Wednesday, February 17, 2016

The Power of Free Housing and Cheap Gas

I recently read a blog posted at the Institute for Faith, Work, & Economics by Dr. Anne Bradley.  It was entitled “The Lesson from Venezuela:  Making Things ‘Free’ Is No substitute for Unleashing Human Creativity with Powerful Market Signals.  To be honest, I don’t think I have spent much time thinking about Venezuela; I understand it as the oil rich county run by Hugo Chavez, a socialist who described himself as a Marxist.  Chavez was the President of Venezuela from 1999-2013, when he died.  Using record oil revenues, he was able to enact a series of social programs that made significant reductions to poverty while improving literacy rates, income equality, and the general quality of life between 2003 and 2007. 

The focus of the blog I read looked, though, at the long-term impact of the Chavez regime as well as the continuing policies of Venezuela’s current President, Nicolas Maduro.  Venezuela, based on having one of the largest oil reserves in the world, was able to provide gasoline for two-cents and free gasoline.  They did this successfully, too, until the state-owned oil company changed priorities.  Positions were filled through patronage, and investments necessary for long-term productivity were ignored.  Oil production decreased, consequently, by 25% during the Chavez’s regime.  This occurred at the same time that spending on social programs continued to rise. 

I mentioned in the first paragraph that there were marked improvements in the quality of life during the period of 2003-2007.  By 2005, the country reached a point where they couldn’t keep up with the pace of increased spending solely by selling oil (which was decreasing even while the price continued to rise), but was forced to begin printing additional money.  They were able to keep up with their costs for several years this way, but 2014 marked a point where things spun out of control.  Even with mandated price controls and a series of government subsidies, data from the International Monetary Fund (IMF) shows that Venezuela’s economy shrank by 10% in 2014 and 8% in 2015, while inflation hit 68.5% and 141.5% for the same years and is project as high as 720% in 2016. 

The blog mentioned that shortages are occurring in many areas, three of which would be particularly troublesome to me:   supermarkets were short on food, breweries didn’t have ample supplies to make beer, and factories weren’t able to produce enough toilet paper.  The country found a simple solution to long lines:  limit who is able to get in line based on the last digit in their ID card.  The successes of the early years of the Chavez regime have disappeared, with violence and poverty rapidly increasing in Venezuela along with inflation.

There are many discussions that can be had about the relative merits of different economic philosophies, and I leave you to them.  What I am more interested in is seeing how we, and more particularly I, can learn from this story.  A couple of the key problems that occurred in Venezuela had to do with how people were selected for positions, a sacrificing of long-term capabilities to cover short term needs, and avoidance of dealing with problems (i.e. printing money, eventually hyperinflation, to fill the funding gap rather than reducing expenditures). 

We need to make sure that we hire well-qualified people who have high integrity to fill positions.  We need to build realistic budgets that look at long-term consequences; if we don’t adequately train our people, equip them with the proper, well-maintained equipment, and adequately fund our infrastructure, we will have long term problems.  We need to identify budget shortfalls quickly, and deal with them in a timely manner; simply ignoring them will only lead to much larger problems in the future that may become insurmountable.

As I look at our current community status, there are many attributes that we are performing admirably on.  Our long-term debt has stabilized over the past few years, while our cash position has dramatically improved.  Operationally, we have been fairly stable in regards to services provided and have been able to continue to fund those operations at a steady rate.  Economically, our community has seen significant positive news over the past few years as well.  From an infrastructure perspective, though, there are still concerns.  We perform street improvements annually and continue to make progress on our mandated combined sewer separation work, but we are limited in what we can perform in the short term without compromising our ability to meet our long term fiscal health.  From an infrastructure perspective, our community is not alone.  Water, sewer, road, and other related infrastructure needs face pressures on a national basis to be able to adequately fund. 

There are many arguments in this line of thought that can be made, and good people with sincere beliefs will arrive at much different answers to the problems.  I will leave it with a parting thought that I have come to a realization that there are a lot of good things that government can do, but it cannot necessarily afford to do all of them.  We are left in a position where we are forced to choose between various goods, and to try to do so wisely in an arena where we need to seek compromise from a community of people who all view this discussion in different ways.

My hope is that I learn from the promise of free housing and cheap gas made in Venezuela.  We can’t deliver everything.  We need to do the best that we can with the limited resources we have, and be honest about those discussions.