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EP53 · Economy · first published 2020-12-17

The Basic Account and The Victory of Freedom | Elina Valtonen | Negotiator 53

Elina Valtonen (still Lepomäki at the time of recording), deputy chair of the National Coalition Party, works through the themes of her book Vapauden voitto and answers the question the channel's viewers sent in: has she become a defender of the euro and a federal Europe? The answer is no — the monetary union has, on her account, stood on clay feet almost from the start. The episode opens up the basic account she designed in 2013, universalism as a principle for allocating public goods, the 95/5 split in earnings-related unemployment funding, the spending automaton built into the health and social services reform, and why federalism means the opposite in Germany to what it means in Finland. It closes on whether the ECB's digital euro could deliver a basic account — and on Miettinen's ECU-2 model.

Sami Miettinen · Sections: AI and the Economy + AI and Society

The Basic Account and The Victory of Freedom | Elina Valtonen | Negotiator 53

Summary: The most-requested moment is a direct answer to a challenge sent in by viewers: has her position on the euro changed? Valtonen’s answer is it has not changed one bit — the monetary union has, on her account, stood on clay feet almost from the start, because the positive incentives that could have been built into it were either not built or not understood.

The episode’s central idea is the basic account, which she designed in 2013. Its core is not money but incentive: a system in which taking work or starting a business is always worth it, including for someone who does not plan their life more than a month ahead.

And its sharpest domestic argument concerns the health and social services reform: the model achieves, in her words, two things at once — costs explode and spending is shuffled oddly around the country, away from the growth centres.

A note on reading this. The guest appears in the episode as Elina Lepomäki; she is now Elina Valtonen, and the title uses the current name. This is an opinionated conversation by an opposition politician about a sitting government’s policy, and the interpretations are marked as hers. It was recorded on 15 December 2020, and many of its predictions can now be assessed with hindsight — which should be done separately rather than reading them as observations.

Why an MP should write a book

Miettinen opens with a general remark that is both a compliment and a criticism: every MP ought to write a book like this — and not afterwards, as Osmo Soininvaara did. A good book about parliament, but a bit late.

Valtonen defends Soininvaara’s book and adds her own reasoning: from the moment she entered politics she wanted to say openly what she would push for, and she trusts democracy strongly enough that everyone has every right not to vote for her if they disagree.

Miettinen highlights what makes the book unusual: it was written while her party was in government, and it argued against its own government’s projects — the health and social services reform among them.

Freedom, universalism and what the state should do

The episode’s conceptual frame rests on two ideas.

Freedom is subordinate to the state’s decision. And universalism — a common good for everyone rather than for some interest group — is what holds freedom up in a democracy. Miettinen’s reading is that in Finland both are being crushed under a massive state apparatus.

Valtonen does not accept the label but does not reject it either. Her comment is more revealing than a definition: in Finland you get branded a freak merely for advocating European-style labour markets. She advocates local bargaining and strong freedom of contract, but in a way that gives the individual a strong negotiating position — which comes from high employment and good social security.

Miettinen offers the taxonomy that is the episode’s analytical backbone, taken from the Libera book Miten Suomi voidaan pelastaa:

what it is
Public goods things the state or a large collective should do, because markets would not
Private goods would happen anyway; state meddling only moves resources around
Good transfers universalist public goods

From which follows the key domestic figure Miettinen takes from Valtonen’s book: 70 per cent of income transfers in Finland occur within one individual’s own life cycle.

The basic account

Valtonen immediately qualifies: it is not that transfers are too large — that depends on the level of taxation. The incentives are the wrong shape. When money is moved from your own left pocket to your right pocket over a number of years, two things follow: inefficiency, because the money runs through the state, and poor incentives.

The concrete mechanism: a middle earner faces a 50 per cent marginal rate, so half of an extra hour’s work goes to the tax authority. Research shows that people even in the lower middle bracket optimise how much they work against taxation — whether to do the extra hour or spend the time on housework instead of buying the service from somebody who specialises in it. A high tax wedge means people cannot afford to use services as much as in many other countries.

And the thing she calls outright bad policy:

Companies as a rule start from one person’s idea and one person’s labour. And if you do that part-time, you may lose all your social security, even though you have paid unemployment insurance contributions and taxes on your salary for years.

What the basic account does. It turns the welfare state’s logic on its head by trusting the individual to the last. Valtonen is careful here and makes a distinction rarely made in these debates: there are people who do not want to or cannot plan their finances more than a month ahead, and that is not a value judgement. The point of the basic account is precisely that the incentives are better even then — even if a person plans no further ahead at all, taking work or starting a business is always worth it.

Last-resort discretionary benefits such as income support remain, but the group using them narrows. The comparison figure: relative to population, Finland uses twice as much income support as Sweden, which tells her it is no longer used as a last resort but as general social security. And the problem with discretion is the trap: it is hard to climb out of.

Why a nest egg works psychologically. Miettinen raises an English research finding: even an artificially small nest egg, or a mere number that is yours, steers behaviour positively years later. He draws from it the episode’s most surprising parallel: owner-occupied housing already works as exactly such a positive balance — it makes people defend their position and seek more of it. Those who never reach the tax-free incentive of home ownership are left outside and slip more easily into the benefit system.

Valtonen says she designed the basic account in 2013 and that it has gathered support in recent years; she has toured Europe speaking about it. Singapore has trialled something similar with success.

The 95/5 split, and how an idea travels

The episode’s best example of how political debate moves is earnings-related unemployment security. When Valtonen published a proposal for funding it with others in January 2015, the reception was, in her words, incomprehensible — they were branded pitch-black bourgeois, Heikki Hiilamo included, and Miettinen uses the phrase a procession through barbed wire.

The group included Juhana Vartiainen (then a Social Democrat), Osmo Soininvaara, Heikki Hiilamo and Tuomas Pöysti, then head of the National Audit Office and later Chancellor of Justice.

The substance was this: 95 per cent of earnings-related benefit already comes from the state through universal insurance, and only about 5 per cent from the unemployment fund’s own share. Valtonen corrects Miettinen precisely — not the union’s, the unemployment fund’s, even where the fund belongs to a union.

And at the time of recording the same subject is everyday talk: an economist went on television saying the system must be reformed, and as Valtonen heard it the trade union confederation did not say a flat no. Miettinen’s summary: smart ideas thrown out ahead of time collect the credit they deserve later. Valtonen’s addition is drier: you have to be pretty thick-skinned; there has been a fair amount of taking it on the chin.

The same applies to education reform. Faster bachelor’s models, incentives to work during studies, and the idea that funding one’s studies could be partly one’s own responsibility — the Australian model raised in the Libera book — was in her account a highly contentious topic then and will probably enter the debate in the coming years.

Finland’s self-image and what PISA actually says

Miettinen notes that the book carries a negative note about Finland and contrasts it with Germany and the United States. Valtonen does not dispute it. She names two background factors: the long period of Finlandisation, and the fact that Finland is quite a success story — as late as the early 1960s GDP per capita was under half of Sweden’s, and by 2008 the two were nearly level. Finland has since fallen 15 to 20 per cent behind Sweden.

Then comes the episode’s sharpest self-criticism, aimed at parliament’s culture: when an international delegation visits, the speeches are always about how you should take a leaf out of our book. She does not accept it:

We do have many things right, indisputably. But there is no room for a groundless, rather parochial we’ll sort this out attitude either.

PISA. Her analysis has three parts and is considerably more precise than usual PISA talk:

  1. Finland has fallen over the last 15 years, and in mathematics and science is at best mid-table.
  2. Part of the success has been attributed to population homogeneity — and she adds herself that if a person’s mother tongue is not Finnish, learning outcomes cannot immediately be fantastic.
  3. And the one that turns the whole argument around: PISA shows that in Finland the home’s influence relative to the school is very large. That tells you less about the education system than about Finnish households.

The most alarming figure is a different one: 10 per cent of the age cohort cannot read or write well enough when they leave comprehensive school, and in the eighth year roughly 70 per cent of girls reach an average of eight or better against only about 40 per cent of boys. Preventing social exclusion is, on her account, the single most important thing to tackle over the next ten years.

Health and social services: a spending automaton and a shortage of democracy

This is the longest domestic passage and the most precise criticism. Valtonen says plainly: the current government’s model is worse than the previous term’s.

Her argument is not primarily ideological but about incentives and democracy:

1. Thin democracy. Representatives are elected to the counties, but they deliver a national service promise legislated in a ministry, operate under the tight steering of the social affairs and health ministry, and receive their funding from the finance ministry. So the elected decision-makers there effectively report to ministry officials — what kind of democracy is that?

2. A spending automaton. The mechanism is described step by step: funding is given to the counties; if it does not suffice — and it may not, since the incentives run the other way — more is requested; and when permanent baseline increases for everyone are made on the basis of realised costs, a magnificent spending automaton has been built.

3. Two things at once. This is the episode’s most quotable formulation:

Curiously, this government’s model achieves two things simultaneously: costs explode, and by the other route, that spending gets shuffled around the country very oddly.

Money is taken from growth centres despite their own needs — less elderly population but many young people at risk of exclusion — and the debts stay while the money goes, even as the taxpayers there carry the cost of the whole administrative contraption.

4. The risk argument. A giant administrative reform in a fairly small country is a larger risk than letting reform happen from the bottom up — which, on her account, has already been happening. The biggest misconception is that no reform has been done: no, we have not done one giant national super-reform that a prime minister could put in his cap. We have not, and thankfully not. Municipalities that could not afford to run these services themselves have joined joint authorities or outsourced.

5. Retroactively unwinding outsourcing. Valtonen notes that many remote areas would have no health centre at all without outsourcing, and that staff are not easily found on the public side. Retroactive legislation is, in her view, problematic from a rule-of-law standpoint and touches on the protection of property, which is a fundamental right.

Miettinen’s addition is fiscal: the county model creates an incentive for a county tax on top of municipal and state tax — and Finland’s 42 per cent tax rate will not bear extra percentage points.

This produces the episode’s funniest aside. Miettinen says the tax rate in relation to GDP, catches his own phrasing, and a small argument follows over whether the correct term is GDP share or GDP ratio. Valtonen recognises the phenomenon at once: when somebody uses a different form of words, the discussion becomes about the words rather than the substance. I’ve been there.

The euro: has the position changed?

Miettinen gives the background openly: viewers — a significant share of whom came via Tuomas Malinen — asked him to put the question of whether Valtonen had become a federalist, since as Libera’s director she took part in a book on the euro’s future in which Malinen, Miettinen, Peter Nyberg and Vesa Kanniainen debated the options.

The answer is the episode’s bluntest:

Has my position on the euro changed much? It has not changed one bit. The monetary union has, unfortunately, stood on clay feet for a long time — almost from the start, you could say.

The reasoning: the positive incentives that could have been built into the system were either not built or not understood.

Why the word “federal” misleads. This is the most illuminating conceptual passage. Valtonen grew up in German culture, and in Germany federalism means the opposite of what it means in Finland: it is the counterweight to French centralism. Germany is a federation, Switzerland is a federation — and in them the mutual liability realised at citizen level is lower than in Finland or inside the euro area. That is why she considers federalism a poor word for what she advocates.

The book’s three scenarios are worked through:

  1. Drifting — in her view the worst option, including for the citizen’s self-determination, because the monetary union’s design faults are patched with central bank money.
  2. A federal union — which would take a long time; language barriers, low mobility and poorly functioning labour markets separate Europe from the United States, though some of this changes as language technology develops.
  3. The euro breaking up.

And as a fourth, Miettinen’s own ECU-2 model, of which he notes drily that nobody wants to discuss it with him — except Juhana Vartiainen, whom he made debate it for an hour on the Puheenaihe channel. The idea: unwind the monetary union by the route it was entered, create dual currencies, keep the present euro as a basket definition with its liabilities, and grow national digital currencies alongside it.

The recovery fund — and what federalism is not

Valtonen’s position is precise and it separates her from both camps. The claim on Twitter that the recovery fund is a step towards a federal union is, on her account, wrong:

No it is not. Many politicians may see it as getting further in integration. But it is not that intrinsically — if you make a pot, collect money from somewhere, and then redistribute it to member states, what part of that is federal?

The comparison is the United States: a no-bailout principle has been followed for over a century, no state has gone bankrupt, and packages like this were not put together, certainly not before the financial crisis. And federal-level transfers explain only about 20 per cent of adjustment between states — a significant share happens through private financial markets and people moving.

Miettinen’s criticism is more targeted: the joint debt is used to plug national budget deficits, and Poland, for instance, hits a jackpot without a pandemic crisis. Valtonen agrees and names the problem precisely: the address is wrong, because the money goes to nation states — and even Italy can borrow as much as it wants directly from the central bank, so this is not about liquidity.

What she would support instead: universal goods in the EU budget — defence, major transport projects, possibly education, border security — which would be handled more efficiently at EU level and would not add to the tax burden nationally. And at the individual level: a basic account, possibly a European one.

This connects to the episode’s most original earlier thought: instead of the central bank indirectly financing member states through the SURE unemployment instrument, it could give everyone a certain balance on a basic account — support delivered straight to the person, without monetising anything more than is being monetised now. Miettinen’s answer: I’m in. And his addition that collectivism need not run through nation states condenses into a joke about personal NATO membership — it’s a joke, but there’s something in it.

The culture of debate and what follows from it

Both arrive at the same observation by different routes. Valtonen’s version:

If you have the slightest thing to say about the euro system, then you were super euro-critical and parochial and all the rest. The space in which you can have even a half-sensible debate here is very thin.

Miettinen gives it a name: the Overton window, the same concept he used with Ivan Puopolo.

And Valtonen draws the episode’s most ethical distinction: she is strongly European and does not feel that dilutes having been born in and living in Finland. She would like Europe to be able to sustain human rights and its own way of life — and grounds it in observation rather than ideology: in a European group in the United States or Asia you notice how much more Europeans from different countries have in common than divides them.

Her worry is China: markedly different conceptions of human rights, democracy and privacy. And that is why a country of five and a half million should not imagine it decides alone how the world works — on the contrary, the further behind it falls in the wealth statistics, the less weight it carries.

On the recovery fund she makes one further checkable observation: there is no comparable strong opposition in Austria, Germany or the Netherlands — in Finland there is a great deal. She takes her hat off to the Finns Party for that, with the caveat that the debate has polarised and no constructive alternative is being sought: it is a take-it-or-leave-it situation.

Miettinen’s own position is pragmatic and he admits to being in two minds: the recovery fund raises net taxes in Finland, but if it fell through, what would replace it would probably be a still more expensive arrangement among euro countries alone, in which Sweden and Denmark would pay nothing. He values the fact that the system is EU-wide rather than merely another contraption for patching the euro, as he considers the EFSF and ESM to have been. Valtonen’s answer is short: it does not help the monetary union’s durability and does almost nothing in the short term — economically it is not a sensible package at all, but a demonstration of solidarity and a political declaration.

What worries her most

The most serious passage comes at the end and concerns central banks. The longer the printing press runs, the more moral hazard accumulates — and alongside it, nominal wealth differences.

Valtonen’s formulation is concrete and ties the episode’s two halves together:

As a young person entering the labour market without capital from your parents or capital from a basic account, you have to work substantially more hours to buy one square metre in central Helsinki or a share of an equity index. Getting onto the first rung of that wealth ladder is considerably harder than it was a few years ago.

And she names the central role: central banks.

The episode ends with Miettinen noting that the ECB’s digital euro consultation window had closed the previous day and that he had intended to submit a proposal — until he noticed that only technical consultation was being sought, not structural. He would have put in both the basic account and ECU-2.

What the episode leaves you with

  1. The basic account’s core is not money but the direction of the incentive. It works precisely for those who do not plan — and Valtonen says so without moralising, which is rare.
  2. Federalism means the opposite in Germany to what it means in Finland. This single conceptual observation explains much of why the Finnish EU debate talks past itself.
  3. The health and social services criticism is a criticism of incentives. The spending automaton’s mechanism — funding, shortfall, extra funding, permanent baseline increase — can be assessed regardless of what one thinks of the counties.

Two things should be read separately as predictions: the assessment that the funding models for unemployment benefit and education will enter the debate, and the assessment of the recovery fund’s effects. In December 2020 those were forecasts, not observations.

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