Planned economies flush with problems

Published 8:32 pm Thursday, September 26, 2013

The jokes are simply too easy to make here, so we’ll try to refrain. Venezuela has now nationalized a toilet paper factory, because that commodity is in short supply in that country. And while Venezuela’s leaders claim that Yankee imperialism or capitalistic greed is to blame, it’s a textbook case of how a planned economy runs into the ditch.

“A Venezuelan state agency on Friday ordered the temporary takeover of a factory that produces toilet paper in what it called an effort to ensure consistent supplies after embarrassing shortages earlier this year,” the Reuters news agency reported last week. “A national agency called Sundecop, which enforces price controls, said in a statement it would occupy one of the factories belonging to paper producer Manpa for 15 days, adding that National Guard troops would ‘safeguard’ the facility.”

The country’s staunch socialists are cheering their post-Chavez leader.

“Government supporters laud efforts by (President Nicolas) Maduro, the successor to late socialist leader Hugo Chavez, for maintaining tough regulations of private businesses,” Reuters says. “They blame unscrupulous merchants for hoarding products to make quick profits, and celebrate the socialist government’s legacy of social assistance programs.”

Now, greed is just one of the theories about why there’s a toilet paper shortage in the South American country.

In May, the head of the National Statistics Institute released a survey showing that most Venezuelans “eat three times a day or more.” So that would explain it.

In fact, the situation is the direct result of price controls and a planned economy. Price controls are one way the Venezuelan government stays popular. But it only works for so long.

The real problem is that price controls don’t take into account what it costs to produce a good. When producers can no longer make a profit, they stop producing. That creates scarcity and hoarding — natural responses to a serious need.

“Argentina, Venezuela, and now even Ecuador have all embraced an unfortunate, if familiar, economic craze currently sweeping the region — price controls,” reports Steve Hanke of the Cato Institute. “In a wrong-headed attempt to ‘suppress’ inflation, the respective governments have attempted to fix prices at artificially low levels. As any economist worth his salt knows, this will ultimately lead to scarcity. Consider Venezuela, where the government sets the price of a number of goods, including premium gasoline, which is fixed at only 5.8 U.S. cents per gallon.”

In Venezuelan stores, only a fraction of the goods that would normally be available can be found on store shelves.

“While price controls ostensibly keep the prices of goods on official markets low, they ultimately lead to empty shelves, depriving many consumers access to essential goods (such as toilet paper),” Hanke explains.

Since the problem is government control, more government control (in this case, the takeover of the toilet paper factory) isn’t likely to solve anything.

The real solution is for the Venezuelan government to lift price controls and let toilet paper producers sell at market-driven prices. Supplies will increase and soon prices will drop.

That’s basic economics.