Economic brutality

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Hugo Chávez announced yesterday that he was raising taxes … in the middle of a recession.

In announcing a rise in the Value-Added Tax, which hits consumers directly, he also lamented having lowered them in the first place. His main reason? He thought lowering taxes would lower inflation, and they didn’t, so he’s bringing them back up.

The sheer ignorance of such a statement is mind-numbing. As any first-year economics student will tell you, inflation has little to do with the tax rate. Inflation is a direct result of long-term fiscal and monetary variables, as well as consumer expectations. Tax rates exert, at best, an indirect influence on inflation.

Inflation simply means there is too much money following too few goods. Changing the amount of money the government takes from people does not really affect long-term inflation either way, because the government (more or less) immediately pumps that money back into the economy.

Think about it this way: inflation is a continuous rise in the price levels. Why would a one-time change in taxes affect prices in any way other than a one-time change in their levels?

That is not to say that the tax hike won’t affect prices. Higher taxes will increase the cost of pretty much everything you buy, and will cause a temporary bump in the price level. And, as Omar reminded me, it hurts the poor particularly hard, since they devote a higher proportion of their income to consumption.

This, however, is not really inflation, by which we usually mean a sustained increase in prices over several years or, in our case, decades.

Higher taxes won’t alter the long-run inflationary course we are in, just like a drop in the tax rate shouldn’t have been expected to alter it either.

What the tax hike does is create disincentives for people to invest and produce. All other things equal, the higher the taxes, the lower the amount of money people and businesses will have at their disposal to consume, and the longer it will take to emerge from this recession.

I guess that’s what we get for electing a President who never went to college.

1 COMMENT

  1. Let’s see:
    Government is going to be forced to give a healthy increase in wages in early 2011.
    Raise in IVA.
    Always in January the Unidad Tributaria is increased by inflation.

    We are going to be facing a big jump in the inflation rate in January which will affect the parallel rate which will push prices even higher.
    We are facing another 40 or 50% year in 2011.

  2. Juan, do you know where one can find inflation rates for all countries during Caldera times? Chavista government officials keep talking all the time that now inflation is lowerthan ever, which is not only a lie (Caldera 2 is not ALL THE TIME) but does not consider the fact a lot of countries in America had very high inflation rates back then. Venezuela is now by far the land with the highest inflation rate in the West.

    • I’ve looked into this before – had an ongoing discussion with someone who used to praise Chavonomics because “inflation wasn’t like under Caldera.” Somehow Caldera’s exchange control experiment (and failure) never entered into the current equation for him.

      Anyways, I’ve analyzed it with five-year averages – the average of inflation for the preceding five years – and compared the Venezuela figures to both the Western Hemisphere and to the entire world, as a ratio. (Ratios under 1 mean Venezuela’s average inflation for the prior five years was less than in the comparative area, and over one means more – 2 meaning double, 3 triple, etc.)

      Western Hemisphere:
      pre-Chavez (85-98): 0.30
      post-Chavez: (99-08): 2.8
      World:
      pre-Chavez: 2.3
      post-Chavez: 5.5

      In other words, while Venezuela’s inflation has always been higher than the world average (through this period), it has spiked under Chavez – even while regional inflation rates were generally falling. Pre-Chavez, Venezuelan inflation was tame by LatAm standards.

      The greater spike compared to the WH (over 10x compared to 2.4x with the world) tells us that the rest of Latin America has done a far better job dealing with inflation than Chavez has. The WH has had double the world average (remember, that number is pushed up by Venezuelan inflation) since Chavez took over, compared to 8.6 times world average before.

      At least some people in LatAm know how to learn from the mistakes of the past.

  3. I guess that’s what we get for electing a President who never went to college.

    No, that’s what we get for electing an uneducated ignoramus.

    It’s subtle, but there is a difference.

  4. “I guess that’s what we get for electing a President who never went to college.”

    On that note, does anyone know if Chavez’ school report cards are in the public domain? It would be interesting to see if His Nibs had a strong suit in anything other than Phys. Ed. as a kid.

  5. Lula never went to College. The President himself, although prefered, doesn’t need to be a college educated guy to be competent. He has to be sorrounded by educated people, though…

    • Coño, I sincerely hope that after all this shit is over we learn our lesson and don’t elect anyone who doesn’t have a PhD for the next 50 years…

    • Hugo finished his bachillerato. As far as I know, he studied bachillerato de ciencias. That means he had to go through 5 years of biology, one year of art history, one year of World history, one year of Venezuela’s history (including a bit about its pre-Columbian past), three years of physics, a couple of years of geography.
      And yet that coup monger said “mankind is 20, 25 centuries old”.
      He went to the Venezuelan Academy of Military Sciences and took several months courses at the USB in a department that seems like the centre of indoctrination of some other Llanero milicos

    • Juan Vicente Gomez is a prime example, he surrounded himself and named as cabinet ministers, well educated people, while probably he never finished grade school. After reading, or as the malas lenguas say “le leyeron”, Doña Barbara, he invited Romulo Gallegos over and offered him the Ministry of Education, the latter politely declined saying he was only a school teacher and novelist and had no administrative skills whatsoever, which was true. The General accepted his excuse, but several weeks later had him elected senator for Apure and Gallegos left the country not to return till after Gomez’s death. Gomez had an eye for excellent people. This one only for yes men.

  6. Chavez agregó que bajo el esquema del capitalismo, el incremento del IVA suele generar un impacto en la inflación gracias a los especuladores, por lo que sugirió que se tomen medidas “más radicales” para enfrentarlos. “Ellos no bajan los precios para nada, el impacto que hemos calculado del incremento del IVA es mínimo, y será mínimo en cuanto a inflación se refiere. Ahora, habrá que luchar contra los especuladores. Podemos hacer una ley especial, para la lucha contra la especulación, medidas más radicales, medidas más severas, un mejor sistema que incorpore al pueblo, a las Fuerzas Armadas, a la milicia, a la inteligencia militar, a la DIM, al SEBIN, para luchar duro contra los especuladores.”

    • If he read history he would realize this is a perfect recipe for failure, from the times of Roman emperors and before, you can not print money and not create price inflation and other distortions. They mixed base metals into gold coins, thereby devaluing the coin and making more coins with the same amount of gold.

      This Chavez policy will come to haunt Obama’s legacy as well. H is busy creating more paper money out of thin air, thereby debasing money already in circulation. Nixon was the culprit decoupling gold, which is and has been money for milenia, from paper money which are government IOUs.

      This is why if you take any $ price today and find its value in gold, you find that it has not really risen or fallen much in price. It just a paper illusion that makes savings a challenge and a shell game politicians have found they can play with the people who do not know the laws of economics as a science, that which explains and predicts, and believe that opposites can be true in science.

    • His Military studies are legally equivalent to a University Licenciatura. That’s why he later joined some postgraduate studies programs (including a Political Science Doctorate, sans dissertation).

      What we need is a President which does not hate society and has some sensibility for economics.

    • The law may say whatever it wants, but if you think “studying” “military studies” at the “Military Academy” is somehow akin to going to college, being exposed to differing points of view, challenging your own preconceived ideas about the world, and meeting different kinds of people, then … I’m sorry. You must have had a terrible college experience.

  7. I can’t help but wonder what chavista apologist Mark Weisbrot thinks of raising taxes in the middle of a recession.

    Let’s remember he wrote:

    “There has long been a double standard regarding fiscal policy — one that the IMF and other multilateral lenders have often promoted — which says that rich countries like the United States or the UK should run large deficits to counteract an economic downturn, but that developing countries cannot. Or worse, that they must do the opposite — cut spending and reduce public deficits during recessions. But in fact developing countries can successfully use expansionary fiscal policy to counteract recessions.”

    http://mrzine.monthlyreview.org/2010/weisbrot160410.html

  8. Let me get this straight. The average price of goods and services in a nation is X. These goods and services are suddenly taxed by a percentage, which leads to the average price going up from X to Y, greater than X. The producers of goods and services must not only sell at higher prices, everything they buy is at a higher price, so all their costs go up. Since all their costs go up, they must increase their prices, which increased even more by taxes than before because things are now more expensive, which also means people buy less of their goods and services because people are not earning more. Are you saying that an increase in X is only considered inflation if the amount by which X increases to Y continues to further increase to an even higher Z?!

  9. Please, Milton, come back and explain that whoever controls the money supply, controls inflation and nothing else can change that.

  10. Sorry to have a different opinion but technically Venezuela is out of recession since the 2nd quarter of 2010, when its seasonnally adjusted GDP rose 1.6 pp with respect to Q1 2010.

    I agree that most people in Venezuela, and elsewhere, are not even aware of this and that the seasonnally adjusted GDP growth rate was 0 (zero) between Q3 and Q2 2001, which reflects how fragil has been the recovery and the rising risks of a double-dip recession. But in general Venezuela is facing the same tough choices that other countries hit by the global economic crisis, i.e. having to raise taxes (see the case of the US) or cut expenditures (UK) in the middle of a fragil recovery.

    Whether this should have been the case, it’s another question. The Venezuelan government could have saved more oil money during the boom and save the country from the burden of recession.

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