Hawaii's economic downturn has delivered a body blow to many of the state’s 1.3 million residents, but economists warn an uppercut could be next.

“The money today is aiming to Asia; its flying right over Hawaii from the Mainland and ending up in China,” said economist and presidential advisor Dr. John Rutledge, one of four speakers at the 2008 Economic Summit in Kahala Tuesday.

The event was organized by Small Business Hawaii and attracted dozens of the advocacy group’s nearly 2,000 members. Delorese Gregoire, the founder of a camp that teaches leadership skills to teenagers, said like many businesses around the state soaring costs have cut deeply into her profit margin.

“Everyday we keep adding to the cost (of doing business) but we can't increase the tuition because the market won't bare anymore increase,” said Gregoire. “Our insurance has gone up so high (and) food costs have gone skyrocketing.”

Gregoire has been running Winners’ Camp the past 23 years. Parents pay $980 per child for a one week experience that promotes courage and self-confidence. “We usually would have sixty to seventy kids per camp, now it's down to forty,” said Gregoire.

Sen. Sam Slom, the president of Small Business Hawaii, says Gregoire’s experience is not unique in the current economic climate. He says many small businesses may be forced to layoff workers in the coming months, another shock to a state that has witnessed the shutdown of Aloha and ATA airlines, Molokai Ranch and the departure of two Norwegian Cruise Line ships.

“During the past ten years it’s been small businesses that have created two out of every three jobs,” says Slom. “So when small business is hurting than everybody in the community is hurting.”

Rutledge, an advisor to the Bush White House and one of the principal architects of the Reagan Economic Plan, criticized Hawaii’s state government for failing to spur the expansion of small business. “When Gov. Lingle said Hawaii is open for business perhaps she meant as a museum because there's a lot more the state government can do with taxes (and) with regulations to help the small businesses of Hawaii to grow,” he said.

Last week a report by the University of Hawaii Economic Research Organization predicted job and real income growth in 2008 would fall to around 0% in each of the state’s four county economies. An earlier report by UHERO stated inflation would be 4.3% this year, slowing to 2.5% in 2009.

Much of the inflationary pressure on Hawaii consumers is being fed by rising fuel and energy prices and according to Rutledge one of the leading causes is the government mandated use of ethanol, which he calls a failed experiment.

“Ethanol has been a flop to date,” he said. “It costs more than gasoline. It uses more resources than gasoline. It pollutes the environment more than gasoline and it makes more carbon dioxide than gasoline.”

Since April 2, 2006, at least 85 percent of Hawaii’s gasoline has been E-10 Unleaded and across the country consumers use about 5 billion gallons of the biofuel every year.

Rutledge says 1/3 of the U.S. corn crop has been diverted to ethanol production, leading to higher food prices and food shortages worldwide.

“This is a cruel, cruel thing to do,” said the economist. “I think they should rescind these mandates today.”

Andrew may be reached at apereira@khon2.com or ph. 591-4263.