EP229 · Economy · first published 2024-01-02
The Book of Revelation for the Economy | Aki Kangasharju | Negotiator 229
Etla's chief executive Aki Kangasharju takes apart the central claim of his book Talouden ilmestyskirja: Finnish GDP looks better than reality. Strip out the household sector's imputed rent and a public sector whose value added nobody can measure, and Finland is about one per cent poorer per capita than in 2008 — with tens of thousands of euros of new debt per citizen on top. The episode sets out why raising taxes cannot close an eleven-billion deficit, why the top marginal rate on labour sits on the wrong side of the Laffer curve, and why nobody knows how efficient public provision is. It ends on a disagreement about the euro and the logical endpoint of modern monetary theory. Published 2 January 2024.
The Book of Revelation for the Economy | Aki Kangasharju
Summary: In episode 229 Sami Miettinen interviews Etla’s chief executive Aki Kangasharju about his book Talouden ilmestyskirja. Published 2 January 2024.
The claim is an accounting claim before it is a political one
The title was the publisher’s idea rather than the author’s, and Kangasharju admits at the outset that he tried reading Revelation for comparison and found it in a messier state than his own manuscript. After that the episode gets to the substance, and the substance is national accounting.
Value added arises in three places: firms, the public sector and households. Only the first is measured in a way that means what it appears to mean.
The public sector: door handles as the measure
This is the single most instructive explanation in the episode.
Public-sector value added is not measured from outcomes but from output proxies. In health care the proxy is the number of doctor’s visits — in Kangasharju’s own image, “how much the hinges wear” — rather than what happens to the patient’s health. The correct measure of value added would be the latter.
From this follows a mechanical and counter-intuitive result: when real wages and costs rise while the number of visits stays flat, measured public productivity declines as a trend — even where the quality of care has plainly improved. Improving quality does not enter the statistic.
Miettinen’s assumption at the start of the exchange is the one many people share: that the public sector’s GDP contribution is simply its consumption spending, which would build in a moral hazard — more spending, more GDP. Kangasharju corrects him: that was the old method; output proxies are used now.
One historical detail is worth noting: separate public-sector productivity statistics used to be published alongside the change in method, and publication was discontinued during the 2010s. The calculation continues inside the national accounts, but the separate productivity statistic is no longer available.
The conclusion is the hardest line in the episode, and it is offered as an observation rather than an accusation:
We do not know where we are efficient, where we are inefficient, or how inefficient.
The household sector: imputed rent, inflated by interest rates
The second mechanism is even less widely known, and it explains much of why Finnish GDP looks better than daily life feels.
Household-sector value added comes almost entirely from imputed rent: the notional rent an owner-occupier is recorded as paying to himself. No money moves. The figure is a gross rent from which housing costs and mortgage interest are deducted.
And here is the key: when interest rates went through the floor in the 2010s, the interest component shrank — so less and less was deducted from the gross rent, and imputed rent grew year after year.
At the same time the hours booked to the sector were falling. The labour hours recorded against households come largely from agriculture and from sole traders — and farm hours have declined steadily. Value added up, hours down.
The result is absurd in a way Kangasharju says out loud: household-sector productivity has risen 26 per cent since 2008. Miettinen’s remark is the best compression of what the figure means — he describes having been “extraordinarily productive” for the national economy while asleep in a flat he owns.
What is left
Take those two away — the household sector, and a public sector that cannot be measured — and what remains is the episode’s core claim:
- Finland is about one per cent poorer per capita than in 2008.
- On top of that has accumulated tens of thousands of euros of additional private and public debt per citizen.
The business sector divides into two phases: about a 10 per cent decline to 2015, and about a 10 per cent recovery since — back, roughly, to where it started.
One industry stands out: IT services, which on Kangasharju’s account has done more than any other to raise GDP per head, and much of whose value added comes from service exports. Miettinen notes that the mercantilist goods-export machine is effectively dead and that service exports have replaced only part of it — the transformation has happened, but more slowly than in competitor countries.
On the current account the observation is unambiguous: the whole national economy, public and private sectors combined, has borrowed from abroad every single year since the financial crisis.
Why taxation cannot close the deficit
Here the episode moves to numbers, and they are checkable.
Miettinen sets the scale: nominal GDP is on the order of 280 billion, and the state deficit was heading for about 11.5 billion. He translates it into the language of an organisation — measured against the state’s own spending that is a deficit of roughly 14 per cent every year — and asks what organisation would survive it.
He then sets two 2022 figures side by side: earned income of 151 billion (about +5 %) and capital income of 13 billion (about −11 %). The conclusion follows directly: even confiscating capital income in its entirety would not close the deficit.
Kangasharju’s answer is mechanical rather than rhetorical. In a country with no growth, tight taxation and a great deal of debt, raising taxes leaves spending untouched — and spending has a dynamic of its own, because public-sector wages have to rise and transfers have to grow if income differences are not to widen. That produces a loop in which taxes must be raised again and again. The only permanently debt-reducing measure is cutting spending.
The total tax rate is the wrong measure
This is the passage where Kangasharju disputes a number often used on his own side of the argument — which is worth noting.
Miettinen offers two figures: the total tax rate is the fourth highest in the world (it peaked at 43.2 per cent and has come down slightly), and the top marginal rate on labour is 59.4 per cent, the highest in the EU.
Kangasharju’s response: “that conversation should stop altogether, because the total tax rate measures nothing.” The reasoning has three parts:
- Systems differ. Some countries pay tax-free transfers, others taxable ones. If Finland raised tax-free transfers and made them taxable so that the net amount stayed the same, the total tax rate would rise without anyone’s position changing.
- Borrowing distorts the comparison. He notes that adjusted for the pace of borrowing, Finland’s figure would be higher than reported.
- The right method is to compare tax by tax — and then what stands out is the steep progression on labour.
The Laffer curve: where it applies and where it does not
Kangasharju’s position is direct: several studies suggest that cutting the top marginal rate could raise more money for the state, and the Nordics have been on the wrong side of the Laffer curve for labour taxation.
He offers two countries as evidence:
- Denmark cut its top marginal rate by ten percentage points in 2009, with results he regards as good.
- Sweden has cut by about five percentage points.
Both are now below Finland, which removes a counter-argument used in election debates — that Denmark was still above Finland.
On the behavioural effect Miettinen gives his own example and “turns himself in”: he calculates the effect of gross pay and the marginal rate before taking on additional work. The argument is not that anyone refuses a raise, but that the choice changes at the margin between work and leisure, and when changing jobs.
And here comes the most important qualification in the episode, and Kangasharju makes it himself: the Laffer curve sits at a different point for every tax. On labour Finland is in his view clearly on the wrong side; on property tax, almost certainly not. Miettinen confirms the comparison from his own experience of Britain, where capital-gains taxation on property is higher.
On capital income Miettinen supplies a figure: the top capital-income rate of 34 per cent is the third highest in Europe on Tax Foundation data. His argument against closing the gap is mobility: capital crosses a border more easily than a person does, so labour income can be taxed more heavily than capital income — not the other way round.
A private good, provided publicly
The structural section is at its clearest where economics has something specific to say.
The distinction is fundamental: a public good is one a market cannot supply — defence, for instance — and there a state monopoly is justified. A private good can be produced on market terms. The observation is that Finland produces an unusual amount of private goods publicly.
Three concrete findings:
- Avoiding competitive tendering. Municipalities set up joint ventures in which each holds a very small stake, which lets them buy from their own company without a tender.
- The purchaser–provider model has been forgotten. Even where a service is to be provided publicly, it could be bought from subcontractors rather than staffing a permanent organisation. Miettinen notes the model’s own weakness himself: purchasing can distort, if large batches of the irrelevant get ordered.
- Why efficiency never arrives. A municipal or wellbeing-services-county employee holds tenure that ends only through misconduct; politicians run the organisation; and efficiency is not measured. Kangasharju’s comparison is honest: listed companies accumulate inefficiency too, but there it is removed through redundancy negotiations — in the public sector it is not removed, not measured, and not something anyone wants to know.
To this he attaches a point made by Bengt Holmström in an interview: when the public sector looks after you from cradle to grave, absolute misery disappears — which shows in happiness metrics — but a person can start to feel worse, because he no longer solves his own problems or makes his own choices.
Labour input: where Finland is good and where it is not
This is the most balanced passage in the episode, because it separates two things that public debate runs together.
Full-time work. Full-time employment among the working-age population has always been high in Finland and is now level with Sweden. There is no problem here.
Part-time work. Here Finland has been “absolutely dreadful”, and although the trend has been good since 2015 — after pension and labour-market reforms — the level remains clearly below Sweden, the other Nordics and the Netherlands.
And then comes the distinction that is the episode’s most analytically precise:
Getting older workers, the partially able and the long-term unemployed to do even a little work is good public-finance policy — but it is not productivity. Raising living standards requires structural reform, not more hours from where value added per hour is lowest.
On incentive traps Kangasharju gives the precise mechanism: transfers withdraw quickly as soon as earnings begin, and once tax progression is added, the effective marginal rate on taking work easily exceeds 60 per cent and can reach 100 per cent for a single parent. Miettinen draws the same thing as a cash-flow curve: at the low end the income-tax rate is competitive, but the step from benefit recipient to employed is steep enough not to be worth taking.
Income differences and social mobility
Kangasharju offers two figures that should be read together, because they point the same way:
- Income differences after taxes and transfers are among the smallest in the world — a couple of countries may be lower.
- The correlation between a parent’s and a child’s income is the lowest in the world.
The second is his point: it is a measure of social mobility, and on it the “American dream” is more probable and more achievable in Finland than anywhere else. Miettinen adds an honest qualification: mobility is relative here, because taxation removes the absolute wealth — what is being measured is position relative to others.
Attached to this is the episode’s media argument. Miettinen describes how the debate about rising income differences repeatedly takes 1993 as its comparison year, and Kangasharju answers with an institutional explanation: the press sides by default with the smaller party, so comments are sought more often from whichever side is presumed to be the underdog — and in Finland the presumption is that the business sector is doing well and the citizen badly, when it is precisely the business sector that has withered.
Kangasharju also notes that the year had been Etla’s best ever for media visibility.
The disagreement about the euro
The last third is the reason to stay, because interviewer and guest do not converge.
Miettinen’s claim. The euro is itself an ultra-radical, non-classical monetary experiment: a currency without a state, running against Mundell’s optimal currency area theory. On the mainstream view, a sovereign area with its own power to tax should have its own market-based money. He regards the logical endpoints as fiscal union or the unwinding of the monetary union.
Kangasharju’s answer. The framing is interesting and the arrangement is not optimal — but three qualifications:
- The euro is not the core of Europe’s problems. The EU’s own tax take is about 1.5 per cent of GDP, negligible next to national public spending, and the Commission would regulate just as eagerly without a common currency.
- Removing the euro would have benefits — particularly as a pressure valve in shocks — but would not solve the problems.
- The monetary union has proved resilient. He says plainly that he expected it to collapse several times over, and claims in his book that it may in fact last.
Miettinen describes having entered the Wolfson Economics Prize competition with a model in which the euro survives as an SDR-style basket currency while regional monies return through digital money. He concedes he has given up pushing it — “the omelette is too scrambled” — and hopes only that the digital-currency reform will make room for a regional layer.
The logical endpoint of modern monetary theory
The sharpest single argument in the monetary section is Kangasharju’s.
Miettinen first makes a concession: in the post-Keynesian framework the modelling of balance sheets is roughly right — the transfers between commercial banks and the central bank are described well. His own criticism concerns the move from description to prescription: that state debt and a central bank claim offset each other does not mean the debt side can be expanded without limit.
Kangasharju takes it further. Imagine a world in which banks could not create credit and were merely an extension of the central bank. Two things follow:
- Growth can only come from taking on public debt.
- The private sector shrinks continuously.
His conclusion: “their ultimate objective is communism, in which the state owns everything.” Miettinen recognises the structure historically — the Soviet Gosbank effectively handled the private sector’s borrowing needs too — and calls the argument a fresh way of putting it.
Both agree on one qualification: the quantitative easing that was actually carried out was not modern monetary theory, because it was done in a world where banks retained the right to create money.
A strike day, and one concession
The episode was recorded on a strike day, and the closing section is about wage formation.
Kangasharju’s criticism is structural: the strikes oppose reforms carried out elsewhere long ago, and much of it is the defence of benefits already won.
But he makes one clear concession, and it is the most honest moment in the episode:
On one point he agrees with the protesters. Social-security cuts that fall on people unable to work go in the wrong direction, because they have no way to compensate through work. Cutting earnings-related unemployment benefit is in his view defensible precisely because those affected are able to work. The government could have cut elsewhere.
On wage formation he sets out a thesis he attributes jointly to himself and Etla’s Antti Kauhanen: in the 1990s Sweden, Germany and Denmark moved to a more decentralised model and the state left the wage table, while in Finland the tripartite arrangement continued with a finance-ministry representative present at effectively every round. The consequence: the labour-market parties never learned to negotiate with each other, because there was always a third party to underwrite the outcome with a tax decision. Now that the state has withdrawn, the channel does not exist.
What survives
Three things.
Two measurement artefacts that are not political. Public-sector output proxies and the household sector’s imputed rent are accounting choices whose effect is the same whatever one thinks of them. Together they explain why the GDP figure and lived experience do not match.
One number that bounds the debate. Earned income 151 billion, capital income 13 billion. So long as the deficit exceeds eleven billion, the question of whether it can be closed by taxing capital income is settled by arithmetic rather than by ideology.
A disagreement left unsmoothed. The interviewer’s reading of the euro as a radical experiment and the guest’s reading of it as a resilient arrangement both stand, and the reader is left to weigh them.