Bad Economics: Redditor says government incompetence is overstated in Venezuela crisis

Part of a series debunking incorrect economics on the internet
Reading time: ~5 minutes. TL;DR Venezuelan collapse is not caused by oil prices, US sanctions or “economic warfare” by evil corporations. It is, however caused by government corruption and incompetence, as well as erosion of central bank independence.

Today, we have redditor /u/A-MacLeod presenting an argument that incompetent government policy is overstated as a cause in the Venezuelan crisis.

While he agrees that the government’s actions are partly to blame, he severely overstates the effect of alternative hypotheses, which are 1. US sanctions, 2. Oil prices and 3. “Economic warfare” by businesses. Let’s take each of those on their own.

1. Us Sanctions

When US sanctions on Venezuela are discussed in the media, it is usually to praise them or to claim they haven’t gone far enough. The media generally claim they are “unlikely to create major economic hardship”. This is flatly rejected by the United Nations, whose General Assembly said they were “disproportionately affecting the poor and the most vulnerable classes”, some would say, as designed. The UN also condemned the US for the sanctions, urged other states not to recognize them and even began discussing reparations the US should pay to Venezuela. Don’t bother trying to find that reported in the media though.

As of August 2018, this is nonsense. First, a history lesson: the US enacted 3 major sanctions against the Maduro regime. The first one in 2014 only applies to individuals selected personally by the US president. The second one enacted in august 2017 blockades selling government debt, and the third one from March 2018 blocks transactions with a government issued Venezuelan cryptocurrency.

So while it’s impossible for the 2014 sanction to affect the poor, there is no reliable evidence of the sanctions affecting anyone but oligarchs. What about the linked United Nations document? Well, first let’s note it was written by the Venezuelan government. Second, the document specifically refers to the recent sanction on a government issued cryptocurrency (which was a bad idea economically anyway, but a great idea if your aim is to launder money.

2. Oil prices

This is easy to refute in one chart. [footnote] Data gathered from the IMF and FRED databases, and plotted by me. Oil prices are yearly averages to smooth out the curve. [/footnote] The Venezuelan GDP per capita pitfall started around 2012, while the oil price dropped about 18 months later.

3. “Economic warfare”

However, it is absolutely beyond doubt that the opposition and the Venezuelan elites are trying to crash the economy.

[Citation needed]

Private monopolistic companies are continually found to be squeezing the economy dry by hoarding, especially foods and medicines.

This is generally dispelled by a statement made 2 paragraphs earlier by the same person:

Another factor affecting the economy are price controls, originally implemented to make sure all could afford key foods and goods. These were very popular with the population but the artificially low price means unscrupulous people can simply fill up a truck with cheap food and drive to Colombia and sell it for way more (the same goes for gasoline).

Shortages can be explained easily by price controls and a shitty MS paint graph. In words: Regardless of if you have a competitive market or a monopolistic profit maximizing company, price controls will reduce supply. A monopolist will reduce supply even further (or not produce altogether) because it is simply trying to maximize profit, or cut its loss.

Conclusion

Duly note that none of these causes explain why Venezuelan inflation is well approximated by the letter “L” turned sideways, which is a discussion for another day, but much more important as a cause of the collapse. Hint: it does have to do with the Venezuelan central bank being staffed by cronies and buffoons.