The Hawaii economy is seriously deficient in a number of the basic building blocks of economic growth, including (but not limited to) human capital formation by Hawaii’s youth and the legal and regulatory frameworks that support markets.

Increases in the quality and quantity of an average worker’s K-12 education should, if the employer provides a set of clear incentives to the worker, increase output per hour of an average worker, raise worker wages, and in the aggregate contribute to economic growth. A higher quality workforce will attract firms to Hawaii that offer higher paying jobs, and if some graduates still end up on the mainland, the sons and daughters of Hawaii will still be earning more and living a better life because of their quality education.

The three governors argue that the public school system is plagued by a lack of accountability for poor student performance. To remedy this, they join many other politicians and analysts in proposing a Governor-appointed rather than an elected [Hawaii State Board of Education|Hawaii Board of Education]. Whether this will be the key ingredient in reforming Hawaii’s public schools remains to be seen, but clearly, a mechanism is required that either provides students in poorly performing schools with more educational choices, and/or triggers rapid changes in the quality of education offered by those schools. Hawaii has in fact been reforming public education for the last two decades, with school principals now controlling a much larger proportion of school budgets.

But the decentralization reforms have generally avoided policy changes that are opposed by the massive State education bureaucracy or the unionized teachers or the unionized principals. How will the system work if some of a school’s problems stem from the principal’s poor leadership and decisions and it is still difficult to replace a school’s principal? This raises a more general question: Are the reforms sufficient to achieve the desired results, or are they still missing key ingredients? Ongoing reforms to education in Hawaii have been diminished by this problem. A key role of the next governor is to ensure that after all the politics of crafting legislation has been completed, a mechanism for bringing good schools to all Hawaii neighborhoods is still in the legislation.

Hawaii’s legal and regulatory frameworks have four problems that greatly reduce their effectiveness in many cases, and cause the systems to be dysfunctional in other instances. First, they are often outdated in their general approach to regulation. Consider the Public Utilities Commission, the State agency that regulates or monitors some firms in the energy, petroleum, transportation, telecommunications, and waste water industries. Its case-oriented method of conducting business has changed little since statehood. The three-member Commission has few resources to either review its own methods or to analyze whether regulatory techniques pioneered in other states could be productively used (with some modifications) in Hawaii. A full review of the Commission’s structure, responsibilities, and resources is long overdue, and could eventually lead to more efficient operations in the industries that it regulates, or a change in the set of regulated industries.

The second major problem with Hawaii’s legal and regulatory frameworks is that we rarely study how proposed regulations could affect future economic growth, and whether actual regulations have affected economic growth. For example, the three-decade-long battle over developer provision of low- and middle-income housing ignores economic analysis that highlights the inefficiency of housing set-aside policies. The Hawaii State Tax Review Commission has regularly found that industry tax credits are inefficient methods for stimulating new firms to enter an emerging or established industry. In both cases, more efficient tools are available to achieve desired results. It is striking that the Hawaii State Government does not have more explicit mechanisms in place to flag and revise problematic bodies of regulation.

Third, Hawaii’s legal and regulatory frameworks often provide few incentives for public agencies or regulated firms to “get the prices right” on their products. Agencies are often reluctant to utilize pricing methods that allow public infrastructure to be used more intensively in some cases and less intensively in others. For example, University of Hawaii classrooms are used less on Fridays and between 3 p.m. and 5 p.m. By offering tuition discounts for classes held at under-utilized times, UH could hold more classes in the same number of buildings — a big consideration, since so many classrooms need repairs or replacement.

Prices that are set uniformly low (e.g., the congested H1 highway never charges a toll) often produce revenue streams that make it difficult to maintain existing infrastructure or to initiate such projects as rail transit on a sensible scale and in a timely manner. Rush hour pricing on the H1 could also reduce traffic congestion substantially, reducing the need to expand highway capacity. More careful pricing of renewable natural resources, such as water, could delay the date when we will need to build costly desalinization plants. The list goes on, and could produce substantial savings in the amount of public infrastructure required to produce some public services.

Finally, the State of Hawaii has not devoted nearly enough attention to implementing a regulatory framework to ensure that the vast natural resources of Hawaii are properly managed and conserved. Starved for funds, the Department of Land and Natural Resources struggles to manage effectively the lands and resources under its stewardship. In the absence of effective systems of management and regulation, private users of Hawaii’s public resources take actions that diminish their value. Moving quickly to implement modern systems of regulation and management is vital if the resource waste is to end. It should be a top priority of the next governor.

Is it possible to identify and develop a set of public policies that promote the basic building blocks of economic growth? Yes, the big issues facing the State have workable solutions. The challenge for the next governor is to ensure that the State focuses its reform efforts on the basic building blocks of growth. It’s not that complicated.