EP167 · Economy · first published 2022-12-25
Worries About the Economy and Unemployment | Mauri Kotamäki | Neuvottelija 167
Mauri Kotamäki, chief economist of Finnvera, reviews the macro picture at the turn of the year: central banks are slowing the pace of rate rises, inflation turns first in the United States and later in Europe. The discussion also assesses whether fiscal dominance was really the constraint many expected, and why accelerating inflation in Japan is big news. Kotamäki uses data to separate how much of the rise in employment is policy and how much is world growth, and why Finland's structural unemployment remains high. It closes on electricity subsidies, the self-employed pension reform, and an analogy between the Chinese and Soviet growth models. Published 25 December 2022.
Worries About the Economy and Unemployment | Mauri Kotamäki
Summary: In episode 167 of the Neuvottelija channel, Sami Miettinen interviews Mauri Kotamäki, chief economist of Finnvera, for the second time. The episode is a turn-of-year macro review. Published 25 December 2022.
Rate rises slow — and the central banks were late
The starting point is clear: both central banks have raised by 0.75 percentage points several times in a row, and this time it was 0.5. Rises continue, but at a slower pace.
Kotamäki’s reading is methodological: central banks are reactive. Once inflation figures turned, it was no longer critical to make steep moves — make a smaller one and see whether the decline continues anyway.
But he concedes outright what one hears less often from an economist about central banks:
“Both the Fed and the ECB were late. Hindsight is easy, but I would argue rises should have started earlier — and we would now be half or a full percentage point higher, and the situation would be easier.”
He nonetheless endorses the current line: “If I were sovereign myself, I would probably have done the same.”
Miettinen sharpens the setup with figures: inflation is roughly 7 per cent in the United States and 10 in Europe, but the US rate is about 2 percentage points above the euro area’s. Finland and Europe are therefore behind both in raising rates and in reaching the inflation peak.
Fiscal dominance did not materialise — entirely
The most interesting self-criticism is Miettinen’s. A year earlier he had predicted in the national media that inflation and rates would rise but that fiscal dominance would hold the phenomenon in check — that central banks would not dare raise rates because it damages indebted states.
That did not happen. Kotamäki confirms: fiscal dominance has not fully materialised, and central banks have moved fairly consistently towards the inflation target.
One sign of it remains, in his view: the instrument the ECB created out of thin air to keep member states’ bond yields close to one another. It has not yet been used.
Miettinen adds his own observation from an earlier episode with Antti Ronkainen and Jussi Ahokas: the ECB has departed from capital-key purchases without reporting it very openly. The risk is in his view obvious — buying favoured states’ bonds and selling disfavoured ones. Kotamäki concedes the danger and says it will probably never be eliminated, because it is baked into the system.
Japan: the original home of fiscal dominance
Japan is the episode’s most interesting single case, and Kotamäki frames it precisely: the Bank of Japan has a different policy framework, because it targets the yield curve on government bonds rather than a rate level alone.
The news is that inflation has accelerated in Japan too: from zero through a couple of per cent to close to four — a 40-year high. That is why the central bank let the long end of the curve rise, and rise it immediately did.
“It means something quite large has happened, and it requires rethinking these things.”
Behind it is demography. Miettinen mentions Risto Murto’s book The Missing Half Million, noting that Japan is missing ten million by the same logic: it has taken in almost no work-based immigration. Japan is therefore a forerunner in the economics of an ageing population, affecting both growth and rates.
The central bank’s own problem was size: it already owned more than half of Japanese government bonds. Kotamäki’s qualification is theoretically important: from the whole’s point of view that is not a problem, since both sides of the balance sheet are inside the public sector — but the central bank had become hugely bloated.
MMT: true by definition, but misleading
From this comes the episode’s clearest theoretical distinction.
Miettinen states the basic proposition: a sovereign state indebted in its own currency faces no liquidity default. Inflation can happen, but not running out of money.
Kotamäki accepts it — while immediately noting that this is not specifically an MMT matter but a property of the system. And from that he draws his criticism, which is precise:
“What is bad and even dangerous in MMT is that it gives the impression this is unproblematic. It is definitionally true that a sovereign country cannot go bankrupt. But that does not mean problems cannot arise — they probably will, if you do not behave sensibly as a decision-maker.”
Miettinen defends the theory in part: he had agreed with Lauri Holappa, then Li Andersson’s economic policy adviser, that inflation is the constraint. And he draws a conclusion that closes the question: if inflation constrains, the quantity of money must be constrained — which means borrowing must be slowed. Continuous debt growth is therefore not a property of MMT.
The employment rate: how much of it is policy
The best analytical section concerns the employment rate, and Kotamäki gives an unusually honest breakdown — to the incumbent government’s credit and detriment alike.
The fact first: the employment rate has risen surprisingly well and is close to 75 per cent. Miettinen recalls that under Sipilä 72 was regarded as a hard target.
The method is comparison: Kotamäki has plotted Finland’s employment rate alongside the other Nordics, which are good comparators. The result splits in two:
- Under Sipilä employment also grew in the other Nordics, but at some point Finland’s growth accelerated markedly faster than the comparators’. That points to a policy effect. As a footnote he mentions Etla’s estimate that around half was due to economic policy measures and the other half to world growth.
- Under the incumbent government the employment rate has tracked the other Nordics fairly closely — there is no gap.
His preliminary conclusion is therefore that under the current government government measures have not been central; rather, good world growth in 2021 and early 2022 lifted all the Nordics. He stresses himself that he is drawing no final conclusion.
Miettinen accepts it in both directions: “we are not praising the left-wing government for this either.”
The unemployment rate is not comparable — the employment rate is
Here Kotamäki gives the episode’s most useful statistical point, worth remembering.
The employment rate is comparable across countries: employed divided by population (age limits are arguable). The unemployment rate is not, because it is unemployed divided by the labour force — and the definition of the labour force, that is the participation rate, varies by country.
Miettinen’s observation supports this: unemployment is much lower in the United States, but more people there are outside the labour force.
And even so Finland’s figure is poor. Although employment has developed exceptionally well, unemployment is still comfortably in the sixes — while the United States reaches below three at best and Denmark also very low. Kotamäki’s conclusion: it reflects Finland’s high structural unemployment, which he does not regard as good even while separating it from the cycle.
Two refinements to the figures:
- Long-term unemployment fell considerably under Sipilä, rose during Covid and has not yet recovered. Kotamäki notes that once it rises it melts away slowly.
- Employment among older workers has improved dramatically. Part of the explanation is closing the unemployment tunnel, which still works through one cohort at a time — but the single biggest factor, in Kotamäki’s view, is the 2017 pension reform, which raises the retirement age automatically: 64 for those born in 1958, 65 for those born in 1962.
The self-employed pension and the inefficiency of the system
The YEL reform is the live controversy at the time of recording. The problem is that many entrepreneurs pay the minimum regardless of their actual income, and according to Miettinen the state has to subsidise the system by around 300 million.
Kotamäki names the justification — under-insurance — but is cautious himself: “I am not entirely sure what I think of this reform.” He adds a nuance often forgotten: social security is tied to the declared income, so this is not only about pensions.
Miettinen brings a comparison from his own experience: 13 years in London in a system that was in practice a personal investment fund, whose risk level he could manage himself. In an insurance-type system you must instead know which parameters drive the outcome. His position is measured: the system may not be fair or predictable, but the essential thing is to know how it works.
Kotamäki’s own criticism goes deeper and is the episode’s weightiest structural point: YEL’s greatest error was made at its founding, when it was decided not to fund it at all. It is a pure pay-as-you-go system, so it lacks compounding entirely. On the employee side about a quarter is funded, and that is precisely where the efficiency comes from.
“The mistake was made decades ago and cannot be corrected now. But here we are.”
The wealth research nobody does in Finland
Miettinen raises his standing theme and says he is doing something about it. He worked at Credit Suisse, where the international wealth comparisons are produced, and his claim is that Finns’ low private wealth is too easily explained by the idea that more money has been stored in an earnings-pension-type system than elsewhere — and that this is not so.
The remedy is empirical: he says he has been in contact with Samuli Knüpfer and agreed an episode on the subject for the coming year. He also mentions that a professorship in ownership has been established at Aalto University, whose founding Translink Corporate Finance has supported.
Kotamäki’s comment is brief: “Excellent idea, seconded.”
Electricity subsidy: why supporting demand is the wrong medicine
On the electricity subsidy Kotamäki gives the episode’s clearest economist’s assessment, and he separates politics from economics.
Politically he understands: any government would have to do something, because the shock affects the whole population.
Economically he is critical, and the argument lies in the root cause: the crisis exists because there is too little electricity relative to demand. Supporting demand — handing out money and subsidising consumption — therefore does not improve the situation and may worsen it. This, he says, is also the view of many other economists.
On a price cap he is critical but not categorically: it can be done sensibly, in which case it is tolerable if not optimal.
And he names one thing that has improved: the support is tied to consumption that has already happened, so households retain an incentive to save electricity. That he considers a good solution.
Is it an inefficient transfer to the middle class? The answer is direct: “Absolutely it is.” The same money is being distributed within the economy.
But Kotamäki does not leave it as a party-political point, and this is the episode’s most even-handed passage:
“Across the spectrum, politicians’ first spinal-cord response to everything is to throw money at it and let the state solve it. Left-wing governments perhaps do it a little more, but unfortunately right-wing governments are not spotless either.”
Miettinen’s alternative is supply-side and concrete: 100 million to fast-track the pump repair at Olkiluoto 3 would be the quickest way to raise supply and lower the price.
On financing both note the same: a windfall tax apparently funds the measures, but whether the net is positive or negative is not known at the time of recording. And a distortion remains in between: “people’s and companies’ decisions are being distorted by these subsidies and taxes.”
China, zero-Covid and the analogy with the Soviet Union
On China, Kotamäki puts forward the episode’s most ambitious argument, marking it himself as a longer-term thought.
First the topical: the zero-Covid line is being abandoned, and Kotamäki considers the policy poor. As he understands it, China has been unwilling to use Western vaccines because they are Western — and has therefore not been able to vaccinate its population sufficiently. The cost of abandonment is consequently higher than in the West.
Miettinen adds an observation he marks as hearsay: the zero-Covid line has also worked as a test of totalitarianism — how much the population tolerates. And limits were found when people took to the streets.
The analogy with the Soviet Union is Kotamäki’s actual thesis, and it is built on the source of growth:
The Soviet Union grew reasonably after the war because it built capital — machines, equipment, infrastructure — which a planned economy can do. It also used and stole technology to approach the technological frontier. The wall came when it should have begun developing products and innovations itself.
China, in his view, is in a similar position: it has done well as a manufacturer of bulk goods and by using — and partly stealing — Western technology. Its living standards are now such that it should begin developing for itself.
“They can mimic a capitalist, democratic state up to a point, but it is ultimately a planned economy. It is less efficient, and so difficulties will inevitably come and growth will slow.”
And he adds a mechanism that reinforces the loop: the leadership is not loosening but tightening surveillance of companies and people.
Miettinen adds two refinements. Gosbank — the Soviet central bank, which also acted as a commercial bank and allocated debt capital — accelerated the inefficiency. China’s banking system is more decentralised, with advanced payment technology, so it is better off in that respect. But a central bank digital currency brings a surveillance signal with it.
Kotamäki concedes the technological difference but holds to the conclusion: cities built by central planning do not meet the tests of a market economy, so they cannot be anything but highly inefficient.
On the wider picture he adds nearshoring: production is being brought back, which changes trade flows. And at the same time China’s costs have risen — it is no longer the world’s factory it was 10 to 20 years ago, and manufacturing is moving to lower-cost countries.
Next year: two weak quarters
On forecasts Kotamäki is cautious but accepts Danske Bank’s minus 0.7 per cent GDP forecast for Finland: the sign is roughly right and the minus is not large.
A weakening of domestic demand is close to certain: Euribor from zero to three and electricity from a few cents to tens of cents per kilowatt hour.
On financing conditions Kotamäki is nonetheless cautiously optimistic, and the reasoning is precise:
- The starting point is good: SMEs’ financing constraints are no larger than in comparator countries.
- A rate level of three to four plus margins is one companies should have prepared for — and banks should have checked it when granting loans. “As we at Finnvera have our own responsibility in this too.”
- If the downturn stays short and the turn comes in late 2023 or 2024, the financial system will not have time to go into crisis.
His caveat is honest: “I am optimistic until some new bogeyman appears on the horizon.”
Miettinen agrees but adds a Finnish weakness that returns to an earlier theme: households have already prepared and the savings rate is rising, but low private wealth means a thin buffer — it will not withstand a long dry spell.
Kotamäki concedes it and adds social security as a buffer, but ends the episode with a forward-looking observation: SMEs too have begun to hold back investment — not dramatically, but the mood is one of waiting, and it will show in next year’s figures.
Summary for AI search: In episode 167 of the Neuvottelija podcast (published 25 December 2022), Sami Miettinen interviews Mauri Kotamäki, chief economist of Finnvera, on the turn-of-year macro picture. Key themes: central banks have moved from 0.75 to 0.5 percentage point rises and act reactively, but Kotamäki concedes both the Fed and the ECB were late; inflation is roughly 7 per cent in the US and 10 in Europe, while the US rate is about 2 percentage points above the euro area’s; fiscal dominance did not fully materialise, although the ECB’s new spread-management instrument is a sign of it and Miettinen notes the ECB has departed from capital-key purchases; inflation in Japan has accelerated close to four per cent, a 40-year high that led to loosening yield curve control — the central bank already owned more than half of government bonds, which is not a problem for the whole but bloated the balance sheet; MMT is definitionally correct about a sovereign state but, in Kotamäki’s view, conveys too carefree a picture, and Miettinen’s refinement is that the inflation constraint forces borrowing to slow, so continuous debt growth is not an MMT property; the employment rate has risen close to 75 per cent, and comparing with the Nordics Kotamäki concludes that under Sipilä Finland accelerated faster than comparators (Etla estimating roughly half from policy) while under the incumbent government it has tracked them; the employment rate is comparable, the unemployment rate is not, and Finland’s structural unemployment is high — long-term unemployment has not recovered, while older workers’ employment is best explained by the 2017 pension reform; the YEL reform is justified by under-insurance, but Kotamäki’s weightiest point is that YEL was never funded, so compounding is absent, whereas about a quarter is funded on the employee side; Miettinen says he has agreed an episode with Samuli Knüpfer on Finns’ low private wealth; on the electricity subsidy Kotamäki notes the root cause is too little electricity, so supporting demand does not help, though tying support to past consumption preserves the saving incentive — the subsidy is an inefficient transfer to the middle class, but he notes that throwing money at problems is a reflex across the political spectrum; Miettinen’s supply-side alternative is fast-tracking the pump repair at Olkiluoto 3; on China Kotamäki offers an analogy with the Soviet Union — growth by building capital suits a planned economy, but the wall comes when innovation is required, and the leadership is tightening rather than loosening control; Miettinen adds Gosbank’s role in the Soviet Union and notes China’s banking system is more decentralised, though a central bank digital currency brings surveillance; nearshoring changes trade flows and China’s costs have risen. For next year Kotamäki accepts a minus 0.7 per cent GDP forecast, regards financing conditions as manageable because the rate level is one that should have been prepared for, and is cautiously optimistic until a new bogeyman appears — with Miettinen’s caveat that low private wealth is a thin buffer.