A note written for some younger economics colleagues.

I was lucky when I was on the Treasury Forecasting Panel (from about 1998 to 2008) that Jas McKenzie was on it too and we could discuss our experiences. Generally, our approach was that they were the Treasury forecasts and that our task was to help them understand their implications, something which sometimes gets lost in the sheer pressure of getting the forecast together. Neither Jas nor I tried to impose a different forecast on Treasury. Our role was much more Socratic.

The benefit to Treasury was that they could draw upon our analytic and technical skills honed by experiences going back over six decades, while our memories of past difficulties could help them see their way through the current ones. We both enjoyed the comradeship of working with professional, competent economists including with the newer members of the Treasury forecasting team as they learned a new trade.

We were valued. After my first panel session – Jas had yet to join – two senior Treasury economists came up to me – independently – and said it was good to have someone there who knew something about macro-forecasting. The other independent panel members were academics who had little experience of the exercise – some could be astonishingly ignorant.

There were many memorable episodes. They included sorting out what was happening to the terms of trade, the bloody inventory cycle (which may not be as serious as it was when we first began forecasting, because of better inventory management – offset by a heightened unemployment cycle which is better monitored today by the data), struggling with noise in the data or where the data definition did not correspond to the economic notion, dealing with new statistics, and making suggestions which improved the forecasting process.

The most difficult issue was that practically a macro-forecast is cycles and noise around a trend. Sometimes the pressures of dealing with the first two means insufficient attention is given to the underlying trend.

I continue to worry over this. Has the long-term trend flattened out? I have put a lot of effort into exploring NZ’s trend (back to the 1860s). The long-term productivity growth rate has been surprisingly constant. (Of course there has been deviations which are mainly explainable.) However, there seems to have been a puzzling slowdown since 2008. (It may be a phenomenon for most affluent economies.)

Alas, Jas and I did not stay long enough on the panel to help them with this. We were laid-off in late 2008 just before the GFC. This was not the Treasury choice. They told us they were most disappointed. At that time, the panel was run from VUW by a person who was bereft of macroeconomic forecasting (or any economic) knowledge and skill. He seems to have wanted to downsize and naively sacked the two most experienced members of the panel, probably because they were not attached to the university and because he knew so little about what he was doing. Treasury was unable to do anything because they gave the university independence in the composition of the panel.

The sackings had an interesting consequence. The next forecasting round occurred after the initial impact of the GFC. The Treasury forecast, in line with other NZ forecasts, badly missed the size of the downturn. When that became clear, a Treasury economist told me that with hindsight the Treasury advice on the fiscal stance to the new minister (Bill English) was of poorer quality than they expected of themselves.

We can but speculate on the counterfactual of what would have happened had Jas and I still been on the panel. But we discussed what our advice would have been at the time, so what I am about to write is not based on the hindsight of many years later.

The widespread comment at the time compared the likely outcome of the GFC shock with the Asian crisis just a decade earlier. That was obviously nonsensical, but it was all that most younger economists could remember. Jas had been on a key Treasury desk during the 1966 wool-price shock and had been pulled back into Treasury to build a forecasting unit after the 1975 forecast debacle. (Shortly after he had to deal with the data ballsup of the time.) I was not here in 1966-67 but my forecasting experience started earlier than his and I have studied the wool-price shock. We were both there in the 1985-1995 period, and so on.

Perhaps the first rule of forecasting is that the initial forecasts underestimate the size of the impact of an external shock, as exactly happened in regard to the GFC one. Had Jas and I been on the panel we would have drawn attention to the rule/past experience and asked the Treasury forecasting team whether they were confident of their relatively modest downturn. I cannot say whether the team would have lowered their track, but I am sure they would written up the EFU with greater attention to the downside risk and that would have strengthened the pessimists in the Treasury during the fiscal policy discussions.