Economic mis-predictions

On this day when NZ will greatly relax its restrictions on social behaviors put in place due to the Corona virus, it should be noted that many of the 'economists' regularly consulted by our mainstream media, some of whom own private consulting firms and others who work for big banks, appear to have largely got their economic forecasts wildly wrong.

For example, there was much talk about "Great Depression" levels of unemployment in this country. However, the Great Depression started in 1929 and lasted many years. It was still going strong into the mid-1930s. Unemployment went up to over 20% in America.

By contrast, as of today, the NZX 50 share index is almost 12% higher than one year ago. Our unemployment rate is still way below double digits. How serious the Kiwi recession turns out to be hinges on how long this health crisis lasts. Greg Mankiw, a former Chair of the US President's Council of Economic Advisers, notes that, unlike during the Global Financial Crisis in 2008, most of the rise in US unemployment in 2020 has, so far, been temporary and NOT permanent.

Back to the Future

The oldest, unanswered question in NZ economics has to be, "Why is our productivity growth so low?". The Productivity Commission was set up in 2011 to investigate. Its latest report says we need more large, 'frontier firms' to underpin export-oriented, innovating clusters. How we get more of those types of firms is left unclear.

My four chief explanations for our weak productivity growth are:

1. Many Kiwis don't see it as a concern that needs fixing. Why? Since we almost top the world in terms of (reported) life satisfaction, leading to little desire for change. Most Kiwis believe NZ is already one of the best places to live. Don't-rock-the-boat policies are popular.

2. The brain drain. Frontier firms need risk-taking, ingenious individuals to spear-head them. But those types often leave NZ. The world is their oyster and they can often find more stimulation elsewhere (and make more money!).

3. Our welfare state, particularly the health-care system, was largely designed 80 years ago and needs reform. It has created poor incentives. Moreover it hasn't solved the problems of poverty and inequality that it was meant to solve. Covid-19 has deepened this crisis.

4. NZ is small and geographically isolated. It isn't close to big markets, like Ireland, which is also a green island nation of 5 million people to which we sometimes compare ourselves.

The Productivity Commission report is here:

https://www.productivity.govt.nz/assets/Documents/frontier-firms/2580acf490/Frontier-firms_David-Skilling.pdf