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  • Robert MacCulloch

The news today is: "Treasury's admission that officials use 'professional judgement' to predict house prices, rather than a solid economic model, has shocked Green, National & ACT MPs, who are demanding answers. Green MP Chlöe Swarbrick says it's important because in 2020, Treasury predicted a house price fall, which informed Government & Reserve Bank decisions that, instead, saw house prices increase an historic 25 percent in one year. "We literally have it on the record, quite explicitly, that they're using their 'professional judgement'. That isn't giving us any form of insight into the variables used to predict house price forecasts, which in turn inform Government policy," said Swarbrick.

Our MPs are discovering what has been an open secret amongst many of us in the Kiwi economics profession for years. Namely the NZ Treasury doesn't have the technical expertise to do the state-of-the-art forecasts which Swarbrick had expected it to be doing. Why? Since it has had an explicit policy of NOT hiring economists who have done the high level degrees and research which are a necessity for learning the skills required to do those forecasts. Instead Treasury has favored a more "holistic" approach to hiring, particularly of folks from non-quantitative backgrounds. Look at the Secretary's "leadership team" - not a single Masters in economics to be found, let alone a doctorate.

It's even worse at the Reserve Bank of NZ. Whereas at the Reserve Bank of Australia, the Governor, Deputy Governor and Assistant Governors in Financial Markets & Economics all have PhDs, three of the four from MIT, the best economics department in the world, not one of the equivalent people has anything like that kind of qualification at the RBNZ. Its' Chief Economist has a BCom. And we do have the talent here in NZ - they're just not hiring it.

So no wonder Treasury officials have been making guesses about future house prices - they just can't do the maths and stats and econometrics which are needed to do proper forecasts. As a result, they wrongly forecast a fall in house prices in 2020 .. which was one of the reasons the RBNZ embarked on its $100 billion quantitative easing program .. which ended up exploding house prices .. which has priced first home buyers out of the market and exacerbated homelessness. Treasury officials sit on the RBNZ's Monetary Policy Committee so there is direct link between their failed forecasts and the RBNZ's mistakes.

New Zealand has long been struggling to achieve higher rates of innovation and productivity growth. In spite of the pro-market reforms in the 1980s, we're still performing poorly on this front. Some of us have consequently become suspicious that there maybe a lurking cause of the problem that's difficult for any government policy to overcome. A forthcoming article, called "The Effect of High-Tech Clusters on the Productivity of Top Inventors", in the American Economic Review, may identify such a root cause. Here's the abstract:

"The high-tech sector is concentrated in a small number of cities. The 10 largest clusters in Computer Science, Semiconductors and Biology account for 69%, 77% and 59% of all US inventors, respectively. Using longitudinal data on 109,846 inventors, I find that geographical agglomeration results in significant productivity gains. When an inventor moves to a city with a large cluster of inventors in the same field, she experiences a sizable increase in the number and quality of patents produced. The presence of significant productivity externalities implies that the agglomeration of inventors generates large gains in the aggregate amount of innovation produced in the US".

In other words, creative, happening people often prefer to live near other creative, happening people in cities so as to physically meet up, get mentally stimulated & feed off each other's ideas, which makes the group even more creative & more happening. Is NZ just too far away, too sparsely populated & too small to get this sort of dynamic going?




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Robert MacCulloch