 Aloha, I'm Kayleigh Akina, and I welcome you today to Think Tech Hawaii's Hawaii Together, a regular program that comes on every two weeks, where we talk about the economy and the government and other fun things that make Hawaii what Hawaii is today. I'm delighted to have a friend joining me today, someone who's been on our program in the past, someone who understands the economics that are taking place here in the state of Hawaii. And he's going to clear up a few misconceptions that we have, but more than that, we're just going to have fun talking about the economy. My friend Paul Brubaker, principal of TZ Economics. Dr. Brubaker is one of the leading economic analysts in the state. He's worked in a variety of corporate settings, as well as private research. And today he's going to share some of his, what we call, mana'o, or his words of wisdom on the economy. Paul, welcome to the program. Good to see you again, please. Well, it's good to see you. Let me just ask you this question. When you were a little kid, three or four years old, and others were imagining becoming spacemen or firemen, did you say, I want to become an economic analyst? Not when I was that young, but actually when I got to high school, I started actually thinking about it sort of in the back of my mind. And then I went major in other things, but eventually I came back around to it. Well, really, I invited you on the show today just to talk story. You know, there's some current events taking place in terms of the volcano eruption on the Big Island housing boom and our president's trade wars that are taking place all across Europe and down into Mexico. We'll talk a bit about that, but before that, just for everybody's sake, what is economics? How would you define that? Well, sort of the textbook definition, it's the study of how things are allocated across unlimited wants given that nothing's free or nothing's infinitely available. So we have scarce resources and we have to figure out exactly how they get to different competing ends. That's right. And the idea is how would you design mechanisms to efficiently do the allocation? You know, when it comes to economics, there's some big principles that we could kind of scribble down on crib notes before we go into our SAT test. One of them is the idea of supply and demand. How would you explain that? That's such a foundational principle in economics. What would you say that really means to the layman? You know, we observed that one really efficient way to solve the allocation problem is for producers to respond to the signals that prices give to them from the market and for consumers who are looking at the same prices to base their consumption decisions on the same prices. And so, if both of them independently are making individualistic decisions based on prices sort of miraculously in the market, things tend to sort themselves out. So if I have three apples and you've got two pears and I really want those pears, I'd be willing to give you the three apples and you'd like to get three apples for the two pears and we have that exchange and we're both happy and we eat our fruit. That's copacetic. That's how it works out for us. Sure. I mean, even better if I knew some guy down the street who had three tilapia and I could do a third trade with him. So that's how the market works in a pure sense. What happens when Big Brother comes in, the bully in the neighborhood or the manager of the big Luna of the block comes in and says, well, wait a minute, you can't give three for two. You've got to have some kind of equity over here so we're going to adjust the price for you. Yeah, sure. I mean, it depends on the situation because we do observe that large hierarchical organizations coexist with markets and so there's a place for the Luna. But in general, what people have found over the centuries is that markets are really efficient ways of organizing allocation, production and consumption whereas dictates from people who we think no more don't work out as well. Sometimes we elect office and wear fancy hats. Or, you know, had a bigger hammer. So there's this term that sometimes gets villainized. It's generally not well understood but we've been referring a little bit to it called the free market. What is your idea of free market? Well, so I used to term market because markets also have problems associated with them. But yeah, generally speaking, if people are free to interact in markets, allocation has a tendency to be efficient. It's even better if you're attentive to the problems that are associated with market-based allocation. And, you know, given the choice, you're making decisions about how to approach a production or consumption or allocation decision wisely, you know, faced with the alternatives. How well is the market working in Hawaii? The kind of ideal market you and I were talking about where we could just trade with each other without much interference. Is that the way things work in the Hawaii economy? You know, it's not the Soviet Union or Maoist China after the Cultural Revolution. But, you know, I would say as a generalization, there's a tendency for intervention in markets that tends to jam up some of the efficiency gains we could get. Could you give an example of how the government may interfere in our free market in Hawaii? Well, the fashionable one now is governments making rules that are essentially production quotas for home-building. Thou shalt build X percent of your units to be affordable and then we're going to define affordability in terms of some income measure. So, if a developer is building down in Kakaako, the government sets up a rule that says such a percentage of your units has to be affordable. Yeah, but I mean it can be, you know, a guy building 11 houses on the island of Kauai has to jump through the same hoops, yeah. Well, you know, that happens a lot on some of the neighbor islands, Maui, Kauai, what impact does it have ultimately on the prices that we experience as consumers? Well, prices in the housing market are going to be what they are regardless of, you know, what goes on in prices in the existing home market. You know, new homes are a relatively small portion of what's out there and even what's transacting. But the problem is that the cost of compliance, the cost of jumping through the hoops to get your project to pencil out in a way that's both profitable and adheres to the requirements being imposed on you as a builder, as a developer, you know, makes housing less affordable and means that there's less of it produced as a consequence of the intervention. That's the cost of regulation. It's essentially the cost of regulation. Now, I know you're familiar with the work of Professor David Callies at the University of Hawaii. Sure, yeah. One of his very well-known books is The Price of Paradise. A regulating paradise. A regulating paradise, that's right. Yeah. In which he talks about what you've just said here, how regulations actually drive up prices and ultimately make things less affordable and even somewhat more scarce. He argues that there's an artificial scarcity of land, which as we were talking about earlier through supply and demand would drive up the price and the cost for the consumer. What are your thoughts about that? Yeah, so Professor Callies is an expert in the law of inclusionary zoning and exactions and the kinds of interventions we were talking about. As an economist, I tend to look at things a little bit differently, but I think in the cases you were talking about, there was a period in the 70s and 80s when a lot of current regulation began to be developed and now it's sort of reached a mature state really in the last decade where all of the counties and the state as well through its housing regulators have adopted fairly challenging rules from a compliance standpoint, so it makes it very difficult to build and we haven't had as much building in this decade as we've had in the past, as much home building. Now, I don't know if there's any evil genius behind this or it just is some total of all the regulations having an impact, but one of the things that Professor Callies says is that in reality we develop on only 4% or less of the total land mass of the state of Hawaii. About 96% is not urbanized or developed and we could easily open up just a sliver, a tiny sliver of that and massively increase the amount of land available. What are your thoughts? Yeah, there's about 4 million acres of land in Hawaii, 2 million of which are in conservation and 2 million of which are in agricultural designation. So there's a very thin sliver, I think it's about 200,000 acres, of which maybe 50,000 are actually urbanized. So it's a very small portion of the land mass, but the economics, of course, are consistent with some of that because, for example, it's not just about space but it's time, so if you think about the commuting time to get to employment centers, you know, once you get an hour away from work, it's kind of not worth it. What happens on our islands is that it's a combination of geography, steep slopes and water bodies that constrain the developable part of land that can be urbanized and then the burden of regulatory intervention that makes the development more costly that creates an environment that we were talking about but urban agglomeration is going to happen anyway because it's efficient for people, particularly in the services and information-producing economy. It's beneficial for people to agglomerate in their workspace or workplaces, right? They co-locate for work and then they make location decisions about where they live depending on their budget, their preferences, are they okay with sitting in traffic for an hour? You know, some people prefer to be close to work and walk. You know, if we're imagining a future in terms of providing more space for housing, what do you think is the better option for Hawaii? Space that goes upward vertically in terms of high-density areas like Kakaako or space that goes out horizontally in terms of places like Mililani or Waikele. Well, it kind of doesn't matter what I think because you can see the spatial valuation gradient, right? It's more expensive at the center and it's cheaper on the periphery and as I say, people sort of sort of sort themselves out and make their own decisions about, you know, how much they want to spend on this versus that. But to your point about vertical space, right, to arbitrarily cut things off at 400 square feet because that's the size of Walter Dodd's building or some other, I don't know where they... Careful, he may be watching. Hey, he's a good guy, but, you know, that's all we're going to do. We're never going to build another building that. So, yeah, that seems a little strange to me. I mean, okay, so here's the bumper sticker version. You know, like, keep the country country, make the city city. So the bumper sticker version is density is proximity. Proximity is mobility. Woo-hoo-hoo. For some people, the Kakaako development is a positive thing for Hawaii and perhaps we should have a little bit more of that in certain defined spaces. Dude, the way I would put it is it makes perfect sense for people to live in high density habitation close to their employment centers if that's what they want and are willing to pay for it. It makes no sense at all to me to force a pattern that's, you know, not supported in the market. I'm just glad I don't have to drive out of downtown anymore to go to a Whole Foods. You know, some people are cool with living the suburban dream and going out to food land in the regional shopping mall and other people, you know, like the hustle and bustle of an urban core and sure, now that Whole Paychex is there, right? It's a hangout. I've actually been there. I haven't actually been into the supermarket part because I've got a bar out front. I never get past the bar. You know, the most common observation about the economics of housing is the rising costs of homes. It has been a relentless and continuous curve. So what do you say to those who suggest that we're in a housing bubble and that we're going to see a crash coming? Let's tap things out a little bit. There's no bubble this time. So the curve you're talking about is just the values exponentiating or rising at a constant percent rate, which is about 4% or 5% unless you adjust for inflation, in which case it's about 2% or 2.5% over long, long, long, long sweeps of time. So that's just you want a competitive rate of return. Otherwise, why would you own the house, right? When you can own a Treasury bond that yields you 3%. So those decisions that individual investors are making are being guided by a broad variety of returns in other asset classes as well as housing. Well, I'm going to cut you off just for a moment here. We're going to take a minute and come back and we're going to talk about what we can do about the rising costs of housing, if anything at all, or what we can do in order to make more housing available here in the state of Hawaii. Which are separate questions. And we'll come back to both of those questions with Paul Brubaker, who's got some fascinating ideas on the subject. We'll start on the Think Tech Hawaii Broadcast Network. Don't go away. Aloha. My name is Mark Shklav. I am the host of Think Tech Hawaii's Law Across the Sea. Law Across the Sea is on Think Tech Hawaii every other Monday at 11 a.m. Please join me where my guests talk about law topics and ideas and music and Hawaii Ana all across the sea from Hawaii and back again. Aloha. Welcome back to Hawaii Together. Our guest today is Paul Brubaker and we're talking economics. Paul, let's just backtrack a little bit. I asked you a bit about whether or not there is a housing bubble. We're always reading a little bit about this here and there. You don't tend to think so, so why don't you go ahead and pop the bubble for us? Yeah, there are a lot of things that we can do to help the housing bubble and the bubble for us. There are markets elsewhere. There are regional markets where it looks to me like there may be a housing bubble, a valuation bubble or a rational speculative bubble in home values. But those are places like Silicon Valley, San Jose, Mountain View, California. Here in Hawaii decade to date or expansion to date prices have moved in a very stable fashion at a constant rate and then a bubble looks like this. A bubble goes up, boom and bust, boom and bust, 20% per year for four or five years and then crashes, crashing back 20 or 30 or 40% from peak to the next trough. That's what we had for most people's recent experience in Hawaii for the last 40 years was a series of these bubble-ish cycles in home values and I'm here to tell you in the 20 teens I'm an auto pilot so don't freak out this is not one of those bubble-ish markets right now. We still have housing problems but waiting for the next crash is not one of them. With continuously rising prices in the home market how do we put people into homes especially as the cost of living overall continues to rise? Sure and housing is the biggest part of the cost of living and specifically the biggest part of the differential in the cost of living in Hawaii versus the rest of the U.S. if that's the basis for comparison and the answer is the answer to the question how do we put people into houses is the same way we've always done it call 2-2, get some help with the down payment or whatever you're going to do and then build up your credit build up your savings get into a mortgage arrangement where you put some money down in a game you bar the rest and then over the life of the loan and however many years you're living in a house you slowly pay back the debt because the house is the asset on which the debt, the liability is being collateralized so it works fine and we've been in a very stable interest rate environment and really reasonably stable growth stable home price appreciation where it's no less difficult to do that today than it's been at any time in the twenty-teen. That's a remarkable statement to say that it's no less difficult today because people are looking at certain indicators and feeling differently for example we have one of the highest per capita rates of the brain drain here in our state young talented people leaving now this is anecdotal we don't know exactly why but the anecdotal part is they say they can't afford to live in Hawaii they can't afford a mortgage and so forth is the brain drain new or the fact that Hawaii is more expensive because I don't know how old you are but in the Cretaceous era when I got out of high school the first thing I did was leave away get a college education and come back so that part to me is not that different coming back maybe I don't know the other part of it is this question of is the cost of living higher than it and relatively speaking Hawaii was always expensive housing in Hawaii as far as I can remember and as far as I can see in the data Hawaii was never a cheap place or not in recent memory not in the half century of statehood and why that's important to understand is that if Hawaii was one of the cheap places all the peasants would be moving here for the cheap housing so the higher housing cost is what prevents that in migration that would bid up the price of wait we got that already it's a desirable place to live which is why it's more expensive and if I don't begrudge any person young or otherwise highly skilled or otherwise the opportunity to take advantage of their skill set and make a decision about you know a job with better income or even with the same income having a job that allows them to afford a less expensive home in another place I think one of the great things about America is that we have that kind of mobility I'm going to think that it's through a little bit more and look at some of the data because what you're saying is potentially promising I turned the thing on its head completely that Hawaii could be just as affordable as it's always been given our use of resources I'm saying even more strongly than that that Hawaii is as affordable as it's ever been now there are times when it was worse but it's rarely been much better than it is now well this could be the era of opportunity then especially given the technology yes except for other things that aren't and I want to turn to that one for those who are in a localized place and that is on the neighbor islands where there's an especially high crunch now particularly on the big island now I've done three or four mainland trips in the last month and a half and the number one question people ask me has to deal with Kilauea volcano erupting how is that affecting our economy both locally on the island and in the state I mean at least they're not talking about superfairy anymore but so what I would say about this this is sort of the iniki effect bad for kawaii hurricane iniki bad for kawaii not obvious in any of the other data and so by the same token the latest phase of the 1983 the same eruption going on for 35 years the latest phase of that eruption has destroyed 600 homes displaced thousands of people and ruined a number of primarily agricultural businesses but yeah is the state as a whole well let me ask you this has the tourist economy been hurt by the Kilauea volcano erupting that's the thing on the big island without question but when I look at the numbers I look at daily passenger accounts statewide people are still getting on the plane so if they're not going to the big island and I know some people are going to the big island but you know many people who would prefer not to expose themselves to air quality issues or whatever are making decisions substituting other destinations not to belittle the tragic loss of the residents absolutely not would it be that the coverage of the volcano eruptions is actually doing more for marketing Hawaii than the Hawaii Visitor Bureau has done through its advertising we're in the news almost every night in virtually every news market across the country and in many international markets bro don't even get me started you and me we should go down there tomorrow build a 60 foot viewing platform and charge $10 for people to ride an elevator to the top and look at the eruption from a distance what I hear them doing is ticketing people for loitering so I mean don't get me started on that shouldn't we do that? let's go make a place where you can actually see vent number 8 Paul you charging me there might be some community members who have some responses to you this is one of the things that we all make with the Pahua community all Pahua come down we go build tower let me switch gears before we go because this has just been a summary of appearance that we've shared today attention has been put back again on the President Trump's tariffs not only is he increasing the tariffs on steel from Europe and from Mexico and Canada he's slapped tariffs on to about $50 billion worth of Chinese goods we're starting to see some retaliation what are your thoughts on how effective President Trump's tariff plan is well if it's if the point was to make things worse he's doing a great job I mean that's right build barriers to trade and that'll make things worse so if that was the objective I'm sure it's working out just great I mean we're just in the first round of tit for tat countervailing tariffs right this is one of a 12 round you know knock down drag out I mean this is just the beginning when President Trump came into office he played a lot of attention on his micro intervention in companies to help jobs stay in America what do you think about Harley Davidson's recent announcement that it's going to be better for them to build their Harleys in Europe then or many of them in Europe then to build them here and ship them over see that one coming right you make steel or aluminum components to motor vehicular manufacturing more expensive why would you not do the production somewhere where it's less expensive I mean I'm just saying isn't that obvious that that was going to be the first thing that happened from the first round of tariffs and as I say we're in round one we're just getting the retaliatory announcements from our former trading partners and then you know it becomes a game of one upsmanship it's like a game of chicken right to see who veers off and so we don't have a head on collision because that's the game that Trump initiated and that the world now is playing well let's go back to what we were talking about at the very beginning we were trying to define economics you talked about markets and behavior and it sounds to me as though there's something predictable about markets there's some principles that can be applied to understanding what's going on with the trade tariffs that President Trump is imposing yeah so the lesson has been we've got at least 200 years of clear history pointing in this direction if you mitigate some of the external problems that can be associated with markets they're still the most efficient way they're the best way to do allocation whether that's you know between apples and pears or fish and poi or countries or you know consonants right and why you would go in there and intervene to make markets a more I mean a less effective way of solving that allocation problem I do not understand what's the ultimate impact upon Hawaii of these trade so ironically is focused on merchandise because I don't think these people know what they're actually doing most trade is actually in services these days right and most merchandise trade is actually in components not the raw materials so it's intra industry trade that's come to dominate merchandise trade and it's services and information and intellectual property and blah blah blah that's the rest of the current account they're focused on the one part you know living out the dream of 1947 when people actually you know we made sugar and sent to the mainland and they gave us cotton so we can make clothes it's not like that's not the world we live in anymore I'm gonna close with this question just coming from left field a bit last time you were here you shared a bit about a research project you did in terms of quantifying Hawaii's agricultural output and at about that time the state governor Governor Ige had made a promise that within three years we would double the agricultural output of the state of Hawaii so just off the top of your head how are we doing so I haven't heard any updates on that goal right so I don't think you're going to to be fair to those guys they weren't actually measuring agricultural output effectively for a variety of reasons you mean they didn't have the metrics at that time well they didn't they took away the money to fund the effort to compile the data yes so it's been a you know this the recession blah blah but the fact is since we talked the sugar the last sugar plantation has closed and the corn seed you know maize breeding genetics based industry has shrunk because of falling grain prices and so they're hoping that you know food self-sufficiency will somehow okay it's not going to happen it's about this big it doesn't really matter it matters to the farmers and we love local stuff but it's about this big in economic importance yeah maybe a half percentage point one half of one percentage point of GDP well obviously our state is going to have to take a hard look at what it can do if it wants to increase agricultural output and the first place to begin of course learning how to measure that well and a big part of it is keeping enough places where you can do things that people haven't actually invented yet the kind of agriculture we're going to do in Hawaii is things we don't know exist yet because you know the innovative people have to come up invite you back to talk about AI and technology all good talking with you today thanks ideas my guest today is Paul who is the principal of TZ economics if you need economics done for you just look up TZ economics I'm Keely on Hawaii together we'll see you next time on the think tech Hawaii broadcast network aloha