Focus
Lawmakers aren't addressing crisis as boldly as they should

By David McClain

Sept. 11 showed us that our highly globalized economy has grown without enough attention to making sufficiently secure our networks of goods and services trade, capital flows, labor movements and information flows.

Private-sector construction projects such as the Mililani Town Center theater complex were a common sight a few years ago. Now, however, the private sector may be too traumatized to spend. Advertiser library photo • June 16, 1999

The short-term fallout of the 1970s energy crisis was four years of recession in the nine years from 1973 to 1982. Similarly, the first few years of the coming quarter-century are likely to be pretty rough economically, internationally and here in Hawai'i.

The governor of the Bank of England recently suggested the global economic slowdown could last several years.

With the Japanese economy shrinking with no prospect of recovery, and the yen beginning to depreciate sharply as a safety valve, we can expect little visitor improvement from the Asian side.

The U.S. economy already is in recession, and while a rebound is coming, it is not expected until next spring. Hawai'i's economy has lost $1 billion in tourism-related spending and is shrinking at a 7 to 10 percent rate in the current quarter. Our economy will continue to decline next year.

Which brings us to the current special session of the Legislature.

Our representatives have made a good start in dealing with our economic problems, but it's only that, a start. Overall, I've found the Legislature's actions to be more cautious than I think the times demand.

Let's get real. The private sector is too traumatized to spend. Tax-rate reductions, though certainly good policy to improve our long-run competitiveness, can't help much in the short run, as they are likely to lead to a saving, rather than spending, of the tax relief. Moreover, any recycling of money saved through the banking system requires consumers or businesses with the confidence to borrow. They are few and far between.

Tax credits focused on investment ignore the fact that this global downturn is the first investment-led recession since the 1930s.

I'm no fan of larger government, but in these extreme times — in order to restore confidence to the private sector — what's needed is a massive, multi-year injection of government spending to replace the spending lost by the absence of tourists.

It's true that extra public spending could lead to a lowering of our just-upgraded bond rating, but I'd rather have an A bond rating and a more fully employed economy than an AA bond rating and tens of thousands out of work.

We have $600 million in repairs and maintenance waiting at the public schools, and another $150 million or more of repair and maintenance at the University of Hawai'i.

President Evan Dobelle has proposed $700 million in new construction in the UH system that would create an estimated 18,000 jobs and in the process move us down the road toward economic diversification.

Thus far, the Legislature has authorized $100 million of general funds for repair and maintenance, and $150 million from the tobacco settlement fund to match money from private and other sources for construction of the UH Health and Wellness Center.

Why is the Legislature being so cautious?

Let me answer that question by reference to an old management education story about recognition of, and adaptation to, change. The story has to do with a frog and a container of water.

If you throw the frog into a pot of boiling water, he'll jump out immediately.

But if you put a frog into a container of cool water, then gradually heat it, the frog won't realize that the water is getting hotter until it's too late and he's cooked.

Does the Legislature realize that the water — the economic environment — got much, much hotter and more inhospitable after Sept. 11?

I'm not sure. I think the natural human impulse is to hope that minimal action will be required. Or perhaps the legislators are just trying to screw up their courage to jump, and it will take until the regular legislative session to do so.

In my more cynical moments, however, I think that some in the Legislature know they need to jump and take dramatic action but are consciously planning to do less than required now.

They'll let the economic situation deteriorate a bit further, so that legislation permitting gambling will get an enthusiastic reception when it's introduced in the regular session.

Never mind that gambling is inconsistent with our tourism brand, based on the spirit of aloha. Never mind that in a down economy the acknowledged social costs of gambling would be amplified. Never mind that our businesses and consumers need a massive jolt of confidence, and they need it now.

Machiavelli would be proud.

David McClain is dean and First Hawaiian Bank distinguished professor of leadership and management at the College of Business Administration, University of Hawai'i. This article is based on a recent speech to the Rotary Club of Honolulu.