Searching for a narrative

77

sugarman-rodriguez-de(A guest post by Venezuelan economist and Harvard Research Fellow José Ramón Morales, despairing at the pervasiveness of populist discourse, even in the face of a bankrupt economy)

Searching for a Reasonable Economic Narrative for the Opposition:

A Provocation and an Invitation

José Ramón Morales Arilla

After years of attacks that reached the point of disregard of the other side’s humanity, it should be clear that the stark division between Venezuelans is the saddest of Hugo Chávez’s legacies. Not only have families been torn apart due to political differences, but the high level of generalized distrust – one of the clearest cultural features of modern day Venezuela – has been directly fueled by the raw tone of the country’s political conversation.

Division has also permeated both sides of the political spectrum, and the obvious gap between “the two oppositions” hampers the chances of reaching a democratic transition to a more prosperous future. This does not have to be the case. Inadvertently, I think we have been dancing around the silver bullet to overcome our political divisions.

For instance, take VP leader Freddy Guevara’s comments on the 45% wage increase to the military,  coupled with a 15% lagged increase in general wages.

The situation was clearly outrageous: on the verge of default, with rampant inflation and unparalleled shortages, the government increases the wages of one group in society just because they hold the country’s weapons.

What was his position? Well, this. The 45% pay rise should apply immediately to everyone.

Guevara’s was a call for “justice” that was joined by most relevant spokesmen from both sides of the opposition. Many in the MUD demanded equal benefits for all, while former Presidential candidate Henrique Capriles even suggested that the wage increase should be of 400%. I repeat: 400%.

It was beautiful. The unified front presented by the opposition seemed to move besides the petty differences of the recent past, and suggests that there is hope in the coordination and aligned political action in the near future.

The catch? Such demands are outside the country’s means. Or put differently, complying with such demands would worsen the macroeconomic and microeconomic crisis that the country is in, that everyone is suffering, and that is clearly the country’s main problem. You might expect politicians to understand how pervasive such an increase in public expenditures and production costs would be in our dire situation, but this fact didn’t make anyone blink twice before making this unified statement to confront the government.

Take for instance one of Julio Borges’ latest Sunday talks to his Amigos Invisibles. He literally goes on to say that a “True fiscal revolución” would be to reduce the VAT tax (main source of non-oil fiscal revenues in the country), and that that’s what any “gobierno serio” would do.

This is the exact approach that Chavismo has taken in governing Venezuela for the last 15 years: total disregard to the overall welfare effects of your proposals and actions just to gain additional immediate support by exploiting opportunistically the public misperceptions on how economics and public finances work.

“Salidistas” and “Entreguistas”, “Escuálidos” and “Enchufados”. If we look past the high-flown epithets, they are all proposing, quite openly, the same thing: fiscal irresponsibility. It’s as if everyone had decided to jump off a cliff together.

So, if all sides with power aspirations are proposing the same thing, then why all this tension? It’s absolutely unnecessary. After all, knowing that the country would be run the same way you are running it if you were not in power should decrease such extreme animosity, am-I-right? I think it’s time for a joint statement. Chavismo and opposition, together as one nation, laying out all the promises that there will be no money to fund…

OK… this is nothing but a provocation. I want to be fair: The opposition wants to reunite the country around democratic values. That simple fact is good enough not to lose hope on the people that are putting up the good fight.

However, the opposition needs to do more than that. “Politics, in its grandest form and highest purpose, aims at healing, educating and leading.” And we are not doing this when it comes to talking about the economy.

When we try to convey that we can make things better without facing tradeoffs, we are being no better than Chavismo. When we say that we should lower the VAT with a fiscal deficit of 18% of GDP and plunging exports, well, that’s about as irresponsible as the Dakazo or price controls.

Widening expectation gaps does the country no good, and it is no service to the success prospects of a potential Unidad government anytime soon. So what should the guiding principles of today’s opposition economic narrative be?

With the risk of being naïve, incomplete, or just plain wrong, I hope to open a conversation on this important topic with this proposal:

Overcoming Venezuela’s current crisis will require sacrifices. The opposition should be assigning the blame where it belongs, while talking about the Venezuela that we could aspire to out of such sacrifices, and how our expectations and demands from the government should adapt if we want to get there.

Our vision is a Venezuela where the paquetazos rojos and grandes virajes are a thing of the past, because economic policy-making is not the result of political opportunism anymore. In that Venezuela, your life savings will never again melt by half with the strike of a pen on a devaluation decree.

The Venezuelan economy that we should aspire to build will not crash when oil prices drop, or the year right after an election. You and your family will be able to work, save, invest and grow safely, without today’s looming sense that everything can fall apart one day or the other.

Exiting this crisis will require us to, once again, walk through the desert of adjustment. The opposition’s proposal should be to walk towards this Promised Land, not towards the mirages of the past. We will overcome our never-ending vicious cycle of populism, crisis and adjustment. That should be our economic proposal.

77 COMMENTS

  1. I agree with you, but first, few people talk about this. I think the only way is to dolarize, not because it is an overall positive, but because it eliminates the possibility of irresponsible politicians screwing the people.

    • Dolarization doesn’t keep goverments from acting irresponsible. If they can’t print money, they would just issue more and more debt. Look at Greece.

      • Adopting the greenback as currency would immediately: (1) thwart inflation, (2) promote exports and trade in general, (3) restore confidence in banks and in savings, (4) bring fiscal responsibility to the government… The list goes on. Note most high-end real-estate transactions in Venezuela are already dollar-denominated.

        And, by they way: Bankers should have never bought Greek Euro-debt.

        • Where are you going to get the US Dollars to replace you entire money supply for an unofficial dollarization (not agreed with the US)? Spontaneous dollarization only happens after a complete meltdown of the local currency money supply – Zimbabwe-style. Surely you do not want that.

      • Goldman Sachs helped cooked the books to get Greece accepted into the EU, and the Greeks themselves were dishonest about how much they were borrowing. The reason they kept on borrowing at low rates is due to faith in the European Union, which is idiotic as it’s a currency union not a political one. (But as long as everyone was making money who cares, right)

    • That reasoning is very close to “the only way is that the US Americans (Swiss, whatever) rule Venezuelan economic matters”. Apparently, by that rationale, we are genetically incapable of dealing with financial matters…genetically.

      • Indeed we are. Can you save a single moment of econonomic lucidity in this country the last 200 years?…

        Last one who tried was CAP II and got axed by his OWN party.

        Venezuelans are genetically incapable of pursue economic equilibrium.

        • As far as the BCV has the option to print, politicians will try to do their utmost to control the printer. The only option is to anchor the currency to the IMF Special Drawing Rights and this still doesn’t solve the issue of printing money, and I don’t think anyone will let the IMF to print for you a different type of currency.

    • Miguel,

      Dollarization is the same as indexation except under the latter you have your central bank and local currency intact. Under Dollarization your central bank has no independent monetary policy and you have no local currency. I know that is what you want for your central bank. You told me that in the past. You will also not have monetary economic stimulation possibilities. Your economy will be stable. You will not grow per se. You have to do all the other parts correctly too if you want to grow. Look at Ecuador. No monetary easing under dollarization.

      I do agree that dollarization would be better than what you have today. Unfortunately, I don´t think you have the possibility of arranging enough US Dollars to replace your entire money supply. In short: you cannot dollarize. It is the same for Iran. However, Iran would want to use the Euro not the US Dollar.

      I would never wish spontaneous dollarization on you because that means your economy must completely implode and your local money supply being wiped out – like in Zimbabwe in 2008. I am sure you do not want to go that way. The people dollarize spontaneously, not the government. They do that when they refuse to accept the local currency because it is completely worthless. Imagine the extremely high level of hyperinflation required to push the people (not the government) to dollarize spontaneously.

  2. You have drawn the best possible map to find the way out of this huge mess but I am afraid people won’t buy it. You are speaking about Politics and your words couldn’t be righter but the caraqueño in the queue, the Spaniard “encantado con” podemos… only thinks about politics (with small p) the good days. When that’s the ground, it doesn’t matter if the best ideas and plans like yours rain on them: things as good as what you propose will never grow. People will buy your thoughts only if you wrap them in tangible promises and every would-be politician know very well that lesson. Your only promise is an hypothetical good future but only thinkers find hypothesis moving or desirable.

      • thanks… politicians promise and promise and thinkers think and think but unfortunately there is no communication between them… “Not many people will accept that Chavez got there because he represented the average Venezuelan” said Pepe below and he is right. J.C. Nagel is implicitly or tacitly one of them. The average Venezuelan, Spaniard… is what it is and changes happen but too slowly

  3. I don’t remember who says this: “Be careful of the enemies to pick, you might end up behaving or acting like him…”

    Not many people will accept that Chavez got there because he represented the average Venezuelan, attitude and aptitude wise. Thinking it can fix or do anything without the appropriate knowledge or education, thinking we can go over anything or anyone just because I am right and anyone else is wrong.

    We just don’t respect others. That for me is the main reason why cant change.

  4. Excellent post!

    Politicians are depreciating the value of political debate. Even within chavismo most criticism against Maduro is that he’s not “socialist enough”, or that there’s inflation/scarcity because he hasn’t had enough “mano dura” with businesses.

    I think economists from both sides of the aisle are telling the truth, though. They’re views are sumarized here:
    http://runrun.es/la-economia/171361/lo-que-le-espera-el-ano-que-viene-la-economia-venezolana-en-10-puntos.html

    The consensus seems to be that (a) The government should depreciate and unify the different exchange rates (b) The swap market should be relegalized (c) There should be adjustment of controlled prices and gas.

    I’ve been thinking lately that the government and the opposition should resume the dialogue so that the Government releases political prisioners and allow the appointment of impartial CNE/TSJ members, comptroller, and so on. In exchange the opposition should recognize the legitimacy of the Maduro government and support these economic reforms.

    • “…the government releases political prisioners and allow the appointment of impartial CNE/TSJ members, comptroller, and so on…”

      I can think in a number of reasons that might never, ever happen, securing chavismo in its own grave, but I’ll mention just two for now:

      1) chavismo is supported by smuggling mafias that are more profitable than drug trafficking, case in point, the dollar monopoly or the first-need product hoarding-smuggling.

      2) chavismo runs on vitriol, it’s bred and grew from hatred, they don’t even see us the other venezuelans as human beings.

    • “Thinking it can fix or do anything without the appropriate knowledge or education, thinking we can go over anything or anyone just because I am right and anyone else is wrong.

      We just don’t respect others. That for me is the main reason why cant change.”

      That is (sadly) the most accurate profile about venezuelans i’ve ever read.

  5. Loud applause! But, from the comments, it appears as though even this audience just isn’t “getting it”. There is NO way to fix what is wrong with the Venezuelan economy without a long period of pain. There are no instant fixes, such as dollarization, that will undo all that is wrong. The real problem lies in that Venezuela is incredibly unproductive. The decades of distortion in economic incentives have deteriorated domestic production and made Venezuela dependent on imports of virtually everything. That is what has to change, and it can only do so when those economic disincentives are eliminated. Once that happens, it will require years for Venezuela rebuild its agriculture and industry. Oil income can help cushion the blows somewhat, but most of the income is going to have to be used to pay down the debt and invest in the maintenance of the country’s infrastructure that has been neglected for so long. Power is going to have to be decentralized, and the State and Local governments are going to collect taxes for their operating revenue, and not rely on the Federal government. It will be a long time before the middle class can count on twice-a-year shopping trips to Miami again.

    But, as long as the opposition still thinks that they can dial back the clock to the eighties and go back to playing the same old zero-sum game, none of this is going to happen. Maybe Venezuela is farther away from rock bottom than we think.

  6. Populism wins because it is simply that, popular.

    The last time we tried something remotely similar to Thatcherite reforms (under the pressure of the IMF), the country burned and people lost their lives. That event has remained such a traumatic experience for all politicians that they won’t dare try to reform our oil-based economy.

  7. What I got from José Ramón Morales Arilla above is that there are no painless, simple, fast solutions to the current economic disaster, and that the situation can only get worse if things only continue as they are. The suggestion Jose Ramon poses is to first stop the political sniper attacks that do not contribute constructively to a solution and only polarize the debate more. Then, it becomes a matter of a consensus of reality to sink into the public consciousness that sacrifice and patience need to come to bare. Otherwise, the disaster can only get worse whic is in nobody’s interest. In other words, everyone stop making things worse and give a chance for a miracle to happen.

  8. The biggest obstacle to getting out of the mess we are in is the inability of ordinary venezuelans to understand economic realities and how economies function, and their willingness to delude themselves into all kind of incredible fantasies which lead them to absurd political stances, namely the belief in the magical power of populism to solve things without the need for sacrifices. Until we find our way around this obstacle there can be no true democracy and in politics the only way forward is by the use of simulation and deceit.

      • People traditionally want to kill the bearer of bad news , Politicians cant convince gorilas on the virtues of horticulture , so they have to play along with the gorillas primitive preferences and conceits to get themselves liked and hope that opens up possibilities for them . Set a great leader like Ghandi loose in the Germany of Hitler and see what happens . Better still try and open a dialogue between Zionist leaders and the Nazi leaders and see how far that gets you . We need a big dollop of realism in looking at things.

  9. This reminds me of some guy who wrote in noticiero digital’s forum something along the lines of:

    “The opposition’s speech, if they’re gonna take economy seriously, for ‘chavistas de base’, it’s gonna translate as ‘tighten that ass, very tight'”

    Populism has been the way to make politics in Venezuela since the politicians saw it made easier to win votes among ignorant people, so the money was almost always spent, almost never invested in lasting infrastructure and systems that could produce and sustain in the future.

    Chavismo is the zenith of populism in Venezuela, it’s the triumph of ignorance, nepotism and rancor that was sold with the thickest sugar-coating I’ve ever seen in a populist speech, and it arrived to power crawling on the populist stupidity seeded in this country so long ago.

    That stupid populism is seen today with absurd examples of opposition’s behavior as not pointing any blame to the wax doll, at all, for nothing, it was always a taboo for politicians to directly confront the corpse and “cantarle sus cuatro verdades en la cara” or even point him as responsible for any policy or officer that was clearly doing their worst to destroy the country. And even after the bastard kicked the bucket, the MUD politicians still insist in treating him as some sacred cow that only “dreamed for a better country”.

    Give them a couple of years more and maburro and pimentón will be treated the same, being put into an altar for the worship of the imbecile masses.

  10. I will never understand why some use this space to complain so harshly about an already agonizing and soon-to-die opposition that doesn’t have a say in anything relevant in the country. Besides not helping your cause – as it’s not constructive criticism at all -, it’s kind of sadistic really, because you are just flogging a dead horse.

    It reminded me of when Quico wrote a devastating text against a media outlet which is also agonizing and won’t last long:
    http://caracaschronicles.com/2014/03/08/a-historic-low-for-el-nacional/

    Seriously, what is the point?

    1- Focus on the real enemy;
    2- Destroy it.

    Then, and only then, you can (and should) start criticising the opposition. Constructive criticism should obviously be welcome, but this? To paint Julio Borges and the other oppositionists as total idiots/amateur fools? How is eliminating taxes in a country that has the worst environment to do business in the world to attract foreign investment in the long term so crazy? Simplifying taxes together with cutting spending would probably be one of the first things the IMF would have asked Venezuela to do.

    • “…Simplifying taxes…”
      As a business owner, you got me there, trying to stay legal and “a derecho” is absurdly difficult.
      Illegal working (aka buhonería) isn’t getting like 40% of the total workforce in the country because “there aren’t chances to get employed” in a 100%, I dare to say that like half of those people just saw how stupid are the requeriments to create an enterprise and just decided that their health wasn’t worth it.

  11. To more fully understand the root of our political problems I suggest interested people seek a U tube talk by Francis Fukuyama sponsored by John Hokpins , of about an hour and a half , published october 30, 2014 and titled political order and political decay where among other topics he dwells on the causes of clientelism as a world wide phenomena .

  12. You want a narrative? How about, “Well kids, its like this… The trust fund has been squandered. The party is over. It’s time for us all to grow up, act like responsible adults, and start working for a living.”

    • The guy in the picture is the very unknown musician Sixto Rodriguez. Rodriguez was the subject of the critically acclaimed 2012 documentary Searching for Sugar Man, which the title of the blog references

  13. I agree with you, that there’s too much populism in hte Oppo’s message. From opposing any solution to gas smuggling, or devaluation, or increasing power bills, etc. I’m with you on fiscal responsibility, and the need to increase tax revenue, etc. I also think MUD should embrace a discourse of fiscal reform.

    But I disagree that raising wages is somehow populist. Let’s look at some numbers:

    – That General who’s making a whooping VEF a month, earns less real money (not including corruption and subsidies) than a minimum wage worker in Colombia who earns COP 616.027 monthly, which is enough to buy VEF 41.623, as of today (VEF 1 = COP 14.80). A senior Venezuelan engineer earns about VEF 20.000 to VEF 40.000, still less than unskilled labor in Colombia.

    – The minimum wage in Venezuela had a recent 10% increase, while the USD recently jumped nearly 60% from 100 to 158. A minimum wage right now is about USD 32 monthly. To my knowledge, the only country in the Americas with a lower minimum wage than that is Cuba, at about USD 9 monthly, and about USD 20 monthly for college trained professionals.

    Why is it populist to expect a minimum wage competitive with Central America or South America? Monthly, Nicaraguans earn USD 115,40, Bolivians earn about USD 200, Salvadorians earn about 242,40, Peruvians earn about USD 254, Guatemalans earn about USD 273,54 and Hondurans earn 353,70. The rest of the countries in our region vary from USD 300 to USD 500 a month.

    I mean, the 400% increase in the Venezuelan minimum wage you decry, means about USD 150 a month at the parallel rate. That’s hardly a plush salary.

    • First of all, wages, as determined by the market place, are a reflection of the value or productivity of the worker. Part of the reason wages are low in Venezuela, is that price controls and subsidies of imports keep the prices of goods artificially low compared to other countries. Secondly, all price controls and minimum wage laws are “populist”.

      • I’m afraid you are thinking as if Venezuela were a regular capitalist economy.

        “wages, as determined by the market place”

        Bad assumption. The percentage of wages in Venezuela set by “the market” is too small to be credited for the overall situation. Minimum wage is set unilaterally by the president, the terms of collective bargaining agreements of public employees are also decided by the president. Only companies big private companies with large independent worker unions like Polar actually bargain the pay and benefits with employees, coincidentally Polar is one of the companies with highest salaries in Venezuela.

        “wages, are a reflection of the value or productivity of the worker”

        Not in Venezuela.
        – The banking sector has experienced above-inflation yearly growth rates around 50% or 70%. Wages above the legal minimum are usually raised 20% or 25%.
        – Before Dakazo, store owners routinely adjusted prices using the parallel rate of the USD as an index, but wages were adjusted according to the minimum wage decree.
        – After the “fair pricing law” and all those regulations, prices were cut and supplies became scarce. Yet the minimum wage rose. (goes both ways)
        – A regular meal in a food court or cafeteria currently goes at VEF 200 or VEF 300. But a minimum wage worker there earns VEF 4889,11, or VEF 244 per working day (20 in a month), or VEF 162 per calendar day. Which means a worker selling meals all day long is paid barely enough to buy lunch on work days, and not enough to buy lunch for the whole month. A cheap street breakfast (2 empanadas and a malta) goes by VEF 75 or VEF 90, so a whole month of breakfast is about half the monthly wage. Don’t even think that worker is going to afford to buy breakfast AND lunch. I don’t think that’s an accurate reflection of the productivity of said worker.

        ‘all price controls and minimum wage laws are “populist”’
        Reality disagrees. Minimum wage laws are not some exotic communist experiment. There’s plenty of countries with minimum wage laws, some in OECD, others in the developing world.

        I do agree that people should start paying what things are worth (gas, power, water, food, etc), but they also need to be payed decent wages. By decent wage I mean one that covers living expenses.

        • Just because most countries have minimum wage laws does not mean that these laws are not “populist”. They originate from politicians making promises to be “popular” and get elected. However, just like with price controls, there are unintended consequences. In the case of price controls, it creates shortages of the items for which the price is held artificially low. In the case of minimum wages, it creates a shortage of jobs available for persons whose labor is worth less than the mandated minimum.

          • “Some countries” is quite an understatement. I don’t mean to say that minimum wage laws are right, because a bunch of people use them, my point is that minimum wage laws are VERY mainstream and and unlikely source of our woes, considering so many countries with this legislation have thrived. Check out this map, countries without any minimum wage law at all are Somalia, North Korea, Surinam and maybe 4 other countries. The rest of the world either has national minimum wages, regional minimum wages or economic-sector-wide minimum wages or collectively bargained wages. 7 countries out of about 200 countries is not just “some”.

            “In the case of minimum wages, it creates a shortage of jobs available for persons whose labor is worth less than the mandated minimum”.

            Wrong context. Your point might be valid, were we talking about Spain, France or any other country with chronic unemployment, where minimum wages are above EUR 500. Some companies might refrain from bringing jobs to those countries because the work can be done somewhere else for less money.

            But in Venezuela, the minimum wage is about USD 31. That’s about USD 1 per calendar day, or USD 1.50 per work day, while international standards consider people living with less than USD 2 a day to be in extreme poverty. Most engineers earn something between US 100 and US 200 monthly. The only place in the Americas, and maybe even the Western Hemisphere, where labor can be found cheaper than that is Cuba.

            Our biggest labor problem isn’t shortage of jobs. Our biggest labor problem is that fully employed people, even in professional jobs, can’t afford their living expenses. According to CENDAS the monthly living expenses in Venezuela by September reached VEF 25,385.96. Compare that against the monthly minimum wage (VEF 4889,11), or -according to this article– the monthly wage for a school principal (VEF 7,845), a college profesor (VEF 6,568 – VEF 15,000), a professional in the civil service (VEF 5,231), or a doctor in the public healthcare system (VEF 5,581 – VEF 7,453).

            If Oppo messages ever strays that far from Venezuelan priorities (and reality), it will only be echoed in Academia and some fringe groups. Because as long as wages continue at this level, it becomes impossible for fully employed people to not depend on government subsidies. How else would they make ends meet if not shopping at Mercal, getting a Mision Vivienda apartment, getting some appliances at Mi Casa Bien Equipada, getting some Chery vehicles, pumping those vehicles with nearly free gas, reselling or hoarding CADIVI dollars, reselling or hoarding price controlled goods, etc? It also becomes hard for this demographic to reject the narrative that lead to “Dakazo”, because the alternative seems to be “raise the price of everything at international levels, except salaries”.

          • Mr Navarro : Your argument for not blaming minimum wage regulations for loss of jobs is convincing ( in almost all countries) , but there is a case to be made for the idea that sometimes the regulatory benefits granted employees are so generous and so economically cumbersome to the employers that they inhibit the hiring of people. Generally wages and other benefits are more generous where those making them work in an industry which high economic returns, where productivity is higher , individual productivity is often less relevant than the productivity of the business in which they work . Where the business climate or culture make for minimally productive businesses then there will be constraints in the size and sufficiency of the wages paid their workers. So one way of improving wages is to make businesses more productive in general .

            In Venezuela business is hampered by a culture and a regulatory system that strike down both productivity and profits , this of course cannot benefit the size of the wages paid , so by improving productivity and the climate in which businesses operate maybe more can be done to improve wages than by simply setting up mandatory minimum wages .

            Of course it can happen that highly productive businesses feel that their profits are increased by reducing the labour employed in their activities or by paying then less wages that maybe are justified by their workers productivity , it is then that maybe mandatory minimum wages can help improve workers situation in some areas !!

          • The government’s narrative regarding inflation is: “Prices need to be lowered to match local wages”. Therefore, gas is given away, the dollar is subsidized, food is price controlled or subsidized, housing is subsidized (GMVV), rents are controlled, chinese goods are subsidized, iranian cars are subsidized, prices at private companies are set by the government, etc.

            The narrative I’d propose is: “Prices need to be freed in order to increase local wages”. That way people will be able to afford more and more unsubsidized and unregulated goods and services, just like most people do in modern societies

            But the narrative of: “Prices need to be increased because capitalism is awesome, and wages need to be freezed, because raising them is populism” is going to get us nowhere politically. It’s just not a compelling message for the people earning miserable wages and queing at 3:00 am to buy food, shampoo, diapers, tv, or fridges.

    • Minimal wages are a form of price control, and produce the same kind of distortions, specifically unemployment.

      Just like any other price the market should be allowed to set the price.

      • You write of minimum wages, as if they were some sort of pet policy of Chavismo, as opposed to one of the most widespread labor policies in the world. See this map.

        Plenty of countries with minimum wage laws have a strong economy. Perhaps you think we should scrap our minimum wage legislation, thus following the lead of Kyrgyzstan, Somalia, U.A.E, North Korea, Guinea and Suriname. But you’re going to have to give me some economic data on those countries to convince me we would be in good company by following that policy.

        • “You write of minimum wages, as if they were some sort of pet policy of Chavismo”
          Really? When? Where?

          You should also have include Switzerland in that list.
          Price controls have been implemented all over the world at one time or another and they will continue to be used in the future. That does not mean it is a good policy. Strong economies naturally can absorb negative policies as long as they do not become a heavy burden. But an economy in recession cannot recuperate by implementing bad policies like price controls and raising minimum wages.

          • Mmm… you did say: “Wage control is just like price controls. In the outset it sounds like a good idea but it is a pandora’s box of calamities illustrated so well in today’s Venezuela.”

            I don’t want to get too technical, but even though Switzerland recently voted against setting the highest government-set minimum wage in the world, they still have among the highest minimum wages, at about USD 15,500. Though not decided by decree, but by industry-wide collective bargaining agreements that cover most of the population. It reminds me of the tripartita.

            Unfortunately, unlike Switzerland, current Venezuela doesn’t have unions strong enough to provide such cover for all Venezuelan workers. The private companies whose workers DO have independent, strong unions, have about the highest wages in our country: Polar, Heinz, GM, Ford, etc. Do you consider “stronger unions” as something we should strive for?

            A minimum wage that further drops, will do little to leverage our competitiveness. We already have the second lowest wages in the Americas. At USD 31 a month, Venezuela is reaching a point where further drops in real wages simply erode the domestic consumer base, since unskilled workers are unable to purchase anything but subsidized goods. No consumer base means small and medium sized business collapse, because they don’t have the scale to compete abroad. The story would be different if the price of labor had increased all these years as the dollar soared, just like the price of everything else did. Business have inventory replacement costs, and workers have pantry replacement costs.

            An interesting read: Increasing the minimum wage can actually create jobs if it’s enforced

          • “Mmm… you did say …”
            Right, and the part where I mention chavismo? The pandora box reference is about price controls which are a reality in Venezuela with disastrous results.

            “Switzerland …. industry-wide collective bargaining agreements that cover most of the population”

            “most” being the important word which means some people get paid less. So there is no minimum and that explains why unemployment is so low in Switzerland.

            “The private companies whose workers DO have independent, strong unions, have about the highest wages in our country”

            So many companies do not need minimum wages to pay well. An economy is made of all kinds of companies those that can pay well and the ones that can barely survive except by hiring the less skilled workers. Raising minimum wages is fantastic for people that have job security, not so much for those that may lose their jobs because of it or those that cannot get a job for the same reason.

            “further drops in real wages simply erode the domestic consumer base, since unskilled workers are unable to purchase anything but subsidized goods.”

            What do unemployed people purchase? How do closing companies affect the consumer base?
            The rise in minimum wage is just going to disappear as inflation leaving people even worse than before.
            This year they have raised the minimum wage twice already 10% in January and 30% in May. Are people doing better? Lets wait and see how they do with this 15%. What I see is an inflationary spiral going on and the economy is not growing. Minimum wages are prejudicial to everyone.

            “An interesting read”
            Yes, I read that article and commented on it above. In short, the study is flawed. It measured changes on employment in fast food chains after a raise in minimum wage during a recession. Fast food chains do well during recessions which accounts for their growth. The study is flawed because it should have measured the effects in all industries not just large fast food chains.

      • (this is a response our discussion above)

        “What do unemployed people purchase?”

        Subsidized goods and government handouts. Which are the same things full-time unskilled Venezuelan workers can afford after putting 40 hours of work.

        “This year they have raised the minimum wage twice already 10% in January and 30% in May. Are people doing better?”

        They are better than they would be if no wage increase had occurred, but not as well as they would be if the cumulative raise had been closer to the 70-80% rise that prices experienced. If business need higher prices to cover costs, workers need higher wages to cover food, clothing, housing, etc. Why should wages decrease as a proportion of the costs?

        “So there is no minimum and that explains why unemployment is so low in Switzerland”

        As if wages were the sole factor that influenced unemployment rates. How do you explain low unemployment in countries where there ARE minimum wage laws? For example, South Korea has a minimum wage (set by a Minimum Wage Council) and an unemployment rate of 2.7%

        I like data better than I like ideology. So I looked up the Venezuelan unemployment rates in the last 10 years, as well as the minimum wage and the parallel exchange rate.

        Long story short: From 2003 to 2011 both the real minimum wage rose and so did the employment rate. From 2011 to 2014 the real minimum wage plummeted but the employment rate has remained unaffected.

        In particular, unemployment decreased in 2003-2006 without any big decrease in the real minimum wage, the real minimum wage decreased in 2006-2007 while employment increased, and then employment stayed at about 92% since 2007, regardless of whether the the real minimum wage has increased or decreased. In particular, from 2007 to 2009 the minimum wage increased in real terms a cumulative 48%, but the employment rate didn’t dive significantly. Then, from 2011 to 2014 the real minimum wage lost about 83% of its real value, yet the employment rate hasn’t soared.

        How does your axiom of “raising the minimum wage increases unemployment” explain this data?

        Year – Employment rate (aprox) – min wage VEF (december) – real min wage USD (december)
        2014 – 92 – 4889,11 – 27,01 (as of today)
        2013 – 92 – 2973 – 46,38
        2012 – 92 – 2047,52 – 118,22
        2011 – 92 – 1548 – 163,81
        2010 – 91 – 1223,89 – 133,90
        2009 – 92 – 959,08 – 160,65
        2008 – 92 – 799,23 – 140,22
        2007 – 92 – 614,79 – 107,86
        2006 – 90 – 512,325 – 150,68
        2005 – 89 – 405 – 150
        2004 – 85 – 321,2352 – 167,31
        2003 – 82 – 247,104 – 154,44

        • Good job. Try your calculations again using only the formal sector. As you know, the informal sector –which includes street peddlers (buhoneros) and those registered in the missions– do not get the benefit of a minimum wage or any other benefit. Also it would be better if you included more history because from a certain date forward the data from the INE is not really trustworthy.

          • Also you should only consider the Private Sector and not the Public Sector, because the government can always run a fiscal deficit and devaluate but the companies cannot (for long).

          • “As you know, the informal sector –which includes street peddlers (buhoneros) and those registered in the missions–”

            Not quite. The informal sector does include street vendors and others who are informally employed or self employed, but it doesn’t include people on welfare (aka misiones), as they are considered to not be working or looking for work.

            “do not get the benefit of a minimum wage or any other benefit”

            Actually, the informal sector in Venezuela can be way a lot more profitable than many formal jobs. The dismal wages in Venezuela have turned plenty of college professionals to driving cabs, selling herbalife, baking cakes and muffins, working as photographers, or simply engaging in bachaqueo”; for economic reasons (as opposed to vocational) . This is an economic tragedy, firstly because regardless of whether their education was public or private, their expertise is going to waste, and secondly because their expertise could be much more productive than the activity they’re doing (think nurses, teachers, engineers, chemists, physicists, etc).

          • ” but it doesn’t include people on welfare (aka misiones)”

            Thanks for the clarification. Maybe the page you linked to has it wrong then as it says:

            “Esta disminución de la cifra de desempleados se debe básicamente al hecho de que toda persona que participe en alguna Misión gubernamental, es registrada como ocupada (empleada)”

            From the Eljuri declaration it seems those people are not considered active which means they are not considered unemployed either. A fuzzy definition in any case as it lowers the unemployment ranks in an artificial way. I wonder what happens with someone who is working formally or informally and also gets benefits from a mission. Are they counted only once or twice (once as employed and once as inactive)?

            “the informal sector in Venezuela can be way a lot more profitable than many formal jobs”

            It can be but it is inherently an unstable situation. Some days you may do handsomely other days not at all, while other days you may lose money. There is no income security and the good times may stop at any time. There is a higher risk involved in those activities.

            In any case the point is that only those with formal jobs in the private sector should be considered in an analysis of the effect of minimum wages on employment.

        • Sorry for the piecemeal replies. Here are a couple considerations more:

          You should not use the parallel rate to adjust the minimum wage. The appropriate measure is the PPP Purchasing Power Parity if you want to compare against other countries. For internal comparisons inflation should be good enough to adjust the minimum wage.

          Of course you are right when you say that minimum wages are not the only factor affecting unemployment. The main factor is economic growth. As the economy goes so do employment and wages. Minimum wages is just a factor in economic growth. In order to determine the effect of m.w. a covariance analysis would be necessary including all the other factors that affect economic growth: public spending, taxes, inflation, exchange rate, interest rates, investment, etc. Not a simple task.

  14. Either worker or work place productivity is high allowing for its employer to pay it decent wages or its low and doenst allow the employer to pay a decent wage , in the former case even if the productivity is high the law of demand and supply for the services of the worker involved sometimes means that it can be paid lower wages than its productivity warrants because the employer can do it and in doing it maximizes its own profit. In the latter case of course there is every justification for a regulatory protection of the workers wages by the government thru use of minimum wage laws . In the latter case however whatever the justice or injustice of paying wages below the living standard if the productivity of the business is so low that it cant afford to pay better wages the regulatory imposition of a minimum wage or set of benefits then has two consequences : either the employer goes out of business or it has to improve it productivity in order to survive , the latter is not always easy, so the end result maybe that workers lose their jobs or that there are less jobs available for workers like him. Paying decent wages offers a dilemma where the productivity of the work place is low beause it causes below living standard wages to be paid amost by necessitywhich of course isnt fair or humane for the worker.

    My fear is that there are too many work places in Venezuela where the productivity is so low that wages suffer as a consequence and where the imposition of generous regulatory benefits to workers is simply a way of making jobs harder to come by.

    Clearly the answer to too low wages is two fold , one to increase work place productivity by creating appropiate conditions to such purpose and second , via regulation to afford workers handicapped by labour market conditions which are unfavourable even where work place productivity is adequate some form of minimum wage protection .

    Of course market place productivity is often negativey affected by perverse government policies which make the creation of wealth a very difficult feat !!

    • “even if the productivity is high the law of demand and supply for the services of the worker involved sometimes means that it can be paid lower wages than its productivity warrants because the employer can do it and in doing it maximizes its own profit. In the latter case of course there is every justification for a regulatory protection of the workers wages by the government thru use of minimum wage laws ”

      Disagree.

      “via regulation to afford workers handicapped by labour market conditions which are unfavourable even where work place productivity is adequate some form of minimum wage protection”

      Your message is ambiguous. It seems to recognize that minimum wages are counter productive to the labor force producing scarcity of much needed jobs but at the same time advocates its use, specifically in cases when the business is productive. Also you condition it on the “justice”of a specific wage level. Can two economic factors be more abstract than the justice of a wage or the productivity of a business? Can a politician or a bureaucrat even begin to determine those?, just like they do every other price?

      There is no such concept as a fair or just wage, because it all depends on supply/demand. Just like any other good.

      When the minimum wage is set too high many distortions are created, for instance the skilled labor and unskilled labor earn the same or almost the same, reducing the incentive on preparation. Many businesses just cannot operate, creating scarcity and reducing demand, the result is even lower wages. Many people are left unemployed and have to do odd jobs to survive (the protection of the minimum wage does not help them). People work informally, without a firm contract with less job security. Those that are employed have to cover the extra tasks, reducing their productivity and raising their workload.

      Wage control is just like price controls. In the outset it sounds like a good idea but it is a pandora’s box of calamities illustrated so well in today’s Venezuela.

      • Sorry my explanation was bit muddled and caused confusion . Lets try again: Lets say business A has good profit margins , it workers show high productivity and it can afford to pay its employees more than subsistance wages and yet supply and demand conditions in the labour market make it possible for the employer to pay subsistance wages or less , in that case regulatory minimum wages can help the worker recieve wages which allow it a better quality of life with no meaningful loss to the employers business.

        Case B : A business has poor profit margins (not due to outside conditions of constraint) , its workers are sattisfactorily productive but the employer cant simply afford to pay them better wages then the imposition of mandatory minimum wages is not advisable because it may cause those workers to lose their jobs or at least force the businessman to reduce his hiring which benefit neither the worker not its employers.

        I have the same problem you have with defining what are fair wages but generally I would say a wage is close to fair where the productivity of the worker and the profitability of the business allow such wage to be paid EVEN where labout market conditions may allow a lower wage to be paid. I dont think itss possible to know when a wage or a profit is fair or reasonable in absolute terms but there is ususally a consensus that will tell you when youre closer to fair than unfair. the Workers productivity and the productivity of the work place are certainly a factor in raising the level of a workers wages.

        My own thoughs on the subject are still open to further clarification , but generally I dont thing the application of minimum wages is necessarily a bad thing in all circumsntances and could be a good thing in several.

        • It is not possible — or advisable — to have different rules for different businesses. Otherwise the struggling business gets a pass for being unproductive and the productive one is penalized and is made less productive. Not to mention the corruption incentives on the functionary that has such discretionary power.

          When the economy fares well all wages tend to go up, but during hard times when business is slow wages go down. Some businesses may reduce personnel or even close, increasing job supply and reducing demand. That does not mean that workers or businesses are less productive it just means that sales are slow, and competition is fiercer. So what seemed like a fair wage at one time can be a burden when circumstances change. Allowing wages to fluctuate according to the market lets the businesses adapt to hard times and reduces unemployment in those times.

          “I dont think itss possible to know when a wage or a profit is fair or reasonable in absolute terms but there is ususally a consensus that will tell you when youre closer to fair than unfair”

          That consensus is established between demand and supply. Having bureaucrats regulate (distort) what that consensus should be using moral gauges like “fair” or “unfair” is inherently unfair. Those that have a job get a nice deal but everyone else gets a raw deal, consumers see higher prices, businesses reduce profits and the unemployed find less opportunities. Even those with a job are in danger of losing it.
          The minimum wage is a mirage because in the end it turns into inflation, unemployment and a slower economy

          The wage, like every other price, should be determined by the market. For instance if there is an excessive supply of accountants then their wages go down. If there are not enough mechanics they get paid better. The wage is an important signal to the market that there are too many accountants and not enough mechanics. Students will prefer those careers that pay better.

          • I have a healthy respect for practice as observed in real life rather than to prescriptive theory , The key issue is whether it is possible for market conditions to offer room for manipulations and extortions which allow a greedy business man to pay wages which are inferior to those it can pay given the contribution of the labourers to the productivity of the business in order to maximize its profits , the end result of actual market operations may be an efficient distribution of resources but not necessarily one which is humane or sattisfactory to even a reasonable worker . The assumptions that markets are always perfect engines for the efficient fixing or prices and wages and never subject to manipulation is not credible from real life observations . On the other hand one cannot trust a doctrinaire bureaucrat removed from
            the pressures of real life market driven opeartons to fix the best or most acceptable price or wage , so what we must face is the fact that both absolute reliance on pure market mechanism and bureaucratic or ideological or electoral political motivations offer risks and can not be trusted to provide us with perfect solutions . Exceses and distortions can come from both the actual operation of market and from regulatory overreach . .We face them a situation which requires us to exercise a judgment which cannot rely or ready made abstract formulas , which is boudned by uncertainties and ambivalences , in short which is probelmatic , which offers no perfect ready made solutions , concrete cases will determine from time to time what is the appropaite policy to take , this is Oliver Wendells Holmes Jr view of how tackle difficult problems , its called pragmatism. !!

          • “manipulations and extortions which allow a greedy business man to pay wages which are inferior to those it can pay given the contribution of the labourers to the productivity of the business in order to maximize its profits”

            You have to ask yourself when does this happen?
            There is no doubt that an unscrupulous businessman (because aren’t they all greedy? aren’t we all greedy?). would love to pay all his employees minimum wage, or even better not pay them at all and have them work 90 hours a week with no rest. What prevents this from happening? The competition, I.E. other greedy businessmen. In a thriving economy where there are many businesses competing for the labor force wages go up and working conditions improve. Businesses compete for the labor force.
            In this situation there is no need for government intervention since conditions are “fair”.

            In a slumped economy when business is slow, companies reduce their personnel or close altogether. Then workers must compete for the few job openings available. In that case wages go down and working conditions deteriorate. Only the most qualified keep their jobs. This is when people ask the government to intervene to make things “fair”. The government then increases the minimum wage, puts limits in the number of working hours, creates new obligatory compensations like cesta-tickets, enforces labor freezes, etc. In sum tries to forcibly and artificially improve the conditions of the worker by squeezing the businesses.

            The result is an increase burden on the businesses precisely when the economic situation is at its worse. The regulations further reduce the capacity of businesses to survive the negative conditions. More businesses close, prices go up, unemployment rises, tax collection goes down. Thus reducing even more the job openings and making the situation even worse. The “cure” kills the economy.

            By now it should be evident that the best way to improve the conditions of the workers in general is to boost the economy. The usual way to do this is creating incentives for businesses by reducing regulations (not increasing it), reducing tax rates, with targeted fiscal spending, etc.

            “We face them a situation which requires us to exercise a judgment which cannot rely or ready made abstract formulas , which is boudned by uncertainties and ambivalences , in short which is probelmatic , which offers no perfect ready made solutions , concrete cases will determine from time to time what is the appropaite policy to take”

            Individual cases need to be evaluated on their merits. Instead of global policies that try to “fix” things through decrees, specific cases of unfair treatment need to be addressed specifically by studying them closely. That is what the courts of law are for.

            There are a few places where government regulations are positive and necessary, one such case is to prevent monopolies and/or cartelization (note that a slumped economy is more prone to have monopolies than a thriving one). Another case is to prevent insider trading, or other kinds of price and market manipulations. This type of cases are also dealt better through the courts of law as they are specific cases.

          • Perhaps Im too tainted by having worked a long time inside a lot of businesses and seen too many instances where presumably perfect market rules of competition just dont operate the way they are meant to.but I dont see the operations of Markets as always producing those perfect results you assumme.

            Courts of Law are necessary but they have limitations beause the complex operations of business and markets arent always easy to scrutinize thru the lens of the law, People who ennact and enforce and interpret laws arent always the wisest of men nor the most practical . Laws can also be manipulated by clever lawyers or even more clever private litigants or by ambitious pols working from inside the legal system.

            I totally agree that the best way to provide people with decent wages that allow them to live according to humane standards is a thriving market economy where to the extent practicable rules of competition are open and fair and manipulations are handled both through balanced statutory controls and access to a well concieved Rule of Law . What I fear I dont buy is the notion that all government regulations are per se harmful and irrational and that markets are miraculous among unprogrammed human endevours in always producing totally rational and fair results. Markets are essential for the development of efficient productive economies but they cant be always be expected to produce perfectly desirable results from a humane point of view.

            I am highly suspect of the capacity of govenrment officials in a political system such as ours to fix anything like rational or balanced wage and labour regulations , but I havent lost hope that the posibility is there in a different system ofgovernancesome desirable results can be obtained through a measured degree of government regulation.

          • Amieres,

            What is actually your field of work? Economics? Mine is software development. It seems politicians and economists as well as “businessmen” in things like importing things to a country have a different view on
            these issues than people like developers of things.

          • Agree with everything you have said above. A note on the judicial system: The civil court system should be reformed to include judges with education specialized in various industries. In a case involving construction contracting, the judge should have familiarity with the industry. Same with banking, medicine, etc…

          • “Im too tainted by having worked a long time inside a lot of businesses and seen too many instances where presumably perfect market rules of competition just dont operate the way they are meant to”

            It would be good to know some of the specifics, it is hard to conclude anything without more information.

            “I dont see the operations of Markets as always producing those perfect results you assumme.”

            ” …that markets are miraculous among unprogrammed human endevours in always producing totally rational and fair results”

            The markets produce a balance that tends to regulate itself (provided that there is indeed competition). That does not mean that the balance is “perfect” or “fair” because those are subjective terms and depend on the point of view of the individual. For instance, if you were an abacus maker or a switchboard operator or a film developer or a VCR maker you would not consider fair that the market reached a balance where your wage is zero. No employee would consider fair a market balance of diminishing wages and reduced employment opportunities as is always the case when an economy contracts. What I mean is, hard times are not avoided by the market. There is no miracle.

            Another point that should be made is that competition does not always drive prices down or generate more productivity, sometimes it is the other way around. It depends on who is competing: buyers or sellers. When demand is bigger than supply buyers compete. When buyers compete prices go up and productivity goes down. When sellers compete is the opposite. Those having to compete never find the situation “fair” or “perfect” because some of them will necessarily end up the losers, for them times are tough. In time the situation usually reverses, like the swing of a pendulum, and those that previously enjoyed the favorable market eventually will suffer in the new conditions.

            This also applies to the workforce where businesses are buyers and employees are sellers. In times of recession the market favors the businesses as the workforce compete for the scarce positions and wages and jobs go down. In times of growth the market favors the employees as the demand for laborers grows. Only in times of growth will the workers improve their conditions. Even in a stable economy some areas will grow while others contract.

            “What I fear I dont buy is the notion that all government regulations are per se harmful and irrational”

            I have never said such a thing. In my previous comment I specifically mentioned some areas where the governments must intervene to prevent monopolies and certain manipulations of the markets. What I have said is that price controls — and here I include minimum wages — are harmful for the workers, the businesses and the consumers.

            Also, I would not call them irrational as there are reasons why people like price controls. Price controls are always imposed with the intent of protecting and benefiting the people.That is the rationale behind it and the logic is simple: a “fair” price is better for everyone. It is all very rational, in theory, unfortunately reality is much more complicated and it does not care about the “fairness” or “unfairness” of a price. Any price artificially imposed will create an imbalance that will result first in scarcity then rationing followed by black markets –with highly “unfair” prices–, corruption, higher unemployment, slumped economy and even violence. The good intention backfires and what was a bad situation gets even worse.

            This does not mean that we should give up on trying to achieve “fair” prices, what it means is that imposing said “fair” price is not the solution. That is merely a shortcut that does more damage than good. It is the wrong way to solve the problem and is the equivalent of trying to cure a fever by cooling down the thermometer. Just like the temperature, the price is just an indicator of the health of the economy, it cannot be manipulated directly. The fair price can be achieved by understanding the law of supply and demand. In the case of wages an increase in the demand of workers is the solution and that can only happen by incentivizing employment and new investments.

          • gro
            Nice article, thank you. The paper mentioned in it has caused a lot of controversy because it seemed to contradict the accepted economic orthodoxy. The paper studied the effect on employment in fast food restaurants of an increase of the minimum wage in NJ in 1992 compared to PA –that did not increase m.w.– serving as a control. The problem is even when an economy goes into recession it does not mean every sector goes into recession, some may actually thrive like fast food chains. So the fast food industry in the short and medium term usually runs counter the rest of the economy faring better during hard times, specially the big power houses like Mc Donalds, not so much the smaller ones. For the study to be valid it should have studied employment across all sectors and not just fast food restaurants.

          • Like Amieres, I tend towards a policy of not interfering in the operation of the free-market. However, societal needs, national security, and geo-political realities can often trump the desire for economic efficiency. I do find it practical and acceptable for a government to create some economic “shock absorbing” measures to ensure that economic shifts due to changing markets or new technologies do not devastate people and their families. I recognize the need for a country to meddle in the market to ensure that that country is not dangerously dependent on imports for strategic goods. BUT, any such measures taken should be done so with eyes wide open to the negative consequences and should be considered limited and temporary in nature.

          • Going deeper into these reflexions I find that any human endevour be it political or commercial or even academic can ever be inmune from the frailties inherent in the human condition and the ease with which the human mind can game any system to favour its own interests or serve its bloated conceits.

  15. There are many forms and degrees of competition , and many ways that conflicting market insterests can be skewed and distorted in ways that lead to one side getting the better of another . For example read a newspaper report which contained a first person narrative of a family that left venezuela for the US bought several car repair shop and went bust within a year , they were not novices but rather experienced and succesfull business people in Venezuela , they couldnt understand what had happened to them , then one of the people whom they had bought the shops from explained to them why they failed , he told them the only way of making it as car repair shop was to decieve the client into believing that he needed more work to be done on its car than was really necessary and then charging for the extra work or spares, That all repair shops in the area knew this and run their business on this basis . There is something called information assymmetry where one side knows much more about a business transaction than the other so the least infomed gets bamboozled , Its happened to me , it happened to a relative who is a car expert , he sent his car to the repair shop with a list of what he wanted done , then when he got his car back he went over it in detail and discovered that half of the repairs had not been done at all or had been done shoddily and incopletely . This an example from one business area but there are many other , In the US i sign up for a Service Plan ( e.g. Telephone ) then in my absence the phone bill goes up to a 100$ per month even if Im not using the phone for long periods and much higher than the plan I had signed for originally . Reason, in my absence the phone company decided that they would automatically apply a new much more expensive plan in my case unless I called and told them I didnt want it . One case which I have already mentioned in this blog ,if you are an open sky coal miner in western US your customers are the East Coast Power Plants , so you have to carry the coal via railroads ,These are organized so that they load the coal miners with transport fees so high that they can hardly make a profit , the miners are stuck because there are no alternative ways of transporting the product to its market. Private comeptitors will also use dirty tactics to wayside a competitor or bunch up and use special interest lobbying groups to have govt agencies favour their businesses in a dozen of difficult to detect ways . Using the govt to game a competitive advantage is a common practice in the US and other places. Im told by a lawyer friend that there is a State in the US where the banks can cash a check signed with the wrong signature ( a falsified signature) and not be held accountable under that States Law ( a real case , the lawyer represented the bank in a lawsuit , he was laughing at the naivete of the person suing for restitution on the fraudently cashed check) . I can give dozens of examples where the markets are gamed so as to defraud or extort the public or get the advantage of competitors , Just recently the papers where full of belatted proceedings against dozens of banks that had operated to defraud their customers on a systemic basis leading to the imposition of billions of dollars inf ines and penalties ( some 8 years after the fraud had happened and only because of the pressure arising from the many financial failure ocurring between 2007 and 2008) , The Free Market Model is indeed the most efficient system of all, it is not replaceable by a totally programmed state run model , but IT IS NOT PERFECT, and IT ALLOWS FOR ABUSES AND FRAUD , competition is not a perfect control system , it can be gamed , manipulated and misused by unscrupolous people of which there are many in any kind of human activity . Thats why govt controls are needed even if they also are susceptible to abuses and excesses. If you seek the holy grail of a perfectly objective way of determining fairness, human fability doens not allow it , there is always an element of judgement ( criteria) involved which is in part subjective , but which has enough objective elements in it that they allow for judgment to be passed with some degree of accuracy. The Quest for Perfection in the appraisal of human behaviour and its outcomes , is an impsible quest, but that doesnt mean that we should abandon the effort altogether , Just as Ortega once wrote , Ideals are like the sign of true North in a compass , they show you which direction to take to get closer to where you want to go , but they dont tell you when you have arrived at your desired destination but they bring you closer to it , Thats as far as human endevours can go .!! thank you for your efforts at covincing me that govt controls are except is some few exceptional cases are wrong and improductive because competition in market economy are automatically so great that it makes such controls unnecessary or harmful.

    • 1.- Auto repair shops fraud
      2.- Phone companies bait and switch scams
      3.- Banks over charging fees
      4.- Coal transportation monopoly (no competition)
      5.- Interest groups lobbying for advantages (thru government intervention!)

      It seems like you and I are talking about different topics. Of course there is fraud in the world, and unscrupulous people, and monopolies. In the US more than anywhere else. That is what laws and courts of law are for.

      But I am arguing about price controls and minimum wages. My initial assertion is that minimum wages worsen the problem they are trying to solve: they create unemployment, lower wages, increase inflation, slowdown the economy. They do not benefit the workforce as a whole, just the opposite, and they damage the economy.

      You mentioned cases where people are trying to stifle competition to show that competition is not perfect. Of course is not perfect, nothing is. When people find themselves competing hard they will resort to all kind of dirty tricks to beat and, if possible, eliminate the competition. And yes government intervention is necessary to make sure competition is as close to perfect as possible. In other words, to make sure that the prices are determined by the market and not by the gamers whether they are unscrupulous scammers or the government itself fixing prices. So yes oversight and controls are necessary to prevent abuses and fraud but not to fix prices.

      “but IT IS NOT PERFECT, and IT ALLOWS FOR ABUSES AND FRAUD ”

      Nothing is perfect. It is human interaction that allows for abuses and fraud. Do you think minimum wages do not allow for abuses and fraud? I would say it increases them. I’m not trying to convince you that market economy somehow eliminates abuses and fraud. Law enforcement does that.

      Take sports for instance, the pinnacle of competition. Competitors will try to get all kinds of illegal advantages: performance enhancing drugs, gamesmanship, illegal blows, game/score fixing, bad calls. Oversight is necessary to make sure competition stays clean. That is why you have referees, commissioners, and ultimately the courts of law. But no one would argue that a sweeping policy is necessary to fix the scores. That is the equivalent of fixing prices.

      “thank you for your efforts at covincing me that govt controls are except is some few exceptional cases are wrong and improductive because competition in market economy are automatically so great that it makes such controls unnecessary or harmful.”

      Please show me where I’ve tried to convince you of that.
      My assertions have been:
      – Price controls are bad (including minimum wages). I have been very, very specific about this. Nowhere I have mentioned other type of government controls in a negative connotation.
      – To solve low wages issues the government should create incentives for investment and employment. This is a type of positive government intervention, for instance.
      – Specific cases of abuses and fraud should be dealt with in the courts of law. Like Roy says in specialized courts of law. This includes monopoly cases.

      • I have no doubt that price and wage regulations can be inefficient or harmful, my point is that there are situations where the most convenient way in which you can prevent market players from abusing their dominant position (a position which may be the result not of fraudulent manipulation but from natural contingent causes) is for the State to regulate the manner in which those players set up their prices or wages. There are very few ordinary car owners who will be able to discover the fraud perpetrated by their car repair men because of the informational assymettry) , the human capacity for gaming any rules is well known to all, Also you have many ways in which people in an industry by adopting a common practice basically fleece their customers , take the way airlines in the US have created a maze of rules to ensure that everything is an extra requiring an additional payment or the way financial entities in the US left to regulate themselves fleeced their customers a dozen different ways because it was ideologically sinful for regulatory agencies to delve too deeply into their activities ( there are dozens if not hundred of books written about this subject) . There are many cases in the US or other developed countries where regulatory bodies intervene in how prices and fares are set up , an example taxi fares , or crude oil , gas and refined product pipelines in the US , also the way Electrical fares are very closely regulated in many parts of the US.

        Your reliance on the Court System to correct abuses is I fear much overated , there is a book coming out from Francis Fukuyama about the Decay in US Government Institutions that precisely makes the case that courts have proven themselves incapable or incompetent in becoming regulator through their court decisions . He thinks that such reliance on courts really makes govt agencies less efficient at doing their jobs , that a strong autonomous meritocratic govt agency can do a better job at preventing abuses than most any court . I would respectfully suggest that you seek the many texts and talks where Fukuyama expounds his thought on this subject.

        I am no friend of govt regulation as a panacea for all the problems which can in the normal course rise in the operation of competitive markets , but neither am I too sanguine about that natural unregulated operation of markets resolving by themselves all their excesses. Not all business men are saints and Philantropists who automatically provide to the common good by serving their self interests. We have much to fear from unwise and ideologically motivated govt regulators , but likewise there is also a justified fear in the possibility of competitive markets to go stray in part because business men being human will find clever ways in which to improve their profits by taking subtle advantage of their counterparts in any transaction .

        • “There are very few ordinary car owners who will be able to discover the fraud perpetrated by their car repair men because of the informational assymettry”

          How would fixing the price help in this case? The issue in question is that they are charging for services not rendered, not the price of the service. How can a price policy help in this case?

          “… basically fleece their customers , take the way airlines in the US have created a maze of rules to ensure that everything is an extra requiring an additional payment”

          Airline prices are not regulated so they can charge whatever they like, and they do. Yes, now they charge extra for handbags, to sit closer to the front, for meals, for extra leg room, for entertainment, to board earlier. It is what an industry that has very small margins and high fixed overheads needs to do to stay afloat and competitive. How would you regulate that? By forbidding them the extra charges? That would just raise the price of the tickets and make it more expensive for the consumer, it could even take some airlines out of business.

          “…taxi fares…”
          Taximeters do not prevent the driver from taking longer routes. That is one of the ways regulation can be gamed.

          “…also the way Electrical fares are very closely regulated in many parts of the US.”

          The tendency in the US is towards deregulation to eliminate the utility monopolies.

          “Decay in US Government Institutions that precisely makes the case that courts have proven themselves incapable or incompetent in becoming regulator through their court decisions ”

          I agree that the legal system in the US has deteriorated, but all the cases you mentioned can still only be solved through a proper judicial process to determine the facts of the matter. How else do you solve the garage issues, or the banking issues.

          “a strong autonomous meritocratic govt agency can do a better job at preventing abuses than most any court”

          Even if we believed that something like a strong autonomous meritocratic govt agency is possible –which I don’t– the real problem is no regulator can fix prices without creating distortions that lead to scarcity, higher prices, black markets, recession.

  16. Cab Fares are fixed , you cant just charge whatever you like (like happens in Venezuela), There is a tidal wave of complaints by airline passengers that from what I read may result in the extras getting regulated by Congress , quite sure that now that the price of jet fuel is reduced they will keep their fares unchanged even if their costs are down ( so much for competition) , ,pipeline tariffs are fixed ( that happens where you have a natural monopoly situation) . got to go will continue later.

  17. Litigation is very costly and the effort needed to pursue litigation to the end usually daunting , thus a barrier is created protecting the abusive businessman from prosecution by most of its victims . Only victims with very big pockets and a lot of patience can reasonsbly resort to litigation to obtain redress from their complaints .

    But even in large cases where litigation is undertaken the result is not as good as one might wish . The point is so very well made by Mr Fukuyama in so many articles and talks that it would be a loss of time for me to try and repeat them here. Just seek these talks and articles of Mr Fukuyama on the issue of political decay and youll get the point.

    Perhaps the use of price and wage regulations isnt directly useful in all cases of abuse , but there are so many forms of abuse practiced in free markets that inevitably there will be cases where they can serve a useful purpose in defending people from abusive businessmen.

    Im quite confident that even with regulation there will be cases where the sharp witted businessman will game the system to obtain an exhorbitant gain or profit ( as measured by common moral sentiment) regardless of the regulatory efforts of government. Wage price controls ( admitedly) will not work in all cases but they represent two tools in the arsenal of a balanced fair regulator to restraint the abuses which happen in any free market.

    This discusion with you has given me much food for reflexion , because even If I am not convinced that markets only require the most cursory of regulation to avoid or restrain excesses of all kinds I too am skeptical of the capacity of most regulators to do it right and not abuse the ordinary honest businessman to the detriment of everyone .

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