Thinking through the Policy Tradeoffs

Inflation, recession, shortages. Chavismo has steered the country into a macroeconomic impasse where any decision they can make will result in some combination of the three. Fight inflation by cutting spending, and you deepen the recession. Fight recession by spending more, and you worsen inflation. That’s the classic Stagflationary dilemma, but chavistas think they’ve thought up away around, it: repression.

Trouble is, try to fight both inflation and recession by bullying people who put up prices (whether of goods or of foreign currency) and suppliers just stop supplying, leading to scarcity. 


Chavismo’s plan right now seems to be to do everything in their power to avoid making spending cuts. Their plan, in terms of dealing with the inflation this will generate, is to throw "speculators" in jail. The current policy direction is tilted pretty far int he direction of scarcity, with considerable inflation as well.

Sadly, none of this is likely to get us out of the recession we’re in either, so the triple whammy of Inflation-Shortages-Recession seems likely to be with us for some time. Not surprisingly, chavismo’s policy direction is pretty much the polar opposite of what economic orthodoxy would suggest: cut spending, bite the bullet in terms of recession, but at least come out the other end with inflation under control and the stage set for sustainable growth.

Even such a policy wouldn’t stop inflation in the short term – inflationary expectations are now hard-wired into people’s decision-making practices, and you can’t defuse that bomb in the short term. But targeting inflation would at least hold out the prospect, somewhere down the road, of genuinely sustainable, orderly growth and overall economic stability.