This is In Real Terms, a column analyzing the week in economic news. Comments? Criticisms? Ideas for future columns? Email me, or drop a note in the comments.
“Venezuela,” New York Times reporter Nicholas Casey wrote this week, “is convulsing from hunger.” Grocery stores are out of food; hospitals are out of medicine; gangs are fighting in the streets over meager supplies.
Venezuela’s collapse has many causes: excessive borrowing, political corruption, an official exchange rate that defies economic realities. But the country’s poverty today is due in large part to the same thing that made Venezuela rich just a few years ago: oil.
Venezuela, a charter member of the OPEC cartel, has the world’s largest oil reserves and is a major oil exporter. (The U.S. is its biggest customer.) Most of Venezuela’s oil is of a thick, gooey variety that is expensive to refine and transport. But none of that mattered when oil prices surged in the late 2000s — at $100 a barrel, even the costliest oil was hugely profitable.
Because most of Venezuela’s oil is produced by the state-owned oil company PDVSA, those windfall profits were controlled by the government, then headed by President Hugo Chavez. Chavez, who died in 2013, used that money to spend heavily on social programs, and spent even more by borrowing billions of dollars overseas. Many of his efforts worked, at least in the short-term: Under Chavez, Venezuela expanded access to education and health care, boosted employment and reduced poverty by more than half.
But all that spending — and borrowing — left Venezuela dependent on ever-rising oil prices. Instead, prices plunged, dropping from over $100 a barrel in mid-2014 to under $30 a barrel earlier this year. (It has rebounded to about $50 in recent weeks.) The unexpected price slump was bad news for oil-based economies from Riyadh, Saudi Arabia, to Williston, North Dakota. But nowhere was hit as hard as Venezuela, which was left with huge debts and no other meaningful exports to help repay them.
Making matters worse, Chavez’s spending on social programs left little remaining to invest in PDVSA. Old fields were allowed to decline, while new drilling opportunities weren’t adequately explored. As a result, Venezuelan oil production isn’t rising and exports are falling due to rising domestic consumption. Meanwhile, production is falling in Venezuela’s most profitable fields, those that produce a lighter type of oil. That leaves the country more reliant than ever on overseas sales of its gooey, heavy crude — oil that isn’t in much demand when there’s so much better oil to be had amida global glut. Venezuela has been forced to import lighter oil from other countries, including the U.S., to mix with its oil so it can sell the blend.
It didn’t have to be this way. For evidence of another path, look no further than the U.S., where private oil companies responded to rising prices by boosting investment in research and exploration. The shale-oil boom that resulted from that investment ultimately led to the near doubling of U.S. oil production in less than a decade. U.S. companies are struggling with low prices, too, but the investments they made during the boom are helping them survive the bust.
Many progressives, of course, would have liked to have seen the U.S. take a somewhat more Chavez-like approach to the oil boom via higher taxes on oil companies’ profits. And there is certainly room for debate over the best way to divide revenues among investors, landowners and the public at large. But it is clear that by failing to think about the future during the boom, Venezuela made the present bust far worse.
Make America in a recession again
What would a Donald Trump presidency mean for the economy? Well, there would be a “lengthy recession,” for starters. There would also be 3.5 million fewer jobs when he leaves office than when he enters it. The national debt would grow. Household incomes would stagnate. Stocks would fall. House prices, too.
That’s all according to a new analysis from economists at the research firm Moody’s Analytics, who tried to assess the impact of Trump’s proposals on government revenue, spending and the economy as a whole. The report’s droll conclusion: “It will be a difficult four years for the typical American family.”
The Moody’s analysis is the first serious attempt to quantify the impact Trump’s policies would have on the economy. “Policies” is probably generous — with a few exceptions such as taxes and immigration, Trump has provided few specific plans. Moody’s did its best to fill in the gaps with reasonable assumptions, but “reasonable” is tricky when assessing a candidate who wants to cut taxes by trillions of dollars, increase spending on the military (except for when he says the opposite), keep entitlements intact and yet somehow not increase the debt.
That, ultimately, is the problem with Moody’s analysis and the others that will inevitably follow: As Alan Cole, an economist at the conservative Tax Foundation, wrote on Twitter this week, Trump’s plans break all economic models because his policies break basic rules of economics, like that the government must pay its bills.
Out of the labor force
In 1955, 97 percent of American men ages 25 to 54 either had a job or were looking for one. Six decades later, that figure has fallen to 88 percent. The long, largely steady decline in what is known in econ jargon as the “prime-age male participation rate,” and it worries economists because it means millions of men who in another era would have been productive members of the workforce are instead sitting on the sidelines. And unlike the decline in the participation rate for all adults, the drop among prime-age men can’t be explained by an aging population or increased college attendance. (Among prime-age women, participation rose in the decades after World War II but has been falling since about 2000.)
A new report from the president’s Council of Economic Advisers this week took a long look at what’s behind the decline and how to reverse it. The authors crossed off a few common explanations: These men aren’t leaving the labor force because they’re going on welfare (few of them qualify) or disability (which explains at most a small piece of the decline). They aren’t staying home while their wives work (less than a quarter of them have a working spouse). And more than a third of them live in poverty, suggesting they aren’t staying out of the labor force because they can make a good living some other way.
What does seem to be driving the decline, or at least a big part of it, is falling demand among employers for less-educated workers. The decline in participation has been steepest for men with just a high school diploma; those men have also seen their wages fall relative to other groups. That suggests companies need fewer less-skilled workers, and as a result won’t pay as much to get them. Many men, apparently, are deciding that the wages being offered just aren’t worth it.
Number of the week
The typical woman who leaves the workforce for five years to raise children loses out on more than $700,000 in income and benefits, according to a new interactive calculator from the liberal Center for American Progress. If that estimate seems high, remember that staying home doesn’t just mean missing out on wages; it also means missing out on raises during those years. Those losses compound over time — a missed raise now means a lower starting point for raises in the future. For higher-earning women, or for those who leave the workforce earlier in their careers, the losses are even larger. (The calculator lets users enter their income, age and other details. It includes estimates for both men and women.)
The calculator is an advocacy tool — it’s meant to point out the impact that expensive child care has on families — and some of its assumptions may be aggressive. It assumes that women don’t work at all during their years out of the labor force, for example. And it treats people who take time off as identical to those who don’t, when in reality people might be more likely to stay home with the kids if they don’t think their earnings outlook is bright. Still, whatever the exact numbers, the basic point is indisputable: Taking time away from the labor force carries a long-term cost for families.
More from us
In the second episode of our Kitchen Table Politics podcast series, Farai Chideya and I talked to Michelle Asha Cooper of the Institute for Higher Education Policy about the cost of college and what’s lacking from the political conversation around higher education.
The improving job market is making it easier for Americans with disabilities to find work, Anna Louie Sussman reports.
The national debate around inequality tends to focus on the “1 percent.” But Josh Zumbrun reports that the upper middle class is growing, too.
Meanwhile, economists at the Federal Reserve Bank of Cleveland find that while inequality is rising, economic mobility — the probability of moving up the income ladder over a lifetime or across generations — hasn’t fallen, and may have increased modestly.
CORRECTION (Nov. 14, 7 p.m.): An earlier version of this article misspelled the name of a Wall Street Journal reporter. Her name is Anna Louie Sussman, not Anna Louise Sussman.