Howzit Howard

What officials have to do, or want to do, about the economy

Two bits of news Tuesday about the big picture economic crisis: + The Senate will consider restricting oil speculation. + The Fannie/Freddie bailout will cost at least $25 billion. Both stories are a bit more complicated than that, but the full situation is easily explained. What senators did was vote 92-0 to remove a procedural impediment to debating limits on oil speculation. This is a long way from action, and a lot of senators don't think there is anything they could do that would have a practical effect on the situation. They may be right. Oil speculation IS exerting upward pressure on oil prices. But no U.S. action can make markets in other countries stop the buying and selling of oil contracts by an endless succession of self-appointed middlemen who want to make a quick profit in the middle space with ever touching the oil itself. Also, the speculators aren't individuals with pin-wheel eyes -- they're pension funds and other institutional investors big enough to afford lobbyists. So don't expect any useful action on this front. As for the bailout, the key point is that $25 billion is merely the figure that will be put into the federal budget, for starters. The true cost could go much higher, because there is really no alternative to pumping billions into Fannie Mae and Freddie Mac so these federally-sponsored but independently-managed mortgage guarantors and resellers can buy, bundle and flip the mortgages that bankers cannot currently sell on securities markets themselves. This, by the way, could become politicized. The Wall Street Journal, whose editorial page drives much of the ideology of the Republican Party these days, has lately made a point of mentioning that Sen. Chris Dodd of Connecticut, the Democratic chairman of the Senate Banking Committee, got a sweetheart mortgage deal from Countrywide Financial, the leading apostle of subprime mortgages and perhaps more responsible than any other company for the mess the country is in. The Journal editorial writer is to be commended for also noting that a lot of Republican members of Congress also supported the wild mortgage market. It seems pretty clear from this distant non-partisan vantage point that a lot of otherwise bright people on both sides of the aisle simply assumed nothing would go wrong. Politicians want to DO something, and to be seen as doing something, about current economic travails. They can start by realizing that the economy is important and they're going to look really stupid if they rubber-stamp any "solutions" that lead to future crises. I mention this in part because financial institutions are lobbying hard for the least possible increased regulation and oversight. This is exactly what led to the current emergency. In an environment of little oversight and regulations, lenders other than banks sold loans to people who couldn't afford the payments, and a lot of players who might not have done this on their own felt obligated to join the crowd, since the crowd was making higher profits at first. And it's always like that. The only way to prevent risky behavior is to forbid it with some clarity. Lenders who are naturally sensible need the reassurance that their competitors can't do these foolish things either.

Glasses part-full and part-empty

As the Hawaii economy cools, one of the most important services I try to provide is a measured view of how good or bad the situation is. In other news stories it often falls to a reporter or commentator to "bottom line it" for you, but in economics many stories are both good and bad. During the economic boom we so recently enjoyed, home prices soared, which was great if you owned a home whose value was soaring, but for a young couple looking to get into home ownership for the first time, there was nothing enjoyable about it. Now prices are easing back down, and mortgage rates are still low, so it's a better situation for that young couple, provided their jobs don't go away in a downturn. Most jobs won't go away, so most would-be first-time homeowners are better off now, in a downturn, than before. Russ wrote a couple days ago accusing me of bias because I "fail to mention" that home prices "are set to crash." Home prices are not set to crash. Current indications indicate a gentle decline that will leave home owners retaining much of the value they accrued in the boom. I will go further and say that if the economy worsens to the point where home prices plunge, we will be in an unforeseen situation so dire that falling home prices will be the least of our troubles. (Interesting tidbit: you would think that realtors would prefer boom times because their sales are easier and their commissions are greater, but while that is collectively true, boom attract a lot of extra people who want to be realtors. In gentle slowdowns, the newsbies tend to go into other work, leaving a clear field for the professionals.) While I'm mentioned reader responses, check out Makistar's interesting comments about Canadian tourism and related topics. Maki suggested we're not new and exciting any more. One day maybe I'll post some thoughts on the renovation of Waikiki, and what still needs to be done in the paved paradise where I happen to reside.

The two Kona economies

I was on the Big Island over the weekend, emceeing an evening of Rodgers and Hammerstein songs at the Aloha Theatre in Kainaliu, part of the Hawaii Performing Arts Festival. And, being there, I asked a lot of questions about how tourism is going. To some degree it is going better on the Kohala coast, where the big resorts, are than is the case down in Kailua-Kona itself. This is not to say that places like Hilton Waikoloa Village and Four Seasons Hualalai haven't seen the slump, but it's more apparently in Kailua-Kona itself. I've never seen the seawall so empty on a Sunday in July and some of the shops were ghost town spooky empty. It was a far cry from the salad days of three NCL ships, when the biggest problem these retailers faced was finding enough help to handle boat days. One problem may be accurate accounts by recent visitors to their friends back in California about the vog. It continues to produce a hazy, featureless sky, the sort you often see in the Los Angeles basin. Another could be the still-awful traffic on the road between Kona airport and the mall district above Kailua-Kona. Widening has relieved the northbound gridlock but southbound it still slows to stop-and-go, even in the middle of the day and on weekends. People who daily fight similar traffic over longer distances in the San Francisco and Los Angeles areas aren't going to enjoy their Big Island vacations as much if they have to add half an hour of traffic jam time to any foray from Waikoloa to Kailua-Kona or points south. It would be interesting if this proved to be a boon for out-of-the-way lodgings like bed-and-breakfasts in Hilo or that place that hangs over the edge of Waimea Canyon. Some stray notes in case you were thinking of a weekend visit to the Big Island -- the main restaurant at Hualalai Resort is exceptional -- a little seafood restaurant in Kawaihae across from the storage tanks does a good seared poke dish -- the Saddle Road has been further improved and is quite easy to drive now.

Where can we get more visitors?

With visitor traffic ebbing from the record levels of a year or two ago, there has been much discussion of possible sources of additional visitors. A thoughtful post by a reader of this blog (check out the comments from time to time) set me to thinking about this. He correctly notes that most Chinese tourism is tour groups. The significance of that is that we may be able to lure regular charter flights even if we don't have direct scheduled airlift from China. I had remarked on the air that the potential of Chinese tourism here isn't as great as some people say, because there are no direct air connections. Everyone who pushes Chinese tourism points out that it's the world's biggest outbound tourist market, which is true, but it's also true that the vast majority visit countries adjacent to China. In fact, most visit the countries adjacent to their home provinces. But that doesn't mean we can't make a good living showing hospitality to the Chinese; it just means, let's be realistic about the scale of the potential market. South Korea, a nation of 50 million and Asia's third biggest economy, has more immediate potential because it has scheduled KAL airlift from Seoul. Taiwan has about 25 million people and direct China Airlines connections to Honolulu. It would be difficult for these places ever to send us as many visitors as we get from Japan, which has almost 130 million people on as much land as California. But it may be possible to get enough to make up for the decline from peak levels of Japanese visitors. The Hawaii Tourism Authority has contractors working on it. The Philippines, with 90 million people, has greater potential now than formerly, now that Hawaiian Airlines has joined PAL in flying between Honolulu and Manila. But like China, the Philippines may not be as big a potential market as it looks. A fifth of Hawaii residents have ethnic ties to the Philippines, but a very large number hail from Ilocos Norte and Ilocos Sur, and these two provinces together have a population of only about 1.1 million, roughly the same as Hawaii's population. And it takes a lot of Philippine pesos to afford a Hawaii vacation. (The Philippine peso is so low against most world currencies that expatriate Filipinos can work comparatively menial jobs in other countries, mail a small amount of money home, and when it arrives it's a fortune. The last time I checked, 11% of the entire Philippine GDP was remittances from expats working on cruise ships or as au pairs in Dubai or Hong Kong, etc.) It won't surprise me if the real tourist traffic winds up going the other way. Most Hawaii residents with family ties to the Philippines are curious about the country and would enjoy visiting if the amenities are good. My online correspondent mentioned that Canadians aren't much of a solution to the tourism problem because they don't spend much. This has actually changed recently. Many Canadians are regarded as cheap by the people selling $50 sunglasses for $250 on Kalakaua Ave. I wouldn't say cheap, I'd say smart -- they take DaBus to da outlets in Waikele. And you know what? A lot of Japanese visitors on their third or fourth visits are that smart, too. But the Canadians, to get back to them, have been spending a lot more this year as a result of the Canadian dollar reaching parity with the American dollars. (A few years ago it took 1.25 Canadian to buy 1.00 American; the change has put Hawaii on sale for Canadians.) Anywhere else we can get visitors from? New Zealand has 4 million people, most of whom have an appreciation of indigenous culture that makes them especially welcome here. But a New Zealander who just wants sun and fun can more easily visit Tahiti. Australia has 22 million people -- Sydney alone has 4 million -- and ample direct air connections from Qantas/Jetstar and Hawaiian. So far, though, many Aussies prefer Bali. It may be that the easiest way to recover lost visitor traffic will be to work with travel agents on the U.S. mainland to make Hawaii more convenient, affordable or fun for mainland Americans. Using the analogy of arguments for Chinese tourism, it's a huge market, there's no visa problem, and these people have ethnic ties to us!    

How labor contracts are negotiated

The layoff announcement at the Honolulu Advertiser, the contract settlements at TheBus and the Holiday Inn Waikiki, the longstanding labor unrest at the Pacific Beach Hotel, and the closure of Aloha Airlines, have all brought back memories of past experiences as a contract negotiator. I thought I would dredge up a few of these memories here to encourage all sides to try to see things from each other's point of view. Here's my background in this area. At the Mutual Broadcasting System I was an AFTRA shop steward and then promoted into management. At United Press International I was a Wire Service Guild shop steward and then promoted into management. At both places I was on contract negotiating teams from both sides of the table. The first observation I'll make is that there is a remarkable similarity to the job of union negotiator and that of management negotiator. In each case you are not only bargaining for the best possible deal from the viewpoint of your own side, but you also have to bargain with your own backers, some of whom will invariably believe that you should have won more. The union negotiator can be hamstrung by the expectations of his own rank-and-file, while the corporate negotiator can be hamstrung by the expectations of other members of management who do not themselves do any negotiating, or, in other cases, by orders from a head office in some other time zone. At Oahu Transit Services, the company the City & County of Honolulu created to run TheBus, for example, the city tells the transit company what its budget is. The Teamsters negotiate with TheBus, but beyond a certain point the union may sometimes find itself negotiating on a second front with the city to try to get it to free up more funds. At The Honolulu Advertiser, local management answers to Gannett corporate headquarters and may have its hands tied in certain respects relating to everything from money to how bargaining is handled. (We tried to get both sides on "Sunrise" separately Thursday morning; the union agreed but management didn't. Sometimes it works the other way around. But I don't automatically assume the local person says no because I know there are sometimes specific procedural orders from headquarters.) At the Pacific Beach Hotel, the ILWU would like to negotiate with the daughter of the founder, but she has delegated the management of the hotel to others, and those others have shielded her from negotiations. They are right to do so, however, if she is not a professional bargainer herself. At UPI, one of our CEOs wanted to intercede personally in contract negotiations but was dissuaded from doing it by our professional negotiator, a lawyer who specializes in contract talks. The lawyer explained that you hold the CEO in reserve in case a stalemate ensues and you decide to make one last offer to try to break it. Both sides use this technique. Certain professional courtesies are common in labor talks, too. For example, I was visibly surprised on the air Thursday when the newspaper union leader Wayne Cahill said he found out about the Advertiser layoffs from a writer. I blurted out that it was a breach of etiquette if he didn't get a courtesy call from management. It is, generally speaking, considered good form for the two sides in contract negotiations to refrain from public comments on bargaining so long as the bargaining is progressing well. I have seen this etiquette erode over the years, partly because so many talks drag on for months or years. It's also true that management tends to have a predisposition not to talk while unions are under pressure to make public comments. This is because corporations get into the habit of not blabbing every little bit of information their competitors could use, and secrecy can become a habit, while union leaders are only as strong as their membership and sometimes need to rouse their members if they are to negotiate a ratifiable contract. Talking versus keeping things to yourself has an analog in contract talks where an employer is seeking concessions. Companies that are in financial trouble will sometimes also show those financials to their labor unions when asking for givebacks. If they think a union leader will have a tough job selling givebacks to rank-and-file, but the financial problems of the company are genuine, they will prove to the union leaders that this is so, allowing him to tell his people he saw the books and, yes, the company is toast unless it gets X and Y and Z. This flies in the face of the strong desire not to talk about such stuff, and one reason it happens is that the same information has to be shown to prospective buyers during due diligence. If a company is not for sale, the management is less likely to do this. When a local operation is part of a bigger company, the bigger company may have its own issues that delay resolution of bargaining talks. Mainland hotel chains understand that compensation for hotel workers needs to be greater in more costly cities -- like Honolulu -- but usually delay settlement in Hawaii so as not to give false hope of parity in markets with much lower cost of living and lower standard wages. I think there have been times when Local 5 basically had deals with Hilton or Starwood but had to wait for the mainland locals to settle first. The Advertiser is also part of a chain -- Gannett owns more than 50 newspapers -- and some similar factors might be in play. Sometimes contract talks are affected by other outside factors. The union for state government employees has an economic interest in bargaining to impasse, because state law brings in a mediator, the mediator usually comes close to splitting the difference, and this arguably results in a better agreement for the workers than settling otherwise. (Some state government officials believe the system as now set up results in virtually all increased state tax revenue going to state employees, creating a situation where everything else has to be resolved by raising taxes or cutting spending.) It is not easy to be a contract negotiator, on either side. Both sides are quick to second-guess the negotiators -- and, by the way, quick also to interpret any sympathetic coverage of one side as signifying lack of sympathy for the other side. The sturm und drang of labor negotiations will be even dicier over the next couple years as our economy cools, making it more difficult to hammer out contracts both sides can live with.  

A new kind of solar power

The new solar panels at NELHA representative a different kind of solar power technology that bears watching. It's still about the rays of the sun producing current -- the big word for this kind of power is photovoltaic -- but the method and material differ. Mountainview, Calif.-based SolFocus Inc., which had a Hawaiian blessing for the NELHA facility Wednesday, converts light energy into electrical energy in the same way as convention solar panel, but adds an optical system to focus a large expanse of sunlight onto each cell. There are different degrees of magnification but the panels can get ten times to several hundred times the oomph from a ray. And the cell is made of germanium rather than polysilicon, which is currently the almost omnipresent material for solar panel. Germanium cells convert 35% more power than polysilicon. Gary Conley, CEO of SolFocus, says power generated from the NELHA (Natural Energy Laboratory of Hawaii Authority, next to Kona airport) facility will be donated to the power grid.

Advertiser layoffs: Read all about it (online)

The Honolulu Advertiser announced Wednesday it is cutting 54 of its 576 staff positions. Affected employees will be told by their supervisors. You can read about it here for free, and that's part of the problem, but only part. Honolulu newspapers face the same issues faced by newspapers across the nation, plus some special ones unique to Hawaii. Newspapers across America have been cutting staff positions -- the Atlanta Journal-Constitution announced 184 job cuts Wednesday -- as they lose ad revenue to online media. Gannett Corp. posted a $233 million quarterly profit Wednesday that was down 36% from the same time last year (18% if you dial out one-time profits from selling some newspapers last year) and said its revenue was down 10% from $1.9 billion to $1.7 billion on ad revenues down 8% and classified revenues down 19%. Gannett owns the Advertiser. In addition to having to deal with that national trend, the Advertiser exists in a rare situation -- one of the nation's last two-newspaper markets. A Canadian media magnate who likes to come to Hawaii to sail bought the Star-Bulletin and is keeping it going at a loss, assisted by decent revenues at affiliated properties, especially MidWeek. So newspaper ad revenues in Honolulu are not a monopoly. In addition to that, Honolulu has Pacific Business News, Honolulu magazine, Honolulu Business, and other publications, as well as five television stations that have full-fledged local newscasts. This is a lot of ad choices for a market this size. It mitigates against higher ad rates. The Hawaii Newspaper and Printing Trades Council, which has been negotiating with the Advertiser for more than a year since the expiration of its last contract, got a pre-echo of all this Tuesday when the newspaper, saying it needed some economic relief, proposed sweeping contract givebacks including longer hours, flexible job descriptions, loss of unused sick leave, the prospect of freezing pensions, lower wages for new hires, and broad freedom to eliminate jobs through outsourcing. One interesting proposal for outsiders watching all this: the Advertiser wants to be able to order writers to take pictures, photographers to write, and everybody to shoot video. The all-news station in Washington, D.C., for which I worked before moving here, and for which I still file (my third job!), has reporters who shoot video for its website. A RADIO station, mind you. The history of news media is that each new medium gains ascendancy and then the older ones find permanent niches. They never die completely (cunieform excepted) but shrink to a size they can sustain by doing what they do really well. When TV came along, radio imploded. No longer did their commercial revenues support live dramas with a half dozen actors and a booth announcer and three or four people in the control room. No longer did a music host have his own engineer controlling the volume and another one cueing up records. Within a few years the typical radio station had a single person on duty and on the air at any given time, doing everything. Sometimes a computer does it. But radio survived. Its audience even supports a few limited big-staff operations, including morning zoo shows and NPR. TV itself has been under pressure since the advent of cable, which took an audience that had previously been divided into three or four choices and scattered it among 100 channels. Local TV stations now have unmanned cameras that take their directions from one guy at a computer. Newspapers were able to postpone such a day of reckoning for many years, first by reaping the savings of simpler, faster equipment for putting the paper together, and then by the market monopolies created when afternoon traffic jams and evening newscasts killed the afternoon newspapers. Even now they probably won't go through quite as much of a catharsis as, say, radio did, because newspapers still do a great deal of original reporting that has value. A newspaper is still a more effective way to browse through stories than most Internet sites. It's great that we can google for anything we like, but browsing has value, too. The Star-Bulletin not long ago tried to look more like a Web page. That wasn't wise. A newspaper can never out webpage a webpage. But it can be a better newspaper, a better digest, a better sampler.

Hawaii ' s economy: different? Or just slow?

When our turgid economy began to calm down, and real estate prices stopped soaring, I began to get this question when giving speeches: "Is there going to be another bubble?" No, I said, there won't be, because the last bubble was caused by the sudden exit of Japanese investors at a time when they were driving the market by themselves. This time the market has lots of driving forces and we're more likely to see a leveling off of prices and then a little settling back. I won't claim to be right just because I'm right so far, since future developments could increase the decline in home prices. Heck, maybe prices will fall so much that would-be first-time homebuyers can afford to buy again. That would be a great thing for some young couples. But it does appear that whatever happens, a bubble it will not be. The new question is whether we're just lagging the mainland, and whatever is happening in California now will happen here. Some people just assume this is so, and all they want to know is how many months or years it will take before we have the same unemployment rate as Fresno. Hawaii's economy does not LAG the mainland economy. It simply behaves differently, buffeted by several different forces:

• It is affected by prosperity in the markets that send us visitors, especially Japan, the West Coast, and Canada. Right now both Japanese and mainland visitor arrivals are down, and we're still doing okay so far.
• It is affected by the military economy, which is managed through central planning and driven by global unrest. The more unrest, the better for this economic sector, and right now there is unrest to spare.
• It is affected by demographics, and like Florida and Arizona we have an aging population with a lot of transplant retirees who tend to act as a stabilizing influence on the economy.

The thing is, whatever happens to us, it won't be "california, but later," it will be something unique to Hawaii. Probably something not as bad. Even California has regional economies, and the coastal cities that send us our visitors aren't doing as badly as the inland towns where we never get much visitor traffic anyway. I'm not trying to paper over the very real slowdown of the Hawaii economy, only encourage you not to get a case of nerves beyond what's actually called for.

Predatory lending and " market forces "

Daniel Akaka sits on the Senate Banking Committee and Tuesday he got to question Federal Reserve Board Chairman Ben Bernanke. "My concern," said Sen. Akaka, "is to educate the people... and empower them in our financial system. Given the recent failures, I'm concerned by the increasing lack of trust that individuals have in the banking system." Bernanke agreed that there is a problem with people, including many immigrants, whom economists call the "unbanked."  Yes, Akaka persisted, but what about working families exploited by unscrupulous lenders through payday loans? "I think that competition is the best solution," Bernanke said. The courtly Akaka would never say so, but that is one dumb response. The whole idea of free markets is that companies go where the profit is, but because there would be certain complications if all companies went into the arms trade, drugs and prostitution, we have rules. Business people like to expound on how you shouldn't have an excess of rules, but a few sensible rules are good for everyone including ethical business people. Sensible regulation of payday services is a no-brainer. Really, it has been alarming lately, and not just to "the unbanked," how clueless are the people who are supposed to be regulating our financial systems. I know the systems are complicated, but there is nothing complicated about cracking down on predatory lending. There's always a paper trail, you see.

Small businesses in times of big economic trouble

The Honolulu district office of the Small Business Administration happily reports that it is performing, by the SBA's own metrics, far better than district offices on the mainland, a sign of a stronger economy here. But our stronger economy is still cooling, and has the potential to cool further, especially if things keep getting dicier on the West Coast, so the SBA is reminding local business owners of the services it offers. There was a briefing session Tuesday at the Central Pacific Bank branch in Mililani. On July 31 there will be two, at the Bank of Hawaii branch in Kahului and the American Savings Bank branch in Kapolei. And more in August, which you can learn about by visiting this URL: http://www.sba.gov/hi The SBA does not itself lend money, but it guarantees loans for small businesses that cannot get loans from local lenders on their own terms. That is not, however, all the SBA does. It counsels businesses on how to become government contractors, and provides more general consulting services, often for free. If business is slowing but you want to avoid laying off personnel, it might actually be a good time to borrow money at the current low interest rates, assign some of the extra employees to help with an expansion or retooling, and be positioned to leap ahead when the economy picks up again a year or two from now.