Check out the local headlines:

"Welfare cases in isles grow by 20%"

"Officials urge action to curb homeless"

"Isle business failures hit record."  
 
The Japanese tourists still come, but with the yen off about a third from two years ago, visiting Japanese are leaving fewer dollars in local tills. Where they used to clog the luxury stores at Honolulu's ritzy Ala Moana mall, the transpacific visitors now swarm over Oahu's outlet stores, Wal-Marts and Kmarts.

Wall Street booms. Greenspan has to keep the U.S. mainland economy on a tight leash, but the listless Hawaii economy is growing at less than 1% a year. Bums wander downtown Honolulu, where landlords are facing nearly 20% vacancies. Hawaii's brightest college graduates flee for better opportunities. Except on Maui (see What's time to a bureaucrat), population growth has slowed to a trickle.

Few see a rebound soon.

"I hate to sound like a Cassandra, but I genuinely regret that we haven't found the bottom," says Andre Tatibouet, chairman of Aston Hotels &Resorts Inc., a 29-property chain based in Honolulu. "People are very quietly scared to death."

Hawaii's woes are mainly self-created. A union-backed Democratic majority in the state legislature took advantage of a cyclical boom in the late Eighties to load new taxes and costly mandates onto local business. The taxing and regulating has been a job-killer.

The state's annual budget comes to around $5,270 per Hawaiian. That compares with $2,980 in California. It amounts to almost 19% of the islands' gross economic output.

A Hawaiian can't turn around without being taxed. Among the more detested revenue-raisers is an excise tax of up to 4% that applies to virtually all goods and services. Multiple levies of the tax are often built into the islands' prices. Hawaii's top income-tax rate is 10%, and it kicks in at around $20,000, thus catching most full-time workers. Even in taxed-to-the-eyeballs New York City the combined city and state top rate (over 12%) kicks in at $65,000.

Where you have high government spending, you have a huge bureaucracy—and huge bureaucracies control lots of votes. The powerful United Public Workers union and its feared president, Gary Rodrigues, have stymied spending reforms. Rodrigues sued when the mayor of the Big Island of Hawaii proposed privatizing the public landfill in 1993 and transferring ten of its workers to other jobs with the government or a private contractor. The state supreme court held for the union, jeopardizing public-private contracts across Hawaii.

The state's voters last November approved a constitutional convention that could have permitted private companies to compete with government operations in things like garbage pickup and parks management; Rodrigues and the unions sued again. In March the state supreme court in effect backed Rodrigues.

All five of the supreme court justices are appointees of former governor John Waihee, a liberal Democrat who ran the state from 1986 to 1994. These jurists recently ruled in favor of same-sex couples who want to marry. That ruling, coupled with a new state law, opens the door to a new class of beneficiaries for the state's already-generous health insurance program.

So business votes with its feet. Growth companies such as VeriFone have chosen to move their main operations out of state. Bancorp Hawaii, parent of Bank of Hawaii and one of only a handful of major financial institutions based on the islands, is diversifying elsewhere in the Pacific Rim.

Today's semisocialist welfare state grew up originally as a reaction against the oligarchy of land-owning corporations—Alexander &Baldwin, Amfac, Castle & Cooke, C. Brewer and Theo H. Davies & Co.—that long dominated the economy. The reaction resulted in passage of scores of regulations aimed at protecting workers and small-scale businesspeople from the concentrated power of the large estates. For example, restrictive zoning has preserved uneconomical agricultural land—and dwindling agricultural jobs—that could be put to more productive use.

The old business oligarchs are either gone or remain as shadows of their former selves. In their place is the oligarchic government and its union bosses. It's a kind of runaway populism that replaced the old-time paternalism.

Take health insurance. Under a law passed in 1974 employers must pay virtually all of workers' insurance premiums. In practice this often means employees get a free ride. Denise Walker, co-owner of a small environmental and geologic consulting firm with offices in Hilo and Honolulu, pays $1,800 a month for health insurance for six employees; they pay nothing. She says it's cheaper for her to cover the full tab than to fill out the paperwork that would establish the employees' share. Add to this a workers' compensation system that presumes all injuries were caused on the job. Says Walker: "I can't afford any more employees."

Red tape inhibits the all-important hotel industry. Honolulu imposed building and design restrictions on Waikiki Beach in the 1970s and subsequently set a cap of about 33,000 hotel rooms. The owners of existing hotels are happy with their privileged status, but with no new hotels the area has a faded look today. Says Paul Brewbaker, vice president and chief economist of Bank of Hawaii: "It [the moratorium] had the perverse outcome of preventing Waikiki from undertaking the changes that could allow the area to reinvent itself, like Las Vegas."

If they want to build, developers on Oahu must wade through at least two separate bureaucracies—the building department for permits and the department of land utilization for aesthetic approval. If the land utilization department forces changes in the design of the building, it's back to the building department for more permits—Hawaiian ping-pong. If natural water flow is affected in Hawaii, developers must plead to the state's water commission in Honolulu for a variance. This is an agonizing process that can take years.

"The pineapple and sugar industries have died, but their zoning [protection] lives on," grumbles Norman Sakamoto, a construction company owner and state senator.

Some of the island's tourism bureaucrats are trying to funnel Japanese tour groups to Hilo on the Big Island of Hawaii, where an airport runway was recently lengthened to accommodate direct international flights. Typical bureaucratic mind-set: Try to tell the tourists where to go rather than find out where they want to go. Japanese usually go to Hawaii not to laze on the beach but to shop and gawk at Pearl Harbor. They aren't impressed by the largely undeveloped Big Island.

As if all this weren't daunting enough, native Hawaiians are demanding government compensation for what their advocates claim was the illegal taking of their land more than a century ago.

Given the tendencies of the state's top court, the dispute is no laughing matter. It was cited by Standard &Poor's in its recent downgrading of Hawaii's debt to single A. It has alarmed title insurers, which have hiked premiums on contested land. "As if we don't have enough to worry about," sighs banker Brewbaker.

Samuel Slom, formerly Bank of Hawaii's chief economist and now owner of a convention speaker service and two other small businesses, was elected last November to the state senate, where he joins Whitney Anderson as the body's second probusiness Republican. That makes it 2 Republicans against 23 Democrats. (The state House is controlled by the Democrats by better than a 3-to-1 margin, although pro-business Republicans such as Quentin Kawananakoa are gradually getting elected.)

Every week Slom rises to recite obituaries of Hawaiian businesses that have gone bankrupt or fled to the mainland while many in the majority party across the aisle sit stone-faced.

At a time when even former socialist countries are going the free enterprise route, this small part of the U.S. remains mired in a half-baked form of socialism.  

		hat's time to a bureaucrat? HAWAII'S third most populous island, with 117,000 full-time inhabitants, Maui is an exception to the state's economic stagnation. While Hawaii as a whole has lost jobs every year since 1993, the county of Maui (including two smaller isles) has added jobs in three of the past four years, notes a First Hawaiian Bank report. Since 1991 Maui's mayor has been Linda Crocket Lingle, 44. She runs a probusiness administration. Her finance director is a former senior manager at Boeing; the parks director was a Dole Food executive; her planning director was a senior vice president of C. Brewer Homes. "Early on we made everyone in government understand that everything we do affects the [local] economy and the strength of the economy affects our quality of life," says Lingle, who won reelection in 1994 on the heavily Democratic island. "To the average government worker time has no inherent value because they will get a check no matter what. We needed to get them to understand that time has value to the economy." Elsewhere in Hawaii, acquiring permits for simple building projects can be agonizingly slow. Lingle instituted a fast-track permitting program for projects under $125,000 that allows builders to begin work within days of when they apply for a permit. A similar process for bigger projects helped get Maui's 415-acre high-tech research park off the ground in record time in the early 1990s. Anchored by a $65 million Department of Defense supercomputer center that crunches data from a nearby $123 million satellite-tracking telescope, the park aims to become the "information technology center of the Pacific," says Brett Klyver, director of development. Alas, Maui can't fully escape the state's bureaucratic grip. Lingle would like to eliminate the state's land use and water commissions, big regulatory departments in Honolulu that duplicate similar county functions. But that would threaten the power base of state Democrats. "Management rights have been negotiated away because the [politicians] doing the negotiating depend upon the support of the public employee union leadership to help them stay in office—you can see the inherent conflict," says Lingle. She is being mentioned as a possible challenger to Governor Benjamin Cayetano in next year's election. Perhaps the state is finally waking from its long populist slumber. —S.L.