Caracas Chronicles

For Hugo Chávez to declare "Economic War" in June 2010 is a little bit like for Adolf Hitler to take 5 minutes off his busy schedule on April 30th, 1945 to declare war on Poland: that fight’s been on for years now. By now it’s obvious: the Economy won, and it’s coming back to kick Chávez – and the rest of us – in the ass.

Chávez’s preferred weapons in the war have been the thicket of administrative permits, controls, prohibitions, and regulations that he’s erected like a wall separating Venezuelans from a decent living. Noting that this constant barrage makes sustained prosperity impossible isn’t just obvious, it’s a virtual tautology.

But the purely economic critique of Chávez’s War on the Economy doesn’t get quite at every reason why the model is so pernicious. The more basic reason isn’t actually economic at all, it’s moral.  What Chávez has created is an economy so distorted that the most lucrative activities are now the ones that produce the least value to society as a whole. The monstruous waste of capital, energy, talent and opportunities involved is the real tragedy, the basic Unknown Soldier entombed in the War on the Economy.

The challenge in writing about a topic like this is always the same: how to draw out the human implications of the dry, dreary language of the dismal science. Start writing about “economic distortions” and you can feel attentions waning all up and down the land. But to talk about economic distortions is really to talk about the ways government decisions push people to act in ways that create no value to anyone other than themselves.

This isn’t some technical aside, this isn’t something that can be left to “the experts”. This is the nub of the issue: an economy that channels capital, energy, talent and opportunities to its least valuable applications is one that gnaws away not just at our prosperity, but at our moral fiber as well.

Take rental cars. For years now renting out cars has been one of the most profitable businesses you could be in in Venezuela. Rental firms get cheap dollars to import cars, rent them out to people at inflated rates (because there aren’t enough cars to go around) for two or three years, putting 200,000 km. on them or more, then turn around and sell them…and they make a profit on the sale! With the collapse of the domestic auto industry and the scarcity of official dollars to import cars, used cars don’t depreciate in Venezuela – they basically go up along with the parallel dollar.

All of which conspires to make renting cars in Venezuela one of the sweetest businesses you can be in.

Now, stop and think about this. Is car rental a “strategic industrial sector”? Does renting out cars generate massive indirect benefits for the rest of the economy, spillovers large enough to justify rewarding it with an extraordinary rate of return? Is car renting a national environmental, or poverty alleviation, or economic development priority? Do you want the best and brightest to dedicate their lives to renting out cars.

No, no, no and no.

So why do we have a policy regime that makes renting out cars such a massively lucrative business? 

The answer is that there really isn’t a reason, because nobody set out to make car rentals particularly profitable. The business’s spectacular performance is just an unexpected consequence, a lucky by-product of the War on the Economy. The Gods of Economic Distortions looked down upon Hertz and smiled.

That’s all.

The Venezuelan economy is littered with cases like this one, just papered over with sectors where strategies, investment decisions, career paths and life choices are made not on the basis of any kind of economic or social rationality, but simply with a view to capturing the rents generated by Chávez’s War on the Economy. In this case, a bizarrely convoluted Foreign Exchange Control regime and a botched industrial policy conspire to make cars scarce, buyers desperate and rental agencies rich. Simple as that.

Which is another way of saying that the War on the Economy operates by turning every businessman into a Distortion Surfer. It works by making them act in ways that may make no sense from the point of view of society as a whole, but are justified financially because one regulatory quirk or another happens to boost their profitability.

The upshot is that the War on the Economy itself molds the Business Elite into the collective parasite Chávez is so fond of accusing it of being, the “enormous parasite leeching off of oil rents” that Uslar Pietri warned about all the way back in 1936.

Because, we should be clear, when Chávez rails against the business elite for acting in ways that do nothing to help the country develop, he’s more or less in the position of a barman berating his most loyal customer for always being drunk.

Actually, even that analogy doesn’t really get to the nub of it. You’d have to picture the bar being the only place where you could get a drink in a dessert town. And the barman giving away shots of whiskey for 5 cents each but charging $25 for a glass of water. Picture that barman the berating his client for always being drunk. Now you’re close.

Like every war, Chávez’s War on The Economy leaves a tragedy in its wake. Over the last 12 years, Chávez’s preferred has waged this war by ensuring that the assets society needs the most to develop are wasted. The War on the Economy latches the engine of entrepreneurship to the wagon of waste. It channels capital and energy unfailingly to its most frivolous uses. It takes the talents of the nation’s brightest and channels it towards activities that leave them better off and society as a whole worse off.