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Congratulations To Venezuela: Monthly Minimum Wage Now Below Seattle's Hourly Minimum

This article is more than 8 years old.

It was Adam Smith who said that there's an awful lot of ruin in a nation. This is usually taken to mean that you're going to have to really work very hard at it to completely mess a country up. But it does appear that President Maduro and his merry band are achieving that in Venezuela. We now hear that the black market rate (and that means the real price, a price being what someone is willing to pay, not what the government says it ought to be) for the bolivar is now at an exchange rate of one hundredth the official rate, somewhere up in the high 680s to the dollar. This does mean that the country's official minimum wage is somewhere just under $11. Umm, no, that's not per hour, not even per day, that's per month. Which is, by the standards of these things, really pretty good going. It's taken what, no more than a couple of decades, to turn an oil rich middle income country into something worse than most sub-Saharan economic wastelands (the minimum manufacturing wage in Ethiopia is currently $21 a month or so).

While there may be a lot of ruin in a nation behold the power of truly stupid and ignorant economic policy:

Having tumbled beyond the 500 per dollar mark in the black market at the start of the month, and then the 600 mark just eight days later, the bolivar is now within sight of crashing through the 700 barrier.

...

This means the bolivar's value on the black market is now less than a hundredth of the main government rate of 6.3 bolivares to the dollar - and underscores the growing inability of Nicolas Maduro, Venezuela's president, to stabilise the country's fast deteriorating economy.

The FT, like everyone else, is taking the exchange rate from dolartoday.

As to why this is happening there's a proximate cause and an ultimate one. That proximate one is that there's yet another set of elections coming up, the government doesn't want to be running out of money when an election is looming so it's printing more money with gay abandon. The money supply is up 85% over the past 12 months which is really rather out of whack with the shrinking economy. The inevtiable result of that is the inflation we're seeing.

As to the minimum wage calculation that minimum was just raised:

Minimum Wages in Venezuela increased to 7421.67 VEF/Month in July of 2015 from 6746.67 VEF/Month in May of 2015.

Which, at that black market exchange rate is just under $11. And that is, let me remind you, $11 per month.

But the ultimate cause is that the entire economic policy from Chavez through Maduro seems to have been designed by those entirely ignorant of the basics of economic policy. The basic aim they laid out (and let's leave aside whether they actually meant what they said or not) was that they wanted the poor of Venezuela to get a better shake of the stick. Nothing wrong with that and depending upon how you go about doing it you might even get the support of real free market maniacs like myself. But there's ways to do it which don't ruin the nation just as there are, obviously from this example, ways to do which do ruin the nation.

The sensible way to do it is to tax one part of the economy so as to provide some money which you then give to the poor people. In Venezuela they could have taxed the rich to do this. Or perhaps they could have taken some of the vast oil earnings. Or, even, they could have charged properly for the gasoline at the gas stations within Venezuela (the government distributor doesn't charge the gas station for deliveries because the retail price of gas is lower than the cost of running the gas station) and used that money. If poor people have more money they are no longer so poor and so the job is done.

Instead they decided that there was some new and lovely way to do it. Let's fix prices instead. Notoriously they fixed the price of food: and of course they fixed that nice and low to purchase lots of votes. The instant effect of which is to reduce the supply of food and the diversion of what is left to the black market where food costs what food is worth. They've then gone on through the economy replaying the same trick with the effects that we see today.

The lesson of this should be obvious for us. Seattle has just raised its minimum wage to $11 an hour (yes, per hour, not month as in Venezuela) and it's going to go on up to $15. But this is price fixing, as in Venezuela. And no, I'm not saying that a $15 an hour minimum wage in an expensive American city is going to produce a howling economic wasteland. But Venezuela is a cautionary tale of what does happen when the politicians decide to buy votes by fixing prices.

It's a much better idea to raise the incomes of the poor by taxing some other part of the society and then giving that money to the poor: which is why I've been suggesting all along that the US should not raise the minimum wage but should raise the Earned Income Tax Credit instead. Or, if you want to get more complicated, have the Federal Reserve hold off on raising interest rates for another year or more so that we can get a little bit of wage inflation going in an economy truly at full employment.

But as Venezuela shows, price fixing as a useful economic policy? Not so much really. Which is something Seattle might want to think about as it discusses (Dear Lord they're not going to be this foolish are they?) rent controls.

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