The working age population in Finland is now shrinking

Edward Hugh writes:

So, what do you do about the problem of secular stagnation? Again here there is divergence of opinion. Some still seek to treat the phenomenon as if it were a variant of the liquidity trap issue. Most notable here is Paul Krugman, who continues to hope that massive quantitative easing backed by strong fiscal stimulus will push the economy back onto a healthy path. But if the issue is secular stagnation, and the root is population ageing and shrinking, it is hard to see how this can be. The fact that Japan is just about to fall back into deflation 2 years after applying a monumental Quantitative Easing problem seems to endorse the idea that the problem may have no “solution” in the classical sense of the term.

There is this:

Finland has transited from being a country with a significant goods trade surplus, to being one with a structural deficit.

Even the current account balance has now turned negative.

And the country’s Net International Investment Position is also turning negative.

With pictures at the link.

Hugh’s conclusion is this:

At the end of the day, only two things can be said with a fair degree of certainty: short term fiscal austerity won’t make any significant improvement and could help make things worse (this whole discourse is based on a misunderstanding about the problem) while short term stimulus won’t stimulate.

More sensible than most of what you will read on this topic.


Examining all of the worlds variables, I find that some are changing more than others. When I notice one that interest me, I shall post.

And the PISA scores of Finland remain best in Europe.


You could have the best PISA score in the universe but .... location, location, finish culture (?) and scale (<10 million won't give you silicon valley, nokia can not happen multiple times)

I think world open borders would help here. It would give a 'one-time boost' to world GDP and probably (guessing) put off structural changes for another generation. Kicking the can down the road to the next generation is always the wisest strategy. Why? Because as the critics of Malthus found out, correctly, science often comes to the rescue. If GDP is increased tenfold in the next generation, through open borders, science might find a cure for old age, making declining demographics moot. And I speak as an expert in all things, including chess.

Finland has a 7.7% unemployment rate. Clearly they have problems beyond a shrinking working age population.

Finish people are nice, but weird...

By the standards of the Eurozone, 7.7% unemployment is actually pretty good.

Good to see Edward Hugh is still on it. I had heard about rising unemployment Finland but never bothered to look at the details.

What's disturbing is that investment in the non-financial sector has also been dropping.

And Finnish disposable household income has been dropping (negative volume since 2012Q4) as is the saving rate ( from 2-4% in 2010 to now barely 0-1% in 2014 ). See fig 1 and 2 of the appendix.

As Ronald wisely points out, there is probably more to this story than mere demographics. Finland's economy was heavily dependant on Nokia, which is a fraction of its former self; wood, pulp and paper, which have also been difficult; and exports to Russia. In addition we are in the euro, which makes our exports artificially expensive. Given these conditions, it is not hugely surprising that the economy is struggling and you wouldn't expect austerity to help much, but that is what we will get.

Austerity reduces consumption in favor of investment. Sounds like exactly what you need.

Of course most countries claiming austerity have not really done so, so your worry is probably unfounded.

I find this comment revealing because it makes a moral claim "what you need" rather than an empirical claim like "will reduce unemployment ".

I find this comment revealing because you think "what you need" is a moral claim.

"[I]nvestment in the non-financial sector has also been dropping". See comment above. As in America, the role of capital income and financial assets has increased in importance to the highest income decile in Finland and represent a major shift from earnings to capital income. Blomgren, Hiilamo, Kangas, and Niemela, Growing Inequalities and Their Impacts in Finland ( Not surprisingly, in Finalnd as in America inequality has been rising and falling as the value of capital assets (in particular financial assets) has been rising and falling, the falling occurring during periods of financial crisis and recessions. The preference of owners of capital for speculation (and the risk it entails) over investment in productive capital has become a scourge on the economy here and in other economically advanced economies, for which everyone is paying and will continue to pay a very high price. In America (and I suspect in Finland) the rate of return on productive capital has been falling (for roughly the same period as inequality has been rising) which, together with the dual tax system favoring capital income, has created major distortions in our economy (including financialization of the economy) and contribute to both financial and economic instability and relativley low rates of economic growth. Yet, too many economists continue looking in all the wrong places for an explanation for "secular stagnation" (which I am using in the broad sense as whatever ails the economy), an aging population and inadequate aggregate demand being two popular places. Peter Thiel's observation is that there's been too much investment in bits and not enough investment in atoms, which I interpret as just another way to describe a preference for investment in speculative assets (including what is coming out of Silicon Valley) over investment in productive capital. The Republican's tax proposal would end the taxation of capital income, providing even greater incentive for speculation and continued growth in the financial sector (bits) at the expense of more productive sectors (atoms). I'd like to know Thiel's suggestions for ending the distortions in the economy and promoting investment in productive capital. Thiel is not an economist and has no dog in this fight so I wouldn't expect any hand waving from him if he's asked.

" I’d like to know Thiel’s suggestions for ending the distortions in the economy and promoting investment in productive capital. Thiel is not an economist and has no dog in this fight so I wouldn’t expect any hand waving from him if he’s asked." - but he funds VC firms so he could be talking his book.

"The preference of owners of capital for speculation (and the risk it entails) over investment in productive capital" - could this be a consequence of the Great Stagnation? TC's theme.

"Not surprisingly, in Finalnd" - you misspelled 'Finland'.

The preference for speculation (over investment in productive capital) has long term consequences (lower output later) that can contribute to secular stagnation. Capacity utilization rates for the past 20 years have been consistently at or below 80%, reaching a low of about 67% in 2009 and increasing to about 79% today. The highest levels were in the 1990s, the lowest levels (before the financial crisis) in the dismal aughts (these are federal reserve statistics). By comparison, the data from the 1920s reflect a utilization rate in the 75% range (the data isn't as reliable as today). Can we invest our way out of secular stagnation given the already existing excess capacity? Good luck with that. Owners of capital are choosing speculation over investment in productive capital for a reason: the rate of return on productive capital is dismal as compared to returns from speculation. But are the returns from speculation sufficiently higher when risk is taken into account? What is the risk when the Fed has signaled that it will intervene and preserve the value of financial assets in the event of a financial crisis. There are two ways to correct this distortion in the economy: the easy way and the hard way. What's the hard way? Ask Peter Boettke. This reminds me of my experience teaching boys how to hit a baseball. Boys (actually, everyone) learn by listening, seeing, and doing, that last way being what my grandmother called learning the hard way and the way the most talented boys learn, including grownup boys.

I want to know :

How you define "investment" and "speculation".
Why you think they are mutually exclusive, and indeed how you think you can do speculation without investment or investment without speculating.

What your source is for the contention that capital income has become "more important" to the U.S. top income decile, since over the past thirty years the empirical literature has found exactly the opposite.

I think you may be mistaking financial intermediation for speculation. I agree that excessive overhead in financial intermediation is a problem. I do not think that it is a distinctly Finnish problem.


The preference for speculation (over investment in productive capital) has long term consequences (lower output later) that can contribute to secular stagnation.

I think it is helpful to keep coming back to the real economy. Real investment, Starbucks stores, giant machines in factories, servers behind a dot com company, represent real output that the economy has to produce with finite resources. Bad investment here may result in less supply in the future. For example, the Austrian theory of 2008 may make a bit of sense if one thinks the problem was that we built a lot of homes we don't need while neglecting capital elsewhere. Now we have a supply shock since factories and other capital intensive sectors are making do with rusting machines that weren't maintained and upgraded during the bubble.

Speculative investment may work by dramatically changing people's perceptions. If Apple soars to a ten trillion dollar company, it may make shareholders think they are rich and cause them to spend recklessly. If it crashes down to nothing the opposite may happen. But nothing is actually demanded from the economy. If shareholders start hitting Starbucks every day, the economy's supply function for flat whites is not changed. After the crash, Starbucks sales may fall but that doesn't make flat whites a bubble. For Apple to trade at a trillion doesn't require the economy to divert labor, land or capital. Whether that is 'good' or 'bad' should not in itself cause the real economy to stagnate or suffer a supply shock.

I've seen it asserted quite often that investment is too speculative and not productive enough. I've never seen it actually demonstrated or argued persuasively. Where could one look for such evidence?

People have to realize that sometimes negative growth and dissaving is optimal. Just think of any elderly man. His productivity used to be much higher, before he retired or cut back his hours of work, so he has negative personal product growth. His savings used to be higher too, before he started drawing on his retirement account. Does he have an economic problem and needs to be forced to go back to work? No. Multiply him by 10 million and nothing changes.

Yes, but what macro-economist is going to put himself out of a job by admitting that?

Errr, if a lot of people in a country decided to stop working (say because they are older), wouldn't that mean people who are still up for working would enjoy a very low unemployment rate and wage increases by businesses desperate to keep their stores, factories and offices fully manned?

So in 15 years Finland will be dead? I don't think this analogy carries you where you want to go. Countries, households, etc.

This seems a bit absurd to me. It is like calling a plumber to a house saying there's leaks in the pipes, but since the water is shut off he will have to find them without looking for drips.

If some type of stagnation has afflicted economies, you are essentially talking about a supply shock. Economies cannot produce as much as they used too because there are too many old people, too many stupid people, too many bad regulations, etc. etc. What happens when you stimulate a supply shock? You get inflation instead. Yet we are bemoaning deflation in Japan despite massive monetary stimulus?!

Actually these symptoms are the opposite. Perhaps the first rumblings of the great Singularity point.... What would happen if you had a huge positive supply shock? You would get deflation and possibly lower economic growth if demand didn't quite get the message that suddenly the amount of supply available is huge.

In either case the solution is to turn the water on and see which pipes drip. Stimulate both with money printing and fiscal pumping until you see inflation. Unless we have infinite supply it would have to show up sooner or later. At that point see if you have full employment and real economic growth. If you don't you have a supply issue (too many old people, too many stupid, too many regulations.....more babies/immigration, better education, reform). Go from there but don't stand around trying to guess what pipes are leaking by looking at them with no water flowing.

Add money and stir.

What Boonton said.

It is hard to take Hugh seriously when his understanding of macroeconomics is so clearly deficient.

Any central bank with a fiat currency can create as much inflation as it wants to whenever it wants to. If you see deflation, it's because the central bank wants it that way. Make me the central banker and I'll show you how it's done in five minutes flat. Better yet, go roust up the former head of the central bank in Zimbabwe, or the current head of the Australian central bank, if you want a more responsible example.

What we have here with all these central bankers throwing up their hands saying they can't create inflation is massive incompetence, dishonesty, or both. It's long past time we called them on it.

Surely some of these GDP statistics should be normalized to population in some sense (there are different reasons to prefer per capita versus per working age population for different discussions.) If, e.g., Japan's working age population is shrinking fast enough, then it's easily possible that optimal macroeconomic policy may be a significant improvement over other proposed policies, and yet not be enough to cause real aggregate GDP to increase.

If the point is that even the best macroeconomic policy won't solve everything, that's fine, but that's still no reason not to adopt the best policy possible.

I agree it is important to look at macro stats like GDP on both an aggregate basis as well as a per capita basis, but the bigger problem with this post is that it simply does not make any sense. If Japan's problem is that it has fewer and fewer workers who can produce good output, then the result would not be deflation but inflation.

Maybe what you suggest has already happened. The monetary spigots were opened and the investment flowed elsewhere showing up in a commodity price increase. The fiscal spigots were opened and the flaws became apparent; a
California fast rail project swallowing up money for no rail and a generous contract to a family member of a prominent politician.

The article about Finland describes the straightjacket of the euro, designed to facilitate trade between European nations that are characterized by stagnant economies, too much debt, saddled by high costs that make them uncompetitive. Which is the end result of a long period of easy money, low borrowing costs.

All the perversities that led to the 2008 financial crisis still exist mostly through intense and expensive efforts by government and central bank expenditures remain a dead weight cost on the economies, and probably will only be cleared out by widespread war. The models that are assumed are that no one will rationally attack their neighbor, there are no gains. I suspect it will be more like there being nothing left to lose.

I don't see any clear relationship between monetary stimulus and commodity price increases. Nor does it make much sense. Money gets printed, people take printed money to buy commodities so commodity prices go up. OK, why are people buying commodities? You make stuff with commodities so a surge in commodity buying would go along with a surge in production.

So even if monetary stimulus did flow first to commodities, you'd still either see an economic expansion or an uptick in inflation.

People talk about shrinking population like it's a bad thing.

Indeed, a shrinking population doesn't have to be a problem if the decline is gradual. With gradual I mean a TFR in the range of about 1,7-1,9 on a decennial scale. From a demographic standpoint Finland isn´t really that problematic. Finland has a TFR of about 1.8. The workforce will decline relative slowly or remain stable as long as you can increase the retirement age (68-70-72-75?). Although ageing will of course have an impact. The dependency ratios will shift as countries lose the their demographic "bonus".

The situation in Germany and Japan is far more stressing with a TFR of about 1.4. Note that these countries have been around this level for several decades now. That means there´s a demographic negative momentum building up. As long as the TFR does not improve every next generation will be structurally smaller in size than the one before.
I'm excluding the effect of immigration of course. Germany is currently benefiting from EU immigration (but for how long? Spain had a boom and look what happened ) while Japan has none (no immigration). In that sense they make an interesting comparison.

Probably because it is

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