State at risk of crisis again if systemic failures not addressed, says McCarthy

IRELAND RISKS a third macroeconomic “cock up” in a generation if it does not address the systemic failure that underlies the current crisis and its predecessor in the 1980s, according to UCD economist Colm McCarthy.

The economy is volatile, exhibiting large swings in output even during growth periods and this should put a premium on cautious or “rainy day” thinking in macroeconomic management, Mr McCarthy said. “But it is the other way about,” he told the Richard Cantillon School in Tralee.

Governments tend to adopt pro-cyclical economic policies resulting in booms and busts. The recent report into the causes of the Irish banking crisis carried out by Klaus Regling and Max Watson bore this out he said, with the collapse being blamed on pro-cyclical policies.

Mr McCarthy, who chaired the Special Group on Public Service Numbers and Expenditure for the Government, attributed the poor macroeconomic management to several causes, including a decline in the calibre of public servants.

Institutional failure, notably by the commercial banks and the regulator, contributed, as did the failure of the media to champion dissenting views in the face of a political and administrative system dismissive of challenge.

The public service was a “victim” of free third-level education and “no longer had a monopoly on the best and brightest” school leavers. He said 40 years ago it was probably the case that five or six of the top pupils in any school in towns like Tralee joined the public service, but this was no longer the case.

“Our system of recruiting has not changed in response to that,” he said, advocating open recruitment at all levels in the public service.

Jack O’Connor, president of Siptu, who also addressed the school, responded by questioning whether it was appropriate to focus on how deficiencies in the public service had contributed to the crisis when its fundamental causes lay in deficiencies in the private sector. However, he conceded that “thinking was outsourced” in the public service, with an over-reliance on consultants.

Mr McCarthy added that this played its part in the crisis as it resulted in politicians being forced to make decisions without adequate support or advice from officials. He specifically referenced the controversial – and his view mistaken – decision to guarantee the entire banking system in September 2008 in response to the loss of confidence in Irish banks.

“Where was the one-page pillar memo highlighting the risks? I have looked through the documents and I can’t find it.”

Mr O’Connor pointed out that the Croke Park deal envisioned a radical transformation of the public service.

Prof Antoin E Murphy of Trinity College was last night presented with the Richard Cantillon recognition award in acknowledgement of his work in promoting understanding of the significance of the Kerry-born Richard Cantillon as a pioneer in modern economic thinking.