A combination of State regulation and private sector expertise could get us out of this mess, writes Paul Sweeney
THE WORLD has changed dramatically in weeks. The collapse of the unfettered "free" market system has been cataclysmic and very public. It will change economics and business. It will also change politics and society. It is not the end of capitalism, but of the Anglo-American model. It may be the end of Western economic dominance. It is the end of the myth of "private sector good, public bad". It is the beginning of a new world economic order.
It is now clear that markets are institutions framed by people, and that "free" markets seldom exist in reality. Power plays the key role in framing market rules, and those with the greatest power dominate in setting the rules in liberal markets. Neo-liberals took the model to extremes - experimenting with financial markets without regulation.
In the liberalised, deregulated, "privatised regulator" model, competition became so intense, with low interest rates, that it imploded. There was great financial innovation, as liberal competition theory predicted, but most of the new products were toxic debt, wrapped up in AAA ratings and certified by private rating agencies. As the CEO of Moodys, Raymond Daniels admitted, "unchecked competition can place the entire financial system at risk". He wrote this a year ago, when a third private ratings agency put Moodys under fierce competitive pressure. This led to bad debts being certified as good.
The greatest villain in generating the crisis has to be Alan Greenspan, former chairman of the US Federal Reserve. This Social Darwinian has powerful admirers in Ireland. Greenspan really believed in free unregulated markets. He only recently admitted that the "whole intellectual edifice" of the risk management model "collapsed last summer".
In the US, there has been a revolution, with massive state intervention in the economy. The social conservatives have become conservative "socialists". While the American dream has been broken for some time, finally there is a growing recognition that US society is deeply divided. Twenty years ago, most Americans, (71 per cent) believed that America was not divided into "haves" and "have nots". Today that is down to 50 per cent, with growing numbers seeing themselves on the wrong side. US social mobility is now lower than in Europe. The predicted landslide for the Democrats will have a huge impact on business: corporate behaviour, rule-making for international markets, and on the World Bank, IMF and OECD.
Ireland could be dealing better with the world financial crisis had our leaders done things differently. The Government a) squandered phenomenal public income and b) failed to regulate the private sector. It did both because the ideology of "free" markets and low taxes was so dominant; the latter supported by many citizens. The minister for finance who presided over the boom years, Charlie McCreevy, was more than a willing apostle. We were "closer to Boston than Berlin", to the Anglo-American model of capitalism, rather than the European social market model. The boom years generated great wealth and the exchequer took in vast sums after the boom began, in spite of massive tax cutting. The Government's surpluses, between 1996 and last year, totalled a staggering €58 billion.
Had we chosen not to cut taxes so deeply, today, we could have, a) far better public services, including a comprehensive health service, b) had greater investment in modern schools, colleges, hospital, trams and roads, and c) a huge counter-cyclical fund to pay for both (a) and (b), in this downturn.
But we chose to cut direct taxes and now we have to borrow €4 billion to maintain day-to-day services in 2009. We will probably have to raid the pension fund to prop up the banking system.
A strange aspect of the crisis in the private banking system has been the virulent attacks on the public sector by conservative commentators. The public sector does have areas of inefficiency; it can be slow to engage in structural reform, and often management skills may be poor or absent. This is a cause for concern. It is not a reason to damn the whole public sector.
On the other hand, if one added the costs of all the inefficiencies in the public sector over the past 20-30 years, plus all cost overruns, real or perceived, of public capital projects, they would never add up to the potential cost of the bailout of the private banking system. This was generated not by inefficiency, but by gross incompetence. But oversight by the public regulators was deficient too.
What is now required is not mud-slinging, but a new public/private paradigm, which uses the best of both sectors.
Getting the best value for public services will always be on the political agenda. The idea that "the private sector does it better" has always been questionable, but what has happened in private financial services has demonstrated that the public sector may be far less incompetent than the private.
The return of the State to regulating and directly participating in the market has to be judicious too. Good regulation is firm, but not stifling. The dominant views of how markets operate, and for whom, has to change. Ireland should consciously adopt the European social market economy, with its public/private balance, so that we all can prosper.
The shambles of the Budget reveals not just the incompetence of the Government, but also the lack of serious economic expertise in the Department of Finance.
The Government badly needs the support of a cadre of first rate economists and other professionals, who take a long-term, strategic view. The paucity of strategic economic advice has been embarrassing.
The efficiency of all public spending would be greatly improved if a "Government Economic Service" was established, staffed with the best economists and other professionals. The new service should be at one remove from the short-term, cost-cutting mentality of the Department of Finance.
The economic outlook is grim here and internationally.
We did not husband the great wealth of the 10 boom years. The Government inflamed an overheating property boom with €2.4 billion in tax subsidies, and still did not terminate many business subsidies in the Budget.
There are some positives. Inflation and interest rates are falling. But the best outcome is that the very public failure of the deregulated, liberalised financial system means governments have been forced to act together to re-regulate international banks and business. Sovereign governments are taking power back from corporations and will have to restore the balance to citizens by setting new rules for the market.
Had the Irish Government learned anything from the collapse of the neo-liberal model, it would never have brought in such a regressive Budget. To quote Keynes: "Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist".
• Paul Sweeney is an economic adviser to Ictu, the Irish Congress of Trade Unions, and has written five books on business and economics, the latest being Ireland's Economic Success.