The world is changing and we must change, too. We are now in a global knowledge and information economy. We must abandon the trickle-down supply-side economic policies, such as tax cuts and subsidies, to stimulate our economy.

To drive economic growth in the new economy, we must invest in public education. That's what our grandparents did after World War II, and the result was a prolonged period of American economic prosperity and world leadership in innovation. Empirical evidence from regional economic models (the same models businesses use) clearly demonstrates that, dollar for dollar, investing in public education drives economic growth more effectively than tax cuts and subsidies. Former Congressional Budget Office Director Robert Reischauer stated:

"I know of no valid economic theory that suggests that tax cuts provide more economic stimulation than would a similar amount of government spending."

Many state and local governments have given away the store in the name of so-called economic development. Economic literature is replete with proof that corporate tax subsidies in the name of economic development don't work. Take the example of Ashland Oil in Ashland, Ky. It was much cheaper for Ashland Oil to stay in Ashland, as taxes and cost of doing business there were low. But Ashland Oil moved to Lexington, a high tax area of the state. Why? Because it couldn't keep young corporate engineers on staff due to the poor quality of public services in Ashland, especially its schools. Poor public services are a natural outcome of low taxes. That's just one example.

Evidence shows that state economies with higher overall tax levels actually grow faster than the economies of states with lower tax levels. An analysis of data from the Department of Commerce, the Bureau of Economic Analysis, and the Federation of Tax Administrators shows that whereas the top 10 fastest growing states in the United States had a top corporate tax rate of 7.1 percent, the bottom 10 slowest-growing states all had the same tax rate of 6.2 percent.

Also, Site Selection Magazine's top 25 most business-friendly states (low overall taxes and regulations) grew slower than their bottom 25 least business-friendly states (high overall taxes and regulations) — 3.9 percent vs. 4.3 percent. Does this mean we should raise taxes? No. Taxes are our collective investment in our future. They should not be too high. They should not be too low. They should be fair and equitable, and sufficient to allow adequate investment in our future prosperity.

Hawai'i needs to make a massive investment in public education, in Hawai'i's human capital. Why? Because a good state economic development policy has three goals, and investing in public education provides the best return on all three. The three goals are: more jobs, higher incomes and reduced disparities.

Here are four policies that we should pursue to ensure a secure and prosperous future for Hawai'i:

1. Hawai'i should invest adequate resources in public education to build our schools' capacity to deliver excellence. Our global knowledge and information economy are the direct result of interactions among six new industries: micro-electronics, computers, telecom, new materials (hydrogen fuel cells), biotech (human genome), and robotics. In this new economy, the quality of the labor force — of human capital — is the most important driver of productivity and growth. Adequacy of school funding is the first step to build schools' capacity to produce the kind of labor force that is needed for the new economy. Unfortunately, a recent study by Grant Thornton shows that funding for public schools in Hawai'i was woefully inadequate.

2. Hawai'i should create an economic development extension service that places its state university system at the center of its economic development. Economies grow through innovation, which depends on investing in human capital and in research and development. America's public universities have historically been prized for their R&D leadership and are the proven incubator for new ideas. Hawai'i should invest in their system of higher education and implement an economic development extension service modeled after the extraordinarily successful agriculture extension service. Just as agriculture extension agents took new seeds and fertilizers developed by universities directly to farmers, an economic development extension agent can take innovations in biotech, robotics, telecom, and so forth directly to business entrepreneurs.

3. Hawai'i should level the playing field for business. The key role of good government is to level the playing field so all entrepreneurs and businesses, large and small, have a fair shot at success. Good government invests in the infrastructure that ensures safety, property rights, free-market economy, and the free flow of goods and services, including financial services. Good government does not pick winners over losers by dishing out subsidies and calling it "economic development." That kind of development drives small businesses and individual entrepreneurs out of business. Good government establishes and enforces rules of fair play and free-market economy. Good government levels the playing field for business.

In Hawai'i, a dollar-for-dollar tax credit for investment in high tech has only created 350 new jobs since 2001 at the cost of $311 million — close to a million dollars to create one new job.

4. Hawai'i should invest state budget surpluses in pre K-12 public schools. Public education is the most highly labor-intensive local industry. Any additional money invested in public education goes directly into job creation and gets spent within a local economy. The standard regional economic model shows that investing in public education is a better way to grow the economy than tax cuts and subsidies. Investing in public education also has other proven benefits, especially income growth, reduced disparities, higher home values, and lower crime rates. In a nutshell, investing in public education creates an economic tide that lifts all boats.

If Hawai'i wants to maintain its leadership in the new economy, we must invest in our human capital. What grows economies is innovation. Innovations such as the steam engine, electricity, biotechnology, telecommunications and the Internet have revolutionized our economy. Did any of them come from tax cuts? Not one did. All were the direct result of taxpayers investing in an infrastructure to ensure the safety of property rights, free-market economy, and the free flow of goods and services. All were the direct result of investing in human capital.

Roger Takabayashi is the president of the Hawai'i State Teachers Association. He wrote this commentary for The Advertiser.