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How Bernie Sanders and Elizabeth Warren Are Channeling Venezuela’s Hugo Chávez

Summary:
A decade ago, Democrat politicians and their cultural and academic allies were singing the praises of Hugo Chávez and his “economic miracle” in Venezuela. From Bernie Sanders to Salon, to Joseph Stiglitz and Sean Penn, Chávez’s version of socialism had transformed Venezuela, lifted up the poor, and set an example for the United States and ...

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A decade ago, Democrat politicians and their cultural and academic allies were singing the praises of Hugo Chávez and his “economic miracle” in Venezuela. From Bernie Sanders to Salon, to Joseph Stiglitz and Sean Penn, Chávez’s version of socialism had transformed Venezuela, lifted up the poor, and set an example for the United States and Latin America.

Today, Venezuela takes its rightful place with the left in the Orwellian memory hole. Sanders no longer brings it up on the campaign trail, Stiglitz has not made a public comment on the Venezuelan economy or Chávez’s successor, Nicolás Maduro. The Left either claims that Venezuela never really tried real socialism (Yahoo Finance) or simply pretends that the country and its brutal kleptocracy are nonexistent or, at best, irrelevant to the latest collectivist policies being thrown out by Democrat politicians.

Yet neither Venezuela nor its policies are irrelevant in US politics; on the contrary, they are the staple of some candidates running for the presidential nomination of the Democratic Party. Their proposals are much closer to the Chávez/Maduro variety of socialism than any of them or their media allies are willing to admit. While they insist that they want to create a New Denmark, what they are fashioning is a domestic version of the latest Latin American tragedy. To understand why this is so, we first need a refresher course on what has happened in Venezuela.

First, Chávez directed almost all his political rhetoric toward poor people in the country and against those who were wealthy. Now, it is important to remember that Latin America has had much greater contrasts between wealth and poverty than what we generally see in the United States and Europe. The classical liberalism that encouraged free trade and produced the open economy in the USA did not take root south of the border. The economies in Latin America historically have been much more highly regulated and more protectionist than what has been the case in this country, and that means fewer economic opportunities for the masses.

This fact has not kept socialists from claiming that Latin American countries practice “untrammeled” free enterprise, and so politicians there — with encouragement from the American left — have maintained that authoritarian socialism is necessary to narrow the standard of living gap between rich and poor in those nations. In the case of Venezuela, the Chávez government nationalized the oil industry, not an insignificant thing given that Venezuela sits upon the world’s largest reserves of crude oil.

Venezuela hardly is the only country with a government-owned oil sector. The oil-producing facilities of the Organization of the Petroleum Exporting Countries (OPEC) nations all are state owned, as is Norway’s petroleum-producing sector. Whatever the inefficiencies of socialism in the energy sectors, however, the people running the nationalized oil industries at least have had the foresight to maintain a workable capital stock. Drilling and transportation of crude oil is highly capital intensive, which means that a sizable portion of oil revenues must be “plowed back” into working capital in order to keep the oil fields productive.

Chávez had different — and more delusional — ideas about how to run Venezuela’s newly nationalized oil industry. First (like the cartoon version of the Latin American dictator), he replaced much of the private workforce with political cronies, which guaranteed that the industry would be poorly managed. Second, he spent oil revenues for political purposes, ostensibly to “build schools and hospitals,” as the narrative goes, and his spending spree somehow drastically reduced the nation’s rate of poverty.

There is some truth to the idea that at the beginning vast wealth transfers will make the recipients better off, but this always is temporary because the productive individuals and industrial sectors having their assets confiscated will not go on producing at the same high level. In the case of the Venezuelan oil boom, Chávez’s scheme had its inevitable meeting with reality.

At first, the vast wealth transfers did make some people better off, in part because the nation had enormous oil revenues and oil prices were at historically high levels around the world. However, even then the oil money was not enough to cover the Chávez spending spree, and his government resorted to what Latin American dictators from central casting always do: print money, and lots of it.

The high oil prices did not last, and Venezuela saw a combination of falling prices and falling production as capital equipment in the neglected oil fields wore out, and oil revenues dropped precipitously. That meant even more money printing and burgeoning hyperinflation to go with it, as one would expect from the cartoonish Chávez (who, mercifully, would die of cancer and leave his government in the hands of the even more thuggish Maduro).

But what does that have to do with the platforms of Bernie Sanders, Elizabeth Warren, and other Democrats? After all, while they talk of “Democratic Socialism,” none are calling for anything that seems to be as radical as anything done in Venezuela. But guess again; their platforms are closer to those of Chávez and Maduro than they will admit.

The Venezuelan authorities seized the assets of oil companies and other firms and then spent their revenues on things not related to the businesses. His supporters say that Chávez's government built hospitals and schools, providing services for poor people that, in return, provided Chávez his votes.

As pointed out before, whatever Chávez and Maduro did with the oil revenues was not sustainable, because the government failed to maintain the capital and oil prices fell drastically, leaving the government to print money. The rest is very sad history.

Other than Sanders, no candidate has called for directly nationalizing the oil and gas industries, although Warren and Sanders have called for shutting down at least some fuel production and it is clear that they would like the industry to disappear altogether, with windmills and solar energy providing the bulk of US energy. Thus, whatever income equality schemes they have planned, using oil revenues is not one of them. (Sanders has promised to provide five years of pay and benefits for energy workers that lose their jobs under his energy — or lack of energy — plan.)

Instead of milking the oil industry for political cash, Sanders and Warren have found what they believe to be an eternal source of revenue: the wealth of American billionaires. Through proposed wealth taxes and other acts of property confiscation, Warren and Sanders seem to believe that they can fund trillions of dollars in new programs, seizing the assets of people like Bill Gates and Jeff Bezos and turning them into new revenue that would work economic miracles elsewhere.

Declared Sanders,

Say Bill Gates was actually taxed $100 billion. We could end homelessness and provide safe drinking water to everyone in this country. Bill would still be a multibillionaire.

While Warren hasn’t made the claim that confiscating most of Gates’s wealth would end homelessness and provide clean water for the nation, she has made a big deal of the fact that the proposed tax would “only” be two cents on the dollar, but also would accomplish all sorts of wonderful things. (I will deal with Sanders’s claims later.)

If the Facebook posts by my progressive friends are accurate, a small number of billionaires “controls” most of the wealth in the world, and this tiny cadre of people is hoarding all the money and leaving everyone else in the world out in the cold. While this might seem like a cause for action, there is much that the progressives, Warren, Sanders, and their economist allies are not saying, and what is left out is the most important thing.

Contrary to what one reads in the New York Times or The Nation, people like Jeff Bezos are not “hoarding” anything, and they certainly are not “creating poverty.” According to economists Thomas Piketty and Gabriel Zucman, among others, capital owners receive increasing returns on their investment and, so, as their businesses grow, they gain an increasing share of the proceeds, leaving workers and everyone else out in the cold.

Getting beyond all the numbers that these economists are presenting, there is a logical construct that must be satisfied for their claims to be true. If they are correct, then over the past two decades, which have seen exponential growth in  web-based enterprises and the rise of billionaire fortunes, we would expect to see a corresponding number of people around the world slide off into poverty. After all, if Bill Gates and Jeff Bezos are gobbling up all the wealth and income, then there would be a constantly decreasing amount for everyone else, which only can mean that the rest of the world is getting poorer. There is no other possible outcome.

Yet that is not what we have seen. Over the past two decades, poverty rates worldwide have fallen, not risen. The numbers are irrefutable and, more important, if they are true, then Warren and Sanders, along with their supporting economists, are wrong.

Even Warren and Sanders, however, recognize that most billionaires are not receiving these huge sums of money as cash income the way the rest of us receive paychecks. Instead, they seem to understand that the vast holdings of billionaires are in non-cash assets such as stocks or property. Furthermore, getting an accurate (and timely) assessment of those assets would be difficult, to put it mildly.

Zucman and others have said that governments simply can seize the assets (like stock holdings) and sell them on open markets (and, in their view, make the markets “more efficient,” which would is a heroic assumption). Getting beyond the practicality of such taxation, there is the problem of the assumption behind it: governments would gain new tax revenues, but the economic behavior of the people being taxed would not change.

One has to understand how someone like Bezos gained his wealth in the first place. Before he founded Amazon in 1994, using $300,000 he received from his parents, he had other tech jobs but hardly commanded anything close to his current wealth. Amazon, he told other investors, was a huge risk and he warned them that it had maybe a 30 percent chance of success. Like so many other internet startups from that era, it took a long time for Amazon to turn a profit, but when many of the dot-com companies imploded at the turn of this century, Amazon managed to survive.

Not that long ago, the wealth that Amazon currently represents did not exist. We are speaking of a firm that is only twenty-five years old. Google is younger than that, and in its early days was up for sale for less than a million dollars. These companies — and many like them — grew and thrived because they provided something of value for their customers and clients.

This last point is important, because to listen to the political rhetoric coming from Sanders and Warren, one would think that people like Bezos and Gates raided everyone else's bank accounts and unexplainably managed to hoard the money for themselves. Neither of these candidates seem to have a clue that the asset values of these billionaire portfolios have come from entrepreneurial activity in which these people risked their own personal wealth to build companies that had no guarantee of success.

What these political candidates and their economist supporters seem to believe, however, is that if they seize huge assets from these people, (1) they easily can convert them into cash without destroying their value and (2) their actions will not have any negative effect on the creation of wealth, so that every year, these billionaires and their companies will continue to fill the government coffers full of cash, paying for every political promise one can imagine.

Earlier in this article, I pointed out Sanders’s assertion that if he could confiscate more than 90 percent of Bill Gates’s assets, the result would be no more homeless people living on the streets and clean water for all Americans. The causality chain is murky, to say the least, and Sanders does not explain how his plan would work or how it would get people off the streets and clean up the nation’s drinking supply. Apparently he assumes that such things are self-evident. But the government has been throwing billions and billions of dollars at these issues for years, and homeless people seem to be increasing, especially in the places that progressives govern.

Besides performing all sorts of government-financed wonders, Warren and Sanders seem to believe that those being taxed would not change their behaviors and that confiscating large amounts of assets from growing firms would have zero effect on business growth. The closest analogy I can find is from the cult film Animal House, in which the band marches into the wall. (I am sure that Sanders and Warren would respond that they would issue threats against the firms and anyone trying to change their wealth status, as though one can build wealth through threats of government punishment.)

Like Chávez and Maduro, who believed that the oil revenues would last forever, Warren and Sanders believe that they have found their fountain of funding: the confiscation of billionaires' assets. And like Chávez and Maduro, they seem to believe that American businesses would continue to grow, that entrepreneurs would pretend that the government didn’t regard them as public enemy number one, and that their taxation schemes would provide lots of funding for free healthcare, education, and much more.

The oil revenue stream, in fact, did run dry (or nearly so), but the flood of new programs and “benefits” was still there, including the new hospitals and the like. As we know, the Chávez/Maduro regime simply printed money and lots of it, but paper money was not a replacement for real assets, and we know the rest of the story. The vaunted new hospital construction became the hospitals with no medicine; consumer goods disappeared from the shelves as did basic food items. All that was left was the inflation and the memories of a better time.

Likewise, whatever new flood of programs Sanders and Warren would fund through mass confiscation of private assets would not last very long before the funding dried up. Of course, one can imagine that they would take the Maduro option: blame capitalism and print money.

Such points are obvious and should be obvious to anyone capable of logical thinking. That so many voters, pundits, academics, and media figures are taken in by the Warren-Sanders schemes does not bode well for our economic and political future. Destroying wealth makes us poorer, not wealthier, and if American voters are not able to understand that simple point, they will find out the hard way. But they will find out. Whether or not they understand why the calamity has hit them is another issue altogether, as American voters seem increasingly determined to vote for politicians who can create the biggest fantasies.

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