Venezuela's economy is starting to remind me of the old woman who swallowed a fly. Those who attended kindergarten in the U.S. will well remember her saga:
There was an old woman who swallowed a bird,
How absurd! to swallow a bird,
She swallowed the bird to catch the spider,
That wriggled and jiggled and tickled inside her,
She swallowed the spider to catch the fly,
I don't know why she swallowed the fly,
Perhaps she'll die.
. . . and on up through dogs and goats and cows, each one intended to deal with the animal that had preceded it down her gullet.
And why does this remind me of Venezuela's economy? Well, first the late President Hugo Chavez diverted money from capital investment in the oil industry to "social investment" in the poor. Unlike the old lady with the fly, I do understand why he did that. And for a while, it worked -- oil production fell, and the decline was more than offset by rising oil prices. After a while, however, oil prices stopped rising, and Venezuela got into a spot of trouble. As the trouble got deeper, the government started having trouble laying its hands on ready cash.
"As the price tag of the Chavez/Maduro regime has grown, the country has dipped more and more into the coffers of its state-owned oil company, PDVSA, and (increasingly) the country's central bank," Steve Hanke of Johns Hopkins recently explained.
This created a little problem with Venezuela's currency, the bolivar. Venezuela now has runaway inflation. Naturally, it needed to do something about that, so -- price controls. And currency restrictions. Hanke's data show that the gap between the official exchange rate and the black-market rate for the bolivar has dramatically widened:
Any economist -- or, for that matter, anyone who slept through one semester of microeconomics -- can tell you what came next: shortages. It became regularly impossible to buy toilet paper, flour or anything else at controlled rates; when such items were available, lines were often hours long, and people started hoarding.
Sales of airline tickets boomed as people used trips abroad (which often took place only on paper) to get around currency restrictions. Then they plummeted when the government cracked down on this dodge and refused to let the airlines repatriate billions in ticket revenue. Some airlines have stopped selling tickets in the country; a couple of weeks ago, Air Canada suspended its flights to and from Venezuela entirely, citing civil unrest. Oh, dear, did I forget to mention the civil unrest? A lot of folks aren't very happy about the chronic shortages and instability.
Now the government is setting up what appears to be a rationing system, although at the moment it's still voluntary. It is shopping incentive cards that allow shoppers a slim chance of winning prizes -- and give the government a way to crack down on people who buy too much stuff at subsidized prices.
As with the old lady and the fly, Venezuela's government may be running out of encores. It can crack down on black-market activity, but that won't make the shortages go away. It might redistribute the suffering a bit, but that's not all it will do. The black market is often a sort of release valve for bad policy; shut it down, and you turn the formerly annoying into the totally intolerable.
There is, as Adam Smith once observed, "a lot of ruin in a nation." President Nicolas Maduro seems determined to find out exactly how much Venezuela has left.
(Megan McArdle writes about economics, business and public policy for Bloomberg View. Follow her on Twitter at @asymmetricinfo.)
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