Venezuela & America Provide A Definitive Comparison Between A Socialist & Capitalist Economy

"The business of America is business." - President Calvin Coolidge

 

"It is not the company that makes a profit that rips off society but the one who doesn't." – Peter Drucker

 

"A system of pure, unregulated laissez-faire capitalism has never existed anywhere." – Ayn Rand writing in Capitalism: The Unknown Ideal

 

 

 

Well pure unregulated laissez-faire capitalism certainly has never existed anywhere but the above graphic shows what happened to Venezuela's currency, when the country with the world's largest oil reserves, turned to pure regulated socialism. 

 

The Venezuelan government's official currency lost 99.996% of its value against the dollar just in 2018 from 1 strong bolivar per 0.097 dollar on January 1 to 1 strong bolivar per 0.00000403 dollar recently – see graphic above.  Venezuelan President Nicolas Maduro has devalued the currency to be more closely aligned with the black market rate – the real market value - & launched a so-called sovereign bolivar, containing five fewer zeros, pegged @ a fixed rate of 60 per dollar instead of 6,000,000 per dollar – see graphic of black market exchange rate below (Source - DolarToday.com as reported in WSJ).  Four million per dollar had been the Venezuelan central bank's preferred valuation of the sovereign bolivar.

 

click on graphic to enlarge

 

In summary, the currency is virtually worthless & so are pensions & savings.  Venezuela defaulted on $50 billion in bonds after failing to make interest payments since last Fall, hyperinflation has hit an annual all time high of 61,463%, & the International Monetary Fund (IMF) projects hyper-inflation of 1,000,000% – a can of coke was recently priced @ 2,800,000 strong bolivars & re-priced the same day @ 28 sovereign bolivars.

 

The problems started almost 15 years ago when the previous president Hugo Chávez started implementing what he called "21st century socialism" saying that "It's impossible for capitalism to achieve our goals, nor is it possible to search for an intermediate way – I invite all Venezuelans to march together on the path of socialism of the new century."

 

Chavez went on to usurp millions of acres of land & thousands of privately owned businesses & foreign assets were nationalized.  Exxon Mobil, Conoco Phillips, & about 20 other international companies famously had assets in Venezuela confiscated.

 

When crude oil prices ended 2015 below $40 per barrel Venezuela was not able to adapt & a severe economic downturn resulted that continues to this day with dire food shortages, faltering public services like water & transportation, closure of companies & resultant unemployment, & falling oil production – there are shortages of milk, meat, coffee, rice, oil, precooked flour, butter, toilet paper, personal hygiene produces & medicines – nearly 75% of Venezuelans have lost an average of twenty pounds & some have resorted to eating garbage.  Almost ninety percent of the population now lives in poverty & accordingly the crime rate has dramatically increased with a murder rate in 2015 of 90 per 100,000 people – greater than the murder rates in Central America's Northern Triangle countries of 25 to 75 per 100,000 & the U.S. murder rate of 5 per 100,000.

 

Maduro has @ least admitted that socialism in Venezuela failed when he told the United Socialist Party Congress (PSUV)  "The production models we've tried so far have failed, & the responsibility is ours – mine & yours."

 

Now to be sure the U.S. economy is not a pure, unregulated laissez-faire capitalistic system, a free enterprise economy that will produce ever higher rungs on the ladder of economic growth for the world – it is a mixed economy that is somewhere between a totally free market economy (pure capitalism) & a government directed economy (socialism) with the current uninformed mindset of a majority of millennials & Democrats favoring more socialism.  Professor Friedman said over twenty years ago "We're more than 50 percent socialist.  And I don't think we're getting our money's worth."

 

Economists today focus on whether or not we are stuck in a modern day secular stagnation that I will define as less than 2% real annual economic growth, or whether the Trump budget of fiscal year 2018 that called for 3% growth starting in 2020 is out of reach in 21st century America, or whether a return to the historic 4% growth levels is only a pipedream.

 

Stanford economics professor John Taylor teaches that economic growth equals employment growth + productivity growth.

 

The demographics of population growth presents a challenge for high economic growth but the productivity growth component of Professor Taylor's formula should be increased substantially via several features of the Tax Cuts & Jobs Act of 2017 – specifically the 100% expensing rules for capital investments, the lowering of the corporate income tax rates, & to a lesser extent the lowering of the individual income tax rates.

 

Long term, the economy grows because of capital & savings, including savings that children running lemonade stands, or washing pans in a bakery for allowance money, deposit in passbook savings accounts – a great way to get started in becoming an entrepreneur.

 

The following graphic illustrates the components of Professor Taylor's formula.

 

  

 

The following graphic shows the difference in economic growth rates between two diametrically opposed ideologies – Reagan for free enterprise (environment of lowering both taxes & regulations) & BO (environment of raising both taxes & regulations) for socialism.  The graphic below shows the quarter to quarter annualized real GDP change for Reagan's & BO's presidencies starting in the 3rd year of each presidency.

 

 

 

Rose Wilder Lane sums up the point of the above graphic when she wrote on page 52 of The Discovery Of Freedom "Men in Government must take the wealth they consume, from the wealth that productive men produce.  The important question is, What amount can they take safely?"

 

The Trump economy of the past year & a half has given many people the feeling that the economy is roaring like it hasn't in about a decade.  But President Trump pointed out that when speaking of a percent or two in GDP it is hard for people to visualize the magnitude of what is happening – they just know they feel good.

 

The best way I know to visualize the differences in GDP growth rates is to look @ how long it would take for the economy to double when comparing two different economic growth rates.

 

For instance, if we can achieve a continuous 3% real economic growth rate the economy will double in 24 years as opposed to 39 years for a 1.85% continuous real economic growth rate.  Starting with a $20 trillion (rounded) economy a 1.85% continuous real economic growth rate would result in almost $10 trillion (in 2018 dollars) less goods & services being available for consumption than would be available with a 3% continuous real economic growth rate.  It would take an additional 15 years to make up this $10 trillion difference @ 1.85% real economic growth.

 

Professor Friedman wrote in Free To Choose: "Wherever the free market has been permitted to operate, wherever anything approaching equality of opportunity has existed, the ordinary man has been able to obtain levels of living never dreamed of before.  Nowhere is the gap between rich & poor wider, nowhere are the rich richer or the poor poorer, than in those societies that do not permit the free market to operate." 

 

A strong economy is the only way to consistently give people the dignity of gainful employment that produces a higher standard of living & a promising future.

 

The collapse of Venezuela, as described above, shows another chapter of the failure of a centrally planned socialist managed economy. 

 

But the majority of millennials & Democrats in 2018 can't reject the temptation to think that socialism in America will work – they think this time will be different.  The lure of socialism is a burden that "is exceedingly hard to throw off, even when patently obvious that it is the chief culprit producing persistent underdevelopment, poverty, & misery."¹

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1.  Mary O'Grady writing the weekly Americas column in the WSJ – August 25, 2006