The biggest economic decision of recent years was taken late last month, and hardly a dog barked. With good intentions but flawed foresight, the Government embarked on a set of policies that could have disastrous consequences for the Irish economy.
In doing so, it set the stage for a process that will eventually place much of Ireland's private sector under State ownership, and squandered a golden opportunity to fundamentally reform the pensions system.
On July 23rd the Minister for Finance, Mr McCreevy, announced he was creating a huge State-run investment fund to provide for Ireland's pension needs during the next century. This fund is being created in response to projections showing that the proportion of old-age pensioners in the population will soar over the next five decades, straining fiscal resources.
The new fund would be created with proceeds from the sale of Telecom Eireann and other semi-States, plus an ongoing annual payment from taxpayers equal to 1 per cent of Gross National Product.
A few calculations put the gigantic scale of the Government's proposal into context. While the detailed projections behind the proposal have not yet been made available by the Government, preliminary calculations show that the value of this new fund would almost certainly eventually exceed 25 per cent of GNP.
If all of this fund were to remain in Ireland, by 2031 the Government would end up owning shares in private companies equal in value to a stake of at least 29 per cent in all of the domestic firms listed on the Dublin Stock Exchange. By the end of next year alone, this fund will have assets of over £4 billion, worth 8 per cent of the total value of listed Irish firms.
The primary danger of this plan is that it will unwittingly place a large chunk of Ireland's major firms under the ownership and control of politicians who do not face the bottom-line pressures that force private business people and investors to allocate resources wisely.
The experience of the last five decades, from the former eastern bloc to Irish Steel, has clearly shown that while governments can and should offer social and legal protections, they cannot successfully manage wealth-generating firms or allocate investment capital. Perhaps the most compelling economic lesson taught by the 1990s has been the financial meltdown in east Asia following the proliferation of politically-directed "crony capitalism".
Indeed, international economic organisations, such as the World Bank, have loudly opposed the creation of state-run retirement funds of the type proposed by Mr McCreevy for exactly this reason, noting that "the net impact on growth may be negative, rather than positive, if public fund-managers allocate this large share of national savings to low-productivity uses".
Those who argue that this could not happen in Ireland should consider the information emerging in the ongoing tribunals, not to mention the decades of ministerial meddling in the business decisions made by semi-State companies.
Indeed, the money to be made from changes in the zoning of land or the votes to be lost from closing a factory are chickenfeed in comparison with the billions of pounds available in the Government's new pension fund. Elements of the Irish financial industry are already lobbying feverishly for the multi-million-pound contract to manage this fund.
Political mismanagement of this pension fund would hurt Irish people in retirement by reducing the value of the funds available to pay their pensions. If politics rather than business criteria governs the management decisions of firms, then the future of these firms and the jobs of the workers they employ will be jeopardised.
Critics may respond that most of the pension fund will be invested outside Ireland, so that the Government might end up owning only relatively small portions of Irish companies.
THIS makes financial sense, but is simply unlikely to fly politically. What Irish government is going to consent to sending hundreds of millions of pounds a year abroad, to be invested in companies such as Ford or Barclays, while Irish firms go under (usually in a highly publicised manner) for lack of working capital?
If only 20 per cent of the fund were to remain in Ireland, the Government would still end up owning a stockholding in Irish companies worth almost 6 per cent of the value of all of the domestic firms traded on the Dublin stock market (giving it automatic directorships in many of these companies).
It also takes a leap of faith to believe that the money in this pension fund will remain untouched by future governments and voters. Nonetheless, Department of Finance literature suggests this new fund will be available to pay pensions until 2056, a period more appropriate to science fiction than economic forecasting.
Given this time-span, and the fiscal and electoral pressures that future governments will face, it seems unlikely that succeeding generations of politicians could avoid the temptation to use this money to fund popular initiatives that have nothing to do with providing retirement income.
And if this were to happen, Ireland would not be unique. A recent study by the US government's independent fiscal watchdog, the Congressional Budget Office, found that efforts by several countries to pre-fund their future pension liabilities through government-operated funds tended to be dismal failures. The reason? Politicians were almost always unable to resist political pressures to dip into these funds to pay for popular spending programmes.
Despite its flaws, the Government's proposal does address a crucial issue: the need to prepare in advance for a great surge in the number of elderly which will put great stress on public finances over coming decades.
However, rather than pouring cash into a State-run pension fund likely to be mismanaged and squandered decades before it is needed, the Government should refund this money to workers in the form of income-tax rebates on condition that workers use these rebates to start, or augment, their own private pension plans.
Giving workers personal ownership of the investment funds used to pre-fund the State's pension liabilities has all of the advantages, and none of the disadvantages, of the Government's proposal. The income generated by these private pensions would enable many retiring in future to escape dependence on government means-tested pensions, and so would lessen the future fiscal burden faced by the Government.
Given that workers would gain or lose from investment decisions they make, they will invest their pension funds in a way that is more economically rational than the decisions made by vote-seeking politicians.
Because workers themselves would legally own these pension funds, future politicians would be unable to squander them to pay for popular spending programmes. Moreover, unlike the type of pension fund proposed by the Government, this approach has a proven track record of success at international level.
Finally, the proliferation of private pension wealth could also democratise the ownership of capital in Ireland by allowing low-income workers (many of whom have been bypassed by the Celtic Tiger) to benefit from the power of investment for the first time.
Although they might receive little fanfare, the decisions that are taken over the next few years on how to prepare for the pension needs of the next century will have massive long-term consequences for the economy. We owe it to ourselves, and to future generations, to have the fullest possible debate on the options we choose.
Gareth Davis is a director of the Dublin-based Edmund Burke Institute and is currently employed as an economic policy analyst at the Heritage Foundation, a Washington DC public-policy institute