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Vibrancy of Economy Will Return Only with Consumer Confidence

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By Lowell L. Kalapa
(Released on 11/22/09)

As the crystal ball gazers on the state’s Council on Revenues struggle to put their collective fingers on the forecast for state general fund tax revenues, observers seem to agree that the outlook will get much worse before it gets better.

Without the return of consumer confidence, the outlook for Hawaii’s economy and, therefore, general fund tax collections, looks bleak. When and until visitors feel confident they will have a job next week or will be able to make their next mortgage payment, discretionary spending, like on a vacation to Hawaii, will be put on the back burner.

The collapse of the credit and housing markets last year shook consumer confidence to its very knees as we learned that Americans had looked upon their homes as their “savings” and leveraged those values to gain cheap money to buy anything and everything they wanted. But with the crash of the housing market and the tightening of the credit markets, the more than $1.4 trillion loss in household wealth had a sobering effect on all Americans. This experience has changed the habits of the current generation of consumers dramatically.

With the loss of the financial security blanket of their homes, Americans, as consumers, are pulling back, being more judicious in their purchases while their credit card companies reduce the available credit lines and impose new and higher fees for delinquencies. Couple that with the huge debt load that many Americans carried into this financial crisis and we find more Americans either saving or trying to pay down their debt. For those who may not have those huge debt loads, the fear of the loss of a job or lesser hours sends more and more consumers to the savings department rather than to department stores.

Unfortunately, this behavior is just the opposite of what is needed to revitalize the economy, for as consumers pull back, the lesser demand for goods means companies will reduce production, cutting workers’ hours and shrinking inventories. With employment prospects dim, consumers are unwilling to go out on a limb for a large purchase or for anything but necessities.

This downturn of consumer activity is evidenced in the downsizing of retailers and the consolidation of some major national retail chains. With that downsizing and consolidation will come a loss of jobs that probably will never come back which means workers will have to be retrained. The same can be said of large manufacturers of durable goods, such as cars, of which we have already heard from Detroit.

What this means for the crystal ball gazers on the Council on Revenues, as well as for administration officials and lawmakers, is that there is no short-term fix for the budget shortfall. Tax revenues will not return to their pre-recession buoyancy in the very near future. Some may argue that the stock market is making a comeback and surely that is a sign that the recession is nearly over. While that may be true, historically a turn in the economy trails a bounce back in the stock market by anywhere from 12 to 18 months.

Given that the national economy must recover before there is a restoration of consumer confidence, discretionary travel will resume sometime after consumers return to the marketplace. Thus, strategies such as taking money from the hurricane fund or raising taxes will not solve the budget shortfall. Hard decisions must be made about where to spend what precious few tax dollars the state will be able to collect in the coming years.

Taxpayers need to realize that state government can no longer be everything to everyone and that elected officials, at all levels, must have the courage and willingness to set priorities and then the backbone to say no to programs and services that are not essential to the health and welfare of the community.

This has been the problem over the past two decades when the economy was booming providing more and more tax dollars, elected officials found new ways to raise more money from taxpayers. The result is that the economy can no longer sustain that level of taxation while also being assaulted with difficult economic circumstances.

Those in business have known all along what a struggle it has been to remain in business in Hawaii. Thus, if Hawaii is to a return to vibrancy, elected officials must reduce spending and, in turn, reduce the heavy burden of government bureaucracy that thirsts for more and more tax dollars.

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui News, West Hawaii Today, Garden Isle News, and the HawaiiReporter.com.

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