University of Hawaii researchers offer ways to mitigate COVID-19 economic crisis

Families tighten their belts and cut spending when their incomes drop, but researchers at the University of Hawaii Public Policy Center say that’s the wrong approach for the state to take in response to COVID-19.

Instead of chopping state government because tax revenues have plummeted, Hawaii should use federal aid to bolster work that is critical to pandemic response, and borrow from the Federal Reserve at super-low rates to make up the funding shortfall, they say.

“Hawaii’s private sector economy is in free fall,” the authors wrote in a report released Monday. “State government cannot afford to exacerbate this crisis by precipitating a parallel crisis in the public sector. Hawaii is already trying to navigate a terrible storm. We don’t want a hurricane.”

The report, titled “Do No Harm: How Hawaii State Government Can Mitigate the Covid-19 Economic Crisis,” was written by professor Colin Moore, director of the UH Public Policy Center, and Robert Perkinson, an associate professor of American studies.

Unlike an individual family, government has the ability to help shape the economy, not simply respond to it, the authors note.

“During a crisis like the COVID-19 pandemic, the natural reaction is to cut spending dramatically, but our state government has a responsibility to shore up the economy even if that means it must borrow money,” Moore said. “A decade of research has shown that austerity only leads to more despair.”

The policy brief is based on a review of economic, policy, public health and historical research. The authors also consulted with economists, policy analysts, tax experts, government officials, jurists and nonprofit leaders. The research was coordinated by the UH Public Policy Center and the Scholars Strategy Network.

Many of the proposals are being considered as legislators reconvene at the Capitol this week. The report’s four main recommendations are to:

>> Make emergency investments in agencies critical to containing the virus and softening its economic toll, particularly in public health, technology and vital human services.

>> Keep other government spending flat so as not to worsen the economic downturn, with no cuts until long-term conditions are clearer or recovery is underway.

>> Bridge the revenue gap by using federal relief funds and taking advantage of historically favorable terms to borrow from the Federal Reserve.

>> Make long-term plans for surgical cuts in spending, ways to raise revenue and strategic investments in the economy to benefit more people.

Although Hawaii’s Constitution calls for a balanced budget with general fund expenditures not exceeding revenues, it does allow for exceptions when the governor declares that public health, safety or welfare is threatened.

The report relies on research from the Great Depression through the Great Recession to buttress its conclusions.

“Time and again, studies show that governments that try to cut their way out of recessions only aggravate the pain, delay economic recovery and, ironically, end up with lower tax revenue,” Perkinson said.

The authors urge Hawaii to use federal money from the CARES Act for emergency COVID-19 spending, such as ramping up testing, tracing and isolation options to prevent clusters of cases from developing. That will allow the state to begin reopening businesses safely, they say.

The state is in a strong position to borrow money, having reached the highest credit ratings in state history in December, and with interest and inflation rates near zero.

“State borrowing is never a free lunch, but at the moment, it’s a steal,” the authors wrote.

“In the case of the Covid downturn, increased spending is both prudent and necessary,” they wrote. “Prudent because we are operating in a highly favorable borrowing environment with interest rates low, federal relief dollars flowing and the Federal Reserve buying state debt. Necessary because sustained investment in testing, tracing and public health is critical to safely managing the pandemic over its full course.”

Do No Harm report by Honolulu Star-Advertiser on Scribd