I thought I’d add a little to the discussion below. Hat tip to my good friend Y
Credit to the Wall Street Journal
A Circus But No Bread
By Mary Anastasia O’Grady
21 May 2007
The Wall Street Journal
(Copyright (c) 2007, Dow Jones & Company, Inc.)
“The characteristic feature of the market price is that it tends to equalize supply and demand.”
— Ludwig von Mises, “Human Action,” 1949
The Venezuelan government will seize control of Radio Caracas Television on Sunday, finally making good on a threat to silence one of the country’s most important independent news sources. It is no coincidence that this is happening at a time when Venezuelans are suffering a shortage of key foodstuffs.
Free-speech protections in Venezuela have been steadily eroding for the past eight years, and most other television stations already practice self-censorship. With the expropriation of RCTV, there is only one other independent voice — Globovision — left standing. This assault on free speech has even provoked criticism by the Organization of American States, which has been silent about President Hugo Chavez’s many other offenses against democracy.
Having built his claim to legitimacy on the spurious assertion that he presides over a democracy, you can bet that Mr. Chavez would not have gone after RCTV unless he deemed control of TV news vital to his survival. It may indeed be. The reason is because the economy has been so mismanaged that a crisis now appears unavoidable. How it will end, in rationing and hunger or hyperinflationary madness, is hard to say. But when the whole thing comes a cropper, the last thing the president will want is TV images of popular protests that could be contagious.
From the earliest days of his presidency, Mr. Chavez made it clear that he intended to vastly expand the state’s economic power. In 2000 he started politicizing the state-owned oil company PdVSA and hollowing out its professional engineering and marketing staffs. Shortly thereafter he took to expropriating farms, factories and apartments. When Venezuelan money began to flee, he slapped on capital controls. More recently, he has forced international oil companies to hand over Venezuelan operations and surrender majority control. He has nationalized the largest telephone company and the most important electricity utility. He is now threatening to take over the banks.
As government takings always do, these assaults on property rights have badly damaged output and investment. Yet the harm has been greatly compounded by three other pernicious policies: price controls, profligate government spending and inflation of the national currency, the bolivar.
Here’s how Chavez economics “works.” As petro-dollars pour into state coffers, the government takes them to the central bank to get new bolivars printed, which are then pumped into the economy through government spending. Mr. Chavez has also been regularly increasing wages. The result is a consumption boom. Under free prices, too many bolivars chasing too few goods would produce inflation that would show up at the supermarket checkout counter. But price controls make that impossible. Instead, serious shortages are emerging.
Free prices are to an economy what microchips are to a computer. They carry information. As Austrian economist Ludwig von Mises explained in his legendary treatise 60 years ago, it is free prices that ensure that supply will meet demand. When Mr. Chavez imposed price controls, he destroyed the price mechanism.
And so it is that the Venezuelan egg is now a delicacy, the chicken an endangered species, toilet paper a luxury and meat an extravagance. White cheese, milk, tuna, sardines, sugar, corn oil, sunflower oil, carbonated drinks, beans, flour and rice are also in short supply.
The reason is simple: Producers have no incentive to bring goods to market if they are forced to sell them at unprofitable prices. Ranchers hold back their animals from slaughter, fisherman don’t cast their nets, food processors don’t invest in equipment and farmers don’t plant. Those who do produce find it makes more sense to take their goods across the border to Colombia or to seek out unregulated (black) markets.
Importers also have little incentive to work these days even though the country needs food from abroad. Some things like wheat are not grown in Venezuela. Other products like milk, sugar and potatoes are imported to supplement local supplies. But the Chavez government has made it difficult to buy a dollar at the official exchange rate of 2,150 bolivars and if an importer has to buy dollars at the market rate of 4,000 bolivars it is impossible to make a profit under price controls. Even imports not subject to price controls can be difficult to find since import permits and licenses, as well as dollars, are hard to come by.
This is putting a crimp in more than just the food supply. According to local press reports, some 40% of the country’s air fleet has been affected by delays in getting spare parts and the automotive industry’s supply chain is hampered by a lack of access to dollars. Earlier this year hospitals began complaining that the servicing of medical equipment has been delayed because spare parts are not available. Hospitals are also reporting shortages of medicines for diabetics, antibiotics and hypertension drugs. Price controls on construction materials have damaged the reliability of supply.
To stock the state-owned grocery stores called Mercal, the Chavez government goes shopping abroad with dollar reserves. Of course, Mercal shelves are often bare as well. Moreover, some enterprising government employees seemed to have learned something about market economics: The Venezuelan media is reporting that Mercal supplies are turning up for sale just across the Colombian border, where market prices prevail.
Venezuelan policy makers can’t be this dumb. The intention is not to feed the country but to destroy the private sector and any political power it might still have. In this environment survival independent of good relations with Mr. Chavez is nearly impossible. In the revolutionary handbook, capitalist producers and importers who buy things from the imperialists will be replaced by socialists living on cooperatives that will feed the country. The only trouble is that that effort is not going well, as Jose de Cordoba reported on the Journal’s front page on Thursday. Lack of knowledge, equipment, incentives and organization have left the co-ops “mostly a bust so far.”
To end the shortages all Mr. Chavez would have to do is lift the price controls. But with inflation already running above 20%, he no doubt fears the price jump that would follow. Much safer to seize RCTV and accelerate the consolidation of the military dictatorship. When the crisis comes, the chavistas will be ready.