The Economic Outrage of the Ex-Im Bank

By Veronique de Rugy

In recent weeks, I thought about the Export-Import Bank (Ex-Im) more than I have in the last three years. That’s because Mrs. Kimberley Reed was just voted out of the Senate Banking Committee, a necessary step for her to become the new president of the agency, and even maybe to fully restore the lending authorities it lost in the summer of 2015.

While these scenarios might be a long way away, the news reignited the utter outrage I feel each time I think about government handouts to massive corporations. Ex-Im dispenses such handouts.

To be sure, there are many corporate-welfare programs. For the fiscal year 2016, the estimated cost to taxpayers for such cronyism is roughly $105 billion (depending on what one labels cronyism you can get a higher or lower figure). This number includes direct and indirect subsidies to large corporations, small businesses, and industry organizations. The assistance comes from programs in various areas of the budget, including the departments of Agriculture, Commerce, Energy, and Housing and Urban Development.

Corporate-welfare spending distorts the economy, undermines markets when policymakers attempt to pick winners and losers, fosters corruption and cronyism, and violates the bedrock American principle of equality under the law. That said, solely focusing on corporate welfare through its budgetary cost grossly understates the magnitude of the problem. Indeed, many of the worst corporate-welfare programs confer advantages with what appears to be little or no budgetary impact.

Loan Guarantees

That’s the case with the ExIm Bank. One of its core businesses is to extend loans and loan guarantees to foreign companies so that they will buy domestic goods. At least, that’s what Ex-Im did before July 1st of 2015, the day the agency received its biggest blow ever after many of us united to fight against this cronyism. On that day, and for first time in decades, the Bank opened its doors like it did every work day before, but this time it wasn’t allowed to do extend any loans because its charter had not been renewed.

Obviously, it’s never the role of the government to inflate the profits of particular companies. But such cronyism is even more offensive considering who the companies being “helped” by Ex-Im are. On the domestic side, 65 percent of the Bank's activities benefited 10 giant manufacturers, including General Electrics and Caterpillar. Boeing was the biggest beneficiary of them all, racking up 40 percent of all the benefits and 68 percent of all loan guarantees. With numbers like these, it is no surprise that we all call it "The Boeing Bank."

On the foreign side, the top beneficiaries are big, often state-owned - and with plenty of access to capital - companies. They are Pemex (the Mexican government oil and gas firm), Emirates Air (the UAE’s national airline), and Ryanair (the fast-growing Irish low-cost airline).

Of course, these foreign beneficiaries love the handouts. The lower borrowing costs they get thanks to Uncle Sam’s guarantee give them a leg up over their unsubsidized competitors (domestic and international). That’s what happens when Air India, or any other foreign company for that matter, receives an Ex-Im loan guarantee to purchase a Boeing plane at discounted borrowing rates and competes with Delta planes bought from Boeing without the government backing.

It doesn’t mean they wouldn’t buy the product without the Ex-Im backing as many of the top beneficiaries have explained when the Bank’s charter was in jeopardy. Ex-Im backed lenders are also thrilled to be making money without much risk since more of it is being shifted to taxpayers. The same is true for domestic companies like Boeing and GE.

Costs Nothing?

Don’t get fooled by the claim that it costs nothing to taxpayers since it mostly due to misleading accounting, and to the fact that companies we lend money to and their clients are for the most part solid, unlikely to default companies. It still leave taxpayers exposed to over a hundred billion in liability ($140 billion in 2015). Also, as CBO has shown, with proper accounting, the Bank is actually in the red.

And don’t buy the claim that Ex-Im is an engine of growth or that exports would collapse without it. First, 98 percent of U.S. exports take place without Ex-Im support. Second, the last three years have provided a good case study for what happens when the crony agency isn’t functioning at its full capacity.

See, while it didn’t take long for the powerful special interests behind Ex-Im (Ex-Im bureaucrats, member of congress, domestic firms, the Chamber of Commerce and many in the financial industry) to get the Bank’s charter reauthorized in December 2015, the agency has nonetheless ever since been the shadow of its past self.

That’s because the Bank’s charter requires a quorum of at least 3 board of directors to make deals above $10 million. This requirement hasn’t been met in the last three years thanks the principled stance of a few members of Congress. This absence of a quorum is a serious blow to the Bank since data show that 84 percent of the Bank’s business were transactions larger than $10 million. As a result, the Bank’s activities in dollar terms collapsed significantly, along with taxpayers’ exposure, from $24 billion in FY2014 to $3.4 billion in FY2017.

The Bank’s appropriations had peaked in FY2012 at $35.8 billion. And yet, between 2012 and 2017, the value of US exports fluctuated slightly but remained relatively stable, near $1.5 trillion, showing no connection between exports in the U.S. and the amount of crony deals extended through Ex-Im.

The fact that U.S. exports didn't collapse as Ex-Im lost much of its power does not surprise most economists. Economists know that while export subsidies can boost the bottom-line of a few particular firms or industries, these subsidies also have a negative impact of the overall economy, mostly by shifting capital away from nonsubsidized firms or industries to subsidized firms or industries.

For that reason, when you hear anyone say that cutting export subsidies while no other country is cutting theirs is an act of self-destructive unilateral disarmament, your response should be uncontrolled laughter. If other countries decide to cripple their economies by supporting a few of their exporters, don’t emulate them.

In fact, in the same way that the economic case for free trade is a unilateral one, meaning that we will reap the benefits of cutting all trade barriers no matter what other countries do. The economic case for eliminating all export subsidies is also a unilateral one.

I could go on and on about the many ridiculous arguments offered by the supporters of the Bank, as well as about the economic reasons to abolish Ex-Im once and for all. But in the end, for me at least, the fight against Ex-Im in particular, and cronyism in general, is about fairness. It is about standing up for the millions of unseen victims of cronyism. It is for them that we fight.

What Is Unseen

The large companies that benefits from government handouts have strong incentives to make sure their voices are heard. But it is critical that we consider the unseen victims of political privilege who are forced to pay for these benefits.

In the case of Ex-Im and many other loan-guarantee programs, they are taxpayers who now bear the risks for trillions of dollars in liabilities accumulated over time. They are the consumers who pay higher prices for to purchase THE subsidized goods. They are the unsubsidized firms competing with subsidized ones. They not only pay higher financing costs but lose out when private capital flows to politically privileged firms regardless of the merits of their projects. Indeed, some are victimized multiple times: first as taxpayers, then as consumers, then as competitors, and finally as borrowers.

Unfortunately, we will never see the businesses that could have been but that never are. We will never hear from the workers whose wages weren’t raised or whose jobs disappeared because of unfair competition from Ex-Im-backed firms.

It is time to put an end to all corporate privilege. We should start by abolishing, completely and permanently, the Ex-Im Bank.

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Veronique de Rugy

AIER Senior Fellow Veronique de Rugy is also a Senior Research Fellow at the Mercatus Center at George Mason University and a nationally syndicated columnist. Her primary research interests include the US economy, the federal budget, homeland security, taxation, tax competition, and financial privacy.