Assessing Tourism’s Contribution TABLE OF CONTENTS to the Hawaii Economy Executive Summary 1 By Leroy O. Laney, Ph.D.*, Professor of Economics and Finance, Hawaii Pacific University I. Introduction 2 and Economic Advisor, First Hawaiian Bank II. Why is Hawaii so Dependent *Dr. Laney has been Professor of Economics and Finance at Hawaii Pacific University since 1998. He was formerly on Tourism? 3 Chief Economist and Senior Vice President of First Hawaiian Bank in Honolulu, and he continues to consult with the Bank and several other Hawaii institutions. Other career experience includes serving as a Staff Economist on III. The Condition of the Hawaii the President’s Council of Economic Advisers in the U.S. White House, as an International Economist at the U.S. Tourism Industry Today 4 Treasury, and as a Senior Economist in the Federal Reserve System. He has published widely in refereed professional journals, edited volumes, and bank publications. IV. Local Attitudes on Tourism: Where you stand depends Executive Summary ! Local attitudes toward tourism vary, on where you sit 9 but it is underappreciated by many. his paper makes several important V. Quantifying Tourism’s Total Often local residents view visitors as Economic Contribution 10 points: competing with them over resources, T VI. A Longer Term Tourism and identify tourists with negative Forecast for Hawaii 13 ! The Hawaii state economy is now effects such as Hawaii’s high cost in a serious recession, one that is of living and congestion. But all VII. Conclusion 13 broader, deeper, and will likely last regional economies must make a Bibliography 14 longer than average. Although this living, and it would be hard to recession has several components, invent a better export driver than Appendix I. An Induced Income the industry hardest hit is the one tourism. It is clean; it enhances Multiplier for the Hawaii upon which we depend the most, local tradition, history, and culture; Economy 14 tourism. Because tourism is respon- it usually emerges in places that are Appendix II. A Jobs Multiplier sible for by far the largest outside desirable in the first place; and its for the Hawaii Tourism Industry 16 injections into the state economy, jobs cannot be outsourced. However, that is the sector that should receive like all industries we must compete, the highest priority in stimulus and our decision makers cannot take GDP mentioned above yields 40%. spending. Until tourism gets well, it for granted. An overwhelming That share would be 35% even if the rest of the economy cannot. majority of the visitors themselves this multiplier were applied only to And the Hawaii tourism industry view Hawaii as a premier destination, direct visitor-related expenditures is in a crisis mode now. but care must be taken to maintain in 2007, listed in public sources. ! Hawaii is so dependent on tourism our competitive position. Of course, it should be noted that because that is the industry in which ! Earlier work has suggested that if, for example, 40% of the economy we have our true comparative tourism accounts for about a quarter were removed, the remaining advantage nowadays. Hawaii has of local Hawaii Gross Domestic 60% would also be affected due to always been largely dependent on Product (GDP), and about one-third massive unemployment and reduced a single industry, even though that of local jobs. These estimates are government services. In fact, for all industry has changed over the years. without applying any normal practical purposes, it is impossible Efforts at diversification have been economic multipliers. This study to draw the line between shares elusive. In large part, this is because does apply some multipliers to both of the economy affected and the Hawaii economy is so small dollars and the number of jobs that unaffected by tourism. It is almost that true diversification is difficult. are created by tourism directly. analogous to the removal of 40% It is economically more efficient to Care was taken to estimate these of the vital organs from the human specialize in what we do best rather multipliers conservatively. body and speculating on survival than try to do a larger number of of the individual. ! Applying an income multiplier of things well. (continued on page 2) 1.5 (see Appendix I) to the 25% of Executive Summary ! A tourism forecast contained in Yet this category significantly (continued from page 1) this study over the next three years undercounts total jobs in any economy projects that the visitor industry dependent on travel and tourism. 2 ! As for jobs, the tourism component may return to positive growth over It does not include jobs dependent on estimated here is substantially higher. that time frame, but that growth things such as: Applying a jobs multiplier of 2.6 will be slow. Thus, it is imperative ! capital investment by companies (see Appendix II) to the one-third that leadership efforts be made now and governments in visitor plant, estimate mentioned above yields to revive and maintain the industry equipment, and infrastructure — as an astounding share of over 80%. as much and as quickly as possible. well as the actual construction of If that jobs multiplier is applied only The path of our economy depends these elements, to Leisure & Hospitality jobs listed upon a healthy tourism industry. in the State Labor Department’s ! tourist retail and restaurant spending, establishment survey alone, it comes I. Introduction ! people involved in providing other to 44%. If total government jobs tourism services like air travel, The main thrust of this paper, are added to that 44%, only 35% rentals, park services, and security, of all jobs in the state remain. commissioned by First Hawaiian Bank, is to review tourism’s economic impor- ! government jobs funded by the And that share would be 74% if taxes that the tourism industry pays, the multiplier were applied to the tance to Hawaii and to make some number of jobs generated by visitor estimated quantifications about the ! manufacture of clothing and other 1 related expenditures in 2007, listed tourism component of the economy. items sold to tourists, in public sources. (Given the way Most observers in Hawaii and every- ! real estate sales due to tourism, where else automatically assume that the jobs multiplier is calculated, ! tourism is the main driver of the health care revenues attributable that 74% would include some jobs to visitors, that are only partially and indirectly economy of the 50th state. Yet, given ! entertainment and art sales due touched by tourism, but that its size and complexity, an exact to tourism, component should be counted also.) measurement of the sector relative to the overall economy is difficult. ! farm jobs devoted to growing food ! State taxes are also affected greatly by There are several reasons for this. for the visitor industry, tourism. State taxes attributed directly One of the main reasons is that, unlike ! and a host of other jobs that are to the visitor industry in 2007 many other major industries, tourism is related to servicing the thousands accounted for 25% of General Fund not broken out neatly and separately as of employees of tourism — barbers, revenues (and that does not include a stand-alone sector of any economy, bakers, to bankers. a number of fees paid by the tourism that of Hawaii included. industry). Subject that to the 1.5 For example, total tourism jobs are A related problem is the calculation income multiplier above, and it not broken out separately. Under the of an appropriate “multiplier” to apply becomes almost 40%. The problems Standard Industrial Classification (SIC) to direct tourism injections to get at the encountered by tourism recently also system in place in the United States total economic contribution of tourism are having a serious impact. Using prior to 1997, there was no category in an economy. Both income multipliers Council on Revenues estimates, related specifically to tourism at all. and employment multipliers are impor- the decline in visitor arrivals alone, After that, when the North American tant. Everyone agrees that such multi- without any secondary effects on other Industry Classification System (NAICS) pliers exist and most people understand forecasted variables, caused a 2.5% was adopted, there was a category added the concepts involved, but the devil is decline in the General Fund in 2008. for “Leisure & Hospitality Jobs.” in the details. Unfortunately, in many ! All these numbers can vary substan- 1 The author would like to thank the following individuals for their time and help in completing this paper: David tially depending on assumptions, Carey, President & CEO, Outrigger Enterprises Group; Mark Dunkerley, President & CEO, Hawaiian Airlines, Inc.; some of which are inevitably arbitrary. Donald Horner, Chairman & CEO, First Hawaiian Bank; Ed Hubennette, Vice President, North America, Hawaii, The overall point is clear, however. & South Pacific, Marriott International, Inc.; Pearl Iboshi, Chief Economist, Research & Economic Analysis Division, Department of Business, Economic Development, & Tourism, State of Hawaii; Richard R. Kelley M.D., Tourism’s contribution to the Hawaii Chairman, Outrigger Enterprises Group; John Monahan, President & CEO, Hawaii Visitors & Convention Economy is so large even under the Bureau; Deena Nichols, Senior Vice President, Macy’s, Inc.; Ernest Nishizaki, Executive Vice President & COO, most conservative assumptions, that Kyo-ya Company LLC; Barbara Okamoto, Vice President, Customer Relationship Management, Hawaii Visitors & Convention Bureau; Frederic Proute, Senior Director - Financial Analysis, Hawaiian Airlines, Inc.; Chris Resich, if it remains in the slump in which President, MC&A, Inc.; Murray Towill, President, Hawaii Hotel & Lodging Association; Keith Vierra, Senior it now finds itself, the overall state Vice President, Starwood Hotels & Resorts Hawaii; Marsha Weinert, Hawaii State Tourism Liaison, Department economy — its jobs, tax revenues, of Business, Economic, Development, and Tourism, State of Hawaii. Any errors or opinions expressed herein, however, remain totally the responsibility of the author. and the life styles of almost all of our 2 Sub-categories of this component include “Arts, Entertainment, & Recreation” and “Accommodation & Food citizens — will be impacted seriously. Services” jobs. The total category accounted for just over 17% of total Hawaii jobs in the year 2008.

2 | ECONOMIC FORECAST - SPECIAL REPORT 2009 economic studies there is a tendency it is a labor intensive industry that is would have emerged by themselves to overstate such multipliers, and that not subject to outsourcing. The jobs without public subsidy. Perhaps the undermines their credibility. This over- that are created stay on the local scene. private sector should be trusted more statement usually stems at least partly To return to the main economic than government when it comes to from the fact that it is often in the lesson of all this, however: If the primary picking the economic winners. interest of those performing economic regional driver — whatever it is — More than that, however, much impact studies on various industries to is not maintained and upgraded, then of the reason for the absence of diversi- overemphasize the importance of those the entire local economy sinks. Jobs fication in the Hawaii economy lies with industries. This document will attempt and economic activities that some its relatively small size. For example, to estimate objective multipliers in a consider to be quite far removed from California’s state economy is quite diver- subsequent section and appendices. that main driver can be affected very sified. But if California were a nation, The most important bottom line adversely. Thus, especially in times of it would be the eighth largest national point of this paper can be put quite economic hardship for the main industry, economy in the world. Hawaii, on the simply: In the final analysis, all regional it is that sector which needs to be fixed other hand, accounts for about 3.4% economies are driven by what they sell first . Otherwise, the entire economy of California Gross Domestic Product to the rest of the world. Those injections quickly gets seriously ill. There are many and less than half of one percent of make the wheels of the local economy historical examples of that happening — U.S. national Gross Domestic Product. turn. In most such economies, intelligent sometimes irreversibly. It turns out that The plain truth is: Hawaii’s economy local observers recognize this readily. Hawaii tourism is in just such a state has never been very diversified, and it Detroit and the entire industrial Midwest now, and with it the entire local is unlikely that it ever will be — at of the United States knows it would be economy. Section III of this document least compared to most larger economies. in deep trouble without the domestic reviews this scenario in some detail. This can easily be seen by a brief review auto industry, and a financial center such of Hawaii’s economic history. Even as New York knows that if that sector going back to the earliest days after were to suddenly collapse most of the II. Why is Hawaii So European contact, our small local city economy would go with it. In many Dependent on Tourism? economy has always been relatively tourism-driven economies, however, Before turning to the state of Hawaii dependent on a single sector or this fact is more frequently forgotten. tourism now and the measurement of industry — even though that sector The reasons the economic impor- its importance, it is probably useful to has not always been the same one. tance of tourism is more often overlooked devote some attention to why Hawaii ! The sandalwood trade dominated are also due to several inherent aspects is so dependent on tourism in the first from about 1810 into the 1820s. of the industry. It is sometimes less place. A basic reason is that diversified Ships carrying fur from Alaska and visible because it blends in with the economies are more resilient, and less the Pacific Northwest stopped in local economy that residents also enjoy. vulnerable to economic downturns, Hawaii to pick up the harvest of It is sometimes not considered a “serious” than the less diversified ones. huge stands of sandalwood, valued industry like certain forms of manufac- Much attention in the past has for its fragrance, in the higher eleva- turing or sophisticated endeavors like been devoted to making Hawaii’s tions. In 1821, 4 million pounds of high tech. Many tourism jobs are not economy a more diversified one, but Hawaii sandalwood were off-loaded higher paying ones, and there is a that has proven to be an elusive goal. in Canton. Labor was diverted away tendency not to count them equally One problem in this area is that the goal from the necessities of life to cut the with other jobs that require higher of diversification for its own sake often wood. Ali‘i went into debt borrowing training and education. But the fact runs counter to the goal of economic against wood that had not yet been is, tourism creates jobs at all levels — efficiency. Economics teaches that harvested, and some of these debts low, middle income, and high. economies should always specialize in were not repaid until well after the Tourism is a great business to have what they do best, and rely on trade demise of the industry. But the as the main pillar of economic support. with the rest of the world to satisfy industry ended quickly when sandal- In fact, it would be hard to design a other needs and wants. This is the woo d forests were depleted . better one. It usually evolves in areas principle of comparative advantage . ! Servicing the Pacific whaling fleet that are desirable in the first place, That is why economists often was next. Whaling held sway from it encourages the enhancement and oppose things like tax subsidies for the 1820s to the 1870s. At its preservation of local culture, traditions, infant industries. High tech is a good zenith in the 1840s, over 85% of and history, and it is a clean industry example. It could be that we do not the American whaling fleet was that encourages the maintenance of have a comparative advantage in such (continued on page 4) the local environment. In addition, industries. If we did, those industries

ECONOMIC FORECAST - SPECIAL REPORT 2009 | 3 Why is Hawaii so Dependent ! The military was the overwhelmingly industry is likely to remain Hawaii’ s on Tourism? (continued from page 3) dominant sector during World War II. biggest export sector for some time Hawaii’s strategic location made it to come. This is mainly because in the Pacific. Whalers fished the attractive to the U.S. military from there is no contender industry in equator in winter and Alaskan the days of the late 1800s. After the the wings now that can possibly waters in summer, stopping in 1898 annexation, in 1900 Congress come close to replacing it . Hawaii in both the spring and the appropriated money for the dredging A graphical depiction of this fall to re-provision and for rest and of Pearl Harbor. World War I was historical progression is useful. Chart I recreation. Because whalers stayed fought in a different theater, but below shows how each of the above in port longer (several months each several other Navy and Army industries have dominated the economy way) than the sandalwood trade, installations were established in the in their turn. Even though there are they left more money in Hawaii. 1920s, all on Oahu. By any standard some intervals of overlap, it is clear that It was highly seasonal, but also economic growth measure, the it was one industry and one industry highly cyclical, as the number of Hawaii economy grew faster during only that usually held center stage. ships that visited each year varied World War II than before or since. (In the chart, the spikes to 100% greatly. Although the whaling After the war, the military’s role in represent the peak of the industry, industry had its ups and downs, and the economy was drastically reduced. even though their actual value varied.) lasted a long time, it also ended Military withdrawal caused a severe abruptly . A bad winter destroyed recession during the 1945-1949 period. much of the fleet in northern Today , the military role is less than III. The Condition of waters, and the final nail in the in the past, more because of the Hawaii Tourism Today coffin was the discovery of crude oil growth of other sectors than because The most recently completed in Pennsylvania, followed by other of absolute shrinkage . year 2008 was not kind to the Hawaii U.S. domestic oil fields . ! Tourism has dominated the post economy, especially its tourism compo- ! Sugar and the plantation economy World War II Hawaii economy. Early nent. In 2007, total visitor expenditures dominated from the 1876 Reciprocity tourism growth came partly because were $12.8 billion, or 20.8% of state Treaty until the outbreak of World World War II put Hawaii on the map, Gross Domestic Product. But in 2008 War II in 1941. Polynesians had and it was fueled by the returning that share declined to 17.9% or $11.4 grown sugarcane for centuries, but military personnel who had experi- billion, an indication of how bad last the first commercial sugar mill in enced it during the war. Then came year was. Hawaii was built at Koloa, Kauai in 1959 statehood, and more military Hawaii tourism is now threatened 1835. Hawaii sugar exports got a big exposure during the Vietnam War. like never before. The economy entered boost from the U.S. Civil War, when But it was the advent of relatively 2008 on a slowing trajectory that had the North was cut off from Louisiana inexpensive jet air travel in the its origins in earlier years. Expectations sugar. This was a period of rapid 1960s that really caused Hawaii were for flat growth going into the year, economic and demographic growth, tourism to take off. The visitor but no one saw the “perfect storm” of as workers were imported from China, Japan and Okinawa, the CHART 1 • HAWAII’S MAJOR ECONOMIC ACTIVITIES Philippines, the Portuguese islands Scaled so that Maximum Value =100 of Madeira, and other locations to 120 work the plantations. From 1876 to Sandalwood Military 1941, the U.S. population tripled, Whaling Vessels Pineapple 100 and that included the annexation of Sugar Visitors 12 new states. But Hawaii’s economy 80 grew eightfold. By 1941, on the eve of World War II, one out of three 60 employed people in Hawaii worked for a sugar or pineapple company. Percent 40 But World War II heralded the beginning of the end of plantation 20 crops like sugar and pine in Hawaii. The power of the plantations never 0 recovered from military dominance 1886 1806 1816 1826 1836 1856 1866 1876 1896 1976 1986 1996 1846 1906 1916 1926 1936 1946 1966 during the war . 1956

4 | ECONOMIC FORECAST - SPECIAL REPORT 2009 events that came about as the year ! At the end of March 2008, Molokai and Kona as well as Honolulu. It progressed. The combination of those Ranch abruptly shut down all of its was Hilo’s only direct flight to the events continues to affect the Hawaii major operations, including the Mainland. The combined exit of economy as 2009 unfolds, and that 22-room Molokai Lodge, 40-unit both Aloha and ATA not only added will likely be the case for some time Kaupoa Beach Village, the Kaluakoi uncertainty to air travel to and from to come. Golf Course, other recreational Hawaii, it raised expectations of The bad news started to accelerate activities, plus the Maunaloa gas higher airfares at a time when many toward the end of the first quarter of station and the town’s theater. In were just planning a summer vacation last year, and each of the state’s four the process, 120 workers lost their to the state, while at the same time counties was affected directly. A brief jobs. The company attributed the it caused planners to scramble to review of some of the major blows follows. closure to failure to win enough make up the lost airlift. While some of them are not directly support for a 200 lot luxury home ! As a result of these events and related to tourism, they deserve mention development at La‘au Point, which various Mainland economic circum- because they represent all the more was to help finance other Ranch stances, expectations going into the reason we should not stand by idly while activities. While not critical from season for 2008 summer visitors the state’s major industry deteriorates. the standpoint of the overall state, were downbeat at best. In fact, as ! It was known going into the year the closure by the island’s largest the summer progressed, outcomes that Norwegian Cruise Lines’ Pride private employer and landowner turned out to be the worst in years. of Hawaii would leave inter-island (about 35% of the island) was devas- Sharply higher energy prices exacer- service in 2008, after only a two year tating to Molokai’s tiny economy. bated airfare increases, and year over stay. Demand for the American- ! Days later, a much larger blow came year monthly visitor arrival results flagged, American-staffed vessel — when Aloha Airgroup announced were consecutively worse. Interviews plagued with service issues — never shutdown of its passenger operations, conducted by this author on the caught up with stateroom supply, after filing for bankruptcy for the Neighbor Islands over the summer and its exit occurred at the end of second time since 2004. In business provided tangible evidence of this. January. But another bombshell was since 1946, the closure of this second Traffic was not as congested at the dropped in February, when NCL largest kama‘aina airline had psycho- major choke points, hotel occupan- announced that the second of what logical as well as immediate and real cies were down, properties shut had once been three American- economic effects. Its fleet of 26 restaurants and wings, and business flagged vessels plying Hawaiian Boeing 737s served five airports in was off visibly at other destinations waters, the Pride of Aloha , would Hawaii and six destinations in the frequented by visitors. also leave in May. That left only continental U.S. They were the only ! As the summer wore on, another one, the Pride of America , which had carrier that offered non-stop service couple negative developments been present since 2005 and was from Orange County to Hawaii, for unfolded in Hawaii’s agricultural designed for cruising Hawaii’s seas. example. The shutdown affected sector regarding two more venerable Economic effects of the two vessels’ 1,900 employees, impacted retire kama‘aina companies. One of Maui’s departure was felt especially on the ment benefits of other ex-workers, dominant employers, Maui Land Neighbor Islands, where businesses as well as stranding passengers. & Pine, announced in late July the such as activity operators, tour ! Close on the heels of this announce- layoff of 274 workers, about a quarter companies, farms, laundries, and ment, the air charter service ATA of its total workforce. The bulk of others across the board were impacted. Airlines also filed for bankruptcy these were in its pineapple operations, The three months notice given for and discontinued all scheduled which have struggled in recent years the Pride of Aloha was much more flights, attributing the action to the in the face of foreign competition. sudden than the ten months associ- loss of a key contract for its military Attempts to shift from canning to ated with the Pride of Hawaii , and charter business. Like Aloha, this fresh fruit have proven to be insuffi- several activities had only recently sudden action also caused disruptions, cient to rescue this traditional Hawaii been created to cater to cruise because other customers were not plantation crop. (Another 100 passengers. Hawaii had high hopes given any advance notice. In addition ML&P workers were cut in February for the Passenger Services Act — to its charter business, ATA offered 2009; 87 at its Kapalua Resort and exempted Pride vessels when their regular service on several routes, another 13 at its corporate head- debut was announced in 2004, and almost all of them to and from quarters in Kahului. Remaining never has a Hawaii industry ramped Hawaii. ATA operated direct flights workers took a 10% pay cut.) up so quickly to be collapsed in so from the Mainland to Maui, Kauai, (continued on page 6) short a time.

ECONOMIC FORECAST - SPECIAL REPORT 2009 | 5 The Condition of Hawaii and employee incentive programs. Statewide hotel occupancy in 2008 Tourism Industry Today Wells Fargo, for example, cancelled declined 4.6% to 70.4%, while hotel (continued from page 5) a 11,000 room-night incentive room revenues fell by $206.7 million meeting at Hilton Hawaiian Village to $2.91 billion, down 6.6% from 2007. ! The other Hawaii plantation crop to in Waikiki in February. December was the worst month of the take a step back in 2008 was sugar In light of all these developments, year for both occupancies and revenues. on Kauai. In September, Gay & it is not surprising that the overall 2008 Hotel occupancy dropped nearly 10% Robinson announced that in 2010 record was very sobering and that the from December 2007, the lowest it would harvest its last crop of outlook for 2009 remains quite down- statewide level since the September 11, commodity sugar, leaving the future beat. A review of the numbers by county 2001 terrorist attacks. Among the top of the operation to a proposed for the past calendar year bears this out. 25 U.S. lodging markets, Hawaii ranked ethanol plant in partnership with While some of these numbers are not fifth in 2008 occupancy — behind New Pacific West Energy. That under- directly related to tourism, they are York City, San Francisco, Miami, and taking has been in the works for important in a report like this if only to Los Angeles. about three years now, though it has underscore why we need to nurture the Major hotel chains that had held encountered various financing and main economic engine, tourism. the line on room rates until late in the permitting hurdles. This Kauai year finally dropped them, causing major closure leaves Maui’s HC&S sugar An Overview of Recent Economic declines in average daily rates (ADR). operation as the only remaining Conditions by County The annual ADR held the line above Hawaii grower of commodity and When the aggregate is down, fixing the the $200 mark, but this was due to a specialty sugar. driver becomes even more important. comparatively strong first quarter. ! Still, none of this prepared Hawaii Overall job growth for the state Statewide revenue per available room, for what was to come in the fall. was flat in 2008, with Oahu and Kauai the broadest measure of hotel perform- The financial global meltdown in showing very minor gains and Maui ance, ended the year at $141.90, off the United States that started with and the Big Island dipping marginally 5.4% from 2007. the mortgage backed securities crisis into negative territory. Unemployment The discouraging path of the visitor spread to become a total freeze-up of rates accelerated markedly across the industry in 2008 can best be seen on a the financial system. Lending ground counties over the year. The Neighbor cumulative basis as the year progressed. to a halt. (Ironically, the local Island numbers were worse than Oahu, Each successive blow to the sector made financial sector has withstood this which from December 2007 to December the picture continually worse. Total meltdown remarkably well.) Investors 2008 on a non-seasonally adjusted basis arrivals actually showed positive growth saw significant declines in lifetime saw only a 1.5% rise to 5.1%. The in the first three months of the year, savings. Obviously none of this was corresponding figures for Maui County but by April cumulative growth was conducive to long distance leisure were a 3.3% rise to 6.7%, compared to flat and by May it had reached negative travel, among the most discretionary Hawaii County’s 3.6% rise to 7.1% and territory. That cumulative decline of items in a household budget. Local Kauai’s 4.6% rise to 7.7%. (The state’s became worse at an accelerating rate consumers were subject to many of corresponding number on a seasonally as the disastrous summer progressed, the same reactions as their Mainland adjusted basis rose 2.4% to 5.5%.) and by the fall it had reached double counterparts, as the negative financial The state’s all-important visitor digit declines, ending the year with a news became continuously worse. industry was very hard hit in 2008, total 11% drop. The holiday retail season in Hawaii with a decline in total arrivals of almost Total spending traced a similar path was worse for stores and restaurants 11%. This was a staggering blow. Only on a cumulative basis. Expenditures catering mainly to visitors than for Canada and the All Other category of were positive cumulatively through May, those focused more on the local visitors showed mild increases, and but the summer saw those numbers also markets, but many of the latter also these are smaller in any case. Again, drop more and more as each month reported disappointing results. it was the Neighbor Islands that bore passed. By the end of the year, spending ! Business travel to Hawaii began the brunt of this decline. While Oahu was down almost 6% for the year on a falling with other visitor numbers in visitors fell 11%, Maui’s fell 15%, the current dollar basis. Oahu visitor spend- 2008. But it stalled further in 2009 Big Island’s dropped over 18%, and ing in 2008 did not suffer as much as for when President Barack Obama Kauai’s plummeted over 20%. This was the state as whole, for which outlays called on boards of directors of particularly devastating to the Neighbor by air visitors dropped almost 10%. companies receiving emergency Islands, whose economies are much more This progression had an understand- government lending to develop dependent on tourism than the more able negative psychological impact on guidelines for conferences, events, diversified Oahu. all components of the industry —

6 | ECONOMIC FORECAST - SPECIAL REPORT 2009 as hotels, activities, restaurants, and such as Duke’s, The Yardhouse, and there was a 31% decline in single tourism retail stood by to see just how Ruth’s Chris — have been faring better family sales and a whopping 43% bad it would get. By year’s end, all in the down economy. But closure of a drop in condo sales. parts of the industry had abandoned restaurant such a Nick’s Fishmarket is a Median prices were also down, hope of holding the line on anything. sign of the hard times. though not by nearly as much. In the Hotels dropped room rates, and heavy On the leeward side at Ko Olina, face of such drastic sales declines, this discounting was apparent in practically Disney is moving forward with its was actually good news. Oahu single all other parts of the industry. development, but the process may family median prices dropped a mere Waikiki hotels entered 2009 in a slow due to the state of the economy. 3%, and condos prices were absolutely survival mode. Oahu has not been Preliminary site work there has begun. flat. Maui single family median prices affected as much by the visitor down- The resort, Disney’s first in Hawaii, will were off 8%, with condos again showing turn as the Neighbor Islands, but that is include 350 traditional hotel rooms and no change. Hawaii County showed not true for off-beach properties. Beach- 480 Disney Vacation Club Villas. As greater softness in prices. The Big Island front properties have lowered rates to well, a pool, spa, wedding lawn, a saw a 13% median price drop for single shore up occupancy, so the off-beach convention center, children’s club, family units, and a 6% decline for properties have had to follow suit. Cash and two restaurants will be included. condos. Among the Neighbor Islands, flows are increasingly anemic, and overall Some expect it to compete more with Kauai prices fared best. Single family occupancy has been down 10-15%. Neighbor Island resorts than Waikiki, median prices were off only 5%, with The Japan market nowadays is for because its ambiance is more similar to condos down 4%. all practical purposes an Oahu market. those destinations. As always, it should be noted that It was off slightly less in 2008 than the Weak construction has added to especially Neighbor Island real estate U.S. domestic side, down 10.2% for the faltering economy. After being the data should be taken with a grain of salt. Oahu versus a 14.5% Mainland drop. leading sector in job growth over the Both transactions and prices can vary (Much of the U.S. domestic decline was previous several years, this component greatly across areas of the island, and the attributable to the exiting cruise ships, also changed abruptly in 2008. Overall mix of transactions — the local versus as cruise passengers fly to Honolulu to state construction job growth dropped the offshore market, for example — can board the vessels.) Although many into negative territory last year, after also be distorting. But the overall trends Japan groups are now staying in cheaper 6.8% growth in 2007. Oahu managed are clear: much lower volume and a off-beach properties, it is the beachfront to remain positive, with 1.4% growth softening in prices. Expectations are properties that set the price. in building jobs, but once again the that prices will fall more in 2009, and In specific developments among the Neighbor Islands generally were weaker. at an accelerating pace. hotels, the Royal Hawaiian completed Maui’s corresponding numbers fell The housing slump has even affected its major renovations, with 400 refur- 4.5% and the Big Island’s dropped the “affordable housing” component, bished rooms, and the Sheraton Waikiki almost 7%. Kauai managed to remain homes aimed at low to moderate income is making steady progress, but renovation positive with 11.7% construction job buyers. Tighter lending standards and of its Princess Kaiulani and the new growth, but even there several projects rising fears about jobs and the overall Diamondhead tower for the Moana that were moving forward earlier in the economy have taken a toll in this have been delayed. Hilton recently year have been scaled back, postponed, segment also, even with falling mortgage opened up 350 timeshare units and or cancelled. rates and the softening prices. (Another Outrigger is actively pursuing Asian Plummeting sales were the hallmark drag on construction related to the development for diversification purposes. of Hawaii real estate in 2008. Realtors affordable housing component relates Outrigger Reef is putting 400 condo spend money like everyone else, and to the higher proportion of affordable hotel units back on the market. the drop in their commissions was but housing required by counties in new On balance, the Waikiki visitor yet another part of Hawaii’s anemic developments.) plant actually is in better shape than economy last year. Single family resales Nonetheless, Hawaii can be thankful it has been in some time, much better on Oahu were off 24%, and condos for greater resiliency in residential than five years ago. Most major hotels were down over 28%. On the Neighbor prices than many Mainland locations. have been renovated, something that islands, the Realtors Association of Constraints on the development process, the industry standard sets as needing Maui reported a 21% drop in single resulting in lower inventory, can have to be done every five to seven years. family sales for the year, with condo buoying effect in times like the present. The Pacific Beach Hotel is the last sales down 35%. The Big Island and We frequently forget that in better times. major hotel not renovated. Kauai fared worse. Hawaii County Trends in home prices have impor- Among restaurants, those that single family sales were off 33%, and tant implications for other components attract a larger share of local business — condos were down 29%. On Kauai, (continued on page 8)

ECONOMIC FORECAST - SPECIAL REPORT 2009 |7 The Condition of Hawaii but those employed in the visitor transactions in such a small sample Tourism Industry Today industry certainly do. make the numbers mean much less (continued from page 7) Some indicators are countercyclical. than they might otherwise. In the For example, student enrollment across condo market, corresponding sales of the economy also. As people feel the ten campus system of the University fell 50.9% to 159, and median prices they are worth less on paper, they of Hawaii rose 5.6% in the fall semester dropped 5.8% to $305,000. spend less on other things. And builders of 2008 over the previous spring. (The Neighbor Island real estate numbers watch home prices too, because a turn- UH community colleges saw a 9.4% were similar in the first month of the around in prices usually mean demand increase, and UH Manoa had a 0.3% year. Big Island single family sales were for their product is ramping up. Home decline.) The increase was attributed down 46%, Kauai’s were off 55%, and prices will continue to be watched to people — many from the tourism Maui’s were down 49%. Corresponding closely in Hawaii. Until they stabilize, industry — seeking additional training median prices were down 17% for it is unlikely that we will see a genuine in this down economy, as they were the Big Island and 20% for Kauai, recovery locally. unemployed or underemployed. but only 1% for Maui. Yet once again, In statewide commercial real small samples can distort the numbers estate transactions over $1 million, Emerging Developments in 2009 substantially. the national freeze in commercial The year 2009 began on the same The year over year monthly visitor property lending hit Hawaii hard in downbeat notes in Hawaii’s economy numbers will begin 2009 on a continued 2008. The dollar amount of such that prevailed in late 2008. Lower state dismally downward track. The first commercial property transactions — tax revenue forecasts sent lawmakers three months of 2008 were the best including hotels, shopping centers, searching for ways to balance the grow- of the last year, so monthly numbers office buildings, and other commercial ing budget deficit. Among other things, in 2009 will suffer by comparison. In real estate — plunged from $3 billion increased taxes or fees on fuel, vehicle January 2009, total visitor arrivals fell in 2007 to $788 million in2008, a 74% weight, cigarettes, alcohol, rental cars, 12.5%, with the Japanese component drop. The number of such transactions and vehicle registration were suggested. dropping 12.7%. Total visitor spending fell 37%, from 264 to 166. An absence Even more severe tax increases have was off 13.6% for the month. of many high value hotel transactions been discussed, including raising the The Hawaii economy will not was a major contributor to the decline, state’s general excise tax. get much help from the private but it was spread over a market that In addition to higher taxes, construction sector in 2009 or 2010. also included warehouses, apartment particularly unpopular in these lean A consensus forecast expects total buildings, golf courses, farmland, and economic times, spending cuts have construction spending to decline at undeveloped land zoned for commercial also been considered — agency cuts, double digit rates in both years. use. Much of the commercial property furloughs, using emergency hurricane Commercial and resort building are financing in earlier years came from relief money and the proceeds of the in retreat. The residential construction loans packaged as mortgage-backed GET surcharge intended to fund Oahu downturn will continue as income securities that were sold to institutional rail transit, and reducing high tech and wealth losses undermine housing investors, a vehicle that dried up in 2008. tax credits. demand. Some help can be expected Other broad indicators of falling It was announced in mid-February from the Federal stimulus plan and statewide economic activity in 2008 that Hawaii’s share of the $787 billion State spending, but that will not offset are noteworthy. One such indicator is federal stimulus package would be the private contraction. More details auto sales, perhaps the biggest ticket $940 million over the next two years. and certainty must come from things item after home sales. The Hawaii While this will not solve the state’s like the Oahu Rail Transit project Auto Dealers Association reported budget deficit problems, it was welcome before they can be factored in with that in 2008 new vehicle registrations news. Because the injection will be any certainty. were an estimated 42,568, well below based on formula-based spending, Overall, as 2009 has begun, projections going into the year. The however, it was initially difficult Hawaii braces for what is likely to record for such a number was achieved to determine exactly how the state be a continuation and worsening of in 2005, with 70,268 new registrations. economy would be impacted. its most severe economic downturn at They have been falling since then, but Oahu home sales opened the year least since 1959 statehood. Any signs not at nearly so rapid a rate as in 2008. with a 46.5% decline over January of of optimism, such as the proceeds of Further declines are expected in 2009; the previous year, only 122 transactions. the federal stimulus or the rail transit in January 2009 the Association The median price fell to $539,500, a project, are either too vague or too released a sales projection of 36,000 for 10.1% monthly decline and the lowest far off to be much consolation in a the year. Tourists may not buy cars here, level since early 2005. But the mix of situation that remains quite downbeat.

8 | ECONOMIC FORECAST - SPECIAL REPORT 2009 IV. Local Attitudes Ironically, Hawaii’s superior image regions toward their area’s primary often has served as an impediment to economic engine. Even in areas, and toward Tourism: Where travel to the islands. For example, sometimes especially in areas where that you stand depends on corporate groups have been viewed engine has visible negative externalities as incurring unnecessary expense when — such as the local pollution associated where you sit they plan a Hawaii event or meeting. with heavy industry — residents are fully Hawaii is blessed with an enviable In today’s environment, heavy price aware that their living standards and number of assets that enhance its status discounting — in airfares, hotels, lifestyle would be far worse without it. as a visitor destination and make it activities, and other aspects of a Hawaii If tourism is viewed as not being superior to competition. These include vacation — make this an unprecedented consistent with community values, then its natural environment and cultural time to visit, and this can be an advan- it becomes difficult if not impossible heritage. Yet attitudes toward tourism in tage that counters the negative income to convey several important points. Hawaii vary a great deal depending on effects of a serious global economic Among them is an appreciation of the the perspective from which the industry downturn. But what CEO wants to fact that protection of Hawaii’s natural is viewed. This lack of consensus often be singled out as a spendthrift in the beauty enhances the local quality of life hampers planning and the optimal current situation because the organiza- as well as the visitor experience. It also development of the visitor product. tion plans an incentives meeting here? highlights respect for cultural values, Ironically, it seems to exist both in history, music, dance, and our traditions, good times and in not so good times Residents while at the same time it helps maintain like the present. This section summa- Enlightened residents recognize a natural spirit of aloha. rizes some of the disparities that exist the economic importance of the state’s And if tourism’s economic impor- in these views. 3 primary export engine. They may not be tance is not recognized by all Hawaii able to measure it accurately, but they residents, it hampers the ability of the Visitors do know it is critically large, which in tourism industry, others in private sector An overwhelming number of actual the final analysis is all that really counts. businesses, and government to garner and potential Hawaii visitors view the Unfortunately, there are sometimes the grass roots support for industry destination as a prime place to take a far too few of those who recognize the initiatives. Only marketing efforts that tropical vacation. This is particularly significance of tourism’s importance are internally as well as externally true among more educated and higher to Hawaii. There is often a strong focused can help alleviate this problem. income travelers. The downside of this unfounded perception of competition is that, with such high expectations, (versus partnership) between visitors Visitor Industry care must be taken not to disappoint and residents over limited resources. No component of the Hawaii them when they get here. Residents often identify the tourism economy needs convincing less about Most of the Hawaii visitor plant industry with the higher cost of living the importance of tourism than the compares quite favorably with that in in Hawaii, and also with traffic conges- visitor industry itself. The burden falls competing destinations. Unfortunately, tion. There is little appreciation that primarily on this sector to convince the same cannot be said for much of tourism has enhanced the quality of everyone else of tourism’s economic Hawaii’s infrastructure: parks, roads, life of our citizens and the economic importance. Unfortunately, however, and other public facilities. Airports are development of other industries, when those directly involved in any the first impression Hawaii visitors get e.g. music and agriculture. And thus industry preach the importance of their of the islands, and upgrades and main- this contributes to legitimate diversifi- business, it is often viewed as just another tenance there are essential. Visitors cation of the economy. lobbying effort. A major point of this should be able to expect safe and clean The result is an indifferent relation- paper is that tourism indisputably public facilities that do not suffer in ship among some residents with respect occupies a central pivotal role in the comparison to what they encounter in to tourism. One might think this Hawaii economy. This must be recognized other destination resorts. The latter ambivalent view would diminish when and appreciated by all of us. should not be seen as oases in what tourism is in as deep a slump as it is Coordination of this message within they sometimes perceive as a third today, but evidence from past periods the industry is critically important. world environment. of tourism contraction (such as the As with any human activity, internal mid-1990s) shows that is often not differences can arise, but these should 3 Some of the discussion in this section is drawn from the case. This indicates that the Hawaii Tourism Product Assessment, Vol. I, Executive be minimized. Strong leadership is Summary , presented to the Hawaii Tourism Authority ambivalence is quite deep-seated. essential. A recent State audit concluded by KPMG LLP, Laird Christianson Advertising, Inc., It is interesting that this ambiva- that the Hawaii Tourism Authority Yesawich, Pepperdine, & Brown, Market Trends Pacific, lence does not exist in many other Inc., and Group 70 International , Ltd., June 8, 1999. (continued on page 10)

ECONOMIC FORECAST - SPECIAL REPORT 2009 |9 Local Attitudes toward Government V. Quantifying Tourism: Where you stand Lawmakers and other government depends on where you sit officials are among the most important Tourism’s Total (continued from page 9) of those who play a role in determining Economic Contribution the future of Hawaii tourism. Often There has been some prior work lacked a long-term strategy for expand- these decision makers also take tourism on estimating tourism’s share of the ing the visitor industry. for granted. Hawaii economy, though not very Other industries in the private It would help if there were more of much recently. In March 1996, the sector can help, as can organizations a shared vision and coordination among World Travel and Tourism Council such as business roundtables, chambers state, county, and individual agencies (WTTC) based in London, England of commerce, economic development with regard to tourism policy and published a study that attempted to boards, and trade associations. In the planning. For example, in response to measure the tourism share of the Hawaii private sector outside of tourism itself, the economic slowdown, our four county economy. The approach used in their there are inevitably some of the same mayors have been meeting often to study was based on a “satellite account” misperceptions as those that exist address strategic initiatives, including methodology developed by Wharton among residents. While a hotel worker the federal stimulus package. Econometric Forecasting Associates may know how important the visitor Perhaps most important, however, (WEFA). The study was replicated in industry is, this appreciation may not is the fact that much of the same three subsequent years — 1997, 1998, be as great among those in non-tourism indifference to tourism’s overriding and 1999 — but it has not been redone retailing, certain components of the importance exists in the public sector since then. 5 construction industry, real estate, as in parts of the private sector and This series of WTTC studies found manufacturing, and business and among residents. Just as in the above that tourism accounted for about a professional services. (For example, discussion regarding residents and quarter of Hawaii Gross Domestic it takes a broader vision for a dentist other groups, the point bears reiterating Product and about one third of its total whose patients are only local residents that the critical driving link between employment. The specific numbers to appreciate the importance of tourism tourism and the overall economy needs contained in the last report (1999) than it does for a restaurateur whose to be emphasized more. were 26.3% of Hawaii Gross Domestic customers are mostly locals, but also Tourists do not vote in local Product and 32.1% of total employment include some tourists.) elections. Thus, if resident voters in the state. The employment share for There is definitely a general are ignorant of tourism’s economic Hawaii was compared to 13.2% for the awareness among businesses in the importance, perhaps it is rational overall United States and 8.2% for the non-tourism sector of Hawaii’s economy behavior among elected officials to world as a whole. Even though this that the visitor industry is the most reflect those views of their constituents series of reports is now ten years old, important among its major sectors. in their decision-making. This is likely the numbers they contain continue A recent survey by the Hawaii Business to be true in spite of more enlightened to be cited widely as the tourism share Roundtable and Pacific Resource views of tourism’s overriding importance. of the Hawaii economy. Partnership, for example, found that the In this regard, it is the education of The report also projected that by visitor industry ranked first (80% of all stakeholders together that is needed. 2010 the total employment share for those responding) in industry importance Without that unified support, not only Hawaii would grow to 39.6%. While and first in support of other businesses the tourism sector but Hawaii’s overall verification of this number awaits an and jobs (70% of those responding). economy will not achieve its potential. update of the 1999 report, it is plausible Other choices were the healthcare Never has this point been more crucial given the expansion of the state economy industry, the construction industry, and than in the very challenging times that 4 since then, an expansion that was the military and defense industry. the Hawaii economy now faces. driven in large part by tourism and changes in the composition of the local visitor plant. (Witness, for example, the large additions in time share that have occurred over the past decade.)

4 See The People’s Pulse , Winter 2009, sponsored by the Hawaii Business Roundtable and Pacific Resource Partnership (research conducted by OmniTrak Group, Inc.) 5 See World Travel & Tourism Council, Travel & Tourism and Hawaii’s Economy , January 31, 1997; WTTC Hawaii Tourism Report 1998 , May 20, 1998; WTTC Hawaii Tourism Report 1999 , June 1999. The Research and Economic Analysis Division of the State of Hawaii Department of Business, Economic Development, and Tourism is currently in the process of updating these studies, but that update was not available at the time this document was prepared.

10 | ECONOMIC FORECAST - SPECIAL REPORT 2009 It should be noted that all of these of it is spent on things outside the local 17% share for leisure and hospitality studies and the numbers included in economy, or imports. Among these jobs in 2008 establishment survey of them did not incorporate any economic three, it is imports that are abnormally jobs yields 44% of total Hawaii jobs multipliers, or the ripple effects of the large for the Hawaii economy, thus it directly or indirectly related to tourism. overall tourism industry as they trickle is this leakage that reduces the local It is possible to update these throughout various levels of the economy. income multiplier compared to that estimates of tourism’s share of the It was admitted that such multipliers for some other economies. Nonetheless, economy, using publicly available data. do exist, but conservatism dictated that 50% in additional induced spending Direct visitor-related expenditures in their exclusion. 6 This present document is significant and should not be ignored. the most recently available year of 2007 does make an attempt to incorporate The employment multiplier in at this writing totaled $14.5 billion. 7 multiplier effects, because to exclude Appendix II considers two types of (Of this amount, $12.8 billion was them can grossly underestimate tourism’s indirect jobs created by the tourism visitor spending, and the remainder overall economic importance. industry. The first is related to those was overseas airline and cruise line There are two types of multipliers who service the industry. Some of their spending. 8) That alone amounted to that should be considered — an job might be related to non-tourism almost 24% of state Gross Domestic induced income multiplier and an activities, but that part which is devoted Product that year. If that number is employment multiplier. An example of to tourism should be counted. The subjected to the income multiplier of the former is calculated in Appendix I second type of indirect job is related to 1.5, it becomes $21.75 billion — or of this document, and the latter in the induced income multiplier developed 35% of state Gross Domestic Product Appendix II. Both use conventional in Appendix I. In sum, Appendix II in 2007. formulas and logic, and both have been concludes that for every direct tourism Turning to job creation by the used in earlier studies. It should also be job in Hawaii, there are likely to be tourism sector, a total of 178,600 jobs emphasized that both are quite conser- about 1.6 other jobs that are created have been attributed to economic vative compared to multipliers that are indirectly. The reader is referred to activity generated by visitor-related often invoked. This conservatism is the two Appendices for more in depth expenditures in 2007 (direct impact adopted in order to avoid criticism that discussion of the logic underlying the only). 9 (The Leisure & Hospitality Jobs tourism’s economic impact is overstated. two multipliers. category in the establishment survey The income multiplier developed If one applies these two multipliers of jobs published by the State Labor in Appendix I is 1.5 — that is, for to the estimates contained in the WTTC Department, which includes only each dollar of expenditure injected study, the following tourism shares can “Arts, Entertainment, & Recreation” into the local economy by the tourism be derived. Subjecting the state Gross plus “Accommodation & Food Service” industry, there is another 50% that Domestic Product share above of 26.3% jobs accounted for 109,850 of that is induced as that dollar is spent and to the income multiplier of 1.5% yields total, or 61.5%.) If that number is re-spent. Those familiar with the use 39.45%. Of course, even this estimate accurate, then subjecting it to the jobs of income multipliers in economic can understate tourism’s economic role, multiplier of 2.6 yields 464,400 jobs, analyses will immediately recognize because if that approximate 40% were or almost 74% of the total jobs in the how conservative this estimate is. suddenly eliminated, the remaining 60% state in 2007 that were somehow Often multipliers of 2.0 or 2.5, or even would likely be seriously affected also. touched directly or indirectly by tourism. higher, are accepted as commonplace As for employment, adding the This number is a good bit higher than in economic impact studies. 1.6 indirect jobs to the 32.1% yields most people would guess. The main reason the lower income a staggering 83.5% job share that is Note that these figures should be multiplier is adopted here is that its somehow indirectly touched by the considered only estimates. They can value depends upon leakages from the visitor industry — over 51% more than change over time, varying with cycles income stream at each stage of the the estimated 32.1% share in the WTTC in tourism for example, and they are re-spending process. There are three study. If that 32.1% estimate already only approximations in the first place. general types of leakages from spending included some indirect jobs, this might Plus, the multipliers themselves are only that are usually considered — part of be considered an overestimate, but the estimates. The main point is that the the subject dollar is saved rather than point is clear. Just multiplying the 2.6 visitor industry is critically important spent, part of it is paid in taxes, and part jobs multiplier of Appendix II times the (continued on page 12)

6 See the introduction to the 1996 report by Richard R. Kelley of Outrigger Hotels and Resorts, “This multiplier effect, everyone agrees, does exist, but there has been no widely accepted formula for computing it; hence its exclusion from the methodology used here.” 7 See Hawaii State Data Book 2007 , Table 7.31. 8 Visitor expenditures cover direct spending by visitors staying overnight or longer, plus any non-overnight inter-island trips reported by these visitors. 9 See Hawaii State Data Book 2007 , Table 7.32.

ECONOMIC FORECAST - SPECIAL REPORT 2009 |11 Quantifying Tourism’s Total members project several major economic Thus, when one thinks of what Economic Contribution variables that affect taxes. The Council’s could have been done with the money, (continued from page 11) consensus forecasts of these independent the sum is quite significant. This fact variables serve as inputs to an econo- should not escape the attention of to the Hawaii economy. One can argue metric model maintained by Tax policymakers in these times of growing about the exact share. Using different Research and Planning in the Depart- State budget deficits, who must make techniques to calculate the multipliers ment of Taxation. It is that model that decisions on how to best allocate or the ultimate shares can cause the forecasts the General Fund, so the increasingly scarce public funds to estimates to vary, but the bottom line values of coefficients in the model make the economy better. And, note is that without the industry Hawaii’s provide quantitative information about once again that we have concentrated economy would essentially dry up. tourism’s economic impact on taxes. in this section only on one particular Anyone who argues with that point The January 2009 estimate of the tax fund, and the calculated effects is teetering on a very thin line. elasticity of state visitor arrivals on the have been partial even for that. General Fund — that is, the percentage Local Tax Impacts by which the General Fund will change Other Economic Benefits A major way in which the visitor for a one percent change is visitor The presence of the local tourism industry affects the Hawaii economy arrivals — is 0.23. That amounts to a industry bestows other benefits on is through tax revenues and fees. For $10.43 million impact on the General Hawaii that often escape attention. example, much infrastructure has been Fund. 11 Thus, in 2008, when total state Consider airlift, for example. As a a result of tourism visitor plant devel- visitor arrivals fell by 10.8%, there was consequence of having a dominant opment, including sewers, schools, an estimated 2.5% decline in the tourism industry, Honolulu residents water, roads, airports, and harbors. General Fund, or $112.64 million. have considerably more access to air So some calculations in that regard But that is not the total impact transportation than is the case for a also shed light on tourism’s importance. on the General Fund. The estimated city of a similar size that is not oriented A weak tourism sector obviously elasticity in the above paragraph is toward a visitor industry. means less that can be spent on public when all else is held constant . And of Examples illustrate this clearly. programs of any kind, and that affects course, in the real world, all else is If one divides available air seats by the standard of living and life style of never held constant. For example, population for four cities — Tucson, all Hawaii residents directly. a decline in visitor arrivals will cause Arizona, Tulsa Oklahoma, Fresno Estimated State taxes attributed Hawaii total personal income to fall, California, and Honolulu — by the to the visitor industry directly in 2007 and personal income is another population of those cities, the ratios amounted to $1.2 billion, or over 25% important variable in the tax forecast- depicted in Chart 2 (below right) apply. of the $4.7 billion in General Fund tax ing model. So consider the numbers Tucson, Tulsa, and Fresno were chosen revenues in 2007. 10 To put that total above as very conservative estimates because those cities are not very of $1.2 billion in perspective relative of the tax effects of the 2008 drop in dependent on tourism. (International to various individual components of the visitor arrivals. origins and destinations were excluded General Fund, it was almost half of the To put the $112.64 million number in computing these ratios, so as not to total General Excise Taxes collected in perspective, however, it is over half bias results in favor of Honolulu.) and three fourths of individual income of the total Transient Accommodation It is quite obvious that Honolulu taxes collected in the subject year. Tax (TAT) collected in 2008, and about has far more seats relative to population We also cannot neglect the fact 12% of total government contracts than the chosen non-tourist cities. that the tourism crisis in which Hawaii awarded last year. If that estimated Similar ratios were obtained when now finds itself is having an extremely figure is subjected in the income multi- calculated from departures and onboard serious impact on tax revenues. An plier derived in Appendix I of this passenger numbers relative to popula- example from the Council on Revenues document, it becomes $169.0 million. tion. This advantage is all the more of the State of Hawaii illustrates this. This, in turn, was almost 18% of total valuable when one considers the The Council does not forecast the 2008 government contracts awarded relative isolation of Honolulu. General Fund directly. Rather, its and 75% of the total TAT collected.

10 Hawaii Travel and Tourism Account and Table C-2, Quarterly Statistical & Economic Report , Department of Business, Economic Development, & Tourism, State of Hawaii. 11 These estimates are presented in Council on Revenues, Forecast of General Fund Tax Revenues, FY 2009 to FY 2015 , January 9, 2009, page 9.

12 | ECONOMIC FORECAST - SPECIAL REPORT 2009 VI. A Longer Term and dispersion across sectors of the to Hawaii, including a lack of nonstop economy. The current recession is flights and visa hurdles.) Tourism Forecast for unprecedented in modern times with This somber outlook is all the Hawaii respect to all three. So it is wise to more reason to do everything possible weigh that force more heavily than the to help the local visitor industry in its The present outlook for Hawaii fact that a Hawaii vacation is cheaper time of crisis. tourism is not optimistic. The State’s than in years. Thus, while there may own forecast for 2009 visitor arrivals is be some recovery in the Hawaii visitor a 5.9% decline. (Using the tax revenue industry in 2010, the increase in arrivals VII. Conclusion numbers in the preceding section, that will likely remain almost flat, in the Various things should be clear means another $61.53 million decline very low single digits at best, for 2010. from this paper. Foremost, the tourism in General Fund tax revenues related We can hope for better performance industry has an overwhelming economic to that figure alone .) by 2011, but the increase in arrivals importance for Hawaii. That is true Anyone who claims to know with may still remain in the low single even if the empirical evidence presented any certainty how Hawaii tourism will digits. A reasonable scenario for visitor here overstates the case, even though fare in 2010 and 2011 should immedi- arrival growth at present might be determined efforts were made to choose ately be suspect. But it is rather clear -6.0%, 1.0%, and 3.0% for the years conservative estimates. that tourism will be dependent to a much 2009, 2010, and 2011, respectively. Despite this, the local tourism greater extent than usual on how quickly We can always hope for better industry is underappreciated by many the national economy recovers from outcomes, but much of this will depend who should know better. More than that, its worst recession since the Great on whether we get any good news the industry is now challenged as never Depression of the 1930s. In the current coming out of the national and global before. It is imperative that this fact be environment, tourism forecasters need economies. We should bear in mind recognized, and that all possible actions to counterbalance two opposing forces. that long distance travel to a place like be taken to remedy that situation. If that The first is the negative wealth effect and Hawaii will not likely be among the does not happen, or until it does, the extremely weak consumer confidence first things to recover when the economy Hawaii economy will remain anemic. that accompanies the very ill economy. does start to grow again. We can pin Employment in all sectors will be down, The second is heavy price discounting some hopes on new markets such as as will tax revenues, business profits, in the Hawaii tourism industry itself, Korea and perhaps China, but those and overall economic well being. along with lower airfares that are related markets will remain small enough that It has not been the purpose of this to cheaper energy prices that are them- they cannot provide a major boost in document to recommend marketing selves a result of that recession. the near term. (The signing of a mid- strategies or new tourism products. Economists often speak of the three 2008 U.S. - China agreement raised Some have suggested recently that a “D’s” when measuring the seriousness hopes, but there are several stumbling new frugality has become a permanent of a recession. These are depth, duration, blocks to getting more Chinese visitors fixture of American consumerism. That would point to repositioning Hawaii as more of a budget destination, away from CHART 2* • SEATS (LTM ENDING NOV-08) PER MSA POPULATION the upscale image that many have tried 12 to cultivate here over the years. Another perennial suggestion that 10 keeps coming back from time to time is the introduction of casino gambling. 8 It is the opinion of this paper that the temptation to introduce gaming 6 to Hawaii be resisted. Regardless of opinions on the social costs, the 4 comparative advantage principle can

Yearly Sales per 1,000 Yearly be invoked once again. Other places 2 that did not have such an advantage have been disappointed when they 0 adopted gambling, and even places Tucson, Arizona Tulsa, Oklahoma Honolulu, Hawaii Fresno, California that do have that advantage — like * Ratios were calculated as seats (for the 12 months ending in November 2008) per 1,000 inhabitants (in July Las Vegas — are suffering in today’s 2007) from U.S. Department of Transportation data. (The author would like to thank Frederic Proute, Senior (continued on page 14) Director - Financial Analysis, Hawaiian Airlines, for this data. )

ECONOMIC FORECAST - SPECIAL REPORT 2009 |13 Conclusion Bibliography (continued from page 14) APPENDIX I. Council on Revenues, Forecast of General Fund Tax Revenues, FY 2009 An Induced Income Multiplier economy. Gambling usually works for the Hawaii Economy better in places that are large enough to FY 2015 , January 9, 2009. Most people, even those who have to absorb its potential unsavory effects, Hitch, Thomas K. How the Collapse never had any formal exposure to or that are so poor that they have no of the Sugar Industry Would Impact on economics, understand the principle better economic alternatives. Hawaii Hawaii’s Economy , monograph circulated 12 that any injection into an economy is not that large, nor is it that poor. by First Hawaiian Bank, December 1987. Specific marketing strategies can does not stop at the injection point. be brainstormed by the experts in that First Hawaiian Bank Research There are further ripple effects area. But several things seem obvious Department, The Impact of Exports on throughout the economy. If one dollar regardless of what these might be. Income in Hawaii , 1961. is spent on something, the person Reducing public funding for tourism who receives that dollar will spend a marketing will be unthinkable for the Hawaii State Data Book 2007 portion of it on something else, and then a portion of that portion will next several years, regardless of the Hawaii Tourism Product Assessment, be spent, and so on. Thus, the total search for ways to find money during Vol. I, Executive Summary , presented economic contribution of the original these hard times. That is because tourism to the Hawaii Tourism Authority by injection can be much larger than the marketing is an investment in jobs, KPMG LLP, Laird Christianson initial outlay. There is a “multiplier” future tax revenues, and economic well Advertising, Inc., Yesawich, Pepperdine, effect.* being for everyone in the state. With & Brown, Market Trends Pacific, Inc., fewer people traveling in these times, and Group 70 International, Ltd., This multiplier can be applied to it is essential to attract a larger share June 8, 1999. of them to Hawaii. Investing in tourism any expenditure to measure its total impact on the economy. Note that is the fastest road to economic recovery Leroy O. Laney and David McClain, after the first round, it makes no for Hawaii — perhaps the only one. “Should Hawaii Roll the Dice on difference what the original injection Now also is the time to upgrade Gambling?”, Price of Paradise , Volume II, is — that is, what the wages are in parks, infrastructure, harbors, marine pp 101-107. facilities, roads, trails, and other public that industry and the like. After that, places. In this regard, the State’s recently The People’s Pulse, Winter 2009, the money is circulating in the general proposed five-year plan for the Depart- sponsored by the Hawaii Business economy and it is only economy-wide ment of Land and Natural Resources Roundtable and Pacific Resource averages that count. Partnership. is a good investment. Temporary The problem comes in calculating an closure of some parks for renovation World Travel & Tourism Council, accurate value for the multiplier. This and admission fees for others makes Travel & Tourism and Hawaii’s Economy , value is sometimes subject to manipu- economic sense. January 31, 1997; WTTC Hawaii lation. Those wishing to convince In general, a renewed focus on Tourism Report 1998, May 20, 1998; others that a certain undertaking will Hawaii’s core business is necessary. WTTC Hawaii Tourism Report 1999, have a big impact want to see a big Without that focus, it will not be June 1999. multiplier; those who do not favor the strategically positioned for long term project might lean toward a smaller one. growth. Long term growth is critical for the economic well being of every- one who lives and works in Hawaii. That will take cooperation among all stakeholders — businesses, government, unions, and community leaders among them. Without such cooperation, the entire economy may founder in this time of crisis that is not likely to blow over quickly.

12 The author has not changed his mind on this over * This effect was originally pointed out by John Maynard Keynes in his seminal book, The General Theory of the years. See Leroy O. Laney and David McClain, Employment, Interest, and Money , published in 1936. This was during the Great Depression, and multipliers “Should Hawaii Roll the Dice on Gambling?”, Price would likely have been larger in a situation like that than when the economy is closer to full employment. of Paradise , Volume II, pp 101-107. But Hawaii’s economy today certainly is not at full employment.

14 | ECONOMIC FORECAST - SPECIAL REPORT 2009 Essentially, the value of the multiplier consume 90% of their income, the So that yields, depends upon “leakages” from the marginal tax rate is 30%, and 15% 1/[1 - (,90 - .40)(1 - .35)] = 1.5 income stream at each stage of the of goods consumed are imported, then re-spending process. The greater these the multiplier becomes While this multiplier is lower than many might have in mind when they leakages are, the quicker the subse- 1/[1 - (.90 - .15)(1 - .30)] = 2.1 quent spending will be attenuated think about it conceptually, it is more and the smaller the multiplier will A number of that magnitude is about defensible from the standpoint of be. The smaller the leakages are, what most people have in mind when realism. This is the number used for the more potent the multiplier is. they think of a multiplier, often even the multiplier in the text. The multi- There are three such leakages that are larger. (If only the marginal propensity plier could, of course, be higher — usually considered — savings, taxes, to consume c is considered, the multi- but it is in the interest of conser- and imports. For example, if Hawaii plier formula would be only 1/[1-c] vatism that this lower estimate is visitors inject $10 billion annually and it would equal 10 — far too high.) chosen. Although it is lower than into the state economy, the recipients So if that 2.1 number were applied to what many would assume, it still of that money will not spend all of the $10 billion above, the total tourism means that the ultimate impact of that. They will save some of it, be impact on the economy would be any injection is 50% greater than its required to pay some of it in taxes, $21.0 billion. direct contribution. and part of what they do spend will (Some recent trends in the Hawaii be on items that come from outside Yet the assumed numbers above might not be appropriate for an economy like economy would tend to lower the Hawaii — thus it will leak out of the actual value of the multiplier as local spending stream that way. Hawaii. Better estimations of numbers that are more appropriate for Hawaii compared to the past. One is the So, the higher tax rates are, the can be had by resorting to actual data tendency to import more over time greater the propensity to save, and on the economy. It might be reasonable as the world economy — not just the greater the tendency to buy to assume the marginal propensity to Hawaii’s — becomes more global. imports is, the smaller the multiplier consume is still .90, but tax brackets In addition, the tax burden has risen will be. Naive multiplier calculations and the marginal propensity to import over time.** Plus, when the economy often consider only the propensity to would likely be higher for Hawaii. is close to capacity, there is less room save, because that is how it is usually A tax rate of .35 is more reasonable, as for the multiplier to have its full presented in an economics principles is a propensity to buy imports of .40. effect. Obviously, if we took every text — and this is one reason multi- (Ultimately, practically everything we economic activity in the state now pliers are sometimes overstated. But consume in Hawaii comes from outside and subjected it to a multiplier, we if people save nothing, if tax rates the islands. But if something is built would get a sum far greater than are zero, and if they only buy things here, cooked here, or otherwise creates the State Gross Domestic Product. produced locally, the multiplier is local jobs, it is fair to consider it a But that Gross Domestic Product is unbounded. That obviously does domestic item for the purposes of this supposed to include many indirect not happen. analysis. And local services, which are multiplier effects. In times of recession an important part of any budget, must or slack economic activity, however, Without deriving it, a simple formula come from here.) incorporation of the multiplier effect for an “open economy” multiplier is — is far more plausible.) 1 / [1 - (c - m)(1 - t)] where c represents the marginal propensity to consume out of one dollar of income, m represents the economy’s marginal propensity to import, and t is the marginal tax rate. For example, if people generally

** Earlier and larger regional multipliers for the Hawaii economy may have been more realistic then than they are today. One used in a past study on the sugar industry by First Hawaiian Bank was 1.72 . See Thomas K. Hitch, How the Collapse of the Sugar Industry Would Impact the Hawaii Economy , monograph circulated by First Hawaiian Bank, 1987.

ECONOMIC FORECAST - SPECIAL REPORT 2009 |15 Let us assume that 40% of the money APPENDIX II. disbursed by a tourism activity goes to A Jobs Multiplier for the the direct creation of jobs. (This might vary by organization, but it is typical of Hawaii Tourism Industry a major hotel chain.) Of the remaining The derivation of an appropriate 60%, let us also assume, following jobs multiplier here follows the Hitch, that about half becomes income methodology of Hitch.* While the to residents of Hawaii (firms or individ- estimates used in deriving this multi- uals) — about 30% of the direct plier might vary some across industries, disbursements of the company, with and may also have changed in minor 30% leaking out of state. This means ways since the time of the original that, if the 30% income which stays study from which it is taken, there within the state creates a commensurate is little reason to believe that the number of jobs, there are close to as results would be changed a major way. many indirect jobs created by the Hitch divides jobs created by an industry as there are direct ones, 75% industry in Hawaii into three levels: in fact (30/40 = .75). (1) The direct jobs are those in The third category of indirect multiplier the industry itself. jobs can then be derived by resorting to (2) First round indirect jobs are the overall regional multiplier derived those that are created by in Appendix I. those who service the industry, such as local suppliers of To summarize: construction, grounds keeping Level 1: direct tourism job 1.00 and other maintenance, Level 2: indirect tourism job .75 transportation, communica- Sub-total 1.75 tions, food, legal, etc. These Level 3: induced multiplier suppliers may service others effect x 1.50 besides the tourism industry, but at least a large part of 2.63 their job is owed to tourism. Subtracting the 1.00 for direct tourism (3) Indirect multiplier jobs that jobs means that there approximately are created. For example, when 1.6 jobs in Hawaii that are created employees in categories (1) indirectly for every job created directly and (2) are paid, they spend by the tourism industry.** most of their paycheck in the local economy. Those who supply those general goods and services therefore also benefit from the tourism industry. The multiplier in this category corresponds to the overall regional multiplier derived in Appendix I.

* Hitch (op. cit.) , p.3. This jobs multiplier methodology was originally estimated by the Research Department of First Hawaiian Bank in 1961, and was published in a study entitled The Impact of Exports on Income in Hawaii . ** Hitch arrived at a number of 2.29 instead of 1.63, but that was because he used an induced income multiplier of 1.72 instead of 1.50 and made slightly different assumptions about indirect jobs. As explained in Appendix I, today the income multiplier might be smaller than it was in earlier years, thus a more conservative number is adopted here.

16 | ECONOMIC FORECAST - SPECIAL REPORT 2009 ECONOMIC FORECAST - SPECIAL REPORT 2009 © FIRST HAWAIIAN BANK