Juhana Vartiainen is the director of the VATT Institute for Economic Research, which analyses public finances in Finland and evaluates economic reforms. He is a recognised – and extremely interesting – expert. Until some weeks ago, he was a well-known economic expert for the Finnish Social Democratic Party. He is today a National Coalition Party candidate in Helsinki, and the economic adviser of Alexander Stubb… It may be a sign that the welfare state is perhaps not anymore the main difference between right and left in the Nordic countries. We will come back on this point in our editorial analysis of the political situation next week.
So, how did you come into politics, initially?
I was a child of the Cold War and of the roaring ‘60s and ‘70s, and I went to school in France, Lycée de Sèvres near Paris. I was there from 69 to 73. That was a time of frantic debates about capitalism and communism, and we had very ambitious teachers who wanted to teach to the children how to discuss and how to respect each others’ opinions. I had a very prominent friend, a Danish friend and classmate, who became the chief editor of a big Danish daily newspaper in politics, and for us, this was the issue: capitalism or communism.
And that, somehow, I have kept with me throughout my life. In the ‘70s, then, when we came back to Finland, that was also a period of frantic politics, since the left was then strong and ascendant, and they wanted to launch this basic comprehensive school, and this was adamantly opposed by the conservative wing of politics. For me, as a young person, the conservative party seemed reactionary. They were against female employment, and they were against sexual liberation, and they were against comprehensive school for everybody. In front, we had the orthodox Communists, who wanted Finland to become part of the Soviet Union. So, for me, the reasonable way seemed to be a social market economy, or a kind of mixed economy, represented by leaders like Olof Palme and Willy Brandt. And that was my choice.
Then, in 76, perhaps, I joined the Social Democratic Party. I was never a professional politician, but in the ‘80s and ‘90s, I was involved with the economic policy committees of the Social Democratic Party, and I was even a candidate for the Parliament in the 1995 election, when Paavo Lipponen came into power. I was not elected, but I did reasonably well. I was then an economic policy-oriented intellectual of the Social Democratic Party. But then, I moved to Sweden in 2002, and there I was no more involved into politics. But I became gradually more and more impressed with the record of the Swedish Moderates centre right party, a body who seemed to be able to react to the challenges of financing the welfare state in a reasonable way.
How did the situation change in Finland, since the 70s? How is it now?
Well, I think the big tectonic plates, or the big movements, have been that the political right has more or less accepted the social democratic welfare state. In all of these Nordic countries, they have realized that they cannot win elections by wanting to dismantle the welfare state. And then, the younger generation of politicians in these parties, like Jyrki Katainen or Alexander Stubb here, or like Anders Borg in Sweden has also grown up with this universal welfare state system. They have become completely comfortable and accustomed to that. So, in that sense, the right wing of the political spectrum has moved to the centre and achieved their political successes by these means.
And at the same time, we come to the break point where the present demographic challenge makes the financing of the welfare state more difficult: the number of people in working age shrinks, and it shrinks with respect to the number of people who don’t work, so that we have a structural problem for the welfare state. The correct response is to try to increase labour supply by trimming up the welfare state, like the unemployment compensation system, or increasing immigration, or increasing the retirement age, that kind of hard measures. But that, in the end, will secure a labour input that is large enough to generate the tax receipts that will be needed to finance the welfare state.
In Sweden, after 2002, when I worked there as a civil servant, I started to think that the centre right parties are well-adjusted, more capable of introducing these policies, whereas social democracy in Sweden, and still more in Finland, has great mental and intellectual difficulties in adapting such policies that many think are against their interests, although they, in the long term, are precisely what is needed to make the welfare state economically robust.
Some weeks ago, you surprised everybody by running as a candidate for the National Coalition Party. How did it occur?
Well, this difficulty for the Social Democrats had created a frustration in me, as to the social democracy’s economic policy capability. I had been sitting in their economic policy working groups, where I thought that they were not at all focused on the right issues, and they more or less repeated empty slogans to each other, and they wanted to interpret the entire economic crisis, now, as a deficient aggregate demand. And it is true that we do have a recession, so we could do something to increase aggregate demand. But still, the basic, big issue for Finland is to increase employment by supply-side measures, so that we can overcome this sustainability gap in the public finances. So, I have become frustrated with social democracy.
I had written about these issues many times, but I did not seem to get any sort of positive reaction, or any reaction at all, in fact, within social democracy. So, this was the situation when, then, I was contacted by the Prime Minister, Mr. Alexander Stubb, who also is the head of the National Coalition Oarty , and he asked me whether I would like to consider to run as a candidate for the Parliament in his party, and also become his right hand in economic policy-making. Of course, since I had, during my entire career, been interested in economic policy issues, and since I had been writing critically about economic policy, when somebody like the Prime Minister says to me, “Well, if you are not happy with economic policy, well, come on and make some policy yourself!”—then it was a difficult decision, but in the end, it was an offer that was hard to resist, you understand.
Considering the challenges for Finland, what kind of recommendations have you made, or are you going to make, for Finland’s economic policy?
Well, we just wrote a report together with the former Minister of Finance of Sweden, Mr. Anders Borg, which was published a month ago. And there, we basically identify the main structural challenges for Finland as of now. The first one is to establish a new wage-setting process, new wage policy institutions and a corresponding process that would secure that the currently poor competitiveness of Finland within the euro zone would start improving. Since, after year 2007, the unit labour cost in Finland has increased , out of proportions with the productivity developments, so that something must be done, and something must be done now, institutionally, in order to convince investors and firms that Finland really takes this competitiveness issue seriously. That was our first recommendation: that the government should really give the social partners the task of coming up with a new wage-setting model that will adapt the open sector’s, i.e. the export sector’s, competitiveness, as the anchor of wage formation, and see to it that nobody will increase their wages and salaries more, because if that happens, then the industry will not be able to thrive. They will not be able to compete in their own right.
And then, the other main observation, which is, of course, to most economists, quite obvious, is that the current rate of employment is not high enough to sustain the comprehensive welfare state arrangements that we have. And therefore, we must introduce much more vigorous policies that will increase labour supply in Finland. We did not go too much into details, since this was obviously only one report of 50 pages. But we still wanted to put the focus clearly on this issue, since we think this is fundamental. Of course, we mean things like encouraging immigration of working-age people. We mean abolishing various paths or ways of retiring early. We mean shortening various career interruptions, or “free years,” as we have in the Nordic countries; increasing the employment of mothers of young children, with the help of better childcare facilities, and cutting down these allowances for home care that, at present, keep young mothers at home for quite a long time, if we compare it to our Nordic neighbours; and then, of course, trying to dismantle all of these situations where individuals, as of now, have only poor economic incentive to work. And this is often the case for lone mothers, or parents of young children, who do not have a secondary or professional education. Very often, they find themselves in a kind of incentive trap, where, if they start working, then as they get some labour income, their social transfer allowances are cut very sharply, so that in the end, they will end up with an hourly wage benefit of 1 or 2 or 3 euros. And of course, then they will not work.
So, we just made the point with Anders Borg that all of these issues must be addressed if we want to make the Finnish welfare state viable. And then, there was a third main point in the report: this quest for regaining competitiveness would be much easier if we can improve productivity at a rate higher than what is the case in other euro countries like Germany, or a country like Sweden. There it is more difficult to identify direct measures, since Finland is a generally well-functioning society, as of now. So, these were the three main focus points of our report with Anders.
On this last one, how do you improve productivity?
It’s far more difficult, in that respect, to outline detailed propositions. But a better housing policy, for example, would lead to greater geographical concentrations of people, and by this means, create attractive economic areas, which will be also attractive for firms to come in, which might just create clusters of growth. And this is something that is suggested by a lot of economic research, showing that growth occurs in geographical concentrations. And then, we speak about the support systems for innovation, such as the subsidy system of Tekes. We say, generally, that one must enhance competition in all sectors of the economy, so that we can combat rent-seeking, and by these means, keep the domestic cost level moderate. But certainly, we completely recognize that it’s not easy, in this policy package, to come with any very detailed recommendations.
Can we consider that these proposals are adopted by the National Coalition Party, and that they will be implemented if the National Coalition Party wins the elections?
At least, I would say that the response by the National Coalition Party and Mr. Alexander Stubb has been clearly favourable. And in my view, even another likely prior candidate for the prime ministership, Mr. Juha Sipilä, has spoken quite positively of a new social agreement, which would lead to an improvement in competitiveness. So, it’s a kind of rephrasing of what we are saying. And he has talked warmly of some of our proposals, like easing up the immigration regime, and other things. So, I would say that yes, by and large, at least the centre right parties have given the right signals there. And even the unions, at least the open sector unions, the export-sector unions, have more or less said, “Yes, we understand the analysis. We accept the idea that we must improve competitiveness.”
The only more negative reactions have come from the public-sector unions, who have said, , “No, we don’t want to be enslaved or subject to this wage anchor by the open export sector.” So, it has not been a unanimous acceptance, but by and large, we think it has been positive. And we certainly hope that it will be positive, since we don’t see any other way out for Finland.
What about the other problem of Finland, the national debt?
Well, the national debt is, to a large extent, a function of these fundamentals, like competitiveness and labour supply. If we can improve competitiveness, then we can increase exports. And if we can increase the employment rate by labour supply measures, then the tax base will just be buttressed, so that the more we can achieve on these two fronts, the lesser will be the need to cut budgetary expenditures. But one must be realistic. Whichever administration will enter office after the election, there will be a need for cleaning up the expenditure side of the budget. We must all recognize that.
I know that this often is announced, that the government must cut in a number of expenses. As an economist, do you think that this will have a positive effect on the economy?
Well, in the short run, of course, it will have a negative effect, but even this will not mean that policies will be austerity policies, they will be mildly restrictive. We will see that, if these budget cuts are introduced, then the fiscal stance will be restrictive in the years to come. But the size of the structural deficit is so large now, that it is very difficult to see a better way out. We could, of course, increase the deficit, and by these means try to pull the economy out of the recession. But then, after a couple of years, when we might have gotten unemployment down by a couple of percentage points, then we will also end up with an even larger structural deficit, and then perhaps have 10 billion euros or 15 billion euros to deal with, in the budget. So basically, that’s why, in my view, there is a consensus view amongst economists that having such mildly restrictive policies now is the least bad of all these bad options.
And in which domain are the most important cuts possible?
Well, that’s an issue for the upcoming administration. I am a macroeconomist. I have not thought too much about the specific allocation of the budget trimmings.
Your main topic for the campaign is economy?
Yes, that is my mission in politics, rescuing the Finnish welfare state. That’s why I came in. You can visit my website, if you speak Finnish.
I have looked at it.
And I have some new recommendations. Some very nice people are saying a word for me.
I have seen that. How are you campaigning?
Well, I’m trying to be active in my website, and I have now a blog on economic affairs. And then, my election team, the head of my election team, books me up with various discussions in the various parts of the town. Even today, I will go to the marketplace and speak and distribute leaflets. So, it’s very salt-of-the-earth, traditional political campaigning. But it’s very new for me. I have not done it for 20 years.
Are you using the social networks?
We do our best there. I am on the Internet, and I am quite an active person on Twitter. I have more than 10 000 followers now. So, for me, that’s an important conduit for getting my ideas and my information about my activities spread out.
What about the name of your Twitter account, @filsdeproust?
Well, I started my Twitter account when I was just a civil servant in Sweden, and I never thought that I would become a public person. And that’s my secret—I’m a fanatic of Marcel Proust, so I have read his great books three times in French, and then it’s a joke amongst some literary people to say that ” I am related to Proust, I am related to one of his children”—of course, that’s a joke, because as far as we know he was impotent and homosexual and did not have any real relationship with women, I guess. So, it’s a kind of joke, somebody being related to Proust. But certainly, if I was choosing my Twitter account name now, I would perhaps choose something else, but that’s where we are. It was not intended for political use to begin with.
What is your opinion about the polls which are putting the National Coalition Party in the 3rd of 4th rank?
Clearly, they are not encouraging at present. But I certainly hope that we will, just in these last weeks, campaign vigorously. And this basic idea of trying to overcome the public deficit, not by expenditure cuts only, but by increasing employment—I guess that this work-line message should resonate quite vigorously with the electorate. But this remains to be seen. It’s a close call.
And what about the future coalition after the elections?
Well, that’s very hard for me to predict, but I have been frustrated with the parties of the left who do not have a realistic attitude as to what should be done to secure the economic viability of the welfare state. They are against most of the necessary labour supply measures. And they are not really at ease with globalization, either. They dream of just increasing the wage by collective willpower, or the bargaining power of the unions, whereas in a globalized capital market, you just have to face the fact that the rate of return, or the profitability of business activities must be more or less the same everywhere. And if wages are increased too much in this country, then business will very comfortably adapt to that by leaving, so that we must understand how globalization works and adapt to it. And then, in fact, globalization will generate quite good living standards for us, in the long run.
But I think that the left parties have not done their homework there, whereas myself, I think—I’m certainly a proponent of the large and universal welfare state, but I am also a market liberal, in the sense that I believe that the way to secure those basic welfare services is to have a well-functioning market economy. So, I feel strongly with both economic liberalism and the welfare state. I guess there are similar people in France, like Manuel Valls, for example. My hunch is that his basic philosophy is a bit like mine.
So, this means that you see difficulty in this kind of economic policy that is coming with the left parties?
At least so far, yes, so it has been, and Antti Rinne has not given any signals about changing course. To me, he’s an unreformed trade union person, and this will just not work. What we need is a social democratic reformer, like Gerhard Schröder was in Germany, or Tony Blair, who very well said that there is no way to escape from globalization. You just have to face the facts. And Jutta Urpilainen was becoming a reformer, but then she was ousted by Antti Rinne.
And what about the True Finns? Do they have economical ideas which are near your ideas?
Well, they might, because a large part of their electoral support comes from small entrepreneurs, so they have some understanding for having a more liberal economy and more flexible labour market. But then, they are very much opposed to what we also need, namely more immigration and freer recruitment possibilities for firms from all countries, all over the globe. So, that would certainly be a sore point. But these populist parties can always surprise, in the sense that their very essence is not to have a consistent policy line, so I guess they will always be open to bargaining about things. But certainly, it seems to me that the Centre Party and the National Coalition Party would be a natural core of any coalition that could constructively deal with the current economic challenges.
You have said that, in your party, you have younger politicians, like Jyrki Katainen and Alexander Stubb, who have in some way understood the welfare state, have grown up with it. Is it the case for the rest of the party, and how are you accepted in the party with the idea of supporting the welfare state?
Well, if we reconvene a year from now, and then you ask me this question, then I might be able to tell you more. But I have been now a candidate for the National Coalition Party for a couple of weeks, and frankly, I don’t know about all of the undercurrents there. But generally, I must say that most people that I meet, and I discuss with—they seem to think in a way that is very similar to mine, so that they like the welfare state, but they are also concerned about the situation, or they want to launch market-friendly reforms. So, it’s a kind of social liberalism. And I have not yet met any sort of hard-line, traditional conservative who would like to privatise school, and privatise healthcare services, and roll back the welfare state. Perhaps these people have not talked to me! But at least it’s my impression so far.