The latest problem in Venezuela

[dismal]

And even assuming you do, why would you go through the trouble of doing all that when the government pays your salary no matter what you do with the ranch and you can just sit on your ass watching cartoons all day?

Well, if you nationalize things and put state employees who don't give a shit in charge of them and production falls 1) that's not graft 2) that's on you.

If you seize a ranch and give it to one of your cronies to run, that crony has some incentive to make it profitable. When the USSR broke up their privatization process was corrupt and created a lot of oligarchs, but those oligarchs had an incentive to produce things with those businesses.

 

[Jayjay]

And even assuming you do, why would you go through the trouble of doing all that when the government pays your salary no matter what you do with the ranch and you can just sit on your ass watching cartoons all day?

Well, if you nationalize things and put state employees who don't give a shit in charge of them and production falls 1) that's not graft 2) that's on you.

If you seize a ranch and give it to one of your cronies to run, that crony has some incentive to make it profitable. When the USSR broke up their privatization process was corrupt and created a lot of oligarchs, but those oligarchs had an incentive to produce things with those businesses.

Only to certain point. The problem with oligarchs in Russia or Ukraine or elsewhere is that they make enough money anyway to care and improve their businesses. An oligarch doesn't care if his businesses make him ten million rubles a year, or ten million and thousand rubles. This is more or less the same problem as with government ownership: lack of competition.

 

[Crazy Eddie]

And even assuming you do, why would you go through the trouble of doing all that when the government pays your salary no matter what you do with the ranch and you can just sit on your ass watching cartoons all day?

Well, if you nationalize things and put state employees who don't give a shit in charge of them and production falls 1) that's not graft 2) that's on you.

Begging the question: why did you put a state employee in charge of production who doesn't give a shit about production and doesn't know what he's doing? What qualifications does this person have in the first place?

In this case, the answer is "none." You didn't appoint him because you thought he could run things, you appointed him because he -- unlike the person he replaced -- was loyal to you and/or you owed him a favor.

If, on the other hand, you nationalize the industry but leave the original employees and managers in place -- or better yet, encourage them to keep the surplus if they exceed quota as "profit", like they do in China -- you will probably avoid that problem.

Corruption, graft, nepotism, etc... these things are problematic no matter what kind of government you're running. Nationalization causes other types of problems (legally and political in terms of international trade) but that's not what's been happening in Venezuela. They're not having food shortages because of socialism, they're having food shortages because their leaders are greedy and incompetent.

So the massive oil profits aren't enough to skate by that anymore. When things get rough and it's time to get some actual work done, they're still fucking around playing house with the property they confiscated.

When the USSR broke up their privatization process was corrupt and created a lot of oligarchs, but those oligarchs had an incentive to produce things with those businesses.

Corruption by itself can lead to some pretty amazing things, actually (just ask Hillary Clinton) but even then is highly limited if those in power have a tendency to give power to people simply because they like them and not because they know what they're doing.

In other words, corruption is the process of wrongfully disenfranchising people, violating their property and their rights in favor of profit; graft and nepotism is the process of wasting that property and/or rights on people who have no business handling them in the first place.

 

[dismal]

Well, if you nationalize things and put state employees who don't give a shit in charge of them and production falls 1) that's not graft 2) that's on you.

Begging the question: why did you put a state employee in charge of production who doesn't give a shit about production and doesn't know what he's doing? What qualifications does this person have in the first place?

In this case, the answer is "none." You didn't appoint him because you thought he could run things, you appointed him because he -- unlike the person he replaced -- was loyal to you and/or you owed him a favor.

If, on the other hand, you nationalize the industry but leave the original employees and managers in place -- or better yet, encourage them to keep the surplus if they exceed quota as "profit", like they do in China -- you will probably avoid that problem.

Corruption, graft, nepotism, etc... these things are problematic no matter what kind of government you're running. Nationalization causes other types of problems (legally and political in terms of international trade) but that's not what's been happening in Venezuela. They're not having food shortages because of socialism, they're having food shortages because their leaders are greedy and incompetent.

So the massive oil profits aren't enough to skate by that anymore. When things get rough and it's time to get some actual work done, they're still fucking around playing house with the property they confiscated.

When the USSR broke up their privatization process was corrupt and created a lot of oligarchs, but those oligarchs had an incentive to produce things with those businesses.

Corruption by itself can lead to some pretty amazing things, actually (just ask Hillary Clinton) but even then is highly limited if those in power have a tendency to give power to people simply because they like them and not because they know what they're doing.

In other words, corruption is the process of wrongfully disenfranchising people, violating their property and their rights in favor of profit; graft and nepotism is the process of wasting that property and/or rights on people who have no business handling them in the first place.

If only there were some way to predict whether the state nationalizing industry would make it more or less likely for cronies of the state to be involved with that industry in unproductive ways.

 

[Derec]

Venezuela chaos: The biggest threat to cheap oil

 

[Crazy Eddie]

If only there were some way to predict whether the state nationalizing industry would make it more or less likely for cronies of the state to be involved with that industry in unproductive ways.

The presence of cronyism as a standard business practice is more than sufficient to predict that.

Unfortunately, Chavez's detractors didn't predict that his reforms would collapse under the weight of incompetence, nepotism, corruption and graft. They predicted failure on purely ideological grounds, as if it would fail just on the PRINCIPLE of the thing. That's what made those predictions so laughable: they were -- and are -- based on principles, not facts.

The SOLUTION to this problem has a similar dimension, to the point that simple privatizing the industry won't actually improve matters unless they are returned to competent and responsible management. That can be accomplished even if those industries AREN'T immediately privatized, and yet privatization will not in and of itself achieve that objective.

The basic problem is that Venezuela's industry and society has ALWAYS had a love affair with corruption. Chavez swept into power because the capitalist class ran an effective oligarchy and managed to keep an EFFICIENT form of corruption that was openly self-serving. He put his faith in the altruism and better nature of his fellow citizens, which turned out to be a terrible idea as they replaced one form of corruption with another much less productive form of it.

Chavez's lesson is the same one you're failing to learn: that PRINCIPLES do not make for good policy.

 

[Loren Pechtel]

If only there were some way to predict whether the state nationalizing industry would make it more or less likely for cronies of the state to be involved with that industry in unproductive ways.

The presence of cronyism as a standard business practice is more than sufficient to predict that.

Unfortunately, Chavez's detractors didn't predict that his reforms would collapse under the weight of incompetence, nepotism, corruption and graft. They predicted failure on purely ideological grounds, as if it would fail just on the PRINCIPLE of the thing. That's what made those predictions so laughable: they were -- and are -- based on principles, not facts.

The collapse due to corruption etc was likely (governments that far left are always corrupt) but not inevitable, thus none of us said anything about it. The collapse due to the economic policies was inevitable, we said something about it.

Note that what we are seeing is a combination of the two factors at work.

 

[Crazy Eddie]

The presence of cronyism as a standard business practice is more than sufficient to predict that.

Unfortunately, Chavez's detractors didn't predict that his reforms would collapse under the weight of incompetence, nepotism, corruption and graft. They predicted failure on purely ideological grounds, as if it would fail just on the PRINCIPLE of the thing. That's what made those predictions so laughable: they were -- and are -- based on principles, not facts.

The collapse due to corruption etc was likely (governments that far left are always corrupt) but not inevitable, thus none of us said anything about it.

Which is entirely my point. The economic policies weren't actually unsound, but they weren't the kinds of policies that could coexist with with a petrol-dependent welfare state. To ignore the corruption problem as irrelevant and focussing on their policies is like trying to treat a chemo therapy patient by installing hair plugs.

Note that what we are seeing is a combination of the two factors at work.

Indeed. But as I've said several times, it isn't some kind of mystical alchemy where these two things just HAPPEN to cause prices to drop because Capitalism. Cronyism causes productivity to drop for concrete reasons that are mutually exclusive from economic policy, and most economic policies -- even rightist ones -- are based on assumptions that do not hold true in the presence of rampant corruption and graft. In principle, the outcomes tend to be similar and the primary difference between leftist and rightist policies is how they measure success. To be sure, rightists WOULD NOT see food shortages as an indicator of failure if it coincided with a growth period in the nation's GDP, while leftists would be willing to accept a loss in overall GDP if GDP PER CAPITA actually increased.

Venezuela is failing by EVERYONE'S standards, primarily due to a corrupt and self-serving political class that has carved up its nation's resources like a giant buffet table, people who were far less loyal to Chavez's lofty visions than they were to their own decadence and greed.

Even in a free market, you can't even run a small business successfully if all of your employees are stealing from the register.

 

[Loren Pechtel]

The collapse due to corruption etc was likely (governments that far left are always corrupt) but not inevitable, thus none of us said anything about it.

Which is entirely my point. The economic policies weren't actually unsound, but they weren't the kinds of policies that could coexist with with a petrol-dependent welfare state. To ignore the corruption problem as irrelevant and focussing on their policies is like trying to treat a chemo therapy patient by installing hair plugs.

No--you're taking the fact that corruption is at play to pretend they were sound. They weren't--they were and are doing a lot of damage.

 

[Axulus]

Crazy Eddie,

Let's explore the specifics of Chavismo style socialism and see how, even in the absence of corruption, it contributed to their economic mess:

-Tiered exchange rate system for imports - in theory, those companies whose products are deemed "most essential" get an extremely favorable exchange rate when importing stuff, so long as they agree to sell their products at a "fair price" as determined by government price lists. The reality is that the amount of currency at these favorable exchange rates is very limited and only goes to politically favored companies. The reality of this means that special government picked companies have a huge advantage on the market with access to this favored currency. This drives out competitors who can not get such access, meaning you have a less vibrant and dynamic sector that supplies these essential goods. Not only that, but it completely distorts the decision on whether to import something or produce it at home. If you can essentially buy imports for pennies on the dollar, how in the world can you beat that price by producing those items from a domestic supplier? You can't. You shut down domestic production in all sorts of ways with that kind of system that otherwise could do perfectly fine with a free-floating exchange rate.

-Expropriation/nationalization of many kinds of businesses. With a threat of a government takeover at any time, why invest in new machinery and equipment? Why expand operations? Why put in a bunch of your spare cash to maintain everything in good shape? By expanding your business and keeping it well maintained, you become a more attractive target for the government to take over your business. It will definitely influence your decision on how much of the cash you'll keep in the business for such purposes vs. take out for personal use. Once again, this diminishes the private sector and reduces private production.

-Pulling out too much cash generated by government run businesses for pet projects. Even with the most competent people it is a difficult decision to determine how much money to keep in the business for repairs, maintenance, upgrades, expansion and whether or not to downsize. These decisions become extremely distorted with the Venezuelan government pulling out far more cash than these businesses needed, to spend on other uses (corruption certainly plays a role in the current situation as well). A large share of money that should have been invested back into the company gets taken out, reducing future production as equipment wares out and new, better technology becomes available.

-Price controls - the government has lists of "fair prices" that businesses can not exceed. These prices are rather arbitrary and do not take into account the hundreds of thousands of events that occur throughout society that can affect costs of production. Just take a look at a price chart for any commodity and you'll see that new information and new events can dramatically affect the price of such items in short periods of time. Many of these commodities are used in production of goods. If the cost of your inputs suddenly spikes, that so-called "fair price" which you must stay at or under might no longer be viable any longer. When that happens, you reduce or stop production all together to save cash until the cost of productions drop again (or you keep production going and lose money in order to avoid the government calling you a traitor and taking over your business). Even this threat of possibility in the future means you'll be less likely to invest in additional capacity and expansion (since the government will threaten to take you over should you ever reduce production and you'll otherwise lose a lot of money when conditions change). Once again, this further reduces private production and output.

-All the above contributed to Venezuela generating 95% of it's export income from oil and 50% of its GDP from oil. Nearly all other sectors were completely gutted. Once the price of oil drops by 66% or more, something that occurs about once every 10 years, you are in for an economic disaster. Not only that, but the factors mentioned above even contributed to a decline in the oil generating capacity of Venezuela. Far too much money was taken out of the national oil company than it needed to keep up with maintenance, upgrades, and new wells needed to replace old ones that were getting depleted. This is an incredible fact considering that the price of oil used to be almost triple the current price. Not only that, but the large decline in the price of oil dramatically reduced the amount of currency available for its tiered exchange rate system. Non-oil companies that do produce products for the Venezuelan economy that rely on imports in their production were suddenly unable to obtain the imports they needed, causing further production shutdowns.

 

[Crazy Eddie]

Which is entirely my point. The economic policies weren't actually unsound, but they weren't the kinds of policies that could coexist with with a petrol-dependent welfare state. To ignore the corruption problem as irrelevant and focussing on their policies is like trying to treat a chemo therapy patient by installing hair plugs.

No--you're taking the fact that corruption is at play to pretend they were sound. They weren't--they were and are doing a lot of damage.

The problems with their economic policies is an entirely different can of worms, one which you have never demonstrated any willingness to discuss rationally without appeals to ideology.

 

[Crazy Eddie]

Crazy Eddie,

Let's explore the specifics of Chavismo style socialism and see how, even in the absence of corruption, it contributed to their economic mess

Lets!

-Tiered exchange rate system for imports - in theory, those companies whose products are deemed "most essential" get an extremely favorable exchange rate when importing stuff, so long as they agree to sell their products at a "fair price" as determined by government price lists. The reality is that the amount of currency at these favorable exchange rates is very limited and only goes to politically favored companies.

Which is an element of corruption. Even in Chavez's own policies the favorable rate was intended to bolster the supply of essential goods, NOT specifically to favor government-owned companies. So theory and practice are inconsistent even here.

The obvious fix would have been to make those exchange rates performance-based, based on production quotas or some other quantifiable measure. This avoids the situation they ended up with, where companies that are productive face unfavorable rates while companies that are un-productive have all the advantages and manage to do only the bare minimum amount of work needed to make a profit.

Not only that, but it completely distorts the decision on whether to import something or produce it at home. If you can essentially buy imports for pennies on the dollar, how in the world can you beat that price by producing those items from a domestic supplier? You can't. You shut down domestic production in all sorts of ways with that kind of system that otherwise could do perfectly fine with a free-floating exchange rate.

I don't necessarily disagree, but we've been told "cheap imports from abroad" supposed to be GOOD for the economy when U.S. companies offshore their production to China and Singapore.

I actually think Chavez wasn't really interested in shoring up domestic production and just assumed the imports would make up the difference (petrodollars, remember?) while artificially inflating the value of those state-run industries in the mean time.

-Expropriation/nationalization of many kinds of businesses. With a threat of a government takeover at any time, why invest in new machinery and equipment? Why expand operations? Why put in a bunch of your spare cash to maintain everything in good shape?

No business in history has ever gone out of business because purely its owner was afraid of being robbed.

So in answer to your question: "Because our business needs it."

-Pulling out too much cash generated by government run businesses for pet projects...

Is a form of corruption or at best government waste.

-Price controls - the government has lists of "fair prices" that businesses can not exceed. These prices are rather arbitrary and do not take into account the hundreds of thousands of events that occur throughout society that can affect costs of production.

True. The Chavistas price controls were based on notions of affordability for the poor and not so much on real world economic conditions.

But the real reason they were imposed was because Chavez feared the businessmen in his opposition would start jacking up their prices and then blame it on the government, suggesting that prices would only come down once Chavez was ousted (the insurance companies pulled this exact same stunt to discredit the ACA and AETNA is doing it again now). Considering the large power of Venezuela's existing oligarchy even under Chavez, that's not a totally unjustified fear. But it's also not an ideal solution to that particular problem.

Businessmen don't like to be told what to do and they do all kinds of shitty things when they feel like the government is messing with them. But "close up shop and stop producing" isn't one of them. A couple of years ago a local example: a restaurant owner unhappy about restrictive local ordinances (they really WERE, and he was right to be pissed) deliberately went and bought an abandoned building they were planning to purchase for condo development and then used a loophole in those same ordinances to hold on to it -- tax free -- for eight and a half years while allowing the building to degenerate into a horrific eyesore and remain completely empty. They've been begging him to sell the property ever since, and his response usually is something along the lines of "I'd love to, but the neon sign in my window is still too bright."

Vengeance, while expensive, is a luxury some people can afford.

All the above contributed to Venezuela generating 95% of it's export income from oil and 50% of its GDP from oil. Nearly all other sectors were completely gutted. Once the price of oil drops by 66% or more, something that occurs about once every 10 years, you are in for an economic disaster. Not only that, but the factors mentioned above even contributed to a decline in the oil generating capacity of Venezuela. Far too much money was taken out of the national oil company than it needed to keep up with maintenance, upgrades, and new wells needed to replace old ones that were getting depleted. This is an incredible fact considering that the price of oil used to be almost triple the current price. Not only that, but the large decline in the price of oil dramatically reduced the amount of currency available for its tiered exchange rate system. Non-oil companies that do produce products for the Venezuelan economy that rely on imports in their production were suddenly unable to obtain the imports they needed, causing further production shutdowns.

And this is the crux of it, really. The oil money wasn't distributed to the companies that could have used it most effectively, and the ones that could were hampered by the sudden lack of access to the import market. This results from a contradiction of goals: you can support industry on the condition that they work to benefit the people or you can work for the benefit of the industry at the expense of the people. The Chavistas tried to do both at the same time -- benefit the people at the expense of selected industries -- and it gummed up the works in the market.