Troubles in the National Economic Outlook (Community Matters)

Welcome to Community Matters on Think Tech Hawaii. I'm your host, Jay Fidell. This episode is entitled Troubles in the National Economic Outlook. What will happen and how will it affect Hawaii? Our guest for the show is Paul Brewaker, principal of TZ Economics, a terrific economist over many, many years. Welcome to the show. >> Got that right. >> Thank you, Jay. It's been a while, but always fun to get back on screen with you. And uh I think you're one of the original guys I know, by the way. You've been doing this for 25 years. >> Yeah. >> Anyway, true fact. >> You're you're really one of the first people I knew who had what we would today call a blog or a video, you know, a vlog. And uh so thanks for inviting me back for a conversation. I know we've got a couple in the archives of YouTube somewhere that I've seen over the past. >> Oh, sure we do. Yeah. >> Yeah. >> So, let's talk about 911. It's 911 today. And yes, >> you know, that does affect the national mood at least at some level and and presumably maybe to a lesser extent it affects the local mood. So, isn't economics all about the mood, the sentiment of the country and the state? Joan Robinson in the 1930s, a Cambridge economist, called it animal spirits, the drove investor behavior. Yeah, the vibe, I guess, is what we're calling it nowadays. But, uh, I I am hoping that, uh, this commemoration of the tragedy of 911 does bring us together. In a way, 911 itself did bring us together as a as a country, as a people, as a nation. And uh sadly we seem to have lost a lot of that. Um on the other hand, it plunged us into a decade or two of uh geopolitical engagements that I'm not sure we look back on as having been all that fruitful. And here we are maybe not having learned as much as we should have from those experiences notwithstanding our deepseated deeply rooted desire to be one as a nation and as a symbol of democracy uh for the world. So the struggle continues in our 250th anniversary of the declaration of independence. I guess I don't know what else to say on the 911 anniversary. >> There's plenty to say, but that's not what we're here for. We're here for economics and the outlook. And I want to do a little speed dating with you, Paul. >> Yeah. >> Um speed dating on the various um you know elements, the various processes and and phenomena that are going on that might affect the national and thus the local economy. Let's talk about the storms first. um the storms not only here but on the mainland. We have climate change. We have various things that people actually don't recognize very often. They don't recognize the connection um between climate change and the storms and the floods and the fires. Um but that does affect the economics, doesn't it? >> Well, absolutely. I mean, right off the top, it's the, you know, frog in the slowly boiling water kind of a problem where these things are happening over geohysical meteorological uh time scales that are a little different from the ones we're used to thinking about from year to year or day to day. And um but the increasing frequency and intensity in Hawaii's case of tropical cyclonic events, you know, tropical cyclones, uh are something we've been thinking about and watching for a quarter century or more. And um this pattern, you know, take a right turn at Albuqueres hitting Kawaii has been in the case of Lel uh the other day has been repeated over the decades with Iniki and Eva and even Hurricane Doc. Different different turns, but they all end up at Breni's beach in Pou for some reason, which is a pattern. So yeah. Um the extent to which sea rise is uh con uh uh compounding the uh risks along our our shorelines where most of Hawaii's communities are located. Um right the problem with urbanization is steep slopes and water bodies and most of us live on a coastal plane uh between the two. We got to preserve the watershed on each of the islands. And that's why the kapoo uh on the mountainous uh you know uh forested uh highlands is so important and why that interaction you know the aua to the to the nearshore literal environment is is so crucial thinking about these cycles but the heating of the atmosphere as we load more carbon and other emissions uh into the atmosphere over the decades and centuries um is creating a risk of not just storms with greater intensity, more frequent uh appearance, but greater amounts of damage, just the the sheer geoysical properties of the storms themselves. But then on the other hand, everybody's built themselves a nice little house on the beach somewhere. You know, it's like between urbanization, the human development, and then these atmospheric developments over long time scales, a century or more, we're at a point where we need to be uh thinking more wisely about how we prepare and harden and make more resilient and improve our adaptation uh to recover more quickly when the events occur. and fundamentally engage in economic activities that reduce the risk for the next generations or the next centuries that have been built up since the industrial revolution. >> You bet. So, um I want to break Trump down because so much of the news uh you know is derived from him. All of national policy flows from him. >> Yeah. >> But first, let's talk about Trump generally as a phenomenon. Um he does he does affect sentiment um and people have an impression of him whether they understand the details of his policies or not. So let me ask you that, you know, Trump as a uh an unhinged kind of mad mad mad president, >> mad King George, >> King George, right? >> King George wannabe, >> you know. I think to be fair, it is a democracy. He did win at least one election. you know, looks like uh you know, uh maybe not the popular vote, but the way the rules of the game are constructed with the electoral college as the final arbiter of what individuals, citizens do in each state. Um you know, he's he's come away with two non-consecutive uh victories. So he does my point here is he does represent to the extent he's a shift in the nature of the presidency and the nature of presidents in America. He does represent a shift in the nature of the American public's view of the economy, the culture, uh you know the history. And uh so I'm not I'm not to give him credit for picking up on the vibe, although he does seem to be tuned in to a certain vibe of a sort that with which I don't selfidentify. Nonetheless, um the interaction you talk about the way he sort of determines the vi I'm not sure I call it policy. He has preferences and those are then communicated in his various uh media channels uh uh to a part of the population that uh embraces the vibe and uh in in some cases people who has who whose views it's my impression people whose views have have evolved have swung back and forth going way back over the decades uh at least to the sort of the tea party movement uh 10 or 15 years ago on one side of the political aisle, the sort of occupy uh agitation on the other side of the aisle and then and what I think fairly seems to be a polarization although not really along traditional political lines which then makes it all the more confusing. So we have economic policy as a consequence of enough people at enough points of time to have uh delivered his administration uh into office implementing economic policies the part that I can talk about that are uh let's say novel uh at best and uh in my opinion uh wouldn't have gotten you a high grade when I taught macroeconomic theory at the University of Hawaii and the University of Wisconsin, which I had to do back in the day because the joke goes, if you work for a bank, you need a second job. You know, only this week he came up with this thing about um he'll give $5,000 to every American citizen who's um an adult, he said. Um, if the if the Congress remains uh swung in the direction of the Republicans and >> if Republicans keep the House and Senate, I'll pay you 5,000 each. >> Yeah. >> Is that's like a bribe, right? Isn't that? >> Yeah. >> Okay. Just >> What does that mean economically though? You know that that that translates into trillions, doesn't it? Well, of course it does, but it has no meaning because it will never happen. It is indicative of nothing in terms of economic importance. But it is hugely revoly as if you needed another thing on the list of the pervasiveness of corruption as a mindset. um you know, separate from the legal standard of what might have been prosecuted if we had a justice department that was actually engaged in that. But what I'm thinking of is I'll give you an example when I was back in my days as uh you know supporting commercial banking uh as a as a financial risk analytic. I was a country risk analy analyst when I first started. along comes the Asian financial crisis. And so the bank's sending me out to Asia. In those days, Bank of Hawaii had branches all over Asia, all over the Pacific Islands. You know, it was the Pacific Century. Remember that one? And uh Hawaii, the crossroads of the Pacific. And uh so I go on my little journey from Tokyo to Soul to Taipei to Hong Kong down to Singapore where we ran a book in in Thailand, Malaysia, and Indonesia. offices in the Philippines and everywhere I went. The thing that I came away thinking about more than anything else was how much the appearance of corruption within the culture spoke to the challenges that some economies were having during this financial regional financial crisis and some worse than others. And not to pick on anybody, but for example, when I got to Indonesia, every time, you know, we would drive around, we had a driver to drive us to our meetings. When you get to the car, I was the young kid riding shotgun in the, you know, Mercedes and the executives in the back. And my job was to get out and pay the guy standing in the parking stall to bribe him to get out of the stall so we can park the car. now that and it was like fractions of a penny because the currency had depreciated by so much. The point is that certain kinds of behavior speak to a set of norms in which rules don't apply. And to me, at least philosophically, this is, you know, the meta problem of the of Trump 2.0. We can go through the economic policy specifics. You know, tariffs probably aren't a good idea. Tariffing the guy in the country next door probably the worst idea since it's uh they be like, you know, California putting a tariff on Arizona. It's crazy. But um more recently uh you know, let's go have a war on Iran because what I I mean it's I shouldn't be laughing because it's so serious and uh remarkably or this thing of rounding up people who you know don't I mean they're literally permitted in the country. They have a green card. What's up? Rounding them up and sending them to Djibouti or something. I don't know where these people are getting sent. That's just crazy. That's okay. That's like Stormtrooper Jack boot, you know, Soviet whatever. Uh I I when I was in my youth, as they say, as a sophomore in college 50 years ago, I went and studied uh I went and I went as close to the Iron Curtain as I could get for my sophomore year. I studied in Vienna, traveled to uh Prague, you know, with the Soviet tanks on this in the Soviet stormtroopers and jack boots chomping, goostepping, goostepping around the city and uh not quite as intensity as much intensity in Budapest or Budapest, however supposed to say it, where the Soviets had invaded Budapest in 56, had invaded Prague in or cracked down in Prague in ' 68. eight and I'm there like six or seven years later. So, um I I hitchhiked to East Berlin. Check it out. Behind the Iron Curtain. But yeah, that's that's that world was a world of fear and terror and silence and uh suppression of individual beliefs and freedoms and the economic costs that came with that kind of suppression. And then literally as a wall like the Berlin wall uh with respect to trade, nothing goes through, right? the exact opposite of what America has, which is the interstate commerce clause of the US Constitution. You're free to move around the country. You're free to go send stuff to the mainland, sell some holy guys on the mainland, some pineapples and macadamia nuts. You know what I mean? Tell them, "Come on down, stay in the hotel before the hurricane and we'll sell you dinner and then you can get on the plane and go back to the mainland and go back out to the hurricane and help us clean up." I mean, that freedom of movement, that mobility, it's what Europe's been trying to do forever, what Britain probably made the mistake of exiting uh 10 years ago, and what tariffs um not just as a representation of an impediment, but an actual impediment to the movement of uh uh goods, not so much services. But the worst part, intermediate goods, it's the components of the automobile, the components that move back and forth across the border from across the bridge from Detroit to Ontario, Canada, while the vehicle is being assembled. Put this component together here, put it over there, just as they would going across the street from Klehi to the, you know, back of Leha as you assemble whatever. and uh I don't know unwinding some of these um unraveling and unwinding some of these mistakes and trying to go back to you know point zero as they say in in front of the notradam there's there's a place in Paris it's called point0 I didn't know until one day I'm standing there I looked down like panto um right go back to the origin where were What did we learn in Econ 302 at uh Manoa from that wacky part-time lecturer Dr. Brewbaker about macroeconomic theory and um you know what we learned is trade is good. The founding fathers since we're celebrating the 250th anniversary of another great document they wrote the the Declaration of Independence uh they put it in the Constitution. That's not an amendment, right? It's the interstate commerce clause. You are free to move around the aircraft. And uh going in the other direction, it's not just unamerican, it's just inefficient. >> So, right, >> well, we have all these things, these factors that are all coming together and all pretty negative. you know, not only climate change, but Trump's monetary policy, >> uh, his position on his efforts to derail the midterms. >> Gosh, you know, who knows what that's going to result in. And the wars, we have a wars in Iran, Ukraine, thanks to him. Canada, I love Canada, especially. >> Um, but here's Hawaii. You know, Hawaii's a long way away, but maybe not such a long way away. All these things that affect the mainland have at least a derivative effect on Hawaii. Can you talk about that? Are we are we resisting? Are we resilient to these things or or not? >> Well, unfortunately, what the pandemic has shown us most recently is that unlike in the past, you can make a case that Hawai's economy was as resilient as the rest of the nation. But what's happened um in the in the post pan pandemic era, we've you know discovered unfortunately that we didn't come back the way the rest of the country did. And you can see that for example, let's see if I can show this to the audience here by sharing my screen. You can see that if you look at per capita, well, if you look at uh GDP adjusted for inflation per person, so per capita, real GDP. And Hawaii was on a path precoid in the 201s. We were chugging along, right? We're on the escalator going up with from productivity growth. I've taken out the inflation, right? I've measured it per person. So, it's like literally a measure of each individual's average output. And then COVID hits and Hawaii was more vulnerable because Hawaii is a more travel oriented, tourism oriented state. And that's one thing that people cut when when the pandemic hit. But you can see that we just haven't come back the way the rest of the country has. going back to the path you previously were on is the definition of resilience, right? The two the two pieces of this are um you know how much were you able to limit the down the impact of the downturn for the US it was a little easier for Hawaii for Las Vegas it was a little harder because when people stopped getting on the planes you're kind of done um same thing after 911 which was one of these moments where at the time if you were there you recall people in Hawaii were freaking out for a few days there wait a Are people ever going to come back? Are they Is this new world we've entered of global mass terrorism one in which people will be feel comfortable traveling around um over long distances when planes are being hijacked and flown into buildings. Um so that you know we've been through this before. after the pandemic, Hawaii just didn't get back on the same path the way the US has. So you're I'm overwhering the the part about resilience, but um in terms of where we go in the future, the two things we do, the two things we export, the two things we trade with the rest of the world based on our comparative advantage that are most important are travel and tourism, receipts from people who don't live here. we acquire by inducing them to get on a plane and enjoy the people, the culture, and the environment that we're blessed with in Hawaii. And occasionally we have to convince them to maybe think about coming back. The other big export turns out in Hawaii is federal military spending in the island which is larger in Hawaii than anywhere else as a percent of GDP and has the particular characteristic that the Department of Defense does not primarily source military material. We're not producing uh we don't have defense industries at the scale other important states for the military have. Uh we have small guys doing amazing things like Oceanit just a totally innovative uh company uh that is uh uh you know dialed in understands the the military's needs as well as other industries because of its large force presence in the island. It's really about maintaining a forward position uh in the region. Um lessons learned from the early 20th century the hard way and lessons that we shouldn't be forgetting. Uh thinking about the contestability of the Taiwan Straits. uh thinking about how China has over 20 years now or 30 years absorbed Hong Kong a formal uh you know former beneficiary of a one state two system pre-commitment my friends in Hong Kong say no it's just China now it's not Hong Kong anymore and and and then Taiwan which has a much longer history of independence and connected with you know Changai I think it is, you know, hung out in Chinatown in downtown Honolulu for a few years there before he was able his way back and Chancel right in the postimperial um um upheaval of the early 20th century, mid 20th century in China. Um anyway, tourism in the military uh are as resilient are as reliable for Hawaii as are the circumstances abroad and within Hawaii that make them viable uh economic activities. And if people won't get on a plane because of a wildfire or because of a hurricane or can't get on a plane because a wildfire or a hurricane have destroyed the lodging in which they would have uh um stayed on uh on their travels. Um you know that's a problem. So we're going to have you know these are challenges that are unique to Hawaii's economic structure. Um, you know, as long ago as in third grade at Monly Elementary School, I learned the word diversification. I remember it because it was good for hangman. Remember hangman? The the spelling game? Yeah, that was a killer word. And supercalifragilistic xpalidocious was not a word. >> But I learned about diversification from Mrs. Chun in third grade. And uh and uh you know, here I am. You know, I I'll be an old duffer for longer than I was a young shredder. And I'm still waiting for economic diversification. I'm sorry. By the way, when I was a kid, tourism was the way we diversified the economy. So, give me a break. Now, it's the reason people want to diversify away from. So, to me, it's the lowhanging fruit. You know, if we could if we could just creatively manage uh the loading, I get, you know, but I mean, I'm I'm here in Colorado. I get on my phone, you know, make my time entry reservation for Rocky Mountain National Park, you know, pay my little fee and that's how you manage the loading on a national park so that everybody doesn't show up at the same time on Saturday morning, you know. Um, we don't do any of that in Hawaii. I don't understand. That's a different story. I'm just saying. No, no. It's a story that you and I have talked about many times. Diversification, it's almost like a dirty word for a lot of people. And I just wonder your thoughts now. You know, could diversification have helped us be less fragile? I have to step back from that and ask is it realistic to is the counterfactual in which we achieved whatever people are thinking about which I don't know anymore um is it is it likely that the counterfactual could have existed rather than the arc you know of my life from elementary school or high school 50 years ago where when I was a kid tourism was a small part of the economy and you know maybe five% 10% the military was 10 to 15% of the economy and agricultural exports were um at least as big as maybe not as big as both of those combined but those obviously have rotated. So technically we did diversify the economy with tourism. Your question and the one younger generations are asking is what do we do next? Because you're always trying to mitigate the risks ex to which you're exposed in the portfolio you have at that moment. Right? We're going to diversify. Don't put all the eggs in one basket. We have a bunch of different baskets. Well, we're not going to have a manufacturing basket in Hawaii at scale. We'll have it in niches like Oceanit that can do amazing thing with a bunch of brilliant engineers and mathematicians and you know all those guys. But you're not going to do you're not going to assemble automobiles in Hawaii. And we should be doing other things. My view of the things we do now is that there the reason we have an opportunity an opportunity to try something else. But I don't know what I'm I'm not the pick a winner from the list guy. I don't I I can't make the list. I I gave up pretty early. I'm not sure anybody can. But I am sure that entrepreneurship and imagination and as I suggested a second ago the ability to chance if you've got a job you've got a you know you go to work every day at the resort and you do keep the books you know or whatever you do um maybe when you go home you can start up something on the internet or I don't know it's a different world we live in now the pathways to the rest of the world are different from the ones uh when you know the at the time of statehood where the pathway to the rest of the world in 1959 at the time of statehood was commercial passenger jet aviation two things happened in 1959 statehood and the Boeing 707 the first commercial commercial passenger jet able to fly to Hawaii so yeah it is a challenge It should always be a challenge to try to do something else to try to uncover to discover something that we can do better than anybody else and then add to the list of of things and diversify the list of so yeah I I'm a you know I'm a champion for the people that are chancing it. I'm also kind of a realist in that there is something to be said to be said for specializing in your comparative advantage. Don't not do that to do the other things. Both are possible at the same time. >> There you go. You know what? One of the things I think we have to address is the changes since statehood. in fact the changes since co um so they they say we have nearly full employment that's pretty good but is that is that real can we rely on that um and the numbers do suggest right now that we have a kind of no growth stagnation in terms of development of business community opportunities for young people all that >> um and we have a brain drain especially poignant for the medical profession and they're all leaving town um we have competition from other resort destinations in the world who don't have a problem in competing with us. And we have a a strange change in the real estate market. I mean, people more than ever can't afford a first home and people can spend people from offshore can spend millions for some of these condos and overlook the blue tents, the blue tents of the homeless. And so these these changes are visible. Um, and to me, and then you walk down Bishop Street, which used to be a place with three-piece suits from Japan. Um, no longer the case. Um, and you walk down Bishop Street, there's nobody there. Monday through Friday, don't even talk about the weekend. And what I'm suggesting is what the message I get is that we are ready to fall off a cliff. Even if it looks good on some metrics, we are ready to fall off a cliff. What do you think? I'm not as catastrophically inclined. Um, but I will say that rather than climbing the hill of success and achievement and economic growth, we're kind of skating along the edge of the cliff. The difference is that we could keep doing it, but the risk, as you point out, is you could stumble and fall off the cliff, or worse yet, a gust of wind could come, you know, from Middle East oil prices or from this geohysical shock that we just went through. We're It's like a bowling pin of hurricane. worth the bowling pins of hurricanes passing nearby the island of Oahu and maybe hitting the other islands. Big rain on the big island with La Beat down on Kauaii and Niha with you know LOL and all the people on Aahu we made it through. Okay. Yeah. No, that's vulnerability. But to be clear when I say not falling off the cliff but sort of skating along the edge of the cliff, let's just let's look at some more of these data. So here's job growth which you can see in the last couple years has just shriveled and shriveled and is now kind of plus or minus whatever the average is about zero. And when you look at the totals, both Aahu and the neighbor islands, just growth fading from about two 1 to 2% per year to 0 to 1% per year and then basically on average closer to zero per year. That flattening out of the job counts means right now employment in Hawaii is not that different from what it was 20 years ago and it's less than it was about 8 to 10 years ago. And some of it is just structural. When you look at the age distribution of the population, there just more residents aged 65 to 74 than there are residents aged 15 to 24. When you think about who in the workforce among the boomers or Gen X, so the I've got the female population on the left side of this chart and the male population on the right side, the women live longer because, you know, they're smarter. But the boomers retiring and the Gen Xers that follow us who will be retiring over the next couple decades outnumber absolutely the Gen Z's and the Gen A's that are coming up through the education system to replace us. The millennials are mostly in the workforce, but even their numbers aren't bigger than ours. And then there's a bunch of, you know, external things that I'll get off the slides here in a second. But, you know, what are you going to do about the price of petroleum? Nothing. You just got to eat it until it goes away as a as a challenge. So, as I say, we're in a situation where by many measures, we're just kind of going sideways in terms of employment. Sometimes it's higher. Some decades are higher, some decades are lower. right now are sort of in between where we've been over benchmarking to the first 20 years of the century. And we face these risks from exogenous shocks like the price of oil going from $70 to $120 a barrel. And uh that uh then show up everywhere else in our transportation uh costs and our energy you know our electricity costs in the cost of producing the goods and services uh that aren't primarily associated with energy but are indirectly uh as we all are affected by energy costs. That vulnerability I think is the the issue we can agree upon that, you know, one false step. Off the cliff you go. Uh that's to me the real danger in Hawaii. >> Yeah. Well, let's talk about what happens. Let's talk about what happens if, you know, as you say, we're on a we're walking along the cliff and we we fall off, we fall down, we somehow, you know, the the worst case analysis is realized or a bad case analysis is realized. What does that look like? Can can you paint a picture for me? When I wake up in the morning, how is life going to be different? How is my walking on Bishop Street going to be different? How is life in Wy Ki going to be different? Um, can you give me a a picture of that? Yeah, let me show you two different pictures. How, you know, some some things are pretty clearly gnarly. That's a technical term in economics, gnarly. And uh and then another example that's kind of it's a bit more of a headscratcher. So, here's one just looking at passengers deplaning airplanes. We get these data on a daily basis. This is a really good highfrequency real-time indicator of what's going on in the tourism part of the economy which is about 15% to 20% you know maybe 17% of Hawaii GDP another six percentage points is maybe the military on the neighbor islands places like uh Maui and and um and Kauaii until this last weekend maybe uh about 30% of GDP. So if you if you look at arrivals relative to the trend from the 201s, so just think about the last decade as the benchmark. If you're on trend, then there's no deviation from the trend. So these are dtrended arrivals. You're on the trend. So the trend so it, you know, there's no deviation from the trend. That's zero. Then comes the mother of all deviations from trend, the COVID pandemic. Everybody has to hunker down everywhere in the world. Tourism shuts down essentially for about 6 months until we figure out we adapt. We figure out safety protocols in which if people can demonstrate that they have received a negative COVID test. We invite them to get on an airplane and come on down here. And then within a few months, COVID vaccines, which while we didn't require that anybody get vaccinated, reassured us as a destination and other travelers who would be exposed to communicable disease. uh these adaptations made it possible for us to recover the travel volumes in relatively short order. I mean it we're talking about years but by 2022 within two years of pandemic on onset we have this shot at getting back to what I've labeled here full resilience getting back to the path we were on in the 201s. Now you can see subsequently that Hawai's drifted away from that path. I use as an example of what seems like an obvious negative just looking at the picture, but I have to remind the audience and maybe even you, Jay, that some people think this is a good thing in Hawaii, and here's the weird part of interpreting economic data. Some people wanted there to be less tourism straight up. They may couch it in they want more diversification, but making less of something as a way to diversify what you've got is kind of the bucks for Lolo way of doing it. Anyway, that's a pattern I can't oops I can't, you know, uh overemphasize in terms of its relative relevance given the structure of the Hawaii economy. But you mentioned housing and let's let me show you another one that I'm not sure people have have recognized, but it's a real thing. And uh now I'm starting to see YouTube videos from Aahu realtors that are saying, "Hey, check this out." Because let's just say with high mortgage rates, rising treasury yields, higher inflation, and risk of higher inflation expectations confronting us uh as a as a macroeconomy. Maybe not the best year for uh residential real estate. Well, check out what's happening with home prices on Aahu. It's the tale of two segments. On the left side of the screen, I have single family prices and as you indicated, these prices keep going up and from an affordability standpoint present a challenge. So for example, if prices on the left, if single family home prices are rising 4% per year, then you need your income to rise in round numbers 4% per year in order to afford the same house you could have afforded a year ago or a few years ago at the same interest rates. There's three elements that there there's three ingredients to this dessert or dinner if it's a main course. Your income, the price of the housing unit, and the rate, the mortgage interest rate at which you can finance leveraged purchases of the house. But as long as everything's in alignment, if you know home prices are rising at a rate that between you're increasing productivity over time, you become better at your job, you learn new skills, your income goes up because your employer uh consciously uh um compensates you for inflation in some way, then maybe you're okay. On the single family side of the market on the left here, you see this big upward shift in prices after COVID. And now after an overshoot, now single family prices are on a parallel track. They're still rising at 4%. But with an extra $100,000 of price increase that never went away after the infla after the post-pandemic, you know, bubbleicious overshoot. Now look at the right side of the screen. Look at condos. Condos are rising slightly faster, maybe 5% in the 201s. But then a couple years ago, they completely derailed. They got on the offramp. Median condo prices on Aahu have been going sideways for the last several years. And the inventories are piling up, piling up. I think there's something like six or seven months of inventory remaining in the condo side of Aahu's housing market. and only two to three months of inventory remaining on the single family side. What the hell happened? Well, first let's just remind our younger viewers or the young professionals that are still hoping to have a shot at housing. If condo prices aren't rising and single family home prices are on the island of Aahu, then the condos are becoming relatively more expens I'm sorry, relatively more inexpensive. other things equal keeping incomes and mortgage rates etc. Hold those constant for a minute. Just the fact that condo prices are not rising while single family home prices are means that condos are becoming more affordable. Now, I can't control what happens with interest rates, and that's not a good story right now, but presumably someday would get better. I can't control what happens with income, but you can control that. you know, learn some AI skills, take some night classes, watch some YouTube videos, include your productivity and in the market for labor, maybe you'll be rewarded for in for raising your skills and productivity. But I'm just saying looking at these prices, it's just a fact that condos remarkably on Aahu have gotten less expensive. By the way, um this is one of these be careful what you wish for things because let me just show you the next couple slides. If you look at these prices, single family on the left, Kano on the right, across the Hawaiian Islands, the neighbor islands have gotten more expensive post pandemic relative to a preandemic benchmark. I've I've benchmarked 2019 is 100 for every county. Now, let's drop Maui in. Remember, single family on the left, condos on the right. Without Maui, with Maui, without Maui, with Maui, without Maui, with Maui. What the hell is happening on Maui? They ban vacation rentals. So, prices collapse. The problem for the people on M and every Well, that means they're more affordable. Yeah. Yeah, it also means that everybody owns a condo is poorer than they were before they passed this bill. And he's these are the actual home price distributions uh on Maui. So be careful what you wish for. Achieving it might be costly in other ways. And by the way, you could just build more housing units and then you'd have more housing units. So what's the problem here? But these two situations, both the one involving Maui condos versus the other islands in general and the one involving single family home price dynamics and condo prices on Aahu are indicative of how much the underlying factors matter. mortgage interest rates or whatever they are, Treasury Secretary Bessant is going to do this to the yield curve and and Fed Chair Worsh, Kevin Worsh is going to do the other thing. And maybe the president will be happy, maybe he won't. Who knows? We do nothing about that we can control in Hawaii. But condos are distinctively doing a different thing on Aahu than single family homes. One of the theories behind it is remote work. Kanos on Aahu are located in the urban core. If you can work remotely in the suburbs and exerbs and zoom town of Hal Eva, then maybe selling your condo that's close to downtown where you used to work as you say and moving to the country um where you can commute remote, you know, electronically is more advantageous. The flip side of that is that condos in the urban core benefit from something that that only happens in dense urban environments. Proximity is mobility, right? Density is proximity. Proximity is mobility. And if they slap a train right down to your condo sometime in the next couple years, well then getting around getting to the airport is not that big a problem. So younger people, if you're looking young couples, if you're looking to move out of that four, you know, fourstory walk up singer cinder block apartment at the corner of McCully and Young Streets. You know, we all lived in this same apartment when we got out of college or where our parents kicked us out of the house. The cinder block walk up apartment from 1959 that's all over Moily. Um, if you're thinking, you know, maybe this is a time to be looking at moving up and take the advice that I did not take when I first came back to Hawaii. A wise man once told me, "Just buy the crappiest studio you can find because then the appreciation is yours, not your landlords, and you got to you got to get on, you know, you got to get on the escalator. Then you can jump up to a one-bedroom apartment. Then you can jump up to a two-bedroom townhouse in Ava. Then you can jump up to a threebedroom, two and a half bath bath house in Milani town. And then you can move up to Milani Mala. And then after the kids leave, you can sell your big ass house at the back of Milani Mala and move down to a condo in Kakaako and downsize. And you can walk to the cafe for coffee every morning. So that's a the circle of life brought on. That's that's what's happening on Aahu and and on a different thing happening on the neighbor islands obviously. Why condos on the neighbor islands are in resort areas. Condos tend to be in the vacation short-term rental pool. Condos are appealing on the neighbor islands to the digital nomads who can work remotely. Different kind of different kind of remote worker on Aahu who who used to commute downtown like you and I both did for decades that and downtown dude downtown when I met you in the 1980s downtown was rocking it. You know what I mean? Or maybe it's the 1990s. I'm just saying when I came back to Hawaii in 1985, man, being downtown was awesome. And uh where the action was, you could drinking after work, you know what I mean? Catch the bus home, so you know, get ticket. >> Come on. >> Well, let's let's uh let me ask you my my final question, Paul. >> Yeah. >> And that is um where where are we going here? And more important, what can we do about it? Now, there are three or four what can we do about it elements here. Number one is what can I do about it? That's the individual person. Uh and that's that's a lot of different categories. I know. >> Yeah. >> Um and then what can the small business do about it or large business in Hawaii? What can they do about it? >> Yeah. >> And finally, what can government do about it to help us out to be more resilient, less vulnerable? And finally, I don't know if we have time for this, but finally, if you were advising the president of the United States, whoever he was, um, what to do about it, you know, to make the economy better for everyone in the country, what would you advise? Okay, that's a fourpart. Did I say four? Four part question. You got some answers for me? >> Yeah, sure. I I can make up answers, but let me start. the president, the the state or let's say county governance government governance in Hawaii uh the business at the business enterprise level and then individually at the top bro nobody going to listen to me over there you know what I mean I mean I'm sorry first of all they kind of speak pigeons so and I'm only kind of faking it you know what I mean but um I'm a very conventional sort of neoc classical economists, the traditions that I was taught in are very different from the ones embraced by the current administration. And therefore, other than a change of administration, I don't see how anything I would have to say would be worth the effort. Um, so I will I will express my voice through my vote and um and by advocating for the things that I think in in economic theoretic terms are the right way we ought to be thinking about approaching economic policy, state and county governance. I would have to say there I have a little bit I just realized how dark it is where I'm sitting. I'm sorry about that you guys. I need to shine a light on myself. Um I have had the extraordinary privilege of um being asked to share uh you know my knowledge and ideas uh at various points in my life and my career with state and government uh state and county government officials and and so the and I've always said sort of the same kind of thing which is um go back to econ 101. You know, economic theory is there for a reason. There's a lot of good ideas that sometimes are counterintuitive, counterintuitive, like they they don't make obvious sense until you uh you know, have guys like me help you walk through why it's important. Um, broadly speaking, I would say that over the arc of the last half century or so, uh, in state and local governance, we've adopted institutional mechanisms design that, uh, institutional mechanism design or designs that are obstructive on balance rather than facilitative. I used this example a second ago about how how to manage recreation. We all have smartphones. We all can all can go on an app and you can do cap and trade. Basically, you can mitigate the loading on our natural recreational resource endowment by moving people around by charging higher prices when there's more people. And that's just an algorithm, right? You don't you don't have to just an algorithm. The math will do that for you. We should also be producing more public goods. Why do we have the same number of parks and recreation areas on Aahu as we had when I was a kid? I where I live, the parks are literally the same parks that were there when I was in elementary school. What up with that? What up with all the people who've been paying property taxes for 50 years? So there are things we can do and advocate at state and local um governance levels and within these halls of state and local government that my impression is that leaders good leaders are happy to uh hear from you. And so when asked, show up and by all means uh reveal your preferences through our our opportunities uh to vote and to communicate directly with public officials. Businesses in Hawaii are constrained by the structure of the Hawaii economy. By that I mean the structure of economic activity itself, which I think it's important to remember. So, while I'm talking about this, I'll I'll shine a light on it uh graphically uh in just a second. Um it is what it is. The Hawaii economy is what it is. We all have a role in changing it. That's partly what we're talking about uh here. But the fact of the matter is you wake up in the morning and this is the pie chart. Tourism and the military are not too big. Not on a This is Aahu. Okay. The other islands, do I have those in here? Yes, the other islands are more dependent on tourism. I mentioned Maui and Kauaii at about 30%. But yeah, change it if you want. I'm just saying the non-ourism part of the Aahu economy is 80% of the economy. That means bro you get chance figure something out do it better than somebody else and that's competition. Now another part of so just look at the pie chart. There's a reason why tourism is 30% of Maui and Kauaii's economy. If you believe and actively engage in political advocacy to diminish the absolute size of those sectors of the economy, you are putting people out of a job. You are taking their income and the futures for their children. So be mindful. Okay. The other structural thing to think about has to do with competition. We're talking about business now and a small open economy. That's what Hawaii is. A small open economy heavily exposed to the rest of the world because the rest of the world makes everything better than we can in that funky warehouse in the back of Kapa Corey, you know, on Dump Road in Kyua for God's sake. That's an actual industrial site. And so that's the nature of the the structure of the economy in Hawaii. We're a small open economy. We rely on the rest of the world. We export these things that we have to the rest of the world in order to import our smartphones and our cars and everything else. And that structure need not be limiting as long as you're focused in your business on where the leading edge is. The leading edge can be at the what's called the what is it called the exttrinsic margin anyway outside on the frontier it can be located inside the organization in the tools that you're adopting to get your work done that may be AI right now it certainly was computers back when you and I were young whippers snappers and you know figuring out do I have to do my on coding. No, not anymore. Yay. Um, so and then finally, structure of industry matters. There are forces in the economy, basically the most important one in the re in the last few decades are what are called network effects wherein if we're all on the same network, it's way more valuable to us than if we're on separate networks. And so, I don't know if I can say this on your channel, but Google and Microsoft make a [ __ ] ton of money because we're all on their network. That sucks because it makes the income distribution widen out and some tech bro a-holes make more money than they probably should because the rest of us are doing our searches on Google and learning a lot from Google Gemini, let me tell you. You know what I mean? So, embrace the tools, but structure may mean that you're down here duking it out with the rest of the peasants on Google Gemini trying to make your business more productive, which then takes us, which is the link to the individual level. It's all about productivity. It turns out it's deeply rooted in early childhood non-cognitive and cog and cognitive development. Like the roots go all the way back there. Skills speak at skills. So they build on each other through life. And you have to keep increasing your productivity. So, I'm going to bite the bullet next week and spend three and a half hours every day taking an online course for which I paid money in big data and data science and machine learning and a bunch of stuff that I like to pretend I know something about because if I don't, I'm going to be a dinosaur. You have to keep moving forward. And these kids, I've got to tell you, there may not have been very many of them born. What's up with that? But some of them are really smart. I mean, it's too late to make new kids, you know? We just have to deal with the kids that are out there. But yeah, some of them, I don't know. I've been blessed. Again, I've been lucky in a lot of ways. But I get these kids call up, hey, can I be an intern? I'm like, I can't pay you any money, but you're cool with that. You can be my intern all day long. And oh man, they're so smart. They just it's amazing. It's a re it's reassuring. Uh because let's face it, as a 70some, you know, I walking down the street a lot of time. I'm like why I yada and uh young whippers snapper. Um I turned into my grandfather. But uh so I they're not going to listen to me, but I got big ideas. State and local government. I've been fortunate to been able to make a contribution from time to time when asked. Always ready to say let's my general message for St. Louis government. It's about bandwidth and boundaries. Credible boundaries to keep it from doing the things they shouldn't and more bandwidth so we can push more stuff through so we can move faster. And at the business level, look at the structure of the economy. Look at the structure of competition. Look at the structure of the labor force. There aren't bodies for you to hire the way they were when I graduated from Kylo High School in the 1970s and the unemployment rate was 10%. What's the unemployment rate now? Like 2 and a half%. 2 and a half% unemployment means the only people that don't have a job are people who are looking for a job and people who will never get a job. You know what I mean? So that's harder work when when 10% when one out of 10 people is out of work, trust me, they'll go, "Bro, I drove a forklift at Dole Canary." You know what I mean? I I worked on I worked at the end of the printing press as a fly boy. You know what a fly boy is? the guy who takes the newspapers and ties them up and takes the newspapers and ties them up eight hours a day thinking they don't have a machine for this. It's a different world and you got to keep at the forefront whether you're a business, especially if you're an individual in a period of rapid technological change that is going to create winners and losers. And the only way to be a winner is to get out ahead of it. Get right to the forefront and learn something that keeps you in demand. I don't know. That's we all went through it, you know. First came the mainframe computer, then came the personal computer, then came the internet, then came the smartphone, then came the apps. And I'll be happy to do a whole another show with you about how much it sucks that some people made way more money because of the nature of that technological evolution from whatever would have been the alternative but wasn't. That's the reality of how things turned out. So get in on it. Don't don't be the elevator operator. That used to be a job. Go watch the old movie. The bug is they get on the elevator and so sixth floor and the guy goes, "Okay, brother. Sixth floor." That was a job. Happy that guy. Oh, Paul, I so enjoy your energy. That's fabulous. And this has been a fabulous discussion. And I'm going to hold you to the notion about doing another show that I know there's a lot more. Uh, we didn't we didn't cover all your slides and we didn't cover all that you have to say. So, I want to come back. We'll call it economics 303. >> Yeah, there you go. Oh, I think there is one of those already. Anyway, >> thank you so much, Paul. Our guest, Paul Brewaker, principal of TZ Economics, for this great discussion. I'm Jay Fidel, host of Community Matters. The title of this episode has been troubles in the national economic outlook and what can Hawaii do about it. Thanks to our viewers for watching. We'll see you again soon for the next one. Aloha. Aloha Paul. Shah.