Paul Brewbaker: The economist speaks plainly about challenges facing Hawaii — and how to manage them

When Paul Brewbaker was a Kailua High School student grappling with a bout of senioritis, a teacher assigned him to spend a day with University of Hawaii professor Steve Jackstadt, who had founded the Hawaii Council on Economic Education and penned comic books in the 1970s, such as “Superheroes of Macroeconomics.”

The experience, which included a visit to the Ewa Sugar Mill on the day it closed, ignited an intellectual spark, said Brewbaker, principal of TZ Economics, an Oahu-based economics consultancy. “One spark and then a very slow burning fuse,” he added, noting that a few college years passed before enrollment in an economic theory course.

After earning degrees from Stanford University and the University of Hawaii, he went on to a 25-year affiliation with Bank of Hawaii, concluding with retirement from its chief economist’s post about a decade ago. As a side job, Brewbaker has taught at Hawaii Pacific University and at UH.

In addition, he weighs in on various economic forecasts. Among recent efforts, he served as a contributor on the Hawaii Executive Conference’s “Troubled Waters: Charting A New Fiscal Course for Hawaii” report.

It examines three Hawaii public spending challenges totaling upwards of $88 billion over the next three decades — including $47.2 billion for shoring up infrastructure; $15.3 billion for prep tied to climate change and natural disaster; and some $25.7 billion in unfunded liability for public employee retirement benefits.

“My main takeaway was that … a $100 billion Hawaii economy today compels Hawaii to achieve 2% real GDP (gross domestic product) growth — not 1% — from now through 2050,” Brewbaker said.

Hawaii had the lowest state real GDP growth rate in second quarter 2019 (0.5%), and an even lower growth rate in the third quarter (0.4%). “If it grows at 2%, by mid-century, Hawaii’s real annual output will be $50 billion higher than at 1%,” Brewbaker said, adding, “I can think of a couple things to do with an extra $50 billion every year.”

Question: Also by mid-century, Hawaii intends to significantly step up its clean-energy profile. Is this focus as good for the economy as it’ll be for the environment?

Answer: Atmospheric greenhouse gas reduction is the ultimate objective, but not every place or every industry need reduce emissions equally, not to mention reduce to nil. Our glorious goal of 100% [fill-in-the-blank] is faith-based environmentalism. …

The optimal mix of lower atmospheric carbon-loading and higher atmospheric carbon-sequestration never will be revealed as long as carbon is costless to emit and unremunerative to sequester. For that you need an actual price, not omniscience.

We need a market for atmospheric carbon in which you pay to emit (and to guide carbon taxation) and in which you get paid to sequester. …

Q: In regards to tourism — Hawaii’s economic engine — what do you make of the state’s shift away from single-focused growing of record visitor numbers?

A: Hawaii needs a new tourism governance structure coordinating marketing and planning with introduction of active, smartphone GPS app-based dynamic pricing to modulate use of public recreational natural resources and to mitigate congestion.

A “zero price” means too many users and no reason for private producers to enter. We get more visitors but not more dollars. … There’s no economic reason why such fees shouldn’t augment general funds, nor any reason why residents shouldn’t pay.

Q: Also on the tourism front, enforcement of the new Honolulu ordinance that cracks down on illegal vacation rentals has been in effect for nearly six months. Thoughts?

A: Don’t tell me who can stay in my house. Stop taking private property rights and transferring them to buttinskies through exclusionary zoning. …

Sure, technological change is disruptive and needs to be managed, but enforcing a 1989 cap in 2019 isn’t exactly management. What’s happened recently is the result of financial innovation. Hosting apps lowered search and matching cost, increasing lodging demand. Apps lowered barriers to entry, increasing supply.

Worried about housing market effects? Build more houses. Today, one quarter of neighbor island lodging units are vacation rentals. All of the net growth in lodging since the 1980s, there and on Oahu, is vacation rentals. Manage it. Prohibition is not management.

Q: On the military front in Hawaii, what’s the general outlook?

A: Most of Hawaii population loss 2016-2019 (inclusive) is an artifact of military disengagement in Afghanistan and Iraq and corresponding force reductions in Hawaii-based active duty personnel and dependents.

From Hawaii’s perspective — until 9/11, the only state seriously to get attacked in a century — the geopolitical imperative to project a U.S. military presence in this hemisphere is tenable. So, in addition to forward surveillance, for example, Hawaii supports readiness of two dozen nuclear attack submarines, providing $1 billion in annual exports of maintenance and repair services on those boats, and exports another quarter billion on surface ships.

This is as close as Hawaii gets to heavy manufacturing industry with skilled tradespeople, nearly a fifth of whom comprise apprentice and journeyman machinists and others acquiring skills. Hawaii’s export of military services to the mainland is about preempting the next attack and about maintaining productive capacity, both. People who prefer to reduce Hawaii defenses hardly can be called protectors.

Q: The state and the city are pursuing public-private partnerships (P3) for redevelopment of Aloha Stadium and rail construction/operations, respectively. Thoughts?

A: P3 could work if so many people didn’t think public land is “free.” It’s not free. It has an opportunity cost: what we could do with the land if we were in charge. Wait: we are.

The private P in the PPP assesses land on their balance sheets at market value. Unless jurisdictions also recognize market valuation, the public P enters the PPP with a different mindset. Tough to have a successful partnership if one partner makes investment decisions based on risk-adjusted returns grounded in an economic cost of capital that the other partner doesn’t recognize.

… Public investment appraisal involves calculus of social net benefits different from private sector profit-and-loss. These present practical challenges to how P3 can work, but I remain hopeful and try to keep an open mind.

Q:Economic prosperity here seems tilted in favor of wealthy investors. Is there a way to make Hawaii’s economy yield prosperity on a scale so that everybody benefits?

A: There are two paths to the prosperity to which this question aspires: investment in human capital (skills) and investment in physical capital (vintage matters). Both raise productivity. Hawaii needs more of both.

Deconstructing STEM (science, technology, engineering and math) economic activities, such as astronomy and biotechnology, reduces real incomes absolutely and impairs social welfare.

Not expanding physical productive capacity stifles future output. Neighbor Isle homebuilding during the last decade was lower than any decade since they were losing population for 40 years (1930s-1960s). …

Suppressing capital formation is a perfected art in Hawaii. That’s why real per capita income in Honolulu was 40% higher than the U.S. average in the early 1970s, and is not quite 10% higher today.

Technology since 1980 complements analytical and critical thinking skills acquired by those who are college-educated. … Male high school dropouts today have lower average real earnings than the dropouts I worked with at Dole Cannery in 1973. Persons with college degrees today have multiples-higher average earnings than the college-educated in 1973.

Occupational polarization has meant that production, administrative support, and clerical jobs in the middle of the skill spectrum were displaced by technology.

Outcomes you call “tilted in favor of wealthy investors” reflect an evolution of economic structure and technology since 1980, which penalizes unskilled workers and rewards skilled workers, costs rural areas and benefits urban areas.

… Why the wealthy aren’t taxed higher nowadays when their income shares increased wildly since 1980 is known only to decision-makers who, since the 1960s, reduced Oahu residential property tax rates by two-thirds.