headed by Actus Lend Lease, the developer of several Army housing communities on Oahu and two at Hickam Air Force Base. The company is demolishing, building and/or renovating more than 10,000 homes on Oahu. Construction will take place between 2005 and 2015. The homes also need to be managed as part of the 50-year contract. Then there is Forest City Military Communities-Hawaii, which will demolish and rebuild 3,000 Navy and Marine homes, in addition to renovating 1,500 homes. Construction will take place between 2004 and 2012. That’s a lot of steady activity to tap into for local businesses.

State of Hawaii Civilian Unemployment RateNo one expects the military to go out of business any time soon.

The $6.1 Billion Question?

Although at press time, Federal Reserve Chairman Ben Bernanke refused to say “recession,” most sources believe it is imminent, if not already in progress. So the billion dollar question is will military projects help us through a recession? In a comparison between defense expenditures and visitor expenditures during the 1990s, defense spending remained fairly consistent while visitor expenditures fluctuated more dramatically (See chart left).
“It’s going to be a meaningful impact and it provides that diversity and that structure and foundation for the economy,” says Jim Tollefson. “If they weren’t here, we’d be subject to much greater fluctuation during economic swings.”

In addition, according to Tom Smyth, a former DBEDT division administrator who retired in 2007, a number of different factors will sustain military spending in the future. “The political, diplomatic policy is to shift forces and attention to the Pacific, and we directly benefit from that,” Smyth says. Nationally, troop numbers are expanding, which will affect the number of service personnel on bases here. Military wages go up independent of the national economy, meaning more money will trickle down to Hawaii’s personnel. Military housing is independent of the wider housing market, so it will not be affected by the credit and mortgage fallout.

According to DBEDT, DoD personnel and their dependents totaled 121,000 in 1989. That total has not been reached since then, but numbered 102,000 in 2005.

“It’s a significant amount of money, has been and probably will be, so that base for spending will take place regardless of what happens on the Mainland in regard to recessionary factors,” Abercrombie says. “The military money will come or it won’t. All that depends on the strategic posture of the United States. I don’t think that’s going to change all that much for purposes of military spending in the state. We had that [during] the last recession, so it by no means protects us from it. It may soften the blow, but by no means protects us.”

He points out, however, that military spending is only a fraction of total federal funding. Since the tax base to fund public projects is relatively small due to Hawaii’s population, federal funding is vital, Abercrombie says. In addition to military spending, there are research dollars for UH, observatories, parks, energy production, niche agriculture and transportation. “If you’re looking at an item to make us recession proof, look to transit,” he says. Since it will be a long term project that could take up to 15 years to complete, along with associated transit oriented development, it could sustain the economy into the future.

In other words, diversification is and will always be key.

“One of the problems that happened when the economy was bad the last time, essentially everything worked in concert to make it bad,” says Boyd of UH West Oahu. “Construction, real estate, title markets collapsed. Basically, there was no counterbalance … which could’ve done something about it. If they had light rail on the agenda back then, that would’ve offset the collapse in the real estate market with light rail and we probably could’ve gotten through that OK.”

Back then, following the end of the Cold War and Desert Storm, there was a dropoff in military spending, too.

“And, what people often don’t realize, there was an even steeper drop in military expenditures when the real estate market collapsed because of the peace dividend,” Boyd says.

Hawaii Business magazine invites you to comment on our articles and the issues they raise. Comments are moderated for offensive language, commercial messages and off-topic posts and may be deleted. Some comments may be chosen for inclusion in the magazine on the Feedback page.

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Jun 5, 2008 09:45 pm
 Posted by  gmathol

I don't think that the military bacon works as described in this articles. Think what you have to spent on infrastructure such as streets and also schools.
Most of the contracts go to the mainland anyway.

This has been flagged
Oct 12, 2008 03:56 am
 Posted by  mktggurl

anyone check to see Hoana Medical's revenue per year? or is it an idea that sounds good? When will they raise Series F of private funding under Act 221?

Come on IPO for hospital sensing that revenue ramp possible.....:)

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