Nothing brings out the well-tailored lobbyists in Washington quite like a threat to corporate welfare. With the Export-Import Bank’s legal authorization set to run out this year, the Chamber of Commerce recently led a Big Business march on Capitol Hill to protect what is known as Boeing’s Bank. Over the last eight decades ExIm has provided over a half trillion dollars in credit, mostly to corporate titans. Congress should close the Bank.
ExIm was created in 1934 to underwrite trade with the Soviet Union. The agency piously claims not to provide subsidies since it charges fees and interest, but it exists only to offer business a better credit deal than is available in the marketplace. The Bank uses its ability to borrow at government rates to provide loans, loan guarantees, working capital guarantees, and loan insurance.
The result is a bad deal for the rest of us. For instance, ExIm is not free, as claimed. Recently made self-financing, the agency has returned $1.6 billion to the Treasury since 2008. However, economists Jason Delisle and Christopher Papagianis warned that the Bank’s “profits are almost surely an accounting illusion” because “the government’s official accounting rules effectively force budget analysts to understate the cost of loan programs like those managed by the Ex-Im Bank.”
In particular, the price of market risk is not included, even though doing so, explained the Congressional Budget Office, would provide “a more comprehensive measure of federal costs.” Delisle and Papagianis figured ExIm’s real price to exceed $200 million annually. Indeed, both the Government Accountability Office and ExIm Inspector General raised questions about the accuracy of the agency’s risk modeling.
Federal Reserve economist John H. Boyd took another approach, explaining: “For an economic profit—that is, a real benefit to taxpayers—Eximbank’s income must exceed its recorded expenses plus its owners’ opportunity cost, a payment to taxpayers for investing their funds in this agency rather than somewhere else.” If ExIm was private, he added, “one must suspect that its owners would have pulled out long ago in favor of a truly profitable enterprise.” He figured the Bank’s real cost averaged around $200 million a year in the late 1970s but had increased to between $521 million and $653 million by 1980. Given the recent explosion in Bank lending the corresponding expense today could be much higher.
Moreover, ExIm’s financial exposure continues to rise. Annual credit authorizations climbed from $12.37 billion in 2007 to $35.73 billion in 2012, before dropping back to $27.29 billion in 2013. Total credit outstanding went from $51.42 billion in 2007 to about $134 billion today.
The Bank claims to create jobs—precisely 255,000 in 2012, for instance. “Supporting American job growth shouldn’t be a political issue,” argued Bank president Fred Hochberg. But ExIm is a political creature. It has avidly joined the much-abused federal “affirmative action” spoils system, channeling money to official minority-and women-owned businesses. The Bank also is promoting politically correct industries, such as renewable energy. One past beneficiary was Solyndra, a White House favorite before the solar company went bankrupt.
“A better way to help promote trade would be to strengthen the economy generally.”
No doubt, Exim financing makes some deals work. But others die because ExIm diverts credit from firms without agency backing. Unfortunately, it is easier to see the benefits of the former than the costs of the latter.
University of Arizona economist Herbert Kaufman estimated that every $1 billion in federal loan guarantees crowded out between $736 million and $1.32 billion in private investment. World Bank economists Heywood Fleisig and Catharine Hill figured that channeling resources to exports reduces “domestic investment, consumption, or government expenditure.” Thus, the two explained, while export subsidies will increase employment in export firms, they will do so “at the expense of employment elsewhere.”
JayEtta Hecker, Associate Director of the then-Government Accounting Office, testified before the Senate: “government export finance assistance programs may largely shift production among sectors within the economy rather than raise the overall level of employment in the economy. Hence, the jobs figure that the Eximbank reports may not represent net job gains.” Shayerah Ilias with the Congressional Research Service similarly argued: “promoting exports through subsidized financing or through government-backed insurance and guarantees will not permanently raise the level of employment in the economy, but alters the composition of employment among the various sectors of the economy and, therefore performs poorly as a jobs creation mechanism.”
The Export Import Bank also sells itself as necessary to promote trade. Bank president Fred Hochberg told a recent gaggle of supporters: “we want to be the wind in your sales,” pushing U.S. exports. But exports should not be an end in themselves irrespective of cost.
Anyway, the Bank plays only a minimal role in the market. In fact, ExIm highlights the fact that it supports just two percent worth of exports today as evidence that it really doesn’t compete with private sector credit institutions. But that means ExIm’s activities are barely a blip in a $17 trillion economy.
Moreover, in promoting trade ExIm often backs competitors of American companies. Competition is, of course, good, but not from government subsidized trade. By law the Bank is not supposed to support deals which would cause “substantial injury” to American firms; however, ExIm judges when that is the case.
Two-thirds of the Bank’s loan guarantees last year backed Boeing sales to rivals of U.S. airlines. Delta blamed ExIm for having to halt its New York-Mumbai service after Air India expanded its flights using Bank-financed jets. Last year ExIm also subsidized an Australian iron mine in purchasing Caterpillar equipment, despite complaints from U.S. miners.
The Bank contends that it corrects market failure using its unique access to information to more accurately assess international risks and underwrite projects unable to find private financing. Thus, explained the agency in its 2012 annual report: “When the availability of credit from commercial lenders is restricted or the cost is prohibitive, Ex-Im Bank can provide the financing assistance that U.S. exporters need.”
However, international financial markets are sophisticated. Firms such as Wells Fargo in San Francisco and Norwest Bank in Minneapolis specialize in export finance. In fact, the vast majority of international transactions, upwards of 90 percent, are financed by the private sector.
The Heritage Foundation’s Diane Katz observed: “If the Bank were stepping in where private investors fear to tread, a larger proportion of its financing would be directed to Africa and Latin America, where risks are greatest.” Instead, the Bank is busiest in Asia, Europe, and North America. Similarly, my former Cato Institute colleague Sallie James pointed out that ExIm focused much attention on “countries such as South Korea, China, Mexico, and Brazil that have had little difficulty in attracting private investment. Indeed, the Bank’s relatively low default rate (less than two percent in 2010) suggests that it is making loans to creditworthy countries.”
Moreover, it’s impossible to know just how many of the deals currently financed by American taxpayers wouldn’t go through absent the subsidy. Surveys show credit to be but one of many factors in making a purchase. One review of aircraft sales ranked financing eighth out of twelve. Yet everyone involved in the transaction—borrower, banker, exporter, bureaucrat—has an incentive to claim ExIm played a vital role. No one will admit that the extra money just padded an already generous profit margin.
The Bank even admitted that it was not essential when it refused to support sales involving the controversial Three Gorges Dam project in China, which was widely criticized on environmental grounds. Bank President Martin Kamarck explained: “This decision does not in any way limit or impede U.S. companies from doing business in the Three Gorges project on private terms and with financing from other sources. Already, several U.S. companies have sold between $60 million and $100 million worth of equipment and services to this project without Ex-Im Bank support.”
The agency claims to support all businesses as part of the administration’s “National Export Initiative” and touts its work with small firms—which the Bank defined as having up to 1500 employees. However, candidate Barack Obama got it right in 2008 when he described the Bank as “little more than a fund for corporate welfare.” The most heavily subsidized industries in 2012 were aircraft and avionics, followed by oil and gas, power generation, and agribusiness. Other major beneficiaries include renewable energy, construction, mining, and medical equipment.
The most money always goes to Big Business. Boeing alone typically accounts for more than 40 percent of the Bank’s credit activities. Corporate behemoths General Electric, Lockheed Martin, Dow Chemical, Bechtel, John Deere, and Caterpillar regularly join Boeing at the federal trough. Veronique De Rugy of the Mercatus Center figured that the top ten recipients collect 75 percent of ExIm’s benefits.
Financial institutions also enjoy bountiful subsidies. According to de Rugy, in 2012 JP Morgan Chase came in on top at $5.1 billion. TD Bank came in second at $1.9 billion, followed by Citibank at $1.5 billion. Notably, community banks don’t have standing agreements with ExIm and aren’t eligible for Bank support. Foreign financial institutions also gain: in 2012 Norddeutsche Landesbank enjoyed $811.3 million in loan guarantees.
Foreign governments share in American corporate welfare as well. In 2011 the Bank offered $2 billion in financing for Petrobras, Brazil’s inefficient state-owned oil operation. A year earlier ExIm approved $1 billion in loan guarantees for the firm. In 2009 the Bank provided $1.05 in loans and $300 million in guarantees for Pemex, the Mexican government’s bloated oil company, which had previously collected $7 billion in loan guarantees. ExIm also has supported Gazprom, Russia’s natural gas giant. The problem is economic as well as political. Observed Sallie James: “When the Bank finances public-sector borrowers, it delays privatization and other free-market reforms that would aid economic development.”
ExIm’s best, but still largely unproven, argument is that if the U.S. government doesn’t provide cheap credit, American companies will lose out to foreign firms subsidized by their governments. Hochberg warned that 59 other credit subsidy agencies (mostly smaller operations in smaller nations) around the world “would like nothing more than to snatch sales from U.S. companies.” In this way the Bank claims “to help level the playing field to support U.S. companies.” To close ExIm would amount to “unilateral disarmament,” warned ExIm spokesman Daniel Reilly.
However, James analyzed Bank data and discovered that between 2002 and 2010 less than 40 percent of its funding was tagged as necessary to “meet competition.” Moreover, she added, ExIm “provides little to no detail about how it evaluates the accuracy or legitimacy of applicants’ claims, what the standards are (if they even exist), or how much effort applicants undertook to justify their claims.” Yet in 2012 the administration said it planned to offer “countervailing” support to domestic firms competing for domestic business, a dramatic expansion of Bank activity.
The fact that other governments are willing to hurt their peoples by channeling credit away from worthier firms in the marketplace in favor of politically well-connected exporters is no reason for America to do the same. Subsidies are unfair to taxpayers as well as other companies. Subsidies promote malinvestment in favored industries. Subsidies encourage firms to rely on government aid rather than entrepreneurial vigor. And subsidies fuel the pursuit of political privilege.
Yet there is no correlation between export subsidies and export success. James observed that since 2000 “Germany and the United States, historically two of the smallest users of export credit programs, had the highest export growth in absolute terms out of the rich countries.”
Exim started subsidizing trade 80 years ago. The results are not worth the cost. Congress should dismantle the Export-Import Bank.
A better way to help promote trade would be to strengthen the economy generally. Lower and rationalize business taxes. Cut and streamline regulation. Reduce tariffs, especially on widely used imports, such as steel. Discourage frivolous litigation. Stop subsidizing the defense of prosperous, populous trade competitors.
Going after corporate welfare offers a political opportunity for the Republican Party. Utah’s Sen. Mike Lee recently spoke of the problem of “cronyism” and how “the elite leaders of Big Government, Big Business, and Big Special Interests are more often than not partners.” The ExIm Bank is a good example.
If Republicans really believe in free markets and limited government, and want to escape the label of party of the rich, they should block the agency’s reauthorization. Let exporters pay to generate their own profits.