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Turning the Economy Around, What Needs to be Done

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By Lowell L. Kalapa

It just doesn’t seem to go away and no matter how much we hope and wish, the economy doesn’t seem to show any signs of improving in the near future.

It seems that some political leaders are focused on the prospect that the Asian economic woes are about over and therefore happy days are just around the corner. What those leaders don’t realize is that those Japanese investors who contributed to the exuberant economy of the late 1980’s got burned by their investments in Hawaii and there is little likelihood that they will return.

While the eastbound visitor figure may rebound, just bringing visitors to Hawaii will not of itself turn this economy around. Let’s face it, Hawaii has long been characterized as a “capital short” state where continual infusions of capital are necessary to keep the Hawaiian economic engine going. If there is no new capital invested in Hawaii, there will be no additional economic growth.

While growth in the number of visitor arrivals will bring new capital to our shores, that growth will only occur if Hawaii is viewed as a desirable place to visit. Certainly, Hawaii has the clean air, the beautiful scenery, and the warm waters, but if that experience is substantially more than the bargain hunting traveler is willing to pay, then Hawaii won’t have a chance of snaring that person’s interest. And the Hawaii experience is not cheap because the cost of doing business in Hawaii is not cheap.

How expensive is it to do business in Hawaii? A survey of annual operating costs per hotel room conducted by Smith Travel Research for PricewaterhouseCoopers a year or so ago lists Hawaii with the highest annual operating cost of the destinations surveyed with $47,760. The next highest destination was Hong Kong at $37,237 per year while Hawaii’s direct competitors in the leisure market – the Caribbean and Mexico checked in at $27,490 and $20,912 respectively. These operating cost figures exclude debt payments so the cost of the site was not a factor in comparing the operating costs.

If it costs that much to maintain a hotel room for a year, then it follows that the hotel has to charge enough to cover the cost of operating that room. As that cost goes higher and higher, Hawaii becomes less competitive for the limited visitor dollar. Thus, it is obvious that in order to stay competitive hotels have to find ways to reduce operating costs.

What should, needs, and has to be done to turn this economic situation around? The one goal that policymakers and community leaders should focus on is how to reduce the cost of living and doing business in Hawaii. With high taxes, high user fees, and choking regulations, no investor can hold the prospect of making a profit in Hawaii. The very word “profit” is foreign to many public policymakers who in many cases view profit as a “rip-off” of their constituents.

But let’s face it, no one invests their hard earned dollars so that they can lose money. As long as the cost of taxes and compliance with government regulations remains high, there is little likelihood any business can turn a profit in Hawaii. The same survey done by Smith Travel Research found that the ratio of profits in Hawaii from hotel operations to be the lowest among the three similar visitor destination areas in the nation. The percent profit is to sales earnings after fixed charges but before interest, depreciation, and income taxes was 22.8% in California, 22.0% in Florida but only 13.1% in Hawaii.

With those types of comparisons it is no wonder that investors will take their capital elsewhere. Without that capital, Hawaii cannot grow and prosper. If Hawaii is to attract that capital, it must do everything possible to improve the prospects of being able to make a profit on an investment in Hawaii.

However, in order to afford these changes like a smaller tax burden or less regulatory control, that means there has to be less government. And that is the rub. Lawmakers do not want to be the “bad guy” and lay off workers. Lawmakers don’t want to give up programs. On the other side, public employee union representatives will fight every effort to downsize the public payroll.

So it would seem that Hawaii is at an impasse. Those who have been chosen to lead don’t seem able to lead. No one wants to take the risk. No one wants to make the tough decisions. Perhaps it is time for new leadership. If not, then Hawaii will continue to sink into the economic black hole.

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