Friday, May 27, 2016

Socialism vs. Free Markets: Venezuela Edition

By Kit

An interesting bit of trivia: The week the socialist paradise of Venezuela’s economic crisis finally began to hit the precipice was the 50th anniversary of the generally agreed-upon starting date for Mao’s Cultural Revolution. That the 50th anniversary hits the same year leftist thought police have run amuck on college campuses and socialism is making a huge surge in American politics courtesy of one Bernie Sanders moves that bit of trivia from “interesting” to “depressing.”

And most depressing was a story in New York Times titled “Dying Infants and No Medicine: Inside Venezuela’s Failing Hospitals,” which read like a late-Victorian muckraker account of some decrepit turn-of-the-century hospital. The most shocking moment comes a single morning three newborn infants die at a maternity ward —and that was before a blackout shut off the respirators in the ward and killed four more despite the best efforts of the doctor’s to keep the “ailing infants alive by pumping air into their lungs by hand for hours.”

There are probably a thousand economic lessons to be gleaned from the sad story of what Chavismo’s has wreaked upon Venezuela with many familiar stories. One of which is the fate of Venezuela's oil industry.

Venezuela has oil, lots of it. Perhaps more than Saudi Arabia. And their oil industry, despite being state-owned, was once a model for the rest of South America. Unlike Mexico’s notoriously dysfunctional Pemex, Venezuela had made sure most of those running the company, PDVSA, were competent and professional. Their industry thrived. Then came Hugo Chavez, who accused the company of hiding profits and, upon coming to power, replaced the leadership of the company with his own cronies whose behavior prompted a general strike from most of the company’s skilled engineers and managers. Hugo Chavez, that friend and champion of the people, responded by calling them saboteurs, firing them, and replacing them with his own cronies who have since mismanaged the company.

Still, with an oil industry as big as Venezuela’s, and as much oil as the country had, this was not too much of problem. However, Venezuela’s oil is of a type that needs to be refined so when the price of oil dropped and, because Venezuela had done his best to bully and fleece private investors, foreign and domestic, to the point that no one is investing in Venezuelan oil, the country could no longer produce the oil needed. The foreign private companies left or were taken over by Chavez’s companies. The results? The country’s oil production is 25% less than what it was when Chavez came to power.

Nor were there other sources of wealth. He bullied private retailers. For example, he nationalized farms and redistributed them, a policy which can work well if well managed (see, the Russian Kulaks before Stalin killed them) but it wasn’t here, and he created socialist collective farms. He put in place price controls on food resulting in people buying more and less people being able to buy it (a lower the price, the more people will buy it) which meant shortages, which he blamed on retailers and private companies whom he accused of hoarding. So they went out of business. He also nationalized the power companies, banks, and anything else he could nationalize.

This created a problem. You see, wealth is typically created in the private sector (and sometimes by a very smart public sector company) by producing or, if you’re a retailer, purchasing a good and then selling it to whomever wants it at a price that allows you to make a profit. You then pay off your expenses, you pay your employees, you might buy more or better equipment or products to sell, and so on. Your employees and the folks you bought new stuff from, then use the money to buy things on the market they want. This is how wealth is grown.

Government companies do things a bit differently. Typically, a company that is nationalized is done so whatever goods or services can be provided at a lower cost than the market value, that is, the cost needed by companies to earn a profit. They can do this because they receive money from the government, most often provided by tax dollars. This can work okay, as long as there is money to be taxed. In Venezuela, Hugo Chavez had driven those folks either out of business or out of the country.

This was really unfortunate because since Chavez came to power he had been spending like, to use a phrase common in our vernacular, a drunken sailor on shore leave in Bangkok. And, like the drunken sailor at Bangkok, there were many unpleasant and long-lasting results of the binge. First, there was the heavy spending certainly carried out to fund the newly-nationalized companies and then there were pet projects, such the decision to provide free housing for the poor, not a bad thing by itself, but when you don’t have money coming in, things will get unpleasant quickly.

And so things are.

The heavy nationalization and mismanagement of countries has resulted in shortages of everything including, but not limited to beats, alcohol, bread, milk, birth control pills, razors, soap, batteries, insecticide, and coffins have hit the country everywhere causing long lines and prompting the government to engage in heavy rationing. The whole thing is rather reminiscent of the stories that came out of the Soviet Union in the 1980s. Of course, one must wonder who can actually buy those goods considering unemployment is at 21%, not helped by his minimum wage increase (that is, increasing the price of hiring people). The last time America had it that bad was during the Great Depression.

And the heavy spending has sent the country deeply into debt which has prompted it has jacked up inflation, with estimates usually around 500%, which prices for commodities are going up as the value of the Bolivars in the Venezuelan’s wallet are going down. Of course, Maduro recent economic czar has a solution to inflation: he says “Inflation does not exist in real life.” Inflation, he says, is not caused by printing more and more money (increasing the supply of money and therefore decreasing its value) but is instead caused by “parasitic” businesses trying to increase profits. (Which businesses?)

Don’t worry, that guy was sacked. It seems even the Chavistas have standards.


"Oil's Dark Secret" The Economist

"Venezuela is on the Brink of a Complete Collapse" Washington Post

"Imagine no Possessions, Imagine Venezuela" The Federalist


BevfromNYC said...

Yes, eventually you run out other people's money.

Anthony said...

Great write up. Venezuela might be a preview of coming attractions no matter which party wins.

Writer X said...

I'd like to see Trump and Hillary schedule their next debate in Venezuela. Wishful thinking.

ArgentGale said...

There's not much I can add that the others haven't covered, though like you I find the Sanders surge disturbing as well. I can understand late teens/early 20s types who probably don't know any better but people closer to my own age, as well as the same Rasmussen polls showing Trump and Hillary even showing Sanders with a lead (and the old Electoral College poll that showed Kasich blowing out Hillary as Cruz and Trump lost showed Sanders beating all three handily)? That's a little worrisome. I do like the Tracinski article at the end, though... As much as I like the local classic rock stations that song always makes me twitchy (and speaking of him, if you read this, Andrew, keep an eye on your e-mail, spam filter and all. There's an article of his I'm curious about your thoughts on).

- Daniel

AndrewPrice said...

I hate to say it, but that this would happen struck me as pretty obvious.

AndrewPrice said...

Daniel, I don't see the email.

ArgentGale said...

I haven't gotten a chance to write it yet. It should be done by evening. Sorry about that.

- Daniel

Critch said...

I'm probably going to be guilty of painting with a really wide brush, but here goes. In my years of knocking around a variety of countries with a variety of governmental/economic systems, it just seems to me that socialist countries seem to the be the most prone to corruption....I know we have had some monumental con artists here in the USA, but our power is not centralized like so many governments so any prosecutor anywhere can pretty much file charges..Bernie Madoff could just have easily been tried in a local NY court as a Federal Court.

tryanmax said...

Critch, to that end, when the government runs everything, there are no barriers to stop corruption from spreading. When a limited government is corrupted, the rest of the nation can function in spite of it, and the corruption can be worked out without upheaval. You'll note that the usual argument from big-government proponents against reform is that it would upset too many apple carts. That's the problem of hitching every apple cart to a single government horse.

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