I was talking about government and the economy with then-state Rep. Brian Schatz, later lieutenant governor and now U.S. Sen. Brian Schatz.
"You’re not saying that all you want government to do is fix the potholes and clean the bathrooms at the public park?" he asked me.
"Pretty much," I replied.
I exaggerated, but our differences weren’t really about the economic roles of government. Our views differed more on the scope of possibilities over which state government realistically could exert influence. State government simply is too small, and is hamstrung by balanced budget rules to do much more than that.
Constitutionally, the state of Hawaii can’t spend more than it takes in. Whether for good reasons or lame ones, if the state cuts this tax, gives away that credit or subsidizes that industry, the funding comes from somewhere else in the budget, dollar for dollar.
Federal deficits are possible, but for the state of Hawaii, if taxes fall, so must spending.
Just as households finance homes and businesses finance buildings with long-term borrowing, the state also can finance public infrastructure investment through long-term borrowing. Formation of long-lived public assets expands productive capacity, just like private investment. Hawaii has gotten away from this; it should probably build more. The trick is to invest productively: Annual principal and interest payments must fall within the balanced-budget requirement, too.
Only underlying growth in the economy yields incremental fiscal resources, enabling state government better to fulfill or expand its missions. That growth primarily originates in the private sector, but public sector investment makes an important, complementary contribution.
During the 2008-2011 recession and transition to recovery, shrinking state and local government value added — at an inflation-adjusted annualized rate of 0.2 percent per annum, combined with private industry shrinking at 0.1 percent — required offsetting federal government stimulus, at +4 percent, to stabilize Hawaii’s economy.
Then came the economic recovery.
First in 2010 and again in 2012, tourism exploded out of a recession deepened by airline shutdowns in 2008. That’s the state surplus: that, plus employment recovery. Gov. Neil Abercrombie, aspiring rivals and budget officials understand these origins of the surplus.
Building a surplus in good times is a necessary and prudent precautionary savings mechanism to hedge against downside risks of future bad times. Budget Director Kalbert Young gets it: the state has one shot at accumulating enough to handle the next economic downturn and to make a down payment on longer-term liabilities associated with an aging population.
Federal government now is exerting the fiscal drag previously exerted by the state and counties. Seasonally adjusted federal civilian employment in Hawaii declined 4.5 percent over the last five quarters.
Seasonally adjusted monthly visitor arrivals, visitor days and real inflation-adjusted visitor expenditures did not rise in the last year. They declined.
Real inflation-adjusted construction spending did not rise in the last 18 months, and what spending was there wasn’t on new building, but on equipment installation like solar photovoltaic systems.
Seasonally adjusted unemployment rates in Hawaii stopped improving at the end of last year.
Adjusted for inflation, seasonally adjusted real Hawaii general fund revenues declined in four of the last five quarters.
I’m not saying the economic expansion is over, but if this is halftime and Bruno Mars is about to perform, how you feel about the second half depends on which team you’re backing. Exports (tourism), investment (construction), and federal government in Hawaii — collectively nearly two-fifths of gross product — have not grown in a year.
So, yeah, fix the potholes, clean the bathrooms and build a surplus. That’ll do it. The next recession may not be around the corner, but we’re 4 years closer to it than to the last recession. In the 2009 fiscal year, during which the Council on Revenues forecast never caught up, Hawaii’s general fund unexpectedly dropped nearly 10 percent.
It could happen again.