It's only May 7th, but you've probably already missed the biggest economic story of the month while you were following bond yields or trying to stay awake watching the Mayweather-Pacquiao fight. So here's the big update: On May 2nd Venezuela's President Nicolas Maduro promised to nationalize the remaining half of all food distribution the government wasn't already controlling. You see, the government food rationing was working so badly, the geniuses in the government decided the solution was... wait for it... more rationing. As it is, people in Venezuela line up for hours for government-subsidized milk and other food staples. But supplies are running out anyway. This is what happens when politicians don't understand or try to bend the laws of economics. And if you're tempted to act smug and think what's happening in Venezuela couldn't happen here, take a closer look at Obamacare and the water crisis in California and get back to me. Or don't bother, I'm going to do that in a moment.
Venezuela is going through the all-too-predictable stages of government intervention in a vital commodity best explained by the venerable economist Ludwig von Mises. First, regulations are imposed. Second, prices rise because those regulations create barriers to entry for potential new suppliers and increase costs and red tape for existing suppliers. Third, the public gets outraged because prices are rising, so the government imposes price controls. Fourth, because those price controls discourage or bankrupt even more suppliers, shortages result. Fifth, because you can't have key resources running out, the government imposes quotas. And now, Venezuela is fully getting into Stage 6: because quotas cannot be maintained, (some people are cheating and the people know it), the government has to nationalize the entire industry that produces the resource and take full control of it. Stage 7 is when we say: "Good night Caracas, thanks for playing the von Mises 'The Price is Wrong' game."
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Now let's come back to the U.S. and see where we are in this process as it stands in California's water saga and in year six of the ACA.
California's water crisis isn't actually new. The Golden State has faced water issues before, after all the state's elected leaders have always generally been at least aware that much of their voters live in a desert. In the distant past, California dealt with existing and expected water shortages by building dams in the north and assembling the needed delivery networks to get the water down south. That policy pretty much ended when current Governor Jerry Brown first won office in 1974 and he's continuing a regulation-over-private sector solutions path in his current term. Brown hasn't entirely ignored other ideas, but he's making his draconian water conservation rules his key response right now. That puts California squarely in that first stage where regulations are imposed and that means costs are about to shoot up for existing fresh water supplies statewide. Soon, Gov. Brown will face pressure to impose price controls and that will likely be his last chance to abandon this destructive course and really open the state up to private sector businesses with real answers. Good luck with that, California.
Now to health care, where Obamacare is the federal government's biggest leap into the heavy health care regulation game it began playing more than 100 years ago. Like Venezuela's doubling down on more rationing, the ACA attempts to fix all the real problems with the government-protected and regulated private health insurance with more government-protected and regulated private health insurance. So when it comes to medicine in this country we're drifting into Stage 3, as the government has already imposed price controls on health insurance, (not to be confused with health care), and given the insurance industry a mandatory coverage law to appease them. We might stay at this stage for awhile, but as we get closer to universal coverage, some kind of quotas/rationing will happen. Right now, the high deductibles for many Obamacare plans and the shortage of doctors willing to treat the ACA-boosted Medicaid patient rolls are acting as de facto rationing. But eventually, more direct government rationing of certain treatments will come just as sure as two plus two equals four. The only way out of that frightening future is repealing the individual mandate, removing the barriers to becoming and staying a doctor in America, and allowing more free market national competition among insurers. That will never happen under this administration, so keep your eyes open for any signs of Stage 4 medical care shortages in the near future.
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Venezuela's economic failure is a wake up call for us and our own foolish government-caused and/or exacerbated problems. It's also fast becoming a humanitarian crisis. The early days of the Soviet Union saw a much worse case of a government-escalated food shortage that resulted in the deaths of almost three million people. It took an American relief effort led by future President Herbert Hoover to stop that famine from taking millions more lives. Let's hope that kind of herculean effort won't be needed south of our border, but unless some very big political changes happen in Venezuela I don't see how major international relief won't soon be necessary.
And if we don't learn from what's going on in Caracas, we'll be facing some horrors of our own too.