Greece Preparing to Leave Euro

When the Chavista socialists in Syriza won the Greek election many forecasters raised the concern that Greece might leave the euro. However, most of them quickly subsided and joined the ranks of the non-confrontation opinion. The prevailing view over the past couple of months seems to have been that the Greek government will eventually cave in, stick to agreed austerity programs and honor its debt payments to the IMF.

I have refused to join the choir of consensus. On February 9 I explained (emphasis added):

There have been many attempts at predicting which way Greece is going to go under the new socialist government. Most of the voices heard thus far seem to agree that Prime Minister Tsipras will not seek a confrontational course against the EU. That is, however, a mistake. This is a man who considers now-defunct Venezuelan president Hugo Chavez a political hero. Tsipras is also a former communist (though being a former communist and at the same time a fan of now-defunct Hugo Chavez is a matter of political semantics) whose training in politics and – to the extent it exists – in economics is fully governed by those ideological roots. It is only logical that he continues to raise the volume vs. Brussels.

This ideological foundation for the Greek attitude toward the EU and the IMF has continued to elude international analysts. One reason is that most of those analysts have a business background or are otherwise trained in strictly quantitative methods such as econometrics; another reason is that most analysts are American, and Americans in general have a shallow – even non-existent – understanding of what role political ideologies play in European politics.

Related to this, it is important to keep in mind that Syriza is governing with coalition support from a small nationalist party whose feelings for the EU are perhaps even more unfriendly than those in Syriza.

Since my February 9 prediction I have steadfastly said that while the Greek future in the euro zone is more uncertain than most economic and political events, it is more likely that they leave the euro than that they stay in.

Today, The Telegraph reports:

Greece is drawing up drastic plans to nationalise the country’s banking system and introduce a parallel currency to pay bills unless the eurozone takes steps to defuse the simmering crisis and soften its demands. Sources close to the ruling Syriza party said the government is determined to keep public services running and pay pensions as funds run critically low. It may be forced to take the unprecedented step of missing a payment to the International Monetary Fund next week.

This is not the place to re-hash all the reasons why Greece is in this situation in the first place. Suffice it to mention one point, though, namely that ever since the end of the military government in 1974 democratically elected governments have emphasized welfare-state spending over a sound, working economy. Slowly but inevitably this has eaten away at the private sector. Eventually, the Greek economy collapsed into a deep recession, government tried to fix its enormous budget problems with austerity patches, the result was an even deeper recession – and here we are.

In other words, the origin of this fiscal crisis is in the welfare state. Now Greece has a government that by ideological conviction stands by, and wants to restore and even grow, that same welfare state. The only way they can do this – they believe – is if they leave the euro zone. While most Greeks have been against a currency secession, the Syriza government has now manipulated the circumstances to exactly where they need them to be, namely where they look like they care more about the Greek people while the evil global capitalist IMF does not.

Prime Minister Tsipras will be considered a national hero for as long as the drachma has some value vs. the euro. Which will probably be 3-6 months. Then the global market will have deemed the drachma worth little more than Monopoly money and Tsipras will have to resort to the kind of currency trickery they use in Venezuela (his vision of Greece’s future). Of course, with such reckless exchange-rate manipulation and money printing comes 40-50 percent inflation.

That is literally where Greece could be in two years, maybe less, if they leave the euro zone.

The Telegraph again:

Greece no longer has enough money to pay the IMF €458m on April 9 and also to cover payments for salaries and social security on April 14, unless the eurozone agrees to disburse the next tranche of its interim bail-out deal in time. “We are a Left-wing government. If we have to choose between a default to the IMF or a default to our own people, it is a no-brainer,” said a senior official.

Again, the circumstances that fit the Syriza agenda for euro secession. And, as the Telegraph emphasizes, one has to look at this from a political, ideological perspective more than strict macroeconomics:

The view in Athens is that the EU creditor powers have yet to grasp that the political landscape has changed dramatically since the election of Syriza in January and that they will have to make real concessions if they wish to prevent a disastrous rupture of monetary union, an outcome they have ruled out repeatedly as unthinkable. “They want to put us through the ritual of humiliation and force us into sequestration. They are trying to put us in a position where we either have to default to our own people or sign up to a deal that is politically toxic for us. If that is their objective, they will have to do it without us,” [a Greek government] source said. … Syriza sources say are they fully aware that a tough line with creditors risks setting off an unstoppable chain-reaction. They insist that they are willing to contemplate the worst rather than abandon their electoral pledges to the Greek people.

Prior to the election of the French socialists to both the presidency and the parliamentary majority in 2012 there was not a single government within the euro zone that even grumbled about the tough austerity measures imposed by the EU-ECB-IMF troika. President Hollande wanted to part with some of the measures that the troika thought would bring France into compliance with the EU’s Stability and Growth Pact. (This is the EU’s constitutional budget balancing measure.)

France is still not in compliance with the Pact, and the alternative policies that the socialists imposed on the French people have not made any notable difference in terms of growth and job creation. But their balking at compliance with EU-imposed austerity measures sparked a movement of dissent through much of the European left. The idea of simply telling the troika that “we care more about our people than about you” eventually brought Syriza to power in Greece – and will now bring Greece out of the euro zone.

In fact, as the Telegraph explains, the Greek government has already drawn up the plans for it:

An emergency fall-back plan is already in the works. “We will shut down the banks and nationalise them, and then issue IOUs if we have to, and we all know what this means. What we will not do is become a protectorate of the EU,” said one source. It is well understood in Athens such action is tantamount to a return to the drachma, even though Syriza would rather reach an amicable accord within EMU.

The effects for the Greek economy would be devastating. For starters, their Treasury bonds, which are denominated in euros, would become even more toxic than they already are. The only way they could continue to honor their payments on those bonds is if they would peg the drachma to the euro. But that would hold up if and only if they locked the borders and prevented people from taking their money out of Greece.

Which is why they propose a nationalization of the banks. Thereby they can lock in people’s money and force them to keep it in the country. But such draconian measures would of course be tantamount to declaring war on the global financial markets. Not that a Chavista socialist government would care, but it would force them to take counter-measures to prevent a complete meltdown of the currency within the first few months.

One such measure is a double-currency system, which is in operation both in China and in Venezuela. That shields the “real” currency from massive depreciation, but it also creates liquidity problems in the economy. The Chinese government escaped those problems thanks to many years of massive trade surpluses that – by means of currency sterilization – flooded he economy with liquidity and cheap credit. (They are now paying the price for that exchange-rate policy.) The Venezuelan government has simply taken to the monetary printing presses to do away with their liquidity problems. One of the many effects is 40-50 percent inflation.

A Greek secession will have serious consequences for the euro zone. Keep a close eye on Spain this year, then France in 2016 and 2017. More than likely the euro zone will be dead by the end of 2018.

Greece Closer to Euro Exit

There have been many attempts at predicting which way Greece is going to go under the new socialist government. Most of the voices heard thus far seem to agree that Prime Minister Tsipras will not seek a confrontational course against the EU. That is, however, a mistake. This is a man who considers now-defunct Venezuelan president Hugo Chavez a political hero. Tsipras is also a former communist (though being a former communist and at the same time a fan of now-defunct Hugo Chavez is a matter of political semantics) whose training in politics and – to the extent it exists – in economics is fully governed by those ideological roots.

It is only logical that he continues to raise the volume vs. Brussels. Alas, from Euractiv:

Greek Prime Minister Alexis Tsipras laid out plans on Sunday (8 February) to dismantle Greece’s “cruel” austerity programme, ruling out any extension of its international bailout and setting himself on a collision course with his European partners at a summit in Brussels later this week. In his first major speech to parliament since storming to power last month, Tsipras rattled off a list of moves to reverse reforms imposed by European and International Monetary Fund lenders; from reinstating pension bonuses and cancelling a property tax to ending mass layoffs and raising the mininum wage back to pre-crisis levels.

There are two reasons to take this man seriously. The first has to do with his admiration of now-defunct Hugo Chavez. Fans of so called Bolivarian socialism – the ideological niche Chavez carved out for himself and his project to destroy Venezuela – truly believe in the idea of socialism in one country. They are not ideologically or intellectually opposed to “going at it alone”: on the contrary, it would be entirely in line with their thinking to try to repeat in Greece what now-defunct Hugo Chavez did in Venezuela. This means, as I have explained several times before, that Tsipras and his party, Syriza, would be more than happy to try to turn Greece into a European Venezuela.

In addition to terrible economic consequences, this would mean cutting some key economic and political ties between Greece and the EU. A termination of EU-imposed austerity and a reintroduction of the drachma are high on that list.

The second reason to take Tsipras seriously will be revealed in just a moment. First, back to Euractiv:

Showing little intent to heed warnings from EU partners to stick to commitments in the €240 billion bailout, Tsipras said he intended to fully respect campaign pledges to heal the “wounds” of the austerity that was a condition of the money. Greece would achieve balanced budgets but would no longer produce unrealistic primary budget surpluses, he said, a reference to requirements to be in the black excluding debt repayments. “The bailout failed,” the 40-year-old leader told parliament to applause. “We want to make clear in every direction what we are not negotiating. We are not negotiating our national sovereignty.” In a symbolic move that appeared to take direct aim at Greece’s biggest creditor, Tsipras finished off his speech with a pledge to seek World War II reparations from Germany.

In effect, that means writing off German loans. But wait – there is more. Let’s continue with the Euractiv article and listen to the political arrogance of Prime Minister Tsipras:

Tsipras ruled out an extending the bailout beyond 28 February when it is due to end. But he said he believed a deal with European partners could be struck on a so-called “bridge” agreement within the next 15 days to keep Greece afloat. “The new government is not justified in asking for an extension,” he said. “Because it cannot ask for an extension of mistakes.” Athens – which is shut out of bond markets and will struggle to finance itself without more aid quickly – plans to service its debt, Tsipras said. “The Greek people gave a strong and clear mandate to immediately end austerity and change policies,” he said. “Therefore the bailout was first cancelled by its very own failure and its destructive results.”

This is quite a high-pitch rhetoric to come from a man whose country cannot function without foreign aid. But herein lies the second reason why it is important to take Tsipras seriously and assume that he means every word he says. From EU Business:

A Greek exit from the euro would see the euro collapse like a house of cards, Finance Minister Yanis Varoufakis warned in comments that triggered a spat with Italy. “Greece’s exit from the euro is not something that is part of our plans, simply because we believe it is like building a house of cards. If you take out the Greek card, the others will collapse,” Varoufakis said in an interview with Italian public broadcaster RAI that was aired on Sunday.

Here is the strategy behind the Greek finance minister’s rant. As PM Tsipras tells the EU, the ECB and the IMF that austerity is over, he flags up that Greece will now begin its long walk out on the left flank. he is now at a point where he can start implementing his long-held dream of a communist, or at least Bolivarian socialist, paradise in Greece. The EU-ECB-IMF troika has very limited resources to put up against the Greeks unilaterally ending austerity – their most formidable weapon would be to kick Greece out of the euro.

Theoretically, the Greek government would not mind that, but they want it to happen on their terms. They want to tell Europe that “you can’t kick us out, because we quit”. That is a risky strategy – they can only push Brussels and Berlin that far – so to increase the likelihood that Greece holds the aces here, finance minister Varoufakis reminds the European leadership what chaos would erupt if they kicked Greece out.

This is a very high-stakes game, for both parties. The first skirmish will be over Greece’s participation in the currency union, with my bets being on Tsipras unilaterally pulling Greece out. That may make him look strong, but in the end Greece will lose. It is their economy and their people who will be subjected to a European version of the Bolivarian socialist paradise that now-defunct Hugo Chavez created.

The Rise of Radical Socialism

The best thing that could happen to Europe right now is:

  • an orderly retreat from the common currency;
  • a massive program for well-organized, phased-in privatizations of large government programs, coupled with appropriate deregulations; and
  • substantial tax cuts proportionate to the spending cuts resulting from privatization.

Such a program would generate GDP growth and job creation of a sort Europe has not seen since at least the rebuilding of the continent after World War II. Sadly, it does not look like Europe is heading in the libertarian direction. On the contrary, the next wave in the continent’s political life is radical socialism.

That is the only thing more worrying for Europe’s future than a continuation of statist austerity. Radical socialism means restoring government spending to the promises that were made when the welfare states were built, as well as raising taxes accordingly to pay for those spending programs.

Put simply, the radical socialists are trying to balance Europe’s welfare states of the 1980s and 1990s – when they were at the height of their generosity – on top of economies that have not grown for seven years. They want their governments to have the same spending capacity today as they had when the economy was, comparatively, close to full employment.

After the surprisingly strong victory for Syriza in Greece, the socialist wave is now making landfall in Spain. From the Daily Mail:

Hundreds of thousands of people marched through Madrid today in a show of strength by a fledgling radical leftist party, as it becomes the latest European political organisation to gain widespread support for its anti-austerity stance. … The party’s rise is greatly due to the charisma of its pony-tailed leader, Pablo Iglesias, a 36-year-old political science professor.

In a way, this revolutionary change to Europe’s political scene is understandable. The austerity policies that have been dictated by the EU, the European Union and the International Monetary Fund have been a twin-headed dragon spewing fiscal-policy contempt over the citizens of country after country. On the one hand, the policies pledge to maintain government promises in the form of all sorts of cash entitlements and in-kind services; on the other hand government drastically reduces the actual content of those services, sometimes paired with higher taxes that make it increasingly difficult for the citizens of Greece, Spain, Portugal, Italy, France and other countries to satisfy the needs privately that government promises to provide for but no longer does.

This is statist austerity at work. It is a high form of cynicism that fails to achieve its stated goal – a balanced government budget – while draining the private sector of even more resources.

The radical socialists see the first part of the statist-austerity equation, namely the damage it leaves in its tracks. They fail, however, to recognize the second part. Alas, their rhetoric. Daily Mail again:

Hailing from the Madrid working class neighborhood of Vallecas, Iglesias prefers jeans and rolled up shirt sleeves to a suit and tie and champions slogans such as Spain is ‘run by the butlers of the rich’ and that the economy must serve the people. … Opinion polls show the party could possibly take the number one spot in upcoming elections and thus trigger one of the biggest political shake-ups in Spain since democracy was restored in 1978 after decades of dictatorship. … This year, Spain holds elections in 15 of its 17 regions followed by general elections. Podemos’ first battle will be in the southern Socialist heartland of Andalusia in March, followed by regional and municipal elections in the crucial ruling Popular Party stronghold of Madrid in May.

And now the false narrative of the Great Recession is coming back to haunt the political leadership. By portraying this as a financial crisis – which it was not – Europe’s political and economic elite has now served the left with a plateful of demagogical goodies. Back to the Daily Mail:

‘The political class has lost all credibility,’ said unemployed lathe worker Marcos Pineda, 54. ‘The PP that governs today had its former treasurer in jail for corruption and the banks were bailed out with 40 billion euros ($52 billion) of European money, but the government refused to call it a bailout.’ Podemos has often expressed its support for some of the policies of left-wing governments in Venezuela, Bolivia and Ecuador, which makes many Spanish mainstream politicians bristle. In Europe, it openly supports Syriza, which won national elections in Greece on January 25 and which has pledged to challenge the austerity measures imposed on the country by the European Union and International Monetary Fund.

The bank bailouts were tightly tied to the massive purchases that the banks did of treasury bonds from troubled welfare states such as Greece, Spain, Portugal, Italy and Ireland. As the credit rating of those countries – and thus their bonds – tumbled like mortally wounded Sturzkampf bombers, the banks pledged to support those welfare states with more bond purchases. In exchange, the banks were given tax-funded bailout money, though as I will show in my next book the bailout money was far from enough to cover what the banks spent on welfare-state junk bonds.

Put bluntly: the banks saved the welfare states, not the other way around. But Europe’s supporters of free market capitalism have failed miserably at communicating this to the public. As a result they leave the political field – and the privilege of defining the political discourse – to the most dangerous socialists Europe has been home to since the Cold War.

This new radical socialist movement is ready to go farther down the red brick road to collectivism than any other leftist movement since the heydays of Communism. With such role models as Venezuela’s now-defunct Hugo Chavez, movements like Syriza and Podemos won’t think twice of destroying property rights and other cornerstones of a functioning economy. They will follow a long-established socialist agenda of evolving their big government from the welfare state and its indicative form of central economic planning to the teleological version used by Communists.

Think it can’t happen now? Go back and read the theorists behind the welfare state project. Go study the works of Gunnar Myrdal and John Kenneth Galbraith. Their roadmap from the first elements of income redistribution to full-blown government control over the entire economy has been followed very faithfully by the left. The only reason why they have not yet reached the teleological planning stage in Europe is that their advancement of government has been interrupted from time to time by voters electing moderate statists – a.k.a., liberals and “conservatives”.

Now, though, the established center-right parties are losing credibility, and losing it fast. M/S Europe, having hit the austerity iceberg, is listing left.

How much water can she take in before she goes down?

Reality v. Socialist Economics

Back in July I wrote about the global socialist rebound, part of which involves the emergence of post-Chavez Venezuela. The new president, Nicolas Maduro, has doubled down on the socialist economic model that Chavez created. Back in November Maduro dictated “fair” pricing on electronics products, and then enforced those prices by sending the military in to the stores of a Daka, Venezuela’s equivalent to Best Buy. The company, of course, lost an enormous amount of money on this government-sanctioned theft, but perhaps we should not expect more from a country that ranks fourth from the bottom in the Heritage Foundation’s Index of Economic Freedom, which has the following to say about the rule of law in Venezuela:

The judiciary is dysfunctional and completely controlled by the executive. Politically inconvenient contracts are abrogated, and the legal system discriminates against or in favor of investors from certain foreign countries. The government expropriates land and other private holdings across the economy arbitrarily and without compensation. Corruption, exacerbated by cronyism and nepotism, is rampant at all level of government.

On a scale from 1 to 100 for property rights protection, with 100 being the best, Venezuela scores a whopping five (5). This is slightly behind Zimbabwe and its farm-seizing president Mugabe.

Add to this an inflation rate in excess of 60 percent, and you have a recipe for screaming shortages of practically everything and anything people need. Food rationing is a good example, where producers have long complained that the government’s mandatory “fair” prices make it impossible to cover production costs, let alone supply the market in sufficient quantities.

But socialists do not let such minute details get in the way of their grand ideological project. Therefore, it is hardly surprising that the Associated Press reports on a new, bizarre regulatory incursion by the government into the country’s shattered remains of a free market:

Venezuelans could soon have to scan their fingerprints to buy bread. President Nicolas Maduro says a mandatory fingerprinting system is being implemented at grocery stores to combat food shortages by keeping people from buying too much of a single item. He calls it an “anti-fraud system” like the fingerprint scan the country uses for voting.

Aside the fact that people who vote for the socialists will get a higher ration of bread, this system will of course not solve any shortage problems whatsoever. All it will do is drive more people over to the black market, where prices are high enough to make production profitable.

The AP again:

Critics … wondered if anything short of a systemic overhaul of the economy could help the socialist South American country’s chronically bare shelves. Venezuela has been grappling with shortages of basic goods like cooking oil and flour for more than a year. In the spring, the administration tried out a similar system in government-run supermarkets on a voluntary basis. Rigid currency controls and a shortage of U.S. dollars have made it increasingly difficult for Venezuelans to find imported products. Price controls don’t help either, with producers complaining that some goods are priced too low to make a profit and justify production.

Let’s keep in mind that Venezuela’s journey to 60 percent inflation, chronic food shortages, destroyed property rights and an infestation of corruption in government, started with an effort to build the perfect welfare state. In the beginning it was all about income redistribution, then it expanded into distribution of consumption by means of socialization of, e.g., utilities. Then came the seizure of natural resources and the expulsion of foreign oil companies. The combined government takeover of utilities and oil fields allowed incompetence to replace expertise as the management principle, predictably leading to brownouts. Costs of power skyrocketed, leading to a “fair price” dictate from now-defunct president Chavez. A similar chain of events led to government nearly destroying food production, all in the name of “fairness” and “income redistribution”.

In other words, one government invasion of the free economy has caused a problem that has led to another invasion, causing yet another problem that led to yet another invasion, etc. Regulations on food producers and prices and the constant threat of yet another arbitrary government property takeover has, as mentioned, caused chronic shortages around the country. And what is the Venezuelan government’s reaction to this? The AP story has the answer:

Last week, Venezuela began closing its border with Colombia at night in an effort to cut down on smuggling, which Maduro has said diverts nearly half of Venezuela’s food. As of January, more than a quarter of basic staples were out of stock in Venezuelan stores, according to the central bank’s scarcity index.

When socialist theory says a square peg can fit into a round hole, then the peg better damn well fit. When socialist economics says it costs a dime to produce a pound of rice, then the producer better damn well not say it costs a quarter.

The Global Socialist Rebound

There is no bigger threat to economic freedom than an authoritarian government. It destroys property rights and economic incentives. It crushes the pillars of entrepreneurship and makes it practically impossible for people to make an honorable living on their own. Gradually, an authoritarian government destroys free-market capitalism, and when the destruction has reached a critical point the most obvious economic result is the inevitable decline in the standard of living for all.

Misery replaces opportunity. Poverty replaces prosperity. Government dependency replaces self determination.

There is nothing new in this. The history of the 20th century is filled to the brim with evidence of the destructive effects of authoritarianism, including its devastating power to destroy well-functioning economies and the prosperity they produce. It would be logical to conclude that we have learned the lessons of the Soviet empire, of the collapse of collectivist economic projects in Latin America and of the slow but unrelenting stagnation of Europe’s welfare states.

You would expect that those lessons would be loud and clear, available to everyone.

Unfortunately, that is not the case. Socialism is on a worldwide rebound. It is not new: already eight years ago I warned about the resurrection of communism in Europe. At that time it was a topic that nobody really paid any attention to. This is understandable. The economy was in pretty good shape, both in the United States and in Europe – in other words there was no reason to worry about depression-driven support for extremism of the kind we can witness in Europe today. The terror attacks of 9/11 were in fresh memory, as were the attacks in London in the summer of 2005. The only extremism that made its way into the public debate had an islamist trademark.

Nevertheless, my warning was timely. Communism and its ideological affiliates have been on the rise for a long time. After a decade in disarray following the fall of the Soviet empire, socialists regained strength and confidence after 9/11. In addition to their support for Saddam Hussein’s regime and opposition to any efforts to topple it, they started lining up their political assets in parliamentary democracies to advance their ideology on democratic terms. In the mid-2000s, the global left was becoming politically savvy thanks in part to idolized authoritarians like Hugo Chavez in Venezuela.

Today, socialism has made dangerous inroads on several fronts around the world. The socialist power structure that Chavez put in place is still in charge of Venezuela, and perhaps even more radical now than under his reign. The “Chavista” version of Latin American socialism has spun off at least two other authoritarian leaders in the region, Evo Morales in Bolivia and Rafael Correa in Ecuador. In a separate but parallel advancement of socialism in Latin America, Cristina Kirchner has driven Argentina into the same ditch on the left side of the road as the gentlemen Chavez, Morales and Correa have done with their countries.

In Europe, the last few years of serious economic crisis has pushed large groups of voters into the arms of socialist parties. It is a remarkably broad phenomenon that has made Chavez-admiring Syriza one of the largest parties in Greece; it led to the sweeping French socialist election victories a couple of years ago; in September it will probably carry the surging left-wing coalition in Sweden to a strong election victory (on a message that the world’s highest taxes are not high enough!).

Even the nationalist movement in Europe is a form of socialism. Hungary’s Fidesz and Jobbik adhere to the same economic collectivism as do Golden Dawn in Greece, Front National in France and an assortment of smaller, nationalist parties in the Netherlands, Belgium, Germany, Denmark and Sweden. The difference between socialists and nationalists in Europe is, essentially, that the former want to expand the welfare state with no inhibitions while the latter want to reserve the services of the welfare state for the people of their individual countries, and not share them with immigrants from – primarily – Africa and the Middle East.

(Disclaimer: UKIP, Britain’s patriotic movement, is basically a libertarian party. They are opposed to the welfare state and to immigration aimed at living off it, but unlike continental and Scandinavian nationalist parties they also want to ultimately dismantle the welfare state. As such they are rather alone on the European political scene. Now back to our regular broadcast.)

The rebound of socialism is not limited to Europe and Latin America. The Obama administration was carried into office by a warped belief that government can take care of people from cradle to grave. Obama and his fervent supporters soon found that Americans still have a strong sense of individualism and skepticism toward government as a partner through life. It is fair to say that on a broad scale, Obama’s aggressive statist agenda has peaked and so has collectivism in America. The question is how we as a country will downsize government, and whether or not it will happen on fiscally sustainable terms.

Others are not so lucky. South Africa is a good example. After two decades of European-inspired welfare statism, South African voters have grown a bit weary of the ANC. Their hold on power is not yet in jeopardy, but it has weakened in recent years. As I have explained in numerous articles, the reasons for this weakened support for the ANC are obvious to any sober observer of the South African economy. Poverty is pandemic among black South Africans and has slowly but steadily spread to colored and white South Africans as well. Unemployment and crime have become permanent phenomena, especially – but not exclusively – in the large areas of the country that still live in abject poverty.

Despite 20 years of promises, the ANC has delivered precisely what socialism always delivers: decline, deprivation and despair. As a result, many South Africans are turning to alternative political movements, and one of the first to capitalize on this is Julius Malema. The former president of the ANC’s youth league has formed his own political movement, an outright communist party that pervertedly calls itself the “Economic Freedom Fighters”.  Here is some of what they want to do to South Africa:

A supposition that the South African economy can be transformed to address the massive unemployment, poverty and inequality crisis without transfer of wealth from those who currently own it to the people as a whole is illusory. The transfer of wealth from the minority should fundamentally focus on the commanding heights of the economy. This should include minerals, metals, banks, energy production, and telecommunications and retain the ownership of central transport and logistics modes such as Transnet, Sasol, Mittal Steel, Eskom, Telkom and all harbours and airports.

They have similar plans for agricultural land, with the intent to redistribute it from current owners and users to others, ostensibly based on racial preferences. The miserable consequences of land expropriation in Zimbabwe have apparently not deterred them. Nor has the economic disaster created by Chavez in Venezuela, where government has gotten itself involved in everything from utilities to the production and distribution of food. Not surprisingly, Julius Malema, South Africa’s premier communist, wants to do the same.

A communist government is just about the last thing South Africa needs. By the same token, Europe is absolutely not in any need of more collectivist policies. Latin America’s socialist experiments must end now, so the continent can reap the harvests of its full economic potential under economic freedom.

Currently, much of the global socialist rebound is currently flying under the radar of freedom-minded scholars, activists and politicians. Let’s hope that changes.

Stiglitz Performs Inflation Raindance

Here is yet another sign that the socialists are increasingly confident about winning the European elections in May. From EU Observer:

The European Central Bank (ECB) should scrap its target to keep price inflation at 2 percent, Nobel prize winning economist Joseph Stiglitz said on Thursday (6 March). Speaking at an event organised by the European Parliament’s Socialist group, Stiglitz said central banks should look to strike a balance between controlling inflation and supporting job creation. “The ECB’s mandate needs to be changed,” he noted.

They spend money on inviting Stiglitz, who probably cost them north of $25,000 including travel, accommodations and honorarium. He is not only a well-known economist but also a fervent supporter of the Venezuelan version of socialism that has sent a formerly prosperous nation into an economic tailspin of runaway inflation and reckless statism.

This alone is probably reason enough for Europe’s parliamentary socialists to invite him. But more important is Stiglitz’s recent recommendation that Europe should continue to grow government. Here is where he really appeals to an emboldened left, determined to restore the welfare-state spending cuts during years of austerity.

When Stiglitz tops off his praise of government with a jab or two at the ECB, there is no stopping the socialists from giving him all the money he wants in order to come over and talk to them. The EU Observer again:

Stiglitz is a long-standing critic of inflation-targeting by central banks, believing instead that monetary policy should be used to stimulate employment.

That is what both the ECB and the Federal Reserve have been doing. The Fed has been printing $85 billion per month for several years now to fund the U.S. government’s deficit. ECB still stands by its pledge to buy any amount of bonds from any “troubled” euro-zone country, any time. Both these monetary policy strategies aim precisely at what Stiglitz is after, namely rock-bottom interest rates to stimulate private-sector activity.

In other words, Stiglitz is breaking through open doors. But as the EU Observer reports continues, so does Stiglitz. Through the open doors, that is:

Stiglitz’s remarks came as ECB president Mario Draghi kept the bank’s headline rates, including its main interest rate, at the record low of 0.25 percent, following a meeting of the bank’s governing council the same day. Draghi said the bank decided to leave the rate unchanged because of continued signs the eurozone economy is slowly recovering. “We saw our baseline by and large confirmed. There is a continuation of a modest recovery,” he told reporters in Frankfurt.

Yes, the recovery

It is unlikely that Stiglitz is really flying all the way from New York to Strasbourg to talk propose a monetary policy that is already in place. More likely, he is on a crusade to pave the way for higher inflation. A faster rise in prices is a wet dream for many statists, as it would inflate tax revenues and close budget gaps without either a need for spending cuts or a pesky fight with those who think taxes should go down, not up.

If this is what Stiglitz is really after, then as the EU Observer reports he has a staunch ally in EU Commissioner Olli Rehn – also known as the Grand Master of European Austerity:

New forecasts published by ECB staff estimate that inflation will stay at 1.0 percent this year, 1.3 percent in 2015, and 1.5 percent in 2016 – comfortably below its 2 percent target all the way through the projection. Last month, the bloc’s economic affairs commissioner, Olli Rehn, warned that low inflation is making price cuts in the peripheral economies less effective at boosting their competitiveness, making it harder to geographically rebalance the economy.

The EU Observer notes that the ECB is not allowed to let inflation rise past two percent…

However, the ECB’s main mandate under the EU treaty is tightly restricted to the maintenance of ‘price stability’ across the eurozone at a rate of around 2 percent per year.

…which explains what Stiglitz really flew over to Europe for: to give the socialists some fuel for pursuing a constitutional change to the ECB mandate.

It is regrettable that anyone is arguing for inflation. It is even more regrettable when that anyone is a reputable economist. And the whole matter gets a bit scary when you consider that the Inflation Raindancer from Columbia University may just have spoken to the people who will actually govern Europe over the next five years. Where is the concern for the standard of living of hundreds of millions of Europeans? Where is the concern for real wages, the value of savings, the predictability of contracts?

So long as inflation stays within 3-5 percent the economy is not going to run away (although five percent is beginning to smell macroeconomic mismanagement). The problem is that politicians who think they can cause inflation won’t know how to rein it in once they have created it.

None of this is apparently of any consequence to Stiglitz. But before he flies over to Europe again, perhaps someone should ask him if he thinks inflation in his beloved Venezuela – reported to be up to 35 percent now – is something for Europe to strive for.

Socialism at Work in Venezuela

One of the most interesting professors I ever had in college was an guy in the economics department. He never stuck to the textbook, probably because he was assigned to teach intermediate microeconomics – a topic that could put anyone to sleep. It was frustrating to study for his exams, but the fascinating content of his lectures always made up for it.

One of his favorite topics was on how he participated in trying to manipulate the stock price of Volvo on the Swedish stock exchange back in the ’70s. The entire thing was illegal, of course, and he ended up getting a brief vacation courtesy of the Swedish government, but that did not stop him from going back to the financial markets trying to make a buck or two.

Rumor has it he eventually did it – legally – and retired in some Spanish Mediterranean village. That was sad, because that economics department needed a colorful professor like him. Not only was he an interesting lecturer in general, but he was also an absolute anti-socialist. I doubt capitalism has ever had a more passionate supporter in academia than this man.

One of the more useful things I learned from him (intermediate microeconomics is not useful…) is that economists and others are wrong when they claim you cannot create laboratories for economic theories. The entire Soviet empire was a big, full-scale laboratory for central economic planning. This professor was right, of course, and sadly a lot of people refuse to learn the lessons from those enormous experiments. Socialism is still a major problem in our world, despite close to a century of utterly discouraging experimental results.

Or, in plain English: don’t bother a socialist with the facts from the Soviet experiment – he has already made up his mind. For this very reason, socialism is a resilient delusion.

A tragic example of this in our time is Venezuela. There, socialists led by the now-defunct Hugo Chavez have transformed a reasonably well functioning country into an unending series of social and economic tragedies. One of the most telling examples is from the country’s health care system – heavily dominated by government regulations and funding – to which we will get in a moment. First, let us get a street view of the Bolivarian brand of socialism that so many people in europe and North America admire. USA Today has the story:

Thousands of Venezuelans lined up outside the country’s equivalent of Best Buy, a chain of electronics stores known as Daka, hoping for a bargain after the socialist government forced the company to charge customers “fair” prices. President Nicolás Maduro ordered a military “occupation” of the company’s five stores as he continues the government’s crackdown on an “economic war” it says is being waged against the country, with the help of Washington.

Yes, economic war… Apparently, socialists believe that the free market is a war machine. That aside, though, this is a typical maneuver by the Venezuelan government. They have imposed price controls on a slew of markets, in the name of “fair” pricing, with the only result being shortages, rationing and Soviet-style lines of customers trying to get their hands on groceries.

There is another reason why they do this: inflation. More on that in a moment. First, let’s get back to the streets of the socialist nightmare:

Members of Venezuela’s National Guard, some of whom carried assault rifles, kept order at the stores as bargain hunters rushed to get inside. “I want a Sony plasma television for the house,” said Amanda Lisboa, 34, a business administrator, who had waited seven hours already outside one Caracas store. “It’s going to be so cheap!” Televisions were the most in-demand item in the line outside one Caracas store, though people waited more than eight hours for fridges, washing machines, sewing machines and other imported appliances.

And why are they imported? Because no one can run a serious business anymore in Venezuela.

Images circulating online as well as reports by local media appeared to show one Daka store in the country’s central city of Valencia being looted. “I have no love for this government,” said Gabriela Campo, 33, a businesswoman, hoping to take home a cut-price television and fridge. “They’re doing this for nothing but political reasons, in time for December’s elections.” Maduro faces municipal elections on Dec. 8. His popularity has dropped significantly in recent months…

As has Obama’s, which is going to have serious repercussions for the Democrats in next year’s mid-term election. But you don’t see Obama deploy the U.S. Army at Best Buys to boost his popularity numbers. Some of his supporters might want him to do that, but we are still a country where the rule of law prevails. We have not degenerated to the destructive Venezuelan levels of authoritarianism.

I could, however, imagine seeing scenes like this in Greece in the near future. Or Spain. It would probably start with supermarkets and clothes stores, but that doesn’t really matter. Once you have created economic and social chaos in a country, there is no rule of either law or common sense anymore.

And now for the inflation part of the story:

…with shortages of basic items such as chicken, milk and toilet paper as well as soaring inflation, at 54.3% over the past 12 months. Economists are expecting a devaluation soon after the election, likely leading to even higher inflation.

Five years ago Venezuela was wrestling with inflation in the 25-30 percent bracket. This is a country spinning completely out of control.

[President] Maduro … appeared on state television Friday calling for the “occupation” of the [Daka store] chain, which employs some 500 staff. “This is for the good of the nation,” Maduro said. “Leave nothing on the shelves, nothing in the warehouses … Let nothing remain in stock!” The president was accompanied on television by images of officials checking prices of 32-inch plasma televisions. Daka’s store managers, according to Maduro, have been arrested and are being held by the country’s security services.

And what is president Maduro going to do to make sure the shelves in the Daka stores are being replenished? We already know that socialism is little more than state-sanctioned looting, and we also know that you can only take other people’s money and property once. Then you have to start being productive on your own, and that is when things go really wrong for socialists. When the Soviet communists had looted the private farms, confiscated whatever the bourgeoisie had and plundered every part of the private sector, they had to start producing food for the people.

Lenin, perhaps one of the least mentally deranged in the Soviet communist leadership, allowed a partial return to private-sector farming, a nod of admission that capitalism and freedom will always trump socialism, tyranny and central economic planning.

But don’t waste any oxygen on trying to tell this story to the delusional leaders of Venezuela. Their policy of state-sanctioned looting will continue until the country is little more than a pile of rubble. USA Today again:

[Critics] are adamant that government price controls, enacted by Chávez a decade ago, are the real cause for the dire state of the economy. With such a shortage of hard currency for importers and regular citizens, dollars sell on the black market for nine times their official, government-set value. Prices, at shops such as Daka, are set according to this black market, hence the government’s crackdown. Chávez often theatrically expropriated or seized assets from more than 1,000 companies during his 14-year tenure. This, among other difficulties for foreign firms, led to a severe lack of foreign investment in the country which, according to OPEC, has the world’s largest oil reserves.

Socialists can point a gun to someone’s head and demand his money. But they don’t know how to make an honest buck.

Nor do they know how to make health care work properly. Here is a story from the Associated Press on the Venezuelan health care system:

Evelina Gonzalez was supposed to undergo cancer surgery in July following chemotherapy but wound up shuttling from hospital to hospital in search of an available operating table. On the crest of her left breast, a mocha-colored tumor doubled in size and now bulges through her white spandex tank top. Gonzalez is on a list of 31 breast cancer patients waiting to have tumors removed at one of Venezuela’s biggest medical facilities, Maracay’s Central Hospital. But like legions of the sick across the country, she’s been neglected by a health care system doctors say is collapsing after years of deterioration.

This is a state-controlled health care system, funded in large part through a government-run program. The private segments of the system are under constant pressure from the socialist government for making money – “profiteering” – on providing health care to willingly paying patients. Or, in the words of The Economist a while back:

The government says the private clinics are profiteers, trafficking in illness, and the president keeps threatening to nationalise them all. Let’s hope he doesn’t, because public hospitals are in a much worse state, despite official claims that giant strides have been made in recent years.

The Associated Press again:

Doctors at the hospital sent home 300 cancer patients last month when supply shortages and overtaxed equipment made it impossible for them to perform non-emergency surgeries. Driving the crisis in health care are the same forces that have left Venezuelans scrambling to find toilet paper, milk and automobile parts. Economists blame government mismanagement and currency controls set by the late President Hugo Chavez for inflation pushing 50 percent annually.

Let’s sum up that list:

1. Overtaxed medical equipment. Please note, American readers, that Obamacare includes a tax on medical equipment.

2. Price controls. In a feeble attempt to put out the inflation fire they themselves have started, the Venezuelan government has created a system of price dictates. The only tangible effect is that supply stops at what the dictated price motivates sellers to bring to the market. You don’t even need to take intermediate microeconomics to figure this one out…

3. Currency manipulation. The Venezuelan government is fixing its currency’s exchange rate in order to sell a lot of state-produced oil from state-seized oil wells. The currency fixing, however, forces them to use a monetary method called currency sterilization, which – to make a long story short – floods the domestic economy with money. If at the same time you regulate free markets to the point where they stop functioning; if you create massive government entitlements for work-free income; then you have a recipe for high inflation.

As the Associated Press story explains, part of the acute problem in health care is related to the government’s currency manipulation:

The government controls the dollars needed to buy medical supplies and has simply not made enough available. “I feel like I’ve been abandoned,” Gonzalez, 37, tells a bright-eyed hospital psychologist trying to boost her morale. Her right eye is swollen by glaucoma diagnosed two years ago but left untreated when she had trouble getting an appointment. Doctors not allied with the government say many patients began dying from easily treatable illnesses when Venezuela’s downward economic slide accelerated after Chavez’s death from cancer in March. Doctors say it’s impossible to know how many have died, and the government doesn’t keep such numbers, just as it hasn’t published health statistics since 2010.

Typical socialist tactic. When things turn for the worse under their regime, they hide the facts and double down on their destructive policies.

Almost everything needed to mend and heal is in critically short supply: needles, syringes and paraffin used in biopsies to diagnose cancer; drugs to treat it; operating room equipment; X-ray film and imaging paper; blood and the reagents needed so it can be used for transfusions. Last month, the government suspended organ donations and transplants. At least 70 percent of radiotherapy machines, precisely what Gonzalez will need once her tumor is removed, are now inoperable in a country with 19,000 cancer patients – meaning fewer than 5,000 can be treated, said Dr. Douglas Natera, president of the Venezuelan Medical Federation.

Instead of fixing the problem, the socialist government ignores it. Why? Because otherwise they would have to admit that socialism is not working. And what is more important for a politician than to pretend that his socialist policies are working? Certainly not people’s lives, right…?

And now for the finale:

The country’s 1999 constitution guarantees free universal health care to Venezuelans, who sit on the world’s largest proven oil reserves. President Nicolas Maduro’s government insists it’s complying. Yet of the country’s 100 fully functioning public hospitals, nine in 10 have just 7 percent of the supplies they need … Venezuela’s 400 private hospitals and clinics are overburdened and strapped for supplies, 95 percent of which must be imported, said Dr. Carlos Rosales, president of the association that represents them. The private system has just 8,000 of the country’s more than 50,000 hospital beds but treats 53 percent of the country’s patients, including the 10 million public employees with health insurance.

Let’s repeat that number:

The private system has just 8,000 of the country’s more than 50,000 hospital beds but treats 53 percent of the country’s patients

What does that tell you about government efficiency?

But wait – it gets even better as the AP story continues (with emphasis added):

Rosales said insurers, many state-owned, are four to six months behind in payments and it is nearly impossible to meet payrolls and pay suppliers. Worse, government price caps set in July for common procedures are impossible to meet, Rosales said. For example, dialysis treatment was set at 200 bolivars ($30 at the official exchange rate and less than $4 on the black market) for a procedure that costs 5,000 bolivars to administer. … At Maracay’s 433-bed Central Hospital, mattresses are missing, broken windows go unrepaired and the cafeteria has been closed for a year. Paint peels off walls and rusty pipes lie exposed. In the halls, patients on intravenous drips lie recovering on gurneys. “We have some antibiotics but they aren’t usually appropriate for what you are specifically treating,” said Dr. Gabriela Gutierrez, the surgeon caring for Gonzalez. There is no anesthesia for elective surgery.

But who cares? After all, Venezuela is a socialist country, and that’s what matters, isn’t it??

Medical students quietly showed AP journalists around to avoid alerting government supporters, who bar reporters from recording images in public hospitals. Broken anesthesia machines and battered stainless-steel instrument tables, some held together with tape, filled one of five idled operating rooms. Foul odors and water from leaky pipes continue to seep into the rooms, doctors said.

But wait there’s more!

In August, cancer patients protested at the eight-month mark since the hospital’s two radiotherapy machines broke down. The machines remain out of order. Half the public health system’s doctors quit under Chavez, and half of those moved abroad, Natera said. Now, support staff is leaving, too, victim of a wage crunch as wages across the economy fail to keep up with inflation. At the Caracas blood bank, Lopez said 62 nurses have quit so far this year along with half the lab staff. … Dengue fever … is making a worrisome comeback. The number of women dying in childbirth has also risen, to 69 per 100,000 in 2010 from 51 in 1998.

Let’s blame it all on Bush.

Seriously – how many of these stories do we need before socialists will wake up from their delusion and stop ignoring facts, experience and the horrors created by their warped ideology?

Socialism: The Resilient Delusion

One of the perennial, unanswered questions in this world is: when is government big enough for a leftist? All we hear from people of left-leaning political convictions is that government must grow bigger. American liberals continuously call for new entitlements – the latest being the ridiculous universal child care program funded by money borrowed from China – but even in notoriously welfare-statist Scandinavia the left continues to demand more government. In Sweden, e.g., the incumbent prime minister and his cabinet (nominally “center-right”) are forcing local governments to raise taxes to record levels. The social democrats, in turn, want to significantly expand government spending and raise payroll taxes. And this in the country that has been notorious for world-record high taxes for almost half a century now.

Add to this the trend of higher taxes sweeping across the EU, and there should be no doubt that the left harbors a totally insatiable desire for more government, regardless of how big government already is.

You would think that the debacle of socialism toward the end of the 20th century had left big enough footprints in the history books for anyone to see and be deterred. Not so. Socialism is still alive and kicking and has even seen a resurrection over the past decade. The international socialist movement, which fell into disarray and a deep identity crisis after the fall of the Berlin Wall, got its act together again in 2001 when muslim terrorists committed the atrocities of 9/11 here in America. Suddenly, the old, deeply rooted anti-Americanism that had driven the global left during the Cold War was jolted back to life.

The resurrection of the global left accelerated in 2003 when they aligned themselves with Saddam Hussein to defend his tyranny against a multinational coalition. From there, the global left reignited its hatred for economic freedom and capitalism, a hatred that was partly inspired by the seemingly successful implementation of socialism in Venezuela. Socialists all over the world merrily turned a blind eye to facts such as out-of-control inflation at 30-35 percent per year, the virtual destruction  of property rights when the military seized everything from farms to oil production facilities, the complete pull-out of foreign investors, food shortage, power shortage (in a country that exports oil) and rampant crime.

To the global left, the very existence of Venezuela gave them hope – hope that their warped view of the world was still somehow valid.

Sadly, the political virus of socialism is not contained to Venezuela. In Ecuador, president Correa has been copying “bolivarian” socialism since he took office in 2009. Reinvigorated by another election victory, Correa now sets out to make his destruction of the country “irreversible”. From the Buenos Aires Herald:

Ecuadorean President Rafael Correa said his party likely won three-quarters of the seats in Congress in last weekend’s election and vowed today to “steamroll” through reforms that will make his socialist model irreversible. The 49-year-old economist was re-elected on Sunday with 57 percent of votes, some 34 percentage points more than the runner-up. During his six years in office he has won broad support with high spending on infrastructure and social welfare.

There is another side to his “success” story. We will get to it in a moment. For now, let’s listen to what the Buenos Aires Herald has to say:

“This is going to be a legislative steamroller to serve the interests of the Ecuadorean people. … In democracy, the winners rule, but the losers have to be respected,” he told foreign reporters at the presidential palace.

The left always reduces democracy to a matter of election results. Or, as it has more aptly been called: the tyranny of the majority. In the socialist paradigm, majority votes are unabridged mandates, which explains why the left so adamantly uses its election victories to “transform” the countries they rule. Look at what Franklin D Roosevelt and his Democrat cohort in Congress did to America during the 1930s; go back and see what happened to France after Francois Mitterand was elected president in 1981 – or just glance at the arrogance of the current French president and his socialist majority in the National Assembly.

And these are mild examples by historic comparison.

The Herald again, where the Ecuadorean president takes his hubris to the next level:

“We’re overwhelmed with the amount of support from people. … We’re going to deepen the citizen’s revolution, build a new homeland and make it irreversible.” … [Correa] also promised to press ahead with socialist reforms to empower the low-income majority and dismantle what he called an elitist system that controlled the state and neglected the poor.

Alright, let’s stop there for a second and take a look at the other side of the story. Here is what the Heritage Foundation has to say about Ecuador in its annual report Index of Economic Freedom:

Ecuador’s economic freedom score is 46.9, making its economy the 159th freest in the 2013 Index. Its overall score is 1.4 points lower than last year, with substantial declines in the control of government spending and investment freedom offsetting improvements in labor freedom and freedom from corruption. Ecuador is ranked 26th out of 29 countries in the South and Central America/Caribbean region, and its overall score is far below world and regional averages. Once considered moderately free, Ecuador has slid significantly in the rankings and continues for a fourth year as a “repressed” economy. The reach of government continues to expand to economic sectors beyond the petroleum industry, and pervasive corruption continues to weaken property rights. The private sector has been marginalized by a restrictive entrepreneurial environment. Ecuador’s underdeveloped financial sector, often subjected to state-directed allocation of credit, limits access to financing and adds costs for entrepreneurs. The overall investment climate has become increasingly risky because of the repressive political environment. The restrictive trade regime is reducing competition and eroding productivity. By controlling flows of trade and investment, the government has been forcing closer economic and commercial ties with Venezuela and China.

As Bloomberg.com reports, this unrelenting decline in economic freedom is taking its toll:

Ecuador’s economy, South America’s seventh biggest, is growing at its weakest pace since 2010 as lower oil prices and limited financing options after a 2008 default crimped government spending and cooled domestic demand. Gross domestic product expanded 4.7 percent in the third quarter from the previous year and 1.5 percent from the prior quarter, the central bank said today in a report on its website. The bank revised down figures for second-quarter growth to 4.6 percent from a previously reported 5.2 percent, the lowest yearly reading since the third quarter of 2010.

These growth figures may seem strong, but they are driven entirely by a government that is not only growing its spending, but doing it while critically dependent on oil-export revenues:

Ecuador’s government, which depends on oil sales for about 44 percent of its revenue, used public spending to boost growth in 2012, Economic Policy Minister Jeannette Sanchez said yesterday. As oil prices fell last year, revenues declined, which limits the amount the government can spend to stimulate the economy, said Capital Markets economist Michael Henderson. “Under Correa you’ve basically seen government spending driving growth,” Henderson, who forecasts 4 percent annual growth in 2012 and 2.5 percent in 2013, said Jan. 2 in a telephone interview from London. “You’re going to see domestic demand slow further and pretty much we expect that to translate into a halving of growth rates from 2012 to 2013.”

It would be a valid point that this expansion of government spending should pull the economy into a higher growth gear. However, for that to happen, the economy must meet three conditions: it must have a healthy entrepreneurial environment; it must have a well-working credit market and a free banking system; and the spending that government engages in must be of such a kind that it actually generates productive economic activity.

The first condition is essentially the same as rock-solid protection of property rights. If a country’s property rights system is weak, no one will risk his investments even if he sees the potential to make some money. As the Heritage Foundation said, Ecuador has not exactly excelled in its protection of property rights.

The second condition is also not met by the Ecuadorian economy. The Correa government has been very heavy-handed in regulating the banking sector, which has stifled access to credit and made it more difficult to finance expansion of private businesses. As a result, it is difficult if not impossible for the private sector to take advantage of any sign of growing economic activity, including government spending on, e.g., infrastructure.

The third condition is rarely discussed in the literature on the role of government spending. If government pours more money into entitlement programs, then there will be no substantial multiplier effect at all for the private sector to capitalize on. Entitlements, especially in the form of work-free income, discourage productive activity such as participation in the work force. At the same time, there is no discernible increase in consumer spending, as the recipients of those entitlements are at the very bottom of the income scale.

A good part of the Correa government’s spending has been on entitlements – though it is still somewhat difficult to determine the exact figures – which leads to the conclusion that a government-driven expansion of the economy falls flat to the ground beyond the dollars the government spends.

The Bloomberg report also indicates that there is a looming budget deficit crisis in Ecuador, which means that Correa will soon face the same problems that Hugo Chavez had to deal with in Venezuela. Chavez chose to print money (partly through so called sterilization of the exchange rate) which ultimately set off an inflationare bonfire in the Venezuelan economy. Will Correa follow in his footsteps? To do so he would have to introduce a national currency; so far he has conveniently been riding on the coat tails of the U.S. dollar.

Would he be willing to drop the dollar as the nation’s currency? Let’s return to the Buenos Aires Herald to see if they can give us a clue:

Among the bills Correa has pledged to push are a plan to distribute idle land among the poor, and a media law to regulate content in newspapers and TV networks – which could stoke an ongoing confrontation with opposition media. “We’ll ask for the same things that we asked for before this resounding victory: for the media to be decent, ethical, to inform instead of manipulate, to communicate instead of getting involved in politics,” the president said. In the past, Correa has called journalists “dogs” and “hired assassins,” and has filed lawsuits against reporters and media owners who he says are determined to undermine his government. He is also expected to pass a new mining law to ease investment terms that could pave the way for the development of some large and mid-sized projects that would let Ecuador diversify its economy away from a dependence on oil exports.

So the freedom of press is in grave danger, and Correa presses on with more government spending despite a decline in oil revenues. So far the Chinese have been generous with loans to cover his budget deficit, but unless Correa is going to put all his country’s oil reserves in Chinese hands he will sooner or later come to the point where Beijing imposes a credit ceiling on him. At that point, he will either have to abandon his socialist agenda – or introduce a national currency.

Once the national currency is there, he can basically create whatever commando economy he wants. That would only accelerate his nation’s plunge into the despair and deprivation that always follows in the footsteps of arrogant socialist revolutionaries.

If the Ecuadorian people cannot be saved from the inevitable, at least let’s hope that Correa’s failure will stand as a stark reminder to the world – just like Venezuela does today – that socialism is never, ever a free meal.