Venezuela’s Inflation: The Wall Street Journal’s Reportage is Off, Way Off

Recent reportage in the Wall Street Journal by Matt Wirz, Carolyn Cui, and Anatoly Kurmanaev states that Venezuela’s annual inflation rate is 500 percent. The authors fail to indicate the source for that 500 percent figure. Knowing that the most accurate estimate of Venezuela’s current annual inflation rate is 55 percent, I concluded that the Journal was way off and set out to determine the source for its incorrect figure. The most likely candidate turned out to be the International Monetary Fund’s (IMF) October 2016 World Economic Outlook (WEO), which contains an estimate for Venezuela’s annual inflation. This report projects Venezuela’s annual inflation to average 475.8 percent for 2016, a far cry from my current estimate of 55 percent. The IMF’s figure, though, gives the appearance of a finger-in-the-wind approach because no methodology accompanies the IMF’s October report. The 95% rule reigns – 95% of what you read in the financial press is either wrong or irrelevant. 


So, how does one make an accurate estimate of inflation in countries experiencing elevated inflation levels? The Johns Hopkins-Cato Institute Troubled Currencies Project calculates reliable inflation estimates. These are based on changes in black market (read: free market) exchange rates. The principle of purchasing power parity (PPP) is used to translate exchange rate changes into estimates of implied inflation rates. When inflation is elevated, this method provides deadly accurate estimates.

Hillary Clinton’s Debt Promise (That She’d Definitely Break)

In the third and final debate last week, Hillary Clinton tried to flex her fiscal responsibility bona fides by vowing  that she “will not add a penny to the debt” on three separate occasions. That must mean she has comprehensive reforms to address entitlements, rein in other spending, and reduce our commitments abroad, if she is not going to add a penny to the current gross debt of $19.7 trillion, right? No, not really.

She is only promising not to make things worse relative to the current baseline, which projects the debt increase to $28.2 trillion over the next decade. To be fair, her plans would add less to the debt than Donald Trump’s, although that’s almost entirely due to an array of new taxes. Even with those hikes, the debt would increase a lot more than a penny were she to win, and neither major party candidate has put forward a substantive plan to address the problems with the country’s fiscal health.

And that’s just the projection over the next decade. The long-term fiscal picture is even bleaker. In the baseline scenario from the most recent Long-Term Budget Outlook from the Congressional Budget Office, federal debt held by the public will almost double by midcentury, from around 77 percent of GDP to more than 140 percent by 2046. Kicking the can down the road, which is effectively the plan by for both candidates in the debate due to their lack of an actual plan, would only increases the magnitude of the changes that will eventually be needed.

Clinton may have meant that her specific proposals are paid for, but even that is not accurate, as the Committee for a Responsible Federal Budget (CRFB) estimated that her proposals would add $200 billion to it, even with the assumption that she would be able to help shepherd immigration reform through Congress and attributing that positive fiscal impact to her. If she were to stabilize the debt to GDP ratio and restrict herself to her preferred method of hiking taxes on high earners (eschewing spending cuts or entitlement reform), she’d have to raise the top tax rate all the way to 61 percent, which would impose significant new disincentives and economic distortions. 

She is not promising that she would not “add a penny to the debt” or at least that can’t be what she means, unless she wants to set herself up to break that promise shortly after taking officer were she to win. She’s promising not to further accelerate our movement down the unsustainable fiscal path we’re on now, which is hardly comforting. Neither of the candidates at the debate last week has put forward any substantive plan to do anything to address the debt or our fiscal trajectory, despite what promises they may have made. 

The Perils of Financial Over-Regulation

Last Friday, I gave the opening remarks at the International Finance Corporation’s annual FinTech CEO Summit — a meeting of many of the top executives involved in developing cutting-edge alternatives to conventional means for raising capital and making payments, among other things. Because the event wasn’t recorded, I thought I’d share the remarks with you here.


I’m honored to be able to address an audience consisting of many of the world’s leading financial-market innovators. I don’t often get invited to speak on the subject of financial technology. That’s probably because the most advanced piece of financial technology concerning which I possess any real expertise is the steam-powered coining press that James Watt and his business partner Matthew Boulton designed a bit more than three centuries ago.

Still I know enough about more recent developments to realize that, so far as the future progress of financial innovation is concerned, these are critical times. Never has there been a more crying need for financial innovation — innovation to overcome the infirmities, not only of conventional private-market sources of capital and payments services, but also of the world’s official monetary systems. Yet never has the threat government regulators and their academic advisors pose to the unfolding of such innovations been so obvious.

When Civic Participation Means Shaming A Non-Voter’s Kid

This video, “Playground” [YouTube, Facebook] makes quite an impression. It shows a scene of schoolyard bullying but takes the side of the jeering, taunting mob – in the name of voting. It is one of a series of 30 second videos put out by a group calling itself Civic Innovation Works, encouraging a vote in the general election on November 8 and seemingly intended as public service announcements.  The others in the series appear to be similar in message, but lacking in this one’s outrageousness (although one does present a fantasy about publicly shaming a non-voter).  

On the off chance that Civic Innovation Works was someone’s idea of an elaborate parody I looked them up. I found that Fenton, the well-known progressive/”social change” public relations agency, takes credit for one of the other videos in the series.

So it would look as if they are on the level. It is almost as if they were trying with “Playground” to convince viewers that electoral politics makes people worse.

In One Chart, Everything You Need to Know about Big Government, the Welfare State, and Sweden’s Economy

Sweden punches way above its weight in debates about economic policy. Leftists all over the world (most recently, Bernie Sanders) say the Nordic nation is an example that proves a big welfare state can exist in a rich nation. And since various data sources (such as the IMF’s huge database) show that Sweden is relatively prosperous and also that there’s an onerous fiscal burden of government, this argument is somewhat plausible.

A few folks on the left sometimes even imply that Sweden is a relatively prosperous nation because it has a large public sector. Though the people who make this assertion never bother to provide any data or evidence.

I have five responses when confronted with the why-can’t-we-be-more-like-Sweden argument.

  1. Sweden became rich when government was small. Indeed, until about 1960, the burden of the public sector in Sweden was smaller than it was in the United States. And as late as 1970, Sweden still had less redistribution spending that America had in 1980.
  2. Sweden compensates for bad fiscal policy by having a very pro-market approach to other areas, such as trade policy, regulatory policy, monetary policy, and rule of law and property rights. Indeed, it has more economic freedom than the United States when looking an non-fiscal policies. The same is true for Denmark.
  3. Sweden has suffered from slower growth ever since the welfare state led to large increases in the burden of government spending. This has resulted in Sweden losing ground relative to other nations and dropping in the rankings of per-capita GDP.
  4. Sweden is trying to undo the damage of big government with pro-market reforms. Starting in the 1990s, there have been tax-rate reductions, periods of spending restraint, adoption of personal retirement accounts, and implementation of nationwide school choice.
  5. Sweden doesn’t look quite so good when you learn that Americans of Swedish descent produce 39 percent more economic output, on a per-capita basis, than the Swedes that stayed in Sweden. There’s even a lower poverty rate for Americans of Swedish ancestry compared to the rate for native Swedes.

I think the above information is very powerful. But I’ll also admit that these five points sometimes aren’t very effective in changing minds and educating people because there’s simply too much information to digest.

As such, I’ve always thought it would be helpful to have one compelling visual that clearly shows why Sweden’s experience is actually an argument against big government.

And, thanks to the Professor Deepak Lal of UCLA, who wrote a chapter for a superb book on fiscal policy published by a British think tank, my wish may have been granted. In his chapter, he noted that Sweden’s economic performance stuttered once big government was imposed on the economy.

Though the Swedish model is offered to prove that high levels of social security can be paid for from the cradle to the grave without damaging economic performance, the claim is false (see Figure 1). The Swedish economy, between 1870 and 1950, grew faster on average than any other industrialised economy, and the country became technologically one of the most advanced and richest in the world. From the 1950s Swedish economic growth slowed relative to other industrialised countries. This was due to the expansion of the welfare state and the growth of public – at the expense of private – employment.57 After the Second World War the working population increased by about 1 million: public employment accounted for c. 770,000, private accounted for only 155,000. The crowding out by an inefficient public sector of the efficient private sector has characterised Sweden for nearly half a century.58 From being the fourth richest county in the OECD in 1970 it has fallen to 14th place. Only in France and New Zealand has there been a larger fall in relative wealth.

And here is Figure 1, which should make clear that what’s good in Sweden (rising relative prosperity) was made possible by the era of free markets and small government, and that what’s bad in Sweden (falling relative prosperity) is associated with the adoption and expansion of the welfare state.

But just to make things obvious for any government officials who may be reading this column, I augment the graph by pointing out (in red) the “free-market era” and the “welfare-state era.”

As you can see, credit for the chart actually belongs to Professor Olle Krantz. The version I found in Professor Lal’s chapter is a reproduction, so unfortunately the two axes are not very clear. But all you need to know is that Sweden’s relative economic position fell significantly between the time the welfare state was adopted and the mid 1990s (which presumably reflects the comparative cross-country data that was available when Krantz did his calculations).

You can also see, for what it’s worth, that Sweden’s economy spiked during World War II. There’s no policy lesson in this observation, other than to perhaps note that it’s never a good idea to have your factories bombed.

But the main lesson, which hopefully is abundantly clear, is that big government is a recipe for comparative decline.

Which perhaps explains why Swedish policymakers have spent the past 25 years or so trying to undo some of those mistakes.

Surge in Emergency Department Use Persists in New Oregon Medicaid Study

One of the main arguments proponents of Medicaid expansion make, at least on the fiscal side, is that it would save money as people gaining Medicaid coverage would reduce their use of expensive visits to the Emergency Department (ED). An earlier study from the Oregon Health Insurance Experiment threw some cold water on that theory, as it found that getting Medicaid actually increased the number of ED visits by 40 percent. Some analysts postulated that this increase was only temporary because it was due to either pent-up demand for health care services, or because new enrollees did not have established relationships with doctors. The thinking was that after enrollees became familiar with their coverage or addressed long-gestating health problems, the reductions in ED use and the associated cost savings would materialize.

A new report analyzing a longer time horizon finds that this is not the case, and there is “no evidence that the increase in ED use due to Medicaid coverage is driven by pent-up demand that dissipates over time; the effect on ED use appears to persist over the first two years.” This is another blow to the oft-repeated claim that Medicaid expansion will lead to significant savings from reduced Emergency Department utilization, and the effect actually seems to work in the other direction.

The Oregon case is important because it is one of the few instances of random assignment in health insurance, as the state wanted to expand Medicaid but had funding constraints, so it employed a lottery to determine who would get coverage. 

In this new update, the researchers see if there are any time patterns or signs of dissipation when it comes to the impact of Medicaid percent of the population with an ED visit or the number of ED visits per person. They expand upon the earlier utilization study to analyze the two years following the 2008 lottery and break up into six-month segments to see if there are any signs of the effects dissipating.

As they explain, “there is no statistical or substantive evidence of any time pattern in the effect on ED use on either variable.” In the first six-month tranche Medicaid coverage increased the number of ED visits per person by about 65 percent relative to the control group, and the estimates for the following three periods were similar and mostly statistically indistinguishable from each other. They also find that Medicaid increases the probability of an ED visit in the first period by nine percent, and the impact in the subsequent periods does not differ significantly. 

Estimated Effect of Medicaid Coverage on Emergency Department Use over Time

Source: Finkelstein et al., New England Journal of Medicine (2016).

Seattle Millennials Should Move to Houston

The Seattle Post-Intelligencer says it has found the best Seattle homes for Millennials. Judging by the former paper’s suggestions, Seattle Millennials should move to Houston. Houston may not have Mt. Rainier, but it has beautiful lakes, a sea coast that is just about as nice as Washington’s (though not as nice as Oregon’s), and most important, it doesn’t have urban-growth boundaries which means it has much more affordable housing.

Click any photo to go to the listing for that property.

The P-I’s first suggestion is a 720-square foot, two-bedroom, one-bath home on a 5,000-square-foot lot. On the plus side, the living room has hardwood floors. On the minus side, the asking price is $259,950–and if Seattle’s housing market is anything like Portland’s, it will go for more than that. At the asking price, the cost is $361 per square foot.

As an alternative, allow me to suggest this 720-square-foot home in Houston’s University Area, not too far from downtown. It has new paint and an updated kitchen and, like the Seattle home, it is on a 5,000-square-foot lot. Unlike the Seattle home, the cost is just $86,500, just under a third of the Seattle house. That’s just $120 per square foot–and the sellers will probably accept a little less.