What Hawaii Can Learn from the UK.

Hawaii Together, with host Joe Kent and guest Gerard Dericks, October 25, 2021

Gerard Dericks, Ph.D., is the new director of the Center for Entrepreneurship and Economic Education at Hawaii Pacific University. He has taught business management and economics at the London School of Economics and the University of Oxford, and is a Fellow of the British Higher Education Academy.

Dericks discusses with host Joe Kent the similarities between the economic policies of Hawaii and the United Kingdom, and why they have scared away entrepreneurs in both jurisdictions.

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There’s a new professor in town, and he favors economic freedom

from Grassroot Institute of Hawaii

An economist who upholds the value of free markets has been tapped to lead Hawaii Pacific University’s new Center for Entrepreneurship and Economic Education.

Moreover, the center’s first director is Hawaii born and raised: Gerard Dericks, a former Mid-Pacific Institute student who completed his last year of high school in California, then went off to see the world before coming back to the islands. He earned his undergraduate degree from Ritsumeikan Asia Pacific University in Beppu, Japan, then his Ph.D. from the London School of Economics.

“But always in the back of my mind,” he said during a recent episode of “Hawaii Together” (see below), “I wanted to come back and be back in Hawaii — contribute to the community here. There’s this new center opening up here at HPU, and I had a chance to come back. I’m excited to be here.”

Interviewed by Joe Kent, institute executive vice president, Dericks said a major thrust of his work will be help educate Hawaii’s youth about economics.

“Of course,” he added, “if you’re actually teaching economics, that means you’re going to be teaching free market economics. You can’t have one without the other. That’s part of this initiative.

“Another part of this initiative … is entrepreneurship — to make Hawaiians more aware of entrepreneurship and give them a bit more support and understanding of what it would take to succeed in entrepreneurship, and to bring that mindset to Hawaii.”

The topic of Dericks’ talk with Kent was “How to avoid the UK’s economic woes,” and, indeed, they did talk about what Hawaii could do to avoid ending up like the UK, despite their many unfortunate similarities. But they also talked about famous economists, the Jones Act, Hawaii’s mixed signals about tourism and how Hawaii projects an anti-business message in general,

“One of the things that I wish is that politicians will take a different stance towards businesses,” he said. “Until we have that political change, I think it’s going to be difficult to really change the culture.”

Coincidentally, Nov. 8-14 is Global Entrepreneurship Week. It ends on Sunday. but its goal of educating people about entrepreneurship and economics will continue at Hawaii Pacific University, Dericks at the helm.

Watch the interview above. A full transcript is below.

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10-25-21 Economist Gerard Dericks with Joe Kent on “Hawaii Together”

Joe Kent: Aloha, and welcome to “Hawaii Together” on the ThinkTech Hawaii broadcasting network. I am Joe Kent, executive vice president of the Grassroot Institute of Hawaii.

We are a nonprofit think tank dedicated to advancing individual liberty, economic freedom and accountable government. I’m filling in today for Dr. Akina. 

At the Grassroot Institute, we’re always trying to work to transform Hawaii into a place where people have more opportunities to prosper. One person says Hawaii can learn lessons from the U.K. about what to avoid in creating a better business climate. Here to discuss entrepreneurship and Hawaii’s economy is economist Dr. Gerard Dericks, who’s also the new director of the Center for Entrepreneurship and Education at Hawaii Pacific University.

Aloha, Gerard, how are you doing?

Gerard Dericks: Just a little correction: the Center for Entrepreneurship and Economic Education at HPU.

Kent: Oh, wonderful. Thank you. You’re going to be educating about entrepreneurship and economic education here, is that right?

Dericks: That’s right. Hawaii is a small state with big economic problems, and we’re all familiar with these: high cost of living, lower wages for comparable jobs compared to the mainland …

Kent: Oh, yes, we’re very familiar with [chuckles] the economic challenges here. I’m so glad that you’re here to talk more about them.

Could you tell us first, though, about your background?

Dericks: Sure. Actually, I was born and raised here in Hawaii. Like so many of us, I wanted to see the world a bit, so after high school, I traveled a bit. I actually did my undergrad in Japan, which is not all that unusual for Hawaii students.

Then from there, I went to London. I studied at the London School of Economics. I got a Ph.D. there. I liked living in the U.K. and then got a job in Oxford, but always in the back of my mind, I wanted to come back and be back in Hawaii — contribute to the community here. There’s this new center opening up here at HPU, and I had a chance to come back. I’m excited to be here.

Kent: We’re so glad to have you back in Hawaii. Welcome back, I guess I should say. What is your goal at your position at HPU?

Dericks: Part of it is a traditional academic role, so I’ll be teaching; also doing research in economics. A major thrust of this center is actually to help educate Hawaii’s youth about economics.

Of course, if you’re actually teaching economics, that means you’re going to be teaching free-market economics. You can’t have one without the other. That’s part of this initiative.

Another part of this initiative, which, of course, is also in the name, is entrepreneurship — to make Hawaiians more aware of entrepreneurship and give them a bit more support and understanding of what it would take to succeed in entrepreneurship and to bring that mindset to Hawaii.

Of course, this is to, hopefully, on the one hand, improve economic conditions here, and part and parcel with this is, as we educate people, to help improve policy as well, because, in democracy, it’s the people that really matter for pushing forward policies.

Kent: I see. You’ve lived in Hawaii and in the U.K. Now you’re back. What similarities and differences do you see between the economic policies here and there?

Dericks: There’s a lot of similarities. On the one hand, Hawaii is known for its relatively high taxes. U.K. has also quite high taxes. Cost of living in the U.K. [is] also substantially higher than the rest of America.

Actually, coming back here to Hawaii, I think Hawaii is actually cheaper than in the U.K. You get a lot more value for your money here than you do in the U.K., which is interesting to see.

Another big social issue is becoming more divisive all the time. … It’s especially even the last couple of years become more to the front in Hawaii: the high cost of housing in Hawaii and the U.K.

I actually lived in the most expensive location in the United Kingdom when it comes to price of houses versus median incomes. It was a ratio of about 11:1 in Oxford, which is where I was living.

That’s becoming a huge social issue. Everyone knows growing up that there’s no hope at all of me being able to buy a house.

Kent: When you say 11:1, you’re saying that if someone makes a certain amount during the year, it would take 11 times that for them to afford paying off a house, right? Eleven times their salary.

Dericks: This is before taxes. That’s right. If your salary was $1 a year, an average cost of the house will be $11, [which] is essentially the equivalent there.

Kent: I see.

Dericks: That’s, of course, before taxes. Probably a third, at least, of your salary is being taken off by taxes.

It’s more like about a 16:1 type of ratio we’re looking at. That’s if you spend no money on food, no money on clothes, no money on vacations, you’re not buying a car, and so on.

Kent: Right. In Hawaii, I believe that figure is around 6 to 8 [to 1] for us. If it’s 11 in the U.K., then that means …

Dericks: This is one city in the U.K.

Kent: Oh, yes, that’s right.

Dericks: The U.K., as a whole, might be something similar, like 6 to 8. I have to look at the numbers. Oxford was particularly high because, basically, Oxford is really a suburb of London. It’s about an hour away by train.

Kent: The housing cost is high there. What is the reason for that though? Is it just because people are greedy, or why is that?

Dericks: It’s exactly the same reason why housing is expensive in Hawaii. On the one hand, you have a growing population, and that’s the case with the U.K., especially in terms of immigration. On the other, you have an extremely restrictive supply environment. U.K. is much worse; it’s actually much worse than what we have here in Hawaii.

Most people in the U.K. will live in these terraced houses. Basically, these are all workhouses from back in the mid-19th century, where it’s just one house that’s just right next to the other. You can hear your neighbor vacuuming and having a row with their kids, or whatnot. The amount of space you have in your home is much smaller. Typically, people don’t have garages or places to park very conveniently.

You have a lot less space, actually, but still, prices were really comparable in Oxford to what they were here a couple of years ago. I know now prices are much higher, so I’m not sure if it’s exactly 1:1 like it used to be. You pay a lot more there for less in the U.K. It’s the same root causes in the U.K. It’s just we’ve had probably more time for this to compound.

Kent: What are the root causes, by the way?

Dericks: Back in 1947 … So, after World War II, what happened is that development rights for land were totally nationalized. Prior to that, you could essentially build, with certain restrictions, what you wanted to on a given plot of land.

The state said, “No, no, no, those property rights, they’re now ours, and now you have to request permission any time you want to alter any structure whatsoever.” It’s not like some garden shed, basically. Anything bigger than that, you need permission in order to change that. Basically, this is very difficult to get.

Kent: It’s similar to the historic restrictions in Hawaii, where if a building or area is marked as historic, then it’s very difficult to change the building.

Then we have all these buildings that are very old, and they’re nice to look at but hard to update. Is that the case in U.K., too?

Dericks: Yes, but it’s much more extreme. It’s as if every single house [has] this historic designation as a worry.

Kent: I see.

Dericks: There are historic designations where you can’t even change internal fixtures of the house and all kinds of things, and you’re criminally liable if you change things.

I was living in a house that was built in the 1850s in the U.K. It’s not because I wanted to; I would have preferred a more modern housing, but you’re just not allowed to build it.

Kent: That’s interesting. In Hawaii, a lot of the housing, especially in downtown Honolulu, was built in the ’60s and ’70s. Since then, the housing policies have become very restrictive — in fact, the most restrictive in the United States — and that’s made it much more difficult to build new housing.

As a result, we have all of these aging buildings, where the plumbing is going bad and the roofs need repairs and the elevators are going out; and the HOA fee, the homeowners association fees, are starting to tick up. That doesn’t seem to be going in the other direction. Is that a problem in the U.K. as well?

Dericks: If you think the problems are bad now, just wait 100 years and see what your houses look like then in that situation, the expense of upkeep in that case.

You get all kinds of problems: very imaginative plumbing, shall we say. Some of these old houses … wood that’s just rotting apart from decades of use and exposure; brickwork also similarly falling apart. It’s a big problem.

Basically, it’s just “slapdash repair it” for the next person to come along. We don’t have any of these new builds to any significant degree to deal with this; haven’t had that for many decades now.

Kent: Let’s go to another topic. Taxation in Hawaii is among the worst in the nation in many areas, and it impacts job creators as well. What is the taxation level like in the U.K.?

Dericks: We have some taxes that are comparable. I’d say income tax on a federal-plus-state basis, it’s pretty similar.

In the U.K., you can’t say it’s very different, so [it’s] high, punitive. One of the things that we do have in the U.K., significantly higher than here, is here we have the excise tax, which is, in all but name, of course, just a sales tax. They don’t want to call it that. That’s what it is.

Kent: It’s a sales tax, but it also hits at every single level in the production chain. It ratchets; it rolls up, like the snowball, and hits the consumer at the end, where the tax is actually built into the price of the product.

The general excise tax is a little different than a sales tax, but it’s thought of as a sales tax. That’s right.

Dericks: Yes, right. It’s not about the sale of the final goods. You’re right. That would be different. In that sense, right, it basically compounds and, so, very difficult to unravel at the end exactly what’s being attributable to this tax. Maybe they are comparable.

In the U.K. anyway, we have the value-added tax, the so-called VAT, which is just on the sale of final goods and services. We get to see right upfront what the total charges [are], but it’s 20%. 

[crosstalk]

Kent: Oh, wow.

We will talk a bit more about taxation and some other laws that are similar between Hawaii and the U.K. when we return. I’m Joe Kent at the Grassroot Institute. Don’t go away.

[Intermission]

Kent: Aloha. Welcome back to “Hawaii Together.” We’re talking today with Gerard Dericks, the new head of the Entrepreneurship and Economic Education Center at Hawaii Pacific University.

We just finished talking about taxation, although I do want to ask one more thing. It’s hard to compare the taxation levels between Hawaii and the U.K. because Hawaii’s tax is a hidden tax, so we’re not really sure how much of a percent it takes from the goods.

You just said, in the U.K., it’s a 20% tax, basically. What does that do to businesses and entrepreneurs?

Dericks: Sales tax is very punitive from an entrepreneurial standpoint because it comes before you’ve actually made a profit. You’ve got to factor this in already.

Most types of corporate income tax is based off, “If you make a profit, then we’re going to tax you.” A sales tax is different; it says, “If you’re selling something, we’re going to take this share.” That’s going to dampen risk-taking activities and dampen people’s enthusiasm for starting out.

A lot of new businesses are going to lose money for the first year or two. Entrepreneurs, like everyone, they need to learn their business, learn what works, what doesn’t.

While you’re trying to sustain that, to have to pay sales taxes on profits you’re not making, just makes it even more difficult and makes you probably more willing to throw in the towel before your endeavor finally bears fruit. [It] dampens risk-taking and makes it more difficult for the little guy to get started, I would say.

Kent: I hope Hawaii learns a lesson from the U.K. on how hard it is to do a business and the effect that taxation has on entrepreneurs, as our taxes, again, are being asked to be raised again by lawmakers.

Another law that’s similar to a tax — it adds cost — is the Jones Act. Some people think of it as a “Jones Act tax.”

The Jones Act, of course, is that over-100-year-old law that protects the American shipping industry. We’ve done an economic study on how much that has added to the cost of living in Hawaii, and you can get that at grassrootinstitute.org.

What is your take on the Jones Act as an economic policy?

Dericks: I think Hawaiians should be angry about it. It’s a totally anti-Hawaiian law requiring the cost of living in Hawaii to be much higher than it would otherwise be.

If you think about it, … this law was imposed 100 years ago. On the one hand, Hawaii wasn’t even a state until … was it ’57? We didn’t have proper legislative representation when it came to actually putting this law into place, and so we should feel disenfranchised very much so by the imposition of this law. I think that that’s an important bit.

Another is that one of the arguments for this law is that it’s important for domestic security, for national security. Any military strategist will tell you that the landscape has changed vastly since the 1920s — air travel, nuclear warfare; now we have drones.

I think that the military justification for this law — any reasonable military strategist, and I could be wrong because I’m not a military expert — but it would seem to me that [the] U.S. has been at war for 20 years, at least, in the Middle East now, and we didn’t need the Jones Act to protect us from the Taliban. That was clearly wrong.

If we did have a war with China, I don’t see how a few merchant marine ships, or whatever it is, these cargo ships, are going to help block these intercontinental ballistic missiles from landing here.

Kent: I see. The national security aspects of it are a bit outdated, you’d say. Those are really interesting arguments. I look forward to talking with you more about the Jones Act and a lot of other regulations that affect Hawaii’s business climate.

I want to talk now about the positive [chuckles], ’cause we want to talk about how to solve Hawaii’s problems. What would you do to create a more business-friendly climate in Hawaii?

Dericks: That’s a good question. Coming from the U.K., it’s quite clear to me that Hawaii [has] some great advantages. One of those is our connection to the mainland, and that we are a unified economic market with that mainland, which means that, actually, the value that we get for our money is still much greater than probably almost anywhere in the world.

[In] the U.K., we just had Brexit, where the United Kingdom left the European Union common economic area, so we no longer have free movement of goods between the EU and the U.K.

Also, [the U.K.] no longer [has] a free movement of labor. Of course, being a state, we have that protective commerce clause with all the rest of the United States. That’s an incredible benefit that’s not to be poo pooed.

When you go into Ross or you go into Costco here, the type of value you can get for your money is incredible compared to the rest of the world, for sure.

Kent: I see. Lean into our advantage in being part of the United States and all the benefits that comes with it.

Also, I want to ask you about tourism, because, of course, that is the golden goose in Hawaii. There are many people who feel that we have too much tourism, and there’s a debate there. How do you think about that question?

Dericks: I find it perplexing. I think we should be wanting to really do our best to maintain our competitive position with tourism, and want to promote and increase the amount of tourists that are here. That’s just going to redound to a stronger economy, to higher wages, to better opportunities for our children.

We need to think about how we can bring in as many tourists as possible to help our economy in a sustainable way. I think that that’s definitely possible.

Kent: I see. You have a lot of eminent economists at your alma maters in LSE, in Oxford. I was just curious: Do you have any favorites that you’d like to talk about, or are there any economists living or dead that you admire?

Dericks: Yes, one of my favorite economists, who’s also an LSE alum, is Friedrich Hayek, and not only for his economic ideas and, of course, his great debate with John Maynard …

Kent: John Maynard Keynes.

Dericks: … Keynes, but also his insight into legislation. I think he won the Nobel Prize for that while at University of Chicago. Incredible work.

I’m also a fan of Ludwig von Mises.

In terms of living economists, I’d say that my favorite living economist would probably be Richard Werner, who studied at Oxford. Now he’s at De Montfort University. 

Actually, basically what he’s uncovered through his research is that banks actually mint money. They create money. When First Hawaiian Bank and Bank of Hawaii [are] giving you a loan, they’re creating that out of thin air. When you pay back a loan, you’re destroying money there.

This actually has really interesting implications for how the economy works because mainstream economics cannot explain at all the Japanese boom and bust that we experienced very palpably here in the late ’80s and early ’90s through our current models.

Richard Werner actually spent a lot of time in Japan working as an investment banker before he became an economist … has actually uncovered this mechanism.

I think [he] has also shown through this [research] how we can harness the power of money creation through the banking system, to funnel that towards entrepreneurial endeavors and, therefore, drive economic growth and prosperity, as happened historically in Germany with their small banks that focused on lending to small businesses, [and that] also as we used to have and still do, to a certain extent, in the United States — although before the savings and loan crisis, we had a lot more small banks in the United States. They’re gradually getting killed off, but we still have more banks on a per capita basis compared to most of the world.

Kent: I see. It sounds like what you’re saying is property rights, low taxation, low regulation, access to capital, are all components to a better climate for entrepreneurship.

In closing, I was curious: What is your advice for Hawaii as we look at the U.K. and where you’ve come from there? What should we do? What shouldn’t we do?

Dericks: Oh, boy. Advice? One of the things that I wish is that politicians will take a different stance towards businesses.

At the moment, they seem to have an almost antagonistic stance towards businesses. They don’t really seem to care what happens to someone who’s invested basically their life savings, and maybe decades of their life, into their restaurant. or a bar, or a nightclub, or whatever it might be.

It seems like they just don’t care. “Just deal with it.” “You figure it out.” “This new environment.” And “We don’t care. We’re just going to impose what we want to impose. It doesn’t matter.”

When really they should be like: “We need to preserve these entrepreneurs, keep them running along and excited about operating in Hawaii and wanting to expand and wanting to grow. We want their kids to look at what’s happening there — and their colleagues — and look at that and say, ‘Yes, I could be an entrepreneur, too. I could create my own business,’ and to foster that type of environment.”

Until we have that political change, I think it’s going to be difficult to really change the culture.

Kent: It’s interesting how sometimes we use taxation as a punishment, and other times, we tax businesses but still want them to thrive. Either way, it’s a punishment;  is what you’re saying?

Dericks: Yes, it’s a punishment. The lockdowns and restrictions on tourism, and comments to the media that, “Oh, don’t come to Hawaii,” as happened recently with a prominent politician here. It’s just unfathomable thinking about that, really.

Kent: Thanks so much for giving us your perspective, Dr. Dericks. I really appreciate you joining us here on ThinkTech Hawaii.

My name again is Joe Kent. I work at the Grassroot Institute of Hawaii. Thanks so much for joining us, and aloha.