Posted on: Friday, January 25, 2002

Island Voices
Hawai'i's politics hurting recovery

By state Rep. Lei Ahu Isa
D-27th District
House Economic Development Committee chairwoman

Even if taking the right fiscal steps would help the economy, governments are incapable of enacting them in time, some political observers say. The endless debates over proposed economic-stimulus packages seem to confirm this.

Experience tells us that by the time the Legislature passes a bill, it will almost certainly be badly designed and too late.

President Evan Dobelle's program of spending millions on CIP and the governor's $1 billion construction bond bill are examples of Keynesian theory. This traditional remedy for recession — deficit spending — went out of fashion years ago.

Until recently, thinking about how to conduct macro-economic policy under recessionary circumstances was an academic exercise. Harvard's Dr. Robert Barro developed a theory that if governments cut taxes or increased spending, consumers would increase their savings (because they expect higher taxes in the future) so as to offset the stimulus. So if the Legislature enacts a one-time tax cut, theory would lead one to expect that consumers would spread their increased consumption over time, rather than going out and binge.

Although this is an intriguing theory, there is little evidence that it works here in Hawai'i. Most Hawai'i consumers may be too uncertain about the future to plan much ahead. They are more accustomed to living paycheck to paycheck.

One would expect public spending to have an even bigger initial stimulative effect than tax cuts. But "public spending" is highly vulnerable to "delay." Planning and obtaining political support for it are likely to take far longer than is required to provide a tax cut, or to give temporary increases for the unemployed. This makes better sense than public works programs.

In any case, if counter-cyclical fiscal policy is to work, speed is crucial. Rhetoric seems to say that Democrats raise taxes through user fees, etc. The strategy of the Republicans is for the tax cuts to placate the conservative base.

At best, the results would be gridlock. Neither side's proposed tax measures are good vehicles to stimulate the economy, and by the time they are passed, the recovery will probably be well under way. The risk, however, is that election-year nerves will lead to both tax cuts and big increases in spending.

The budget outlook would then become even worse.