Will Republicans Make a Principled Stand Against Ex-Im Reauthorization in 2014?

Jobs are good. Exports create jobs. We create exports. Renew our charter.

Such is the essence of the marketing pitch of the U.S. Export-Import Bank, whose officials have begun ramping up their lobbying efforts ahead of a 2014 vote concerning reauthorization of the Bank’s charter, which expires in September.  Last go around, in 2012, Ex-Im ran into some unexpected turbulence when free-market think tanks, government watchdog groups, and limited government Republicans in Congress raised some compelling – but ultimately ignored – objections to reauthorization.

The ostensible purpose of the Ex-Im Bank is to assist in financing the export of U.S. goods and services to international markets. Even if that were a legitimate role of government, the public must keep a watchful eye on how much and to whom loans are made – especially given the current administration’s tendency to bet big on particular industries and specific firms, and in light of its commitment to seeing U.S. exports reach $3.14 trillion in 2014.

From the U.S. Export-Import Bank’s 2013 Annual Report:

The Ex-Im Bank’s mission is to support American jobs by facilitating the export of U.S. goods and services. The Bank provides competitive export financing and ensures a level playing field for U.S. exporters competing for sales in the global marketplace. Ex-Im Bank does not compete with private-sector lenders but provides export financing that fill gaps in trade financing. The Bank assumes credit and country risks that the private sector is unable or unwilling to accept. It also helps to level the playing field for U.S. exporters by matching the financing that other governments provide to their exporters. The Bank’s charter requires that the transactions it authorizes demonstrate reasonable assurance of repayment.

The defensive tone of this mission statement anticipates Ex-Im critics’ objections, but it certainly doesn’t answer them. The objectives of filling gaps in trade financing passed over by the private sector and expecting a reasonable assurance of repayment are mutually exclusive – unless the threshold for “reasonable assurance” is more risk-permissive than the private-sector’s most risk-permissive financing entities.  Therefore, Ex-Im is either putting taxpayer resources at risk or it is competing directly with private-sector lenders for customers in need of finance. And if the latter, then as it seeks to create the proverbial “level playing field” for the U.S. companies whose customers it finances, Ex-Im is un-leveling the playing field for the finance industry, as well as for the U.S. firms in industries that compete globally with these U.S-taxpayer financed foreign companies.

The Bank does more harm than good. It assists some – mostly large, politically savvy, deep-pocketed – U.S. companies at the expense of others.  When U.S. taxpayers provide the financing for foreign companies’ purchases from U.S. companies, they are subsidizing the foreign competitors of downstream U.S. companies.  This is analogous to the tariff-rate quotas of the U.S. sugar program, to give one example, which benefit cane and beet producers and refiners, but put U.S. sugar-using firms in the food processing, bakery, and confectionary industries at disadvantages vis-à-vis their foreign competitors, who have access to cheaper sugar.  It is an exercise in picking winners and losers with the winners being those firms and industries with the most effective K Street operations.

Delta Airlines objected and even went to court on the grounds that Ex-Im’s financing of Air India’s purchase of 30 Boeing aircraft subsidized its foreign competition.  Likewise, Cliffs Natural Resources, a mining company that operates three iron ore mines in Minnesota and one in Michigan, continues to object to Ex-Im’s $694 million financing of an Australian iron mine’s purchases of U.S.-made bulldozers and trucks from Caterpillar, locomotives from General Electric and drilling rigs from Copco. According to the Duluth News Tribune, “[t]he Roy Hill project in Australia’s outback is so big and so remote that entire new cities, ocean ports, roads, an airport and a 220-mile railroad are being built for a single mine that annually will produce 55 million tons - more iron ore than all U.S. mines combined. The project is owned by billionaire Gina Rinehart, the richest person in Australia.”

Leaving the question of why U.S. taxpayers should be subsidizing purchases of Australia’s richest person aside, iron ore extracted from Australian mines competes with U.S. iron ore for customers in the steel industry.  In that regard, the Roy Hill project financing benefits some U.S. equipment manufacturers at the expense of U.S. mining interests and U.S. steel producers, whose Asian competitors get cheaper raw materials.  This imbalance, this picking of winners and losers, this battle in the political arena that should be occurring in the marketplace will persist as long as the Ex-Im Bank is open for business.

The validity of these and many other objections notwithstanding, after several months of debate and deliberation in 2012, Republican leadership in Congress not only caved to establishment pressure to reauthorize the Bank’s charter, but also upped its annual allowance by 40 percent to $140 billion.  One “rebellious” Republican who voted against reauthorization in 2012 is Jeb Hensarling, who now chairs the House Financial Services Committee, which will consider the reauthorization bill this session. The Ex-Im reauthorization debate and vote will provide Hensarling and other Republicans the opportunity to distinguish free-market capitalism from the crony variety that has given capitalism a bad name.

In this Washington Examiner column from last week, Tim Carney suggests that by opposing reauthorization of the Ex-Im bank, the GOP can make the 2014 elections a referendum on corporate welfare.  Let’s hope he’s right.

As this issue is likely to become topical in the weeks and months ahead, following is a list of papers, op-eds, and blog posts written by Cato scholars (mostly by Sallie James, who has moved on to new endeavors) over the years.

http://www.cato.org/blog/ex-im-loan-australias-richest-person-attracts-opposition (8/26/13)

http://www.cato.org/blog/wsj-sets-litmus-test-corporate-welfare (6/28/13)

http://www.downsizinggovernment.org/eric-cantor-sprints-after-his-bolted-horse (10/29/12)

http://www.downsizinggovernment.org/export-import-bank (10/12)

https://object.cato.org/sites/cato.org/files/serials/files/regulation/2012/8/v35n2-7.pdf#page=4 (8/21/12)

http://www.cato.org/blog/ppi-considers-ex-im-debate-senseless (5/22/12)

http://www.downsizinggovernment.org/when-bipartisanship-dirty-word (5/16/12)

http://www.cato.org/blog/ex-im-reauthorization-vote-expected-tomorrow (5/8/12)

http://www.cato.org/blog/house-republicans-including-tea-partiers-support-ex-im (4/27/12)

http://www.cato.org/blog/washington-post-pulls-its-punch (4/9/12)

http://www.cato.org/blog/ex-im-shenanigans-contd (3/15/12)

http://www.cato.org/publications/free-trade-bulletin/expanding-exims-mandate-is-big-mistake (3/14/12)

http://www.cato.org/blog/house-gop-leadership-takes-brave-stand-ex-im (3/9/12)

http://www.cato.org/blog/ex-im-bank-crony-capitalism (3/5/12)

http://www.cato.org/blog/end-ex-im-bank (2/14/12)

http://www.cato.org/blog/ex-im-bank-pits-us-industry-against-industry (11/14/11)

http://www.cato.org/blog/more-ex-im-bank (8/30/11)

http://www.cato.org/publications/trade-policy-analysis/time-x-out-exim-bank (7/6/11)

http://www.downsizinggovernment.org/boeings-government-bank (11/9/9)

http://www.cato.org/publications/trade-briefing-paper/rethinking-exportimport-bank (3/12/02)

Does the U.S. Economy Need More Boeings or More Facebooks?

Remember the story of that once-great nation that sacrificed its well-paying manufacturing jobs for low-wage, burger-flipping jobs at the altar of free trade? At one time, that story was a popular rejoinder of manufacturing unions and their apologists to the inconvenient facts that, despite manufacturing employment attrition, the economy was producing an average of 1.84 million net new jobs per year every year between 1983 and 2007, a quarter century during which the real value of U.S. trade increased five-fold and real GDP more than doubled.

The claim that service-sector jobs are uniformly inferior to manufacturing jobs lost credibility, as average wages in the two broad sectors converged in 2005 and have been consistently higher in services ever since. In 2011, the average service sector wage stood at $19.18 per hour, as compared to $18.94 in manufacturing. (But I don’t recall buying any $25-$30 hamburgers last year.)

One reason for U.S. manufacturing wages being higher than services wages in the past is that manufacturing labor unions “succeeded” at winning concessions from management that turned out to be unsustainable. The value of manufacturing labor didn’t justify its exorbitant costs, which encouraged producers to substitute other inputs for labor and to adopt more efficient techniques and technologies.

With the superiority-of-manufacturing-wages argument discredited, new arguments have emerged attempting to make the case that there is something special – even sacred – about the manufacturing sector that should afford it special policy consideration. Many of those arguments, however, conflate the meanings of manufacturing sector employment and manufacturing sector health or they rely on statistics that don’t support their arguments or they become irrelevant by losing sight of the fact that resources are scarce and must be used efficiently. And too often the prescriptions offered would place the economy on the slippery slope that descends into industrial policy.

I recently submitted this rebuttal to this essay by an environmental sciences professor by the name of Vaclav Smil, who commits those errors. (Judging from the tone of his mostly evasive response to my rebuttal, Smil doesn’t seem to have much tolerance for views that differ from his own.) Perhaps most noteworthy among Smil’s slew of questionable arguments is his claim that manufacturing companies, like Boeing, valued at $50 billion, are better for the economy than service companies like Facebook, which is also valued at $50 billion because

[i]n terms of job creation there is no comparison… Boeing employs some 160,000 people, whereas Facebook only employs 2,000.

Granted, Boeing’s operations support more jobs. But is that better for the economy than a company that provides the same value using 1/80th the amount of labor resources? Of course not. We need economic growth in the United States to create wealth and increase living standards. Economic growth and employment are not one and the same thing. In fact, the essence of growth is creating more value with fewer inputs (or at lower input cost). Creating jobs is easy. Instead of bulldozers, mandate shovels; instead of shovels, require spoons. Inefficient production techniques can create more jobs than efficient ones, but they don’t create value, which is the economic goal.

With 2,000 workers producing the same value as 160,000 – one producing the same value as 80 – Facebook is 80 times more productive than Boeing, freeing up 158,000 workers for other more productive endeavors (perhaps 79 more Facebook-type operations). If those companies were individual countries, the per capita GDP in Facebookland would be $25 million, but only $3.125 million in Boeingia. Where would you rather live?

Smil calls my assessment a cruel joke, presumably for its failure to empathize with unemployed and underemployed Americans, by considering value before job creation.  But policies designed to encourage more Boeing’s, as Smil supports (or, in fairness, any businesses that employ at least X number of people or meet this requirement or that) would likely retard the establishment of firms, like Facebook, that produce the goods and services that people want to consume. The provision of goods and services that people want to buy – rather than those that policymakers in Washington think people want to buy (or are happy to force them to buy) – is the essence of value creation.

Thus, policies should incentivize (or, at least not discourage) the kind of innovation and entrepreneurship needed to create more Facebooks? This kind of business formation occurs in environments where the rule of law is clear and abided; where there is greater certainty to the business and political climate; where the specter of asset expropriation is negligible; where physical and administrative infrastructure is in good shape; where the local work force is productive; where skilled foreigners aren’t chased back to their own shores; where there are limited physical, political, and administrative frictions; and so on. In other words, restraining the role of government to its proper functions and nothing more would create the environment most likely to produce more Facebooks in both the manufacturing and services sectors.


The National Equalization of Opportunity Board

The National Labor Relations Board filed a complaint last month to stop Boeing from building its new 787 in South Carolina rather than Washington State. As Arthur Laffer and Stephen Moore explain in today’s Wall Street Journal, the Board’s action stems from Boeing’s declaration that it cannot “afford a work stoppage every three years” as has been happening in Washington. The New York Times seems to endorse the NLRB complaint, implying that the federal government must force companies to do business in agency-shop states like Washington, because otherwise they couldn’t compete with more efficient right-to-work states like South Carolina.

Laffer and Moore claim that the NLRB’s move is unprecedented, but it is actually highly reminiscent of the “Equalization of Opportunity Bill.” The EOB forbade entrepreneurs from owning more than one business, in order to allow less efficient, less capable entrepreneurs to compete with them. The EOB is, of course, a measure enacted by the United States Government in Ayn Rand’s Atlas Shrugged.

Yet more evidence that the Obama administration is not only conversant with Rand’s classic, it is using the book as a policy model. It’s just a little confused as to which characters were the heroes and which the bad guys.

Boeing’s Tanker Win Is a Small Taxpayer Win

The Defense Department announced yesterday that it is awarding its aerial refueling tanker contract to Boeing. We’ll pay them $3.5 billion for the first 18 tankers and $35 billion if all the planned 179 tankers get built. These are essentially gas stations in the sky that extend the range of bomber and fighter aircraft.

The decision is causing great consternation in Alabama, where EADS, the losing bidder, would have located most of the manufacturing for the deal. Governor Robert Bentley compared the loss of federal spending to a “death in family.” I’ll leave it to others to speculate as to what that says about his priorities and just point that the decision is good for Americans generally.*

From a military perspective, both aircraft likely would have performed well. Tanker technology is not cutting edge these days, so technical risks in development are relatively low. And given that the Pentagon knows that its decision will come under great scrutiny, it is reasonable to accept its judgment that Boeing’s offer is better.  

The main reason why taxpayers come out ahead here is, however, one that the Pentagon is not allowed to consider when weighing bids: how the award affects future political pressure for spending.  I explained these politics in 2008, before EADS took over the bid of its Airbus subsidiary:

The political problem with the Airbus deal is that it opens a production facility in Alabama to make conventional aircraft assembled elsewhere into tankers, but will not close Boeing’s similar plant in Wichita, Kansas. This means taxpayers have a new mouth to feed. Because they create concentrated interests, US military production facilities are nearly impossible to close. In the private sector, sellers make money by cutting costs and delivering products more efficiently. In defense contracting, companies succeed by keeping production lines open and relying on local Congressman, workers and lobbyists to get them work. That’s why the US has twice the number of shipyards it needs despite consolidation in the shipbuilding industry. It would have been better to keep all the production in Europe, preventing new domestic lobbies from forming, or more realistically, accomplish the same thing by making Airbus lease Boeing’s plant.

*It’s worth asking whether 179 is excessive, given that precision munitions are vastly increasing the striking power of each aircraft. Today we can destroy exponentially more targets with the same forces relative to twenty years ago, and we continue to grow that ratio.

Is a U.S. Company Assisting Egyptian Surveillance?

Boeing subsidiary Narus reports on its Web site that it “protects and manages” a number of worldwide networks, including that of Egypt Telecom. A recent IT World article entitled “Narus Develops a Scary Sleuth for Social Media” reported on a Narus product called Hone last year:

Hone will sift through millions of profiles searching for people with similar attributes — blogger profiles that share the same e-mail address, for example. It can look for statistically likely matches, by studying things like the gender, nationality, age, location, home and work addresses of people. Another component can trace the location of someone using a mobile device such as a laptop or phone.

Media advocate Tim Karr reports that “Narus provides Egypt Telecom with Deep Packet Inspection equipment (DPI), a content-filtering technology that allows network managers to inspect, track and target content from users of the Internet and mobile phones, as it passes through routers on the information superhighway.”

It’s very hard to know how Narus’s technology was used in Egypt before the country pulled the plug on its Internet connectivity, or how it’s being used now. Narus is declining comment.

So what’s to be done?

Narus and its parent, the Boeing Company, have no right to their business with the U.S. government. On our behalf, Congress is entitled to ask about Narus’s/Boeing’s assistance to the Mubarak regime in Egypt. If contractors were required to refrain from assisting authoritarian governments’ surveillance as a condition of doing business with the U.S. government, that seems like the most direct way to dissuade them from providing top-notch technology capabilities to regimes on the wrong side of history.

Of course, decades of U.S. entanglement in the Middle East have created the circumstance where an authoritarian government has been an official “friend.” Until a few weeks ago, U.S. unity with the Mubarak regime probably had our government indulging Egypt’s characterization of political opponents as “terrorists and criminals.” It shouldn’t be in retrospect that we learn how costly these entangling alliances really are.

Chris Preble made a similar point ably on the National Interest blog last week:

We should step back and consider that our close relationship with Mubarak over the years created a vicious cycle, one that inclined us to cling tighter and tighter to him as opposition to him grew. And as the relationship deepened, U.S. policy seems to have become nearly paralyzed by the fear that the building anger at Mubarak’s regime would inevitably be directed at us.

We can’t undo our past policies of cozying up to foreign autocrats (the problem extends well beyond Egypt) over the years. And we won’t make things right by simply shifting — or doubling or tripling — U.S. foreign aid to a new leader. We should instead be open to the idea that an arms-length relationship might be the best one of all.