Democracy and the Rule of Law: Some Additional Thoughts

I have devoted a number of posts on this site to explicating the proper understanding of the rule of law, and its fraught relationship to representative democracy. In a previous post, I describe the threat posed to individual rights by the majority’s desire to finance their own consumption at the expense of other citizens, or even more expediently, by stealing from future generations. But recent events have reminded me that there may be an even more sinister force at work, namely the electorate’s gross ignorance of modern political history and the rudiments of economics. A case in point is Venezuela’s unfortunate history over the last 15 years.

The Venezuelan presidential election of 1998 that brought Hugo Chavez to power was “free and fair,” and reflected the popular will at the time. Although his popularity began to wane as the economy slowed and his willingness to adopt repressive and extra-judicial methods became more evident, he appears to have retained majority support at least through 2007, before he announced his intention to remove constitutional term limits and thereby become “president for life.” Because of his persecution of political opponents and his suppression of press freedom, it is impossible to say that Chavez actually retained popular support beyond this point.

The masses had good cause for feeling aggrieved by bad and unfair economic policies over the prior few decades, and no doubt suffered unjustly under the crony capitalism (and crony socialism) practiced by the political elites. Accordingly, Chavez’s promises to “spread the wealth around” by transfer payments and by enacting a variety of welfare programs had great appeal. No doubt, some of this is attributable to simple greed and envy, but his supporters were also tragically wrong to think that the sort of political economy favored by Chavez could improve their lot in the long term.

First, I believe it should have been apparent to them from Chavez’s rhetoric, his participation in the unsuccessful coup of 1992, and his actions soon after his election, that that he would follow the policy of Putin, and other elected politicians-turned-autocrats, known as “one man, one vote, one time.” They should have understood that if his policies didn’t work they would not have another chance to democratically remove him for a very long time. Perhaps, they were willing to forgo the dubious pleasures of democracy for the prospects of a better life brought about by much more egalitarian policies.

However, the lavish commodity subsidies and social programs implemented by the Chavez regime (and continued by his hand-picked successor Nicolas Maduro after Chavez’s death in 2013) could only be financed by large foreign borrowing. Interest on this debt, and dollars made available to political allies at favorable exchange rates, reduced the supply of dollars available to import both raw materials and finished goods. At the same time, the nationalization of many industries resulted in decreased production, as professional managers were replaced by government bureaucrats, leading to shortages in such basic goods as cooking oil, milk, toilet paper, medicine, etc.[1] As supply shrinks, prices inevitably rise, and the official, government-calculated rate of inflation is now running at an annual rate of 63% (the actual rate is probably twice this).[2]

In order to preserve their purchasing power, those with spare bolivars desperately seek dollars, but—unless you are a good friend of the government—they are scarce, and the black market exchange rate has zoomed from 17 to 1 at the start of 2013 to over 100 to 1 now.[3] Crime has also skyrocketed, as there are fewer resources available to pay for prosecutors, police, and the courts. In response, those with badly-needed skills—doctors, business managers, engineers—flee the country for greener pastures.

As a consequence of inflation, trade unions have seen the real wages of their members fall. When the countries major industries were still privately owned, they could strike for better wages. Now, the government is replacing independent unions with state-controlled ones. Workers that protest end up in jail or dead. [4].

In short, even though Venezuela sits on the world’s largest quantity of proven petroleum reserves, its economy is shrinking. With the price of oil now in free-fall, things will almost certainly get worse. But, this slow motion train wreck surely could have been foreseen by anyone who knew anything about the modern history of Cuba, the Soviet Union, Argentina, etc.  Or, by anyone with a basic understanding of how free markets operate and what happens when autocrats crudely interfere, for political purposes, with something far too complex to be managed even by well-meaning economists.

Could something comparable happen here? Well, we certainly have a more longstanding and firmly rooted commitment to the rule of law than do the Venezuelans, but we seem to be travelling the same road to serfdom. In just the last 7 years, the federal debt held by the public as a percentage of GDP has risen from 35.5% to 72.6%.[5] At some point, as discovered by Greece, Italy, Portugal, and others, this debt burden produces an economic crisis.

Even more frightening, the national debt figure excludes the more than $87 trillion (net current value) in unfunded promises we have made to existing retirees and current participants in our bloated entitlement programs (Social Security, Medicare, and federal pensions). [6] These obligations cannot be satisfied merely by raising taxes on the “rich,” and will require the major restructuring of benefits, which will likely be political suicide for whoever is brave enough to call for them.

What percentage of our electorate understands the nature and magnitude of this problem? Answer: a small one. What happens when they do is anybody’s guess, but I daresay the outcome will not be pretty.

______________

[1] See Sara Schaefer Munoz, “Despite Riches, Venezuela Starts Food Rations,” The Wall Street Journal, October 23, 2014, p. A15.

[2] See Kejal Vyas, “Venezuela’s Currency Hits New Low,” The Wall Street Journal, September 30, 2014, p. C4.

[3] Ibid.

[4] See Sara Schaefer Munoz, “Unions Confront Venezuela Leader,” The Wall Street Journal, September 25, 2014, p. A15.

[5] St. Louis Federal Reserve Bank of St. Louis, “Economic Research,” http://research.stlouisfed.org/fred2/series/FYGFGDQ188S. This is actually a conservative estimate, because the more commonly used figure for our national debt (17.5 trillion) would imply a debt to percentage of GDP ratio of more than 100%. The difference is that the latter calculation includes inter-governmental debt, for example, what the Treasury Department owes the Social Security Administration for past borrowings.

[6] Chris Cox and Bill Archer, “Why $16 Trillion Only Hints at the True U.S. Debt,” (opinion column) The Wall Street Journal, November 28, 2012, http://online.wsj.com/news/articles/SB10001424127887323353204578127374039087636.

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