The Irish Times is worried about Public Sector ‘reform’. Again. And.. firstly, secondly, thirdly… Michael Casey writes about the economy.

The Irish Times is banging the drum about public sector reform. And why?

THIS YEAR economic activity is expected to contract by 9 per cent. In 2010, according to recent estimates by the Economic and Social Research Institute (ESRI), output per head will have fallen back to the 2001 level. This unprecedented contraction has involved major and painful economic adjustment, in the form of pay cuts, job losses, business closures, and worries about the solvency of many private sector pension schemes.

To date, the private sector has shouldered much of the burden of adjustment in this recession, with the rate of unemployment expected to reach 17 per cent next year. The public sector has, by comparison, escaped lightly so far.

Hmmm… that’s not quite what the Irish Times said in living memory. For what of this comment from an editorial in November which argued that:

At this time, when many private sector workers are facing into unemployment or a wage freeze, public servants should be willing to accept more efficient and flexible work practices in return for their privileged and protected positions and extremely generous pension entitlements. By and large, the public service does a good job. It is not the bloated, inefficient monster that is sometimes portrayed by its critics. But, like all long-established organisations, it can benefit from change and restructuring. In particular, it should concern itself with providing flexible, integrated services that meet the needs of citizens.

Although how it is meant to do so when one reads the following proscriptions is never quite explained…

Public sector numbers actually increased last year. The public sector pension levy was a pay cut. However, the levy can also be seen as a payment by public sector workers to maintain superior pension benefits; benefits which many in the private sector no longer enjoy.

Indeed, so the argument is that lower numbers will increase quality? Hmmm…and the OECD noted that the numbers employed in the public sector were low in relation to our population. Furthermore the public sector is also working under the general tax levies which have been imposed on all workers through taxation. Now, one could argue that the pensions levy is a partial rebalancing, but is the IT seriously arguing – with further tax increases on the way (and remember, tax is a function of income), that it makes sense to impose further cuts on the public sector… in a wildly deflationary economy where consumption is down?

Still, the IT doesn’t quite make that case. Instead it strikes out on a separate path:

In March, Minister for Finance Brian Lenihan announced an immediate and indefinite public sector jobs embargo. In December 2002, his predecessor in office, Charlie McCreevy announced a similar, though less draconian, ban on public service recruitment. Those job reductions failed to materialise. Instead, the number of public service employees increased by some 36,000 (13 per cent) between 2003 and 2008. This time the parlous state of the public finances allows no room for error in enforcing the embargo. The Taoiseach Brian Cowen and Mr Lenihan will be anxious to emphasise this point when, shortly, they begin talks with the trade unions on public sector reform.

But one might argue that an embargo would be actually seen by the unions as much the lesser of many potential evils. So that’s not enough for the IT.

Mr Cowen in his recent letter to the Irish Congress of the Trade Unions (Ictu) pressed for “greater flexibility” in the deployment of people and resources across public service boundaries “so that we can restructure public service delivery”. The Government wants to transform how the public service operates. Fine Gael and Labour want the same outcome,

This begs many questions. The first being what sort of flexibility. There is already considerable movement within the public sector. And as it happens I’d have no problem (not being a public sector worker!) in there being more. But how much, and to what purpose? For paradoxically, as we know, Fine Gael et al have belaboured the point on numerous occasions that actual geographic movement in the form of decentralisation is now dead. Although that was, in some respects, the most radical restructuring of the public sector imaginable and the most specific form of flexibility I can think of.

And tellingly, for all the cant there are remarkably few solid policy statements on the nature of public sector reform. For example, the IT only lists the following as an FG proposal:

Fine Gael’s deputy leader and finance spokesman, said last week that managers in the public sector should manage, or face dismissal.

That’s not exactly a stunning innovation – is it? There’s some merit in the idea, although how would it work in practice? My experience of the commercial sector across two decades is that the idea that managers face dismissal often is a comfortable myth put around by those whose experience of that sector is rather less knowledgeable than they’d propose. Companies move much more slowly than these guys suggest. Personal relationships, etc, stay peoples hands. Unbelievable inefficiencies and poor management remain rooted in place, which could equal if not indeed exceed anything in our supposedly sclerotic public sector. Although one could equally argue that trying to impose strictures lifted more or less wholesale from the private sector and force them onto public service bodies is an exercise in futility. The two areas are too divergent for such simplistic approaches.

Eamon Gilmore, leader of the Labour Party, advised public sector unions that embracing, not impeding, change was the best way of winning the publics support and of protecting the interests of union members. Serious reform of the public sector – too long shirked by all political parties – was never more necessary. An economy in crisis presents a political opportunity to achieve that reform.

And yet again, in the course of all these words the Irish Times doesn’t explicitly state what the nature of the ‘reform’ should be. Instead we see it retreat into cookie cutter supposed truisms. Could it be that they don’t actually know what such reforms might consist of? Is it possible that ‘public sector reform’ has become one of those sort of political ‘shorthand’ concepts, where its actual meaning is much much less important than its ability to make the person using it appear forceful and willing make ‘hard’ decisions? Because in all the text of the editorial one can only take away the conclusion that reform is necessary because… er… it’s necessary.

Right so. I’m convinced.

Meanwhile by way of a contrast let’s look at a piece by Michael Casey, formerly of the Central Bank and now with the IMF. His arguments are always of interest, even if one finds reasons to disagree with them. And, they have at least the virtue of being based in factual data, rather than bland reassertions of prevailing wisdom. But, before I get to that, I only just noticed a small tic of his writing style. Every piece contains within it a list… look here, here and here. It’s all first, second and third. I like that a lot. Makes for concise reading with snappy points. Clearly his time at the Central Bank and the IMF has not been wasted.

As to his views on these matters, well, today and in a previous piece which I missed are quite fascinating. Consider his thoughts on public sector reform…

Fourth, public sector reform on the required scale would probably be a 10-year project. Existing bureaucratic practices are deeply embedded and any attempt at reform is likely to be resisted, regardless of which government happens to be in power. The much-vaunted Strategic Management Initiative took years to implement and yet failed to deliver the goods.

Indeed. And even if one were to accept the notion of public service reform, how do programmes, of any kind, work out in practice?

Evidence from the IMF and World Bank indicates that the majority of countries fail to complete three-year stabilisations; the pain and civil unrest almost invariably throws the programmes off track. In the few cases where programmes have been successful, the governments involved have been able to convince people that there is light at the end of the tunnel. In Ireland, the absence of a plan is regrettable.

Three thoughts strike me. Firstly – you see, list making, it’s contagious – that even in extremis it may be impossible to impose the sort of ‘programmes’ some call for if we’re talking about civil unrest. Secondly, that even if countries fail to complete such approaches somehow they muddle through. Thirdly, that maybe in the Irish context that there is no light at the end of the tunnel. I’ve yet, despite the boosterism form the ESRI and the government, to hear a convincing analysis as to when we can expect an upturn. If ever – and I don’t mean that in a lazy ‘we’re all doomed’ sense but rather that the economy may be consigned to essential stasis for a very prolonged period.

Casey makes, what I think, are some sensible points.

Second, the public finances are not just a mess but a dilemma. We can restore stability to the public finances but only at the expense of the economy. We can reflate the economy but only at the expense of the public finances. This is an oversimplification perhaps, but it illustrates the lose/lose nature of the problem (which could have been avoided).The promise of further taxes next year plus expenditure cuts is undermining confidence and could result in civil unrest. Many people have no experience of recession and are frightened by it.

Third, social partnership probably won’t deliver an appropriate incomes policy which is so badly needed to regain competitiveness. According to the ESRI’s recent paper on recovery scenarios, this is crucial if we are to see decent growth rates in the next decade. Unfortunately, social partnership is a wounded animal and is incapable of delivering this outcome. Which government would set aside social partnership and impose wage cuts? The answer is none.

I can’t help but feel that this dilemma is an artificial one, in the sense that the cheerleaders of the economic right haven’t been able to see the wood for the trees. So obsessed have they been in their pursuit of ‘pain’ that they don’t realise that said pain will actively injure the economy. Because away from the gloomy, yet all too optimistic, uplands of the centre-right economic and political analysis there is a stark reality. Impose the pain and you kill the economy.

And Casey has no illusions about the utility of fiscal ‘stabilisation’…

Instead of a stimulus package – which other countries have introduced – we have gone in the other direction. It could prove to be the worst own goal in our history. If the Government’s top priority of “stabilising the public finances” does extinguish the last spark in the economy, all bets are off. It might not even succeed in reducing the deficit. If economic activity falls further, so will revenue, and the Government will find itself chasing a target from which it is constantly moving away.

And he asks the central question…

But why would the Government take such a huge risk?

And answers it by suggesting that…

There are several reasons.

First, it is claimed that it would be difficult and expensive to borrow abroad. Second, if we are not seen to take some pain, our international reputation will suffer. Third, we need to widen the tax base. Fourth, we have to be seen to respect EU guidelines. Losing Lisbon was embarrassing enough – in a doomsday scenario, we may need the EU to bail us out.

Fifth, we may yet need to borrow to bail out the banks; we don’t want to exhaust our borrowing capacity too soon. Sixth, the period of fiscal stabilisation that occurred in the late 1980s did not slow down the economy.

Most of these reasons are valid, but not entirely compelling. They are mainly assertions without much research support. For example, the last fiscal stabilisation in the late 1980s was successful for a variety of reasons – reasons that no longer exist. The international economy was growing well; there was no problem with banks, no credit crunch and no fear factor arising from deep recession and job losses.

His point about the difference between fiscal stabilisation then and now is crucial. There’s no point in trying to map the past on to the present. The current economy, even in its weakened state, is a very different beast from that those of us old enough to recall the 1980s remember. I can best sum it up by the term complexity. There are, to put it simply, many more layers of services, service providers, elements within the mix. None of this is to say that those could not be wiped away by a prolonged depression. But it is to say that the nostrums of the 80s are simply not going to work in the same way now as they did then. And as to the others, he clearly dismisses them as unwarranted at this point in time.

And Casey is also gloomy, albeit measured, about prospects for change:

But in any event the recovery of competitiveness is likely to be a medium-term process; it is not going to be achieved over-night. In the short run of course, lower incomes mean lower consumption – another dilemma.

So everything, to some degree, cancels out – or actively worsens – everything else. It’s quite a state we’re in. No mistake.

Nor does Casey believe that a change of government will do anything tangible to ameliorate the situation. Not with a bank guarantee and prospective nationalisation of more institutions in the offing.

A change of government is not going to effect any improvement on this front. Indeed, no political party has formulated an alternative industrial policy.

Finally, most important economic decisions are made in Brussels, Frankfurt and Washington. Irish governments of whatever hue do not have the sovereign power to make much difference. They should, of course, have the ability to hold the mirror and keep it safe, but if they let it fall there is not much they can do to fix it. For all these reasons the economy would not benefit very much from a change of government however enlightened it might be. The present Opposition parties would have much to lose if they came to power before the recession ends.

Now there’s food for thought.