Venezuela's Red Monday and Bernanke's warning about America's income gap

A month ago I wrote about capitalism's threat to democracies that do not have the social and financial infrastructures in place to accommodate radical economic shifts and concentrations of wealth.(1)

Last week, as if to underscore the warning, Federal Reserve Chairman Ben Bernanke gave a speech about the growing income gap in America and the threat this poses to America's free market economy and, by implication, our democratic system. Bernanke said, in part:

"No one should be allowed to slip too far down the economic ladder, especially for reasons beyond his or her control. Like equality of opportunity, this general principle is grounded in economic practicality as well as our sense of fairness. [...] If we [do] not place some limits on the downside risk of individuals affected by economic change, the public at large might be less willing to accept the dynamism that is so essential to economic progress."

In his comments about the speech, the Chicago Tribune's Bill Barnhart noted that the warning is not new:

Between 1979 and 2006, those in the bottom 10 percent of wages saw their wages increase just 4 percent, while the wages of those in the top 10 percent rose 34 percent, Bernanke said. After-tax income of those in the top 1 percent of household income increased to 14 percent of total household income in 2004 from 8 percent in 1979.

These statistics are not new. Neither is the subject of the income gap, which President Bush acknowledged recently.

Bernanke's predecessor as Fed chief, Alan Greenspan, expressed concerns in congressional testimony in July 2004.

"This issue has regrettably been going on for 15 years or thereabouts," he said. "I think the effect of increasing concentration of incomes is not desirable in a democratic society."

Bernanke's warning can be seen as a backdrop to Hugo Chavez's recent actions. On February 13 Reuters reported:

Venezuelan President Hugo Chavez is setting a faster than expected pace in his nationalization drive toward self-styled socialism, striking three takeover deals that push out U.S. firms in about a month. [...]

Venezuelan authorities said on Tuesday they would buy the assets of U.S. power company CMS for $106 million, a day after cutting a similar deal with telecom giant Verizon for $572 million.

Last week the government signed an accord to buy the holdings of U.S.-based global power generation firm AES Corp. for $750 million despite analysts' predictions of protracted takeover battles.

"The government has showed it's clearly willing to move at a particularly fast pace to deliver on promises," said Patrick Esteruelas, an analyst with the Eurasia Group.

The deals came two weeks after Chavez received special powers to rule by decree and five weeks after he vowed to nationalize the telecommunications and power utilities.

The announcements on January 8, which Esteruelas dubbed "Red Monday," wiped out a fifth of the Caracas stock exchange's value.

Chavez quickly implemented the nationalizations by avoiding protracted legal battles and outright seizures, and, instead, striking buyout deals.

The companies did not have the choice to hold on to their investments, but they and economists said the buyout terms were tough but fair given the nation's deteriorating investment climate.

New Vice President Jorge Rodriguez, a central player in the nationalization effort, cited the state's purchase of Verizon's 29 percent stake in Venezuelan phone company CANTV as a sign the process was "fast and transparent."

Chavez is in the vanguard of Latin America's resurgent left, which has also swept Bolivia and Ecuador with promises to roll back 1990s' free-market reforms that first brought companies like AES and Verizon to Venezuela.

The nationalization push follows Venezuela's campaign over the previous two years to regain control of its oilfields and boost taxes on industry operations.[...]

The report goes on to observe that Chavez may have a stiff fight when trying to nationalize by May 1 four oil projects in the Orinoco basin worth $30 billion. In any case:

The aggressive nationalization efforts have sparked investor concerns about working in Venezuela, already a tough environment due to double-digit inflation and heavy government regulations.

There are places in Latin America where the indigenous people are not allowed to walk on the sidewalk, which is reserved for descendants of the conquistadors. There are inequalities and levels of corruption and poverty in Latin American countries that are hard for anyone raised in a decent society to comprehend.

One can argue that the indecencies were always entrenched in Latin America simply because of the vast inequalities in power sharing, and that capitalism ultimately works to level out inequalities. This truth is easily shouted down by the effects of cronyism in the wealthiest business class and large-scale foreign investment in a developing country's key sectors.

To put all this another way, Ayn Rand never lived in Mexico City. Very few at the bottom of the social scale have read Atlas Shrugged. They don't understand the connection between capitalism and freedom. All the poorest know is that free market reforms and trade pacts such as NAFTA have not improved their lot one whit and in many cases made things worse for them.

That's not enough reason to toss out capitalism and free trade agreements. But unless a government does a correction along the road to free markets by developing social programs that meet the needs of the worst off, politicians such as Hugo Chavez find a big opening. Then US foreign relations are set back -- along with good US development and aid policies for third world countries.

1) Capitalism vs democracy, Part 1
Capitalism vs democracy, Part 2