Confronting brutal facts key to return of prosperity

 

OPINION:Economic pain can be a catalyst for serious change in the way our society is organised, writes DONAL CASEY

DECISIONS ARE the lifeblood of an effective organisation. Strip away the clutter, and all that is left is an endless stream of challenges and choices requiring decisions and action. A sound decision-making process is a vital sign of organisational health.

On the surface, the process of making decisions appears straightforward. The issue in question is identified. All the relevant facts and background data are gathered. A planned meeting of the right people debates the issues, and a way forward is agreed and implemented.

Reality is very different. Decisions evolve from a rolling maul of conversations, analysis, intuition, debates and cups of tea. Most decisions are made outside the “meeting”. Political decision-making is even harder to define, as public discourse and media commentary assume centre stage. The vital signs of our national decision-making process are barely perceptible now. Debate in the last six months has degraded into populism and self-interest. If the first casualty of war is truth, then the first casualty of national economic meltdown must be facts.

Good to Greatby Jim Collins et al is a highly acclaimed study into the habits of enduringly successful organisations. It details half a dozen key insights, but one in particular is urgently required in post-Celtic Tiger Ireland – Confront the Brutal Facts.

Only those organisations with the honesty and rigour to face unpalatable facts about themselves and their operating environment achieve enduring success. This makes perfect sense, and resonates with the Darwinian concept of adaptiveness as the key to survival.

We are nearing a situation where a fact-checking process, akin to the referendum commission, is needed to protect the honesty of public debates. Real observed data deemed “inconvenient” to one’s argument have been summarily cast aside. Much of this selectivity has routinely gone unchallenged on live radio and television. False certainty is another favoured tactic in the current debate, as absolute pronouncements are made on issues of unknowable uncertainty. Some opinions are expressed with a level of confidence that is fundamentally out of step with the uncharted waters in which we find ourselves.

The debate on Nama rages on. The definitiveness of some commentators belies the complexity and uncertainty of the issue. The most honest answer I have heard on Nama from one our most respected economists is – “I don’t know”.

The country is currently splintering along the public/private sector fault line. It is the wrong fault line, as both sides are inherently interdependent. However, it must be within our capacity as a country to determine the change in the relative earnings of both sectors since the onset of recession. The best efforts of the CSO and ESRI in this regard have been dismissed within hours of their publication.

Some of the facts are beyond dispute. One in nine workers in the private sector has lost their job. The equivalent number in the public sector is less than one in a hundred. The Revenue has a complete year-on-year analysis of earnings which could provide irrefutable data on the interplay of salaries, variable pay and bonuses in both sectors. Around 1.9 million data points from real-time tax returns would be impossible to ignore.

Agreeing the relative pain being experienced in this fashion would facilitate an honest debate about fairness.

That brings us to the thorny issue of the public sector pension levy. This has now been firmly established by union leaders as a salary cut rather than a proportionate payment towards gilt-edged pensions, not available to private sector workers.

A recent contribution to the debate has been a report from the Comptroller and Auditor General on the real cost of public pensions. This 89-page report is littered with inconvenient truths on the issue, notably that our national liability for accrued public service pensions is now estimated at €108 billion. The report requires much more commentary than space allows here, but it does make one thing clear. The relative earnings debate must include the impact of pensions. Trade union leaders cannot on the one hand define the pension levy as a salary cut, and in the next sentence defend their gilt-edged pensions on the basis that their members are paying two-thirds of the cost. These positions are mutually exclusive.

Selective use of emotionalised anecdotes has been another feature of our degraded national debate. Policy decisions based on individual cases are never robust. They are a lazy substitute for proper analysis. Anecdotes are only useful in turning sound decisions into a communicable narrative.

Some individual abuses of our pensions system appear to be driving a flurry of activity on the issue of pensions tax relief. Responding to these individual cases by turning the system upside down is not the answer. The law of unintended consequences plays out over decades in the world of pension provision. Proposing fundamental changes in a week-long renegotiation of the programme for government is not sound policy-making.

Shifting the budgetary adjustment to public expenditure this year does not change the ongoing cost adjustment that is needed in the private sector. The first round of cost-cutting has centred on job cuts and the elimination of variable pay. Much more is needed in salary cuts, particularly at senior levels, where the greatest benefits were seen during the boom.

These lower costs are already translating into cheaper products and services for all workers, public and private.

Making these adjustments in the form of extreme tax increases for higher earners would fail an economic cost benefit analysis. We are competing internationally for high-end, knowledge-based jobs. These are the most geographically mobile. We need Google more than Google needs us. A return to the wealth tax ideology would in the medium term inevitably lead to reduced earnings and pensions for those advocating that strategy. Providing for €108 billion worth of public sector pensions requires a lot of private sector wealth creation.

The Good to Greatinsight had a second part: Confront the brutal facts, yet never lose faith. The authors called it the Stockdale Paradox after a US army admiral who survived eight years in brutal captivity during the Vietnam war. Jim Stockdale later recounted that all the optimists had died in the “Hanoi Hilton”. They kept thinking they would be out by Christmas. He had maintained an unwavering faith that he would prevail, but combined this with a brutally honest view of the prison camp reality.

Without doubt, we have made serious mistakes in our first era of widespread prosperity. There is painful learning in the embers of the Celtic Tiger. Deep learning is rarely possible without pain. This pain and anger can be the catalyst for serious change in the way our society is organised and led.

We too must keep the faith. The enduring positives of our Irishness remain. We are a young bright country with an extraordinary diaspora. We are an English-speaking hub for the EU market. An island nation, we are born traders with the innate social skills required to thrive in the knowledge era.

There is a pathway back to prosperity but it isn’t paved with division or denial.


Donal Casey is an actuary and managing director of Aon Consulting (Ireland). The views expressed here are personal