 Welcome to Hawaii Together on the Think Tech Hawaii Broadcast Network. I'm Kilii Akina. Hawaii is many things to many people. It's a beautiful landscape. As you see behind me are the Molokai cliffs. It's a lovely sky, the wonderful sea, and the great people. But it's also an economy. What is an economy? Without an economy, we wouldn't work. We wouldn't function. We wouldn't survive. We wouldn't be sustainable. Today it's my delight to have an old friend who's been an economist for 51 years. 41 of those at the University of Hawaii as he shares and ruminates upon his reflections over the relationship between government and the economy and a great many other questions. His name is Professor James Romasat. He's a professor emeritus, retired from the University of Hawaii. Please welcome him to my program today. Jim, good to have you. Thanks for coming down to the studio. Thanks for having me, Kilii, on Think Tech Hawaii. That's right. Well, one of the things we like to do on Think Tech Hawaii as we do at the Grassroot Institute is just talk with people who know a bit more than I know. And that's a lot of people. But in your case, you know a lot about economics. I remember when I was starting off as a freshman at Northwestern University, I took my first economics course, and it was just simplified with the amount of knowledge that is needed to understand what we call the economy. So let me just right at the outset ask you what is economics? Well, to me, economics is a method for designing and evaluating public policy. It does that by having a system for understanding how producers behave, consumers behave, the system behaves with those together. And that allows us to evaluate consequences of different types of policy and how they would affect public welfare. So we've got this big system that involves producers of economic product. We've got consumers who have them. And we understand how it all works together through this process called economics. Now, you said public policy. When you talk about it concerning public policy, what kinds of policies are we talking about? So what does the government do? What does the government spend its money on? Does it get its money through taxes or deficit finance or floating bonds? And all the regulations that a government might make, do they improve their welfare or not? So this system, this economy, if you will, regulates how products get distributed. And there's some level of scarcity. The government tells us how they get distributed amongst ends that compete with each other. Is that right? That's the conventional definition. In my end, as your professor Robert Eisner told you, that's exactly right. In my view, I'd like to bring out the emphasis on public policy. Ever since Adam Smith, that's been the primary focus in my opinion. So when we talk about public policy, we're obviously to some extent talking about how involved the government should be in this system called the economy. And there are some people who think that the government should be involved in a very big way, like a caretaker or like a parent, caring for the people who are working in the economy. And then there are other people who think that the government should be involved in a very small way. In fact, in as limited a way as possible and get out of the way for the most part, which system tends to work better when government's involved in a very big, big way or when government is minimally involved? Well, the fundamental insight of Adam Smith was that when producers and consumers pursue their own interests, the system works out very well. Now let me just stop you there and we'll come back and let you finish up. You said Adam Smith was a big name in economics, the author of The Wealth of Nations, the textbook of textbooks, says that there's something called self-interest. Now I'm looking back now from the beginning of the 21st century American culture, self-interest has gotten a very bad name. When people think of self-interest and the free market or the markets that Adam Smith talked about, they tend to think of Gordon Gekko or maybe Wall Street, that there's this greed that drives the market. How is it that self-interest has gotten a bad name and explain how Adam Smith actually was meant to self-interest? Well, Adam Smith was talking about the self-interest of producers, producing what people want because that's what they're going to pay for. And consumers, of course, buying at the lowest price they can but there's competition among producers. And that system works out. Yeah, it sounds more like a formula than an actual evil motive. Now I wouldn't go as far as saying like Gordon Gekko agreed is good. A lot of times greed is bad, especially when business interests ally with government elites and make rules or policies that enrich a small group at the expense of the general public. It can get a little bit imbalanced. Yes, and it has. Now let me go back to the point at which I cut you off. You were introducing this concept of self-interest in the market as being a driving force. Right. Go ahead. But there are some exceptions, the one I mentioned, but also certain things are not in the market, such as pollution. The government has a very legitimate role in imposing costs on producers who are imposing costs on us via the pollution. They can do it by pollution taxes or other regulations. So you're describing government as playing a referee role, that when the rules get broken or the plane gets out of hand that they come in and intervene. What are you talking about? They're a referee, that's a big part of it, and also they can in effect change the prices. Instead of taking the market prices as given, they can say well this price of this polluting product is too low. I can raise the price by putting a tax on that product or by putting a tax on the emissions themselves. And of course infrastructure, to the extent the private sector is not motivated to provide roads and bridges and other kinds of infrastructure than the government can facilitate if not provide directly. Well I can see what you mean in terms of Adam Smith. The government may need to intervene to correct a malfunction in the market such as the creation of pollution to impose some rules and punish the bad players, so to speak. But what happens when government goes beyond that? When government uses that power to play a much bigger, bigger role in the market to determine prices beyond the need to regulate bad things like pollution? Sure, so there's a misunderstanding of sustainability I think in Hawaii and elsewhere to the extent that people think it means fix the environment at all costs. So if you impose a rule of 100% renewable and the all cost includes granting tax credits and imposing high electricity prices on consumers, that may not be improving their welfare. So that's an example of possibly going too far. In what way would it not improve people's welfare? Well in terms of the higher taxes and higher prices. So we can do renewable but the question is at what cost? Eventually the price of solar and wind are going to come down enough and the cost of storage, battery storage for example are going to come down enough so that indeed it'll make sense to increase the percentage of renewables but should we do that by government committee or should we do that by market? Now you have pointed out that we may not gain all that much by going after 100% renewable that we have a very low amount of pollution in the first place in Hawaii and the benefit we get is not necessarily going to transform the planet. That's right. We produce one-fifth of one percent of all the CO2 emissions on the planet and China is producing about 100 times as much as we are. So if we're to have a global agreement that everybody reduces CO2 that could be a good thing but for one very small economy to try to do it on its own seems a little futile and that's an example of pursuing sustainability by symbolism instead of substance. And as you pointed out we would pay an extremely high cost for doing that. We could pay an extremely high cost. That's a matter for researchers to determine. Now this goes back to our conversation earlier about the role the government should play. By itself the market may not push us into a place where we actually end up with 100% renewable because the market may make the cost to the consumer lower actually but the way we might get to 100% renewables is through government fiat, government control and government enforcement. And what would be the downside of it? Well if we do it by corrected markets that is putting on the correct price on emissions and for Hawaii it's not so much CO2 that's important but more the local pollutants like sulfur and particulates that are produced by coal so that could be a correction and if that were to happen the generation would transition very slowly to renewables. We'll get there. By doing it by mandates and subsidies that's when the consumer is put at risk. Now a lot of times we try to fix the Hawaii economy as if it's in a vacuum without taking a look at factors outside of Hawaii that affect our economy. Many people say that some of those factors outside of Hawaii are even bigger in terms of their impact upon our economy than anything we would do in our state. For example some have said that the tourist markets in Asia may actually have a bigger impact. There are many different things. What do you think is the biggest impact upon the health of the Hawaii economy? The biggest thing we have to worry about right now is the US economy and that's of course been in the news lately and one of the reasons that the stock market is so volatile is because of the uncertainties about trade. Now there's some good news that may materialize. The US is on the threshold of doing a new NAFTA a trade agreement with Mexico and Canada. Mexico has approved it already. Canada will probably approve it and the only holdout is essentially the Speaker of the House Nancy Pelosi so she is the one reason why this may not pass even though it's fairly good for the US but it's also good for Donald Trump which in politics may be an undesirable. What you're saying is that the health of the US economy the robustness of our national economy and factors that impact it as a trade relationship are actually bigger factors in determining the Hawaii economy than things we do locally. Yeah because even though we're sitting in an island the labor market is still somewhat integrated with the whole economy. So we have these positive things maybe a deal on beef with Europe maybe a deal with Japan on agriculture products and then we're still talking with China but on the other hand we have this trade war with China and we don't know if that's going to be resolved so the forecast of the growth of the US economy 2018 we were growing at 3% this year we'll probably grow at 2.3% and my best guess is we'll be growing at less than 2% by 2020 because of these trade problems and the cooperation that it's built up over my lifetime of 75 years the general agreement on trade and tariffs was signed in 1944 and ever since then there's been an elaborate complex of legal rules and social capital we call it trust reciprocity in supporting the exchange across countries. I'm going to stop you here because we're going to run into a break but what I hear you saying is that the impact of trade is based upon a long-term relationship that involves relationships trust, precedent, law and so forth so what I'm going to ask you when we come back from the break is what's the impact of short-term measures such as threats of tariffs and so forth from our president upon our trade relationship. I'm Kaylee Ikeena with Think Tech Hawaii's Hawaii Together and we'll be right back with the economist James Rowe. Aloha I'm Mellie James host of Let's Mana Up Tuesdays every other Tuesday from 11 to 1130 this show is meant to dive into stories of local product entrepreneurs and how they're growing their companies from right here in Hawaii I'm so thrilled to have our show kicked off and so please join us on Tuesdays at 11 o'clock as we talk to local entrepreneurs and hear their stories. Hey aloha everyone and welcome to the Think Tech Hawaii studio my name is Andrew Lanning I'm the host of Pretty Matters Hawaii we air here every Tuesday at 10 a.m. Hawaii time trying to bring you issues about security that you may not know issues that can protect your family, protect yourself, protect our community, protect our companies, the folks we work with please join us and hope you can maybe get a little different perspective on how to live a little safer. Aloha. Welcome back and thanks for not going away I'm Kaylee Ikeena on the Think Tech Hawaii Broadcast Network. My guest today Professor James Romasette is giving us some insights into the nature of economic what it is and how it impacts Hawaii. We are talking now a little bit about the health of the Hawaii economy being impacted by the overall robustness of the United States economy in particular we're looking at trade and tariffs and so forth. Jim you're telling us a little bit about the long-term nature of healthy trade relationships that benefit the economy but what's the impact of short-term management of those trade relationships through threats of tariffs and so forth? Yeah so Trump tariffs the first thing we have to understand is they're not meant to be permanent they're meant to be a temporary device to encourage other countries such as China to get to the bargaining table and make a fair and free trade deal. Now that's what his advisors have told us. That's what the advisors say and sometimes Trump also says that. But the risk is when you start using national emergency powers to overcome this 75 years of complex governance of international cooperation you put that at risk that other countries may use similar tactics and we may start unraveling that governance structure. So that's what I'm worried about. We'll see what happens. Do you see Hawaii reacting or Hawaii being impacted in the short run or more so in the long run? I think there's a potential of cascading. So right now inflation is fine but prices may start going up. Certain interests are already being hurt. Agricultural interests obviously. Even though Trump is giving some money to farmers what that does so they produce more soybeans. The price of soybeans still goes down and so they can't really make money in the long run and they're not getting completely subsidized. I should have asked you to bring your crystal ball with you. I don't have my crystal ball today so we don't know how it's going to turn out but there's these risks that we need to be worried about. Janet Yellen, the former head of the Federal Reserve was just saying the other day recession is still unlikely but it's more likely than it used to be. So let's say 25% chance of recession in 2020. You're known for a phrase, the curse of paradise. What do you mean by that? The curse of paradise is based on the idea of resource curse an idea in trade and development economics. Going back to the Dutch when they discovered oil on the North Sea so much of their resources went into oil production that other industries that had more rapid productivity growth suffered. That's what's been noticed all around the world. In Hawaii we had also a curse but I call it curse of paradise. First it was sandalwood then it was the whaling industry then it was sugar and pineapple then it was tourism and when resources flow into those industries then the more productive sectors that offer opportunities especially to young people who want to get a good education and stay in Hawaii then they don't see those opportunities materializing. In other words there has been a historic imbalance in the Hawaii productivity sector whereas we end up with primarily a tiny handful you can count them on one hand of industries that drive the economy. And the other bad part about the curse of paradise is that when those interests become so powerful they begin to affect policies. The most extreme example of that is when the sugar and pineapple planters took over the government and formed the one party Republic of Hawaii before annexation. So we call it rent seeking not a patini opera like my wife thinks but it's special interests getting together with government and changing the rules to get a bigger slice of the pie even though it causes the size of the pie to shrink we call that rent seeking and that's the big danger. We often talk about diversification of the economy being a solution to that problem. What are your thoughts on diversifying wise economy from more than two or three major industries military government tourism? I don't think diversification per se makes that much sense. The important thing is to pursue we call it your comparative advantage relative to other economies but not only now but looking into the future so that we're going to have those productivity gains. So in the case of tourism David McLean our UH president used to say diversify from your strength so ecotourism, health tourism, sports tourism all these things are growth opportunities that would give us a competitive advantage or a comparative advantage. Those are things we could build on and not artificially try to force production in any particular sector. Some say that we should be more self-sufficient for example they look at the fact that the majority of our food is imported shipped in and they look at all the land we have in Hawaii the air and the water we should be growing our own food supplies we're cut off from transportation lines What are your thoughts about this line of reasons? Well that's the dark side of sustainability that if you look at something symbolic whether it's renewable energy or food self-sufficiency and you say regardless of the cost then you're suppressing other parts of the economy and even the environment the nature conservancy has a nice electronic brochure you can find online which says that the value of the coal allows these are non-market values is ten billion dollars and it's vanishing even a PBS special cause of the disappearing Hawaiian forest which means cultural values as well as real resources including the source of our groundwater so that can be fixed with small investments with very high benefit cost ratio and those are the kind of things that government should be facilitating you're growing both the environment and the material part of the economy instead of going to very costly desalination Well when we look at the cost of living in Hawaii the price of paradise, the cost of living and so forth many people suggest that the solution is to help the low wage earner by raising minimum wages forcing businesses to pay a certain rate so that workers are able to afford the high cost of living do you have some thoughts on that? Well I read your column I had some thoughts on it That's one of my thoughts and as you pointed out it acts as a regressive tax because higher cost means higher prices and who pays a higher percentage of their income to poor so it acts as an anti-poor tax but another aspect is that when you artificially go away from the market clearing wage the clear supply and demand there's more people that want to work less employers that want to employ and so that wedge is called unemployment so you're actually creating unemployment not only that but the employers aren't going to choose at random when they ration the limited jobs they're going to choose the ones from good families probably choose minorities less choose poor people less so this is going to be anti-minority, anti-poor and if it has to be done it should be done at the national level if you do it at the state level Maui and Honolulu have considered doing it at the county level then it's going to impact business investment it's very easy for businesses thinking to invest in Hawaii well we have to pay this high minimum wage let's do it somewhere else minimum wage, mandate would be under-productive we're going to close it in just about 45 seconds they're likely to be anti-poor instead of the intention which is pro-poor so a lot of people are moving away from Hawaii we claim to have a high level of brain drain in what way is that correct and what way is that perhaps not correct the way it's not correct is that everybody except for a few states on the west coast and a few in the south I think they have a brain drain so it can't be everybody has a brain drain mobility is a good thing moving back and forth to your best opportunity that's a good thing but it's probably true that in Hawaii a lot of our young people don't see upward mobility it's going to pay off their investment in education they don't see opportunities as much as they should and that's partly because this thing we talked about the curse of paradise smart growth approach to development Jim thank you for your insights appreciate your long career as an educator and an economist thanks very much for having me I enjoyed it you have a great afternoon my guest today James Romaset professor emeritus at the University of Hawaii he's been in the economics department there for 41 years and now he shares his insight I'm Ili Akina president of grassroots institute so next time on think tech Hawaii aloha