In the past couple of weeks, the New York Times has had two big articles about Venezuela, describing the horrific conditions that now exist there, and analyzing what went wrong. On May 14, it was “How Venezuela Stumbled to the Brink of Collapse”; and on May 17 it was “Venezuela’s Collapse Is the Worst Outside of War in Decades, Economists Say.”
It will not surprise you that the word “socialism” does not appear in either article. But the stupidity here goes far beyond just not mentioning the subject of “socialism.” The affirmative effort in these articles is to somehow shift the blame for Venezuela’s economic collapse to something other than socialism, whether it be “poor governance,” corruption, or general incompetence. The May 17 piece does have a reference to “misguided policies,” but they never say what those “misguided policies” may be. Widespread nationalizations of industry? Massive public housing schemes? Heavily subsidized food and household products? “Free” healthcare? None of these are mentioned.
But of course they do mention — multiple times — the Trump administration’s sanctions, just imposed in the past couple of months, as if those have something meaningful to do with a 60-80% collapse of GDP that has taken place over a decade or more.
From a summary in the May 17 piece:
Venezuela, at one point Latin America’s wealthiest country, has not been shattered by armed conflict. Instead, economists say, the poor governance, corruption and misguided policies of President Nicolás Maduro and his predecessor, Hugo Chávez, have fueled runaway inflation, shuttered businesses and brought the country to its knees. And in recent months, the Trump administration has imposed stiff sanctions to try to cripple it further.
Yet it is actually possible from these two articles to get a few insights into the mechanisms by which socialism inevitably fails. Consider a couple of examples:
First is the story of PdVSA, the nationalized Venezuelan oil producer. To be fair to Chavez and Maduro, PdVSA became state-owned long before they took over, actually in 1976. A few years after Chavez’s accession to power in 1998, there was a big strike by the workers. Here is the NYT account of how that came out:
Workers went on strike at the state-run oil firm, Petróleos de Venezuela, or PDVSA, which he had long denounced for its associations with business elites and the United States. The strike threatened to destroy the economy and Mr. Chávez’s presidency. But it also presented an opportunity to stave off another uprising. After the strike collapsed, he fired 18,000 PDVSA workers, many of them skilled technicians and managers, and replaced them with some 100,000 supporters. Much of the firm’s operating budget was diverted into programs for Mr. Chávez’s political base, payoffs for government cronies and subsidies to keep his promise of affordable food.
Now, suppose that there was a major strike of workers at a large U.S. oil company. What would happen? Because the business is privately owned, the strike would be of little or no interest to the government. Either the strike would quickly be settled by the private owners for some additional compensation for the workers or, in a worst case, the strike would continue until the company went into bankruptcy. In the latter case, the assets would be sold off to other producers. Meanwhile, there are plenty of other companies to produce oil, and production from other companies would continue without major effect to the economy. And for that reason, we don’t much see unionization or strikes in industries with large numbers of companies. Certainly, a strike in the U.S. against an oil company, even a huge one, would have little to no effect on the overall economy, let alone on the political situation of the country.
But under the socialist model, with just one nationalized company in the country’s dominant industry, the strike could “threaten to destroy the economy.” Chavez decided he had to get rid of the 18,000 workers who opposed him but knew how to produce the oil, and replace them with more than 5 times as many people, chosen on the basis of loyalty to the regime, but mostly without training or expertise. At the time of the PdVSA strike in 2002, Venezuela’s oil production averaged about 3.2 million barrels per day. By the beginning of this year, Venezuela’s production was down to 1.2 million bbl/d, and for the most recent month, April 2019, it was 830,000 bbl/d. Now that’s a collapse!
And then there is the story of having an agenda of free handouts to low and moderate income people that far exceed the ability of the productive economy to support such handouts. In the case of the Chavez/Maduro regime, these handouts have mostly been in the areas of housing, food, household products and medical care. In the early days, revenue to support the handouts came largely from exports of the government-controlled oil. But as the oil production has declined, the ability to continue that model went away. The government resorted to the old standby, printing money. Today, a hyperinflation is ongoing. From the May 17 Times article:
Juan Carlos Valles arrives at his tiny canteen in a corner of the market by 5 a.m. and begins making a broth out of beef bones and frying corn pastries in the darkness. He says his stall has been without power since March, his sales are down 80 percent since last year and each day is a struggle against soldiers who force him to accept nearly worthless low-denomination bills. Whatever money he makes he immediately invests in more bones and corn flour, because prices go up daily. “If you take a rest, you lose,” said Mr. Valles, who has run his canteen since 1998. “The money has become worthless. By the time you take it to the bank, you have already lost some of it.”
Things in Venezuela don’t seem to have worked out too well for the low income people. Fortunately, no politicians in the U.S. would be so dumb as to propose programs of massive handouts of free stuff to low and moderate income people, financed by the printing of money. Or would they? There is, for example, the famous Alexandria Ocasio-Cortez, originator of the massive suite of handout programs known as the Green New Deal. And how to pay for that? AOC was quoted in January 2019 by Business Insider as saying that Modern Monetary Theory (MMT) should be "a larger part of the conversation.” You haven’t heard of Modern Monetary Theory? In brief, that’s the proposition that “governments that control their own currency can spend freely, as they can always create more money to pay off debts in their own currency.”
So, no problem! What happened in Venezuela could never happen here.