The Phoenix on Colm McCarthy of An Bord Snip

Friday July 17, 2009 22:33

by Plebian

[here's an interesting profile on Colm McCarthy from the Phoenix, and published here in the national interest]
ECONOMIST Colm McCarthy has been selected as the man to make sensible, ie swingeing, cuts in public expenditure as chairman of the Special Group on Public Service Numbers and Expenditure (‘An Bord Snip Nua’). But as ministers agonise about the wisdom of even allowing the public to know what’s in McCarthy’s report, there is no debate about McCarthy’s credentials or judgment in these matters.

Colm McCarthy

That he has always disliked public expenditure per se is regarded as a good thing in itself. Was McCarthy selected for Bord Snip simply because finance minister Brian Lenihan knows there is nobody who has a greater appetite for a slash-and-burn agenda?

Colm McCarthy has been a prominent member of the Irish commentariat for thirty years. Indeed, his prominence in economic debates stems largely from his highly visible public profile. McCarthy had early stints in the Central Bank and the ESRI, and latterly has lectured at UCD since 2005. Nevertheless, McCarthy has spent the bulk of his career as the M in the economic consulting firm DKM. While economists frequently take on consulting jobs, these are generally undertaken for the money and the results are not seen as conferring status within the profession. Academic work on the other hand often involves the acquisition of a depth of expertise in correspondingly narrow areas, a kind of trap which McCarthy has sidestepped through his late entry into academia. Consulting has equipped him to comment on a broad range of topics. His undoubted respect in the profession has resulted from his energetic participation in public forums including high- profile media work.

This profile was acquired early on. McCarthy has been variously identified as the Dean and the Doyen of the “Doheny and Nesbitt School of Economics,” named after the city centre hostelry where the young economist drank with colleagues including Seán Barrett, Moore McDowell and the late journalist Paul Tansey in the eighties. One can only imagine the force of personality and conviction that led McCarthy to stand out in such company and he is perhaps fortunate in finding such a venue to hone his sardonic wit. His style, while colourful, would be rightly regarded as Tory curmudgeonry if it had not arisen in the smokey atmosphere of Dublin pubs and pints. Instead, McCarthy’s admiring peers get away with describing it as straight talking. Add in the gruff, no-nonsense, professional Dub persona and the picture of a dependable rock of common sense is complete.

One of those who fell under McCarthy’s spell in those days was the then newly ensconced editor and stakeholder at the Sunday Tribune, that political chamelion Vincent Browne, who was then coming out
of one of his radical left phases and into more monetarist mode as he strove to make a profitable business out of the newspaper. Browne flipped from left-republicanism into John Bruton-type concern for fiscal rectitude within months of joining the Nesbitt’s pub scene, largely due to the influence of McCarthy. This culminated in a dramatic presentation to the the nation on the Late Late Show one night when Browne and Tansey scared the daylights out of middle Ireland with predictions of financial armageddon unless public expenditure was slashed — the sort of thing Browne now dismisses as right-wing scaremongering.

But McCarthy’s certainty in the rectitude of his own opinions does not arise from personality alone. This kind of intellectual arrogance is part and parcel of the training of the mainstream economist. Aspiring economists are taught that their involvement with numbers and mathematical models magically and uniquely confers on them a scientific status which practitioners of messier social sciences such as sociology can only envy. This aura of science is, however, purchased at a heavy price. Economists are incredibly squeamish about contact with the real world of the economy. You won’t find economists studying the political process by which taxation decisions are made, asking corporate decision-makers about how prices are actually set, or on factory floors investigating how capital and labour are actually combined to make cars. Instead economists make deductions from abstract models they learned in the classroom and test them against statistics downloaded from the internet. Then the models appear confirmed, often after a lot of massaging of the numbers, a publication is produced. When the models are disconfirmed, the study is quietly binned as involving “negative results”.

ASSUMPTIONS

These models are based on a set of assumptions which are taken as given and are never questioned. The first is that, as Margaret Thatcher opined, “There is no such thing as society.” The social world which is seen around us is solely the result of adding up the actions of isolated individuals. This assumption makes a lot of important things invisible to the average economist, including the key role of institutions in social life.

Finally, economists internalise as fact the basically utopian notion that completely competitive markets guide their assumed selfish activity of isolated individuals towards a mutually beneficial result which maximises social welfare. All of these assumptions push economists towards conservative political stances. If individuals freely pursuing their own personal goals in markets produce mutually beneficial results, there is little role for state intervention. Economists often bring to their deliberations a preconceived preference for the small state. Some economists are able to transcend this training. Colm McCarthy, despite his reputation for intelligence, is not one of them.

McCarthy’s views are wide ranging but have seldom strayed from this basic conservative economic framework. McCarthy, along with the rest of the Doheny and Nesbitt crowd, cut his teeth on an aggressive advocacy of cuts in government spending. This was justified through a need to cut the government deficit, but had the mainstream economic prejudice against state action lurking behind it. The necessity if spending cuts has formed a constant refrain in McCarthy’s commentary. The fact that until the current economic crisis state spending as a percentage of gross national product had declined substantially made no impression on McCarthy. In 2008, McCarthy was contending “it would be a solid base for realistic pay talks if the incoming Taoiseach were to rule out increasing tax rates to fund Government in 2009 and beyond,” and that the Book of Estimates was a “target-rich environment” that needed “a root and branch pruning” (The Irish Times, 21/11/2008).

The negative impacts on the economy of such spending cuts (economists call this the deflationary impact) don’t bother McCarthy either. As early as 1979, McCarthy was observing that following a budget-cutting, deflationary policy wouldn’t lead to an increase in unemployment because the worsening job market would simply encourage more people to emigrate. No problem then. Consistent with his free market approach, McCarthy opposed public spending as a method of job creation preferring instead tax cuts and eliminating “restrictive practices” (the term restrictive practices is often code for worker protections). An interesting commentary on all concerned was that when Haughey himself flipped over to financial rectitude in 1987 he and finance minister Ray MacSharry sought out the ‘dismal’ McCarthy to become part of Bord Snip Mark I.

DKM & NTR

Earlier, McCarthy’s horror of public investment and expenditure had provoked him into apoplexy at the DART public transport project which he railed against as financial insanity and profligacy. More recently, however, when National Toll Roads (NTR) asked DKM to prepare a report on its controversial (and extremely profitable) West-Link toll bridge in 2005, McCarthy’s enthusiasm for private transport over public was also manifest.

McCarthy, in his last report for DKM, wrote a report for NTR stating that, while NTR accrued massive profits from its bloated operation on the M50, the state was also raking it in via taxes (plus a small percentage of the tolls). The exchequer take would rise as time went on, argued McCarthy, an interesting projection, incidentally, that assumed the good times would continue to roll on and on.

As the equally right-wing but more publicly conscious economist Senator Shane Ross observed at the time, “No sensible person would expect National Toll Roads to to publicise an expensive report that fails to promote its interests. DKM delivered. NTR published.” However, while Ross argued that McCarthy’s report was designed to pass the blame for the financial and transport fiasco “from big business to big government”, McCarthy’s report also argued that NTR would make 616m net in the years to 2020. What a surprise it was then when the government bought out NTR for just 600m less than two years later.

Obviously the emigration wheeze would work less well in the current period and McCarthy has found other reasons not to worry about deflating the economy. Lately, he has been citing “Ricardian equivalence”, a decidedly right-wing theory which contends that public borrowing and spending today is always offset by consumer saving in anticipation of having to pay taxes later. Conversely, McCarthy argues, government spending cuts have little consequence because consumers increase spending because they no longer anticipate taxes later. This theory is subject to much criticism and has little empirical support.

On top of this McCarthy subsequently suggested that there might be an equilibrium level to which the economy is predestined to fall. Consequently it doesn’t matter how fast the economy contracts. In fact, faster can be better as we get to the bottom and the subsequent upturn faster. Any policy countering deflation is just nostalgia for the bubble economy of the recent past. John McHale, the incoming Professor of Economics at NUIG, compared this suggestion to the unsuccessful “shock therapy” applied to the post-communist states. As a last refuge McCarthy cites the hope that the recession may be over by the time any new spending comes on line.

The sum total of the cuts recommended by “An Bord Snip Nua” will be dictated by the Minister of Finance rather than Chairman McCarthy. Nevertheless, it would be comforting to know the cuts might be reluctant and well-considered in some cases rather than driven by an established enthusiasm for cutting budgets and firing public servants. The character of the cuts might be anticipated from the nature of McCarthy’s well-articulated right-wing views. He has frequently advocated the sale of all commercial semi-state companies. He has described some of the goals of the government’s energy white paper — including ensuring a sustainable future for semi-state energy enterprises, ensuring affordable energy for everyone, and creating jobs, growth and innovation in the energy sector — as “meaningless.”

McCarthy has also and logically been the scourge of quangos (this is somewhat ironic as, though not strictly quangos, both Bord Snips were extra-governmental bodies formed to undertake a responsibility which should rest with the Minister for Finance and his paid advisors). McCarthy once suggested that the recipients of government services should be “invited to reveal their real preferences” by paying for the full costs directly. The areas he cited specifically are health and education.

MYTH

McCarthy is actively hostile to bargaining with public sector unions. According to the Irish Independent (5/7/2009), he has said that there is “something redolent of Soviet-era central planning about Irish procedures for determining public pay … Bolshevik-style central bodies determine the minutiae of pay and conditions for 350,000 employees nationwide.” (Public employees would be surprised to learn that their pay and conditions are being set Bolshevik-style.) Instead he prefers that pay should be set as in the non-unionised private sector by supply and demand in the market. Pay setting by markets unfettered by institutions, negotiations, and power differentials is a favorite myth of right-wing economists.

Private consultants such as DKM/Davy Research have been making millions doing work and research that properly trained, qualified civil servants should have been doing for no extra cost. The latter policy might involve more fundamental changes in educational and recruitment policies that would cost a little extra money — but it would save serious money in the medium to long term. It would also mean that companies such as DKM in the ‘thrusting, dynamic’ private sector would have taken (wasted?) a lot less in taxpayers money down the years. Like most champions of the market and private enterprise, big government has been kind to them in providing grants, tax breaks, contracts and “incentives” that lets them then bite the hand that feeds them.

McCarthy has been described in his role as chairman of “An Bord Snip Nua” as “an honest broker” in the debate over budget cuts. McCarthy’s honesty is not in question. Indeed, he is one of the last people to conceal his opinions. But he is far from simply a “broker” between different interests. His partisan advocacy of his own particular political views is cloaked only by the public’s credulous acceptance of anyone with the label of economist as a “scientist” or some kind of neutral technocrat.