What’s going on in Venezuela?

Feb 3 JDN 2458518

As you may know, Venezuela is currently in a state of political crisis. Juan Guaido has declared himself President and been recognized by the United States as such, while Nicolas Maduro claims that he remains President as he has been for the last six years—during most of which time has has “ruled by decree”, which is to say that he has been effectively a dictator.

Maduro claims that this is a US-backed coup. I’ve seen a lot of people on the left buy into this claim.

I’m not saying this is impossible: The US has backed coups several times before, and has a particular track record of doing so against socialist regimes in Latin America.

But there are some reasons to be skeptical of it.

Unrest in Venezuela is nothing new, and looks to be quite grassroots. There have been widespread protests against Maduro—and severe crackdowns against those protests—for several years now. Guaido himself got his start in politics by organizing protests against Chavez and then Maduro, starting when he was a college student.

While Chavez, Maduro’s predecessor, remains extremely popular, most of the support for Maduro in Venezuela seems to come from the military and other elites. This is looking a lot like the Lenin/Stalin pattern: A charismatic and popular authoritarian socialist revolutionary opens the door for a murderous psychopathic authoritarian socialist who rules with an iron fist and causes millions of deaths. (In China, Mao managed to play both roles by himself.)

Guaido himself rejects all claims that he’s working for the US (but I suppose he would in either case).

And so far, no US troops have been deployed to Venezuela, and at the moment, Trump is currently only threatening for more sanctions or an embargo, not a military intervention. (He’s Trump, so who knows? And he did talk about invading them a year or two ago.)

The best evidence I’ve seen that it could be a US-orchestrated coup is a leaked report about a meeting discussing the possibility of such a coup a few months ago. But at least by the most reliable accounts we have, the US decided not to support that coup. I guess that could be part of the cover-up? (It feels weird when the crazy-sounding conspiracy theorists actually have a point. There totally have been US coups against Latin American governments that were covered up for decades.)

Even if it is actually a coup, I’m not entirely convinced that’s a bad thing.

The American and French Revolutions were coups, after all. When you are faced with a strong authoritarian government, a coup may be your only option for achieving freedom.
Here’s a bit of evidence that this is indeed what’s happening: the countries that support Guaido are a lot more democratic than the countries that support Maduro.

Guaido has already been recognized by most of Europe and Latin America, including Argentina, Brazil, Chile, Colombia, Costa Rica, Guatemala, Honduras, Panama, Paraguay, and Peru. Among those supporting Maduro are China, Russia, Iran, and Turkey—not exactly bastions of liberal democracy. Within Latin America, only Bolivia, Cuba, Mexico, and Uruguay support Maduro. Of those, only Mexico and Uruguay are recognizably democratic.

The average Democracy Index of countries that support Guaido is 7.5, which would be a “flawed democracy”. The average Democracy Index of countries that support Maduro is only 4.4, a “hybrid regime”.

Here is a plot of the Democracy Index by country supporting Guaido:democracy_index_guaido

Here is a plot of the Democracy Index by country supporting Maduro:

democracy_index_maduro

Since the entire EU recognizes Guaido, I could have shown each European country separately and biased the numbers even further, but I decided to specifically stick to major European powers with explicitly stated positions on Venezuela.

And we know that Maduro was a ruthless and autocratic dictator. So this is looking an awful lot like a democratic uprising against authoritarianism. It’s hard for me to be upset about that.

Second, Venezuela was in terrible shape, and largely due to Maduro’s administration.

After Maduro was elected (we’re still not sure how legitimate that election really was), Maduro underwent a total economic meltdown. Depression, hyperinflation, famine, a resurgence of malaria, and a huge exodus of refugees all followed. Millions of people are now starving in a country that was once quite rich. Nearly 90% of the population now lives in poverty. The story of Venezuela’s economy is one of total self-destruction.

Due to the bizarre system of subsidies and price controls in place, oil is now 100 times cheaper in Venezuela than water. Venezuela’s oil production has plummeted under Maduroto its lowest levels in decades, which might be good for climate change but is very bad for a country so dependent upon oil export revenue. It’s pretty much a classic cautionary tale for the Resource Curse.

Maduro, like any good socialist dictator, has blamed US sanctions for all his country’s economic failings. But there have not been strict US sanctions against Venezuela, and we remain their chief purchaser of oil by a wide margin. If you’ve ever bought gasoline at a Citgo station, you have paid for Venezuelan oil. Moreover, if your socialist country is that heavily dependent on exporting to capitalist countries… that really doesn’t say much in favor of socialism as an economic system, does it?

I don’t know what will happen. Maybe Maduro will successfully regain power. Maybe Guaido will retain control but turn out to be just as bad (there’s a long track record of coups against awful dictators resulting in equally awful dictators—Idi Amin is a classic example). Maybe Trump will do something stupid or crazy and we’ll end up in yet another decades-long military quagmire.

But there’s also a chance of something much better: Maybe Guaido can actually maintain power and build a genuinely democratic regime in Venezuela, and turn their economy back from the brink of devastation toward more sustainable growth. When the devil you know is this bad, sometimes you really do want to bet on the devil you don’t.

Asymmetric nominal rigidity, or why everything is always “on sale”

July 9, JDN 2457579

The next time you’re watching television or shopping, I want you to count the number of items that are listed as “on sale” versus the number that aren’t. (Also, be careful to distinguish labels like “Low Price!” and “Great Value!” that are dressed up like “on sale” labels but actually indicate the usual price.) While “on sale” is presented as though it’s something rare and special, in reality anywhere from a third to half of all products are on sale at any given time. At some retailers (such as Art Van Furniture and Jos. A. Bank clothing), literally almost everything is almost always on sale.

There is a very good explanation for this in terms of cognitive economics. It is a special case of a more general phenomenon of asymmetric nominal rigidity. Asymmetric nominal rigidity is the tendency of human beings to be highly resistant to (rigidity) changes in actual (nominal) dollar prices, but only in the direction that hurts them (asymmetric). Ultimately this is an expression of the far deeper phenomenon of loss aversion, where losses are felt much more than gains.

Usually we actually talk about downward nominal wage rigidity, which is often cited as a reason why depressions can get so bad. People are extremely resistant to having their wages cut, even if there is a perfectly good reason to do so, and even if the economy is under deflation so that their real wage is not actually falling. It doesn’t just feel unpleasant; it feels unjust. People feel betrayed when they see the numbers on their paycheck go down, and they are willing to bear substantial costs to retaliate against that injustice—typically, they quit or go on strike. This reduces spending, which then exacerbates the deflation, which requires more wage cuts—and down we go into the spiral of depression, unless the government intervenes with monetary and fiscal policy.

But what does this have to do with everything being on sale? Well, for every downward wage rigidity, there is an upward price rigidity. When things become more expensive, people stop buying them—even if they could still afford them, and often even if the price increase is quite small. Again, they feel in some sense betrayed by the rising price (though not to the same degree as they feel betrayed by falling wages, due to their closer relationship to their employer). Responses to price increases are about twice as strong as responses to price decreases, just as losses are felt about twice as much as gains.

Businesses have figured this out—in some ways faster than economists did—and use it to their advantage; and thus so many things are “on sale”.

Actually, “on sale” serves two functions, which can be distinguished according to their marketing strategies. Businesses like Jos. A. Bank where almost everything is on sale are primarily exploiting anchoring—they want people to think of the listed “retail price” as the default price, and then the “sale price” that everyone actually pays feels lower as a result. If they “drop” the price of something from $300 to $150 feels like the company is doing you a favor; whereas if they had just priced it at $150 to begin with, you wouldn’t get any warm fuzzy feelings from that. This works especially well for products that people don’t purchase very often and aren’t accustomed to comparing—which is why you see it in furniture stores and high-end clothing retailers, not in grocery stores and pharmacies.

But even when people are accustomed to shopping around and are familiar with what the price ordinarily would be, sales serve a second function, because of asymmetric nominal rigidity: They escape that feeling of betrayal that comes from raising prices.

Here’s how it works: Due to the thousand natural shocks that flesh is heir to, there will always be some uncertainty in the prices you will want to set in the future. Future prices may go up, they may go down; and people spend their lives trying to predict this sort of thing and rarely outperform chance. But if you just raise and lower your prices as the winds blow (as most neoclassical economists generally assume you will), you will alienate your customers. Just as a ratchet works by turning the bolt more in one direction than the other, this sort of roller-coaster pricing would attract a small number of customers with each price decrease, then repel a larger number with each increase, until after a few cycles of rise and fall you would run out of customers. This is the real source of price rigidities, not that silly nonsense about “menu costs”. Especially in the Information Age, it costs almost nothing to change the number on the label—but change it wrong and it may cost you the customer.

One response would simply be to set your price at a reasonable estimate of the long-term optimal average price, but this leaves a lot of money on the table, as some times it will be too low (your inventory sells out and you make less profit than you could have), and even worse, other times it will be too high (customers refuse to buy your product). If only there were a way to change prices without customers feeling so betrayed!

Well, it turns out, there is, and it’s called “on sale”. You have a new product that you want to sell. You start by setting the price of the product at about the highest price you would ever need to sell it in the foreseeable future. Then, unless right now happens to be a time where demand is high and prices should also be high, you immediately put it on sale, and have the marketing team drum up some excuse about wanting to draw attention to your exciting new product. You put a deadline on that sale, which may be explicit (“Ends July 30”) or vague (“For a Limited Time!” which is technically always true—you merely promise that your sale will not last until the heat death of the universe), but clearly indicates to customers that you are not promising to keep this price forever.

Then, when demand picks up and you want to raise the price, you can! All you have to do is end the sale, which if you left the deadline vague can be done whenever you like. Even if you set explicit deadlines (which will make customers even more comfortable with the changes, and also give them a sense of urgency that may lead to more impulse buying), you can just implement a new sale each time the last one runs out, varying the discount according to market conditions. Customers won’t retaliate, because they won’t feel betrayed; you said fair and square the sale wouldn’t last forever. They will still buy somewhat less, of course; that’s the Law of Demand. But they won’t overcompensate out of spite and outrage; they’ll just buy the amount that is their new optimal purchase amount at this new price.

Coupons are a lot like sales, but they’re actually even more devious; they allow for a perfectly legal form of price discrimination. Businesses know that only certain types of people clip coupons; roughly speaking, people who are either very poor or very frugal—either way, people who are very responsive to prices. Coupons allow them to set a lower price for those groups of people, while setting a higher price for other people whose demand is more inelastic. A similar phenomenon is going on with student and senior discounts; students and seniors get lower prices because they typically have less income than other adults (though why there is so rarely a youth discount, only a student discount, I’m actually not sure—controlling for demographics, students are in general richer than non-students).

Once you realize this is what’s happening, what should you do as a customer? Basically, try to ignore whether or not a label says “on sale”. Look at the actual number of the price, and try to compare it to prices you’ve paid in the past for that product, as well as of course how much value the product is worth to you. If indeed this is a particularly low price and the product is durable, you may well be wise to purchase more and stock up for the future. But you should try to train yourself to react the same way to “On sale, now $49.99” as you would to simply “$49.99”. (Making your reaction exactly the same is probably impossible, but the closer you can get the better off you are likely to be.) Always compare prices from multiple sources for any major purchase (Amazon makes this easier than ever before), and compare actual prices you would pay—with discounts, after taxes, including shipping. The rest is window dressing.

If you get coupons or special discounts, of course use them—but only if you were going to make the purchase anyway, or were just barely on the fence about it. Rarely is it actually rational for you to buy something you wouldn’t have bought just because it’s on sale for 50% off, let alone 10% off. It’s far more likely that you’d either want to buy it anyway, or still have no reason to buy it even at the new price. Businesses are of course hoping you’ll overcompensate for the discount and buy more than you would have otherwise. Foil their plans, and thereby make your life better and our economy more efficient.