Inertia Wins!

The Export-Import Bank’s charter expires on June 30. This series of posts makes the case for closing Ex-Im, one argument at a time. See also parts 1 and 2.

Ex-Im officials claim the vast majority of its lending activities go to smaller businesses. This is true by number of loans—in 2013, 2,160 out of 2,775 businesses receiving Ex-Im financing were small businesses, or just more than 78 percent. But Ex-Im’s claim is false by the more important metric of dollar value of loans. In most years, more than 80 percent of Ex-Im financing, measured in dollars, goes to big firms. Also worth noting: Ex-Im’s in-house definition of “small business” covers firms with up to 1,500 employees.

Ex-Im’s charter states “the Bank shall make available, from the aggregate loan, guarantee, and insurance authority available to it, an amount to finance exports directly by small business concerns … which shall be not less than 20 percent of such authority for each fiscal year.”

Small business’ actual share of Ex-Im financing has failed to meet that 20 percent threshold in 2011 (18.45 percent), 2012 (17.11 percent), and 2013 (18.96 percent). 2014 was the first year Ex-Im met that threshold since at least 2010.

Small business advocates who favor keeping or expanding Ex-Im should note that Ex-Im gives financing to approximately one in 10,000 small businesses. Considering approximately 20 other agencies give subsidies to small business, Ex-Im’s closure would have very little effect on the amount of subsidies small businesses receive. Most of its closure’s impact would be felt by its top ten beneficiaries, all of which are large companies by anyone’s definition of the term.

The Export-Import Bank’s charter expires on June 30. Unless Congress votes to reauthorize that charter, Ex-Im will soon cease to exist. This would be a major victory in the fight against corporate welfare. Ex-Im’s beneficiaries often tar their opponents as anti-American, anti-business, and anti-jobs. This series of posts will instead stick to the merits of the issue, which overwhelmingly favor closing Ex-Im, one argument at a time. For more arguments, see my recent paper. For the first installment of this series, see here.

The Export-Import Bank has given financing to more than 20 foreign airlines, many of them state-owned or state-supported. Ryanair, Air India, Korean Air, and fourteen other airlines have each received more than $1 billion in financing during the period 2000-13. Emirates Airlines saves as much as $20 million per plane purchased with Ex-Im financing, according to Congressional testimony by Delta Airlines CEO Richard Anderson. Air India, with Ex-Im’s help, was able to drive Delta out the Indian market entirely, costing Delta and related businesses up to 1,000 jobs.

Ex-Im does not engage in a great deal of direct lending. Instead, most of its activity consists of guaranteeing loans companies secure from third-party banks. If a foreign airline is unable or unwilling to pay back the third-party loan, Ex-Im will step in and repay it with U.S. taxpayer dollars. Ex-Im’s loan guarantees allow those airlines to secure extremely favorable interest rates, saving them a great deal of money. The quid pro quo, naturally, is that the airlines buy planes from Boeing instead of Airbus or Embraer.

Delta Airlines, understandably, is upset at the Export-Import Bank for giving direct assistance to its foreign competitors. They sued Ex-Im in 2011 and again in 2013, with Hawaiian Airlines and the Air Line Pilots Association joining as plaintiffs. Other domestic airlines probably have similar sentiments, but have been less vocal about it for various reasons.

No doubt some politicians will use this example to argue that Delta and other aggrieved companies should receive their own subsidies to balance out the favors Ex-Im does for its foreign competitors. A better policy would be for government to neither help nor hinder. Good companies that satisfy their customers will win out in the end.

Ex-Im’s activities don’t just harm domestic companies. They also harm domestic workers. In 2005, General Electric used a $3 million Ex-Im grant to move one of its factories from Bloomington, Indiana to Celaya, Mexico. “My taxes are paying to ship my job to Mexico,” quipped one of the 470 laid-off workers.

Ex-Im’s benefits to some companies are obvious enough. But those benefits come at a cost to other companies. This fact should be included in Congress’ calculus as it decides whether or not to continue the bank.

The Export-Import Bank’s charter expires on June 30. Unless Congress votes to reauthorize that charter, Ex-Im will soon cease to exist. This would be a major victory in the fight against corporate welfare. Ex-Im’s beneficiaries often tar their opponents as anti-American, anti-business, and anti-jobs. This series of posts will instead stick to the merits of the issue, which overwhelmingly favor closing Ex-Im, one argument at a time. For more arguments, see my recent paper.

The upcoming Ex-Im reauthorization vote provides the perfect litmus test for which members of Congress are pro-business, and which are pro-market. The distinction is an important one. Pro-business thinkers are concerned with the fates of particular firms. The General Motors bailout is an example of a pro-business policy aimed at helping a specific business. Pro-market thinkers are less concerned with which firms prosper, focusing instead on maintaining an open and fair competitive market process, under which companies succeed or fail on their merits. Pro-market thinking is neither pro-business nor anti-business.

Ex-Im is a classic example of pro-business policy. In most years, a ingle business, Boeing, alone accounts for more than 40 percent of the Ex-Im Bank’s business. A literal top-ten list of Ex-Im beneficiaries accounted for 76 percent of its business in 2013.While Ex-Im clearly helps certain businesses, it is harmful to the competitive market process as a whole.

Because there is only so much investment capital to go around, every time the Ex-Im Bank secures favorable terms for one of its beneficiaries, another company elsewhere in the economy has to pay more for financing, or may lose access to it entirely. The best possible economic result is a wash. But more likely, the Export-Import Bank causes real economic harm on net. Its politically-directed financing decisions are not subject to market discipline. Over the years, Ex-Im has secured financing for companies such as Enron and Solyndra. It also has a policy of giving special treatment to politically favored sectors, such as renewable energy and other green industries. In fact, 10 percent of Ex-Im’s authorizations are required to go to renewable energy projects, and has restrictions on financing “High-Carbon Intensity” projects.

Another merit-unrelated variable is political access. It is difficult for companies to get Ex-Im financing unless they invest in political connections. This creates an additional deadweight loss, diverting activity away from entrepreneurship and towards lobbying.

Businesses and consumers are better served by pro-market policies. Politics should be left out of financial decisions. Investors would get higher returns, and deserving companies would have easier access to capital. Consumers would be the ultimate beneficiaries of a financial system that rewards value creation over political connections. Such a financial system would not include an Export-Import Bank.

Over at the American Spectator, University of Chicago lecturer Frank Schell recently published a column arguing that the Export-Import Bank should be reformed, not abolished. Today, I have a piece disagreeing for two reasons:

First, Congress has no appetite for substantive changes. Second, corruption and favoritism are inevitable consequences of Ex-Im’s very mission. As such, Congress should let the agency’s charter expire…

America’s entrepreneurs are talented and resourceful enough to compete in global markets without having to spend time influence-peddling in Washington. They deserve the opportunity.

Read the whole thing here.

At this point, it looks like Congress will let the Export-Import Bank’s charter expire on June 30. This is not a big deal in the grand scheme of things. Ex-Im would continue to service its existing loan guarantees and other financial products, and Ex-Im employees would also review applications for new loans and loan guarantees, though they would not be able to act on them. But suppose Ex-Im does have to shut down operations for good. What other options do export-oriented policymakers have?

Tyler Cowen brings up one option: mess with the price system.

Even a slight depreciation likely would offset the effects of Ex-Im expiration by more than a factor of one hundred, perhaps by more than a factor of one thousand.  Ex-Im is a relatively small program and it has nothing to do with more than 98 percent of American exports.  Many of its foreign beneficiaries, such as Pemex and Chinese state-owned enterprises, don’t need the subsidy to fund their imports.  Boeing is still reporting a robust demand for its planes.

If the goal is to increase exports, a weak dollar is far more effective than any Ex-Im project could ever hope to be. As Cowen says, Ex-Im is involved with less than 2 percent of U.S. exports. Altering the price system itself would affect 100 percent of transactions, exports or not.

Renewing Ex-Im’s charter is a bad idea. Weakening the dollar is a worse idea by at least a factor of 50, even ignoring imports and purely domestic transactions. Every export made cheaper equals an import made more expensive. Every business helped means another one hurt. There is no net benefit.

Many people believe American businesses should export as much as possible, and import only when necessary. But as the Cato Institute’s Dan Ikenson noted in recent congressional testimony:

As Milton Friedman used to say: imports are the goods and services we get to consume without having to produce; exports are the goods and services we produce, but don’t get to consume.

Ex-Im’s very mission, intentionally or not, is to impoverish the U.S. to the greatest extent it can. Imagine working as hard as you can to make something. Then, instead of consuming it and getting value from it, you send it overseas so someone else. Exports do have value, but only because they can be exchanged for imports. Exports are the price we pay for imports. They are not a good thing in and of themselves.

Politicians, especially the populist Lindsey Grahams and Sherrod Browns of the world, would do well to remember that. Ex-Im helps some businesses, but only at others’ expense. The program is a wash at best, and almost certainly harms the American economy on net. Congress should let Ex-Im’s charter expire. More importantly, Congress should also resist the temptation to weaken (or strengthen) the dollar to influence the balance of trade.

Rep. Jeb Hensarling (R-Texas) chairs the House Financial Services Committee. The Export-Import Bank’s reauthorization falls under his jurisdiction, and he has been one of the bank’s most consistent critics. He also called for closing Ex-Im in a recentWall Street Journal op-ed, making a number of well-reasoned arguments. But his closing clarion call is rather narrow for my taste:

If Republicans can’t stand up to corporate interests in this skirmish, how will we ever stand up to the myriad special interests warring against adoption of a simplified, pro-growth tax code? How will we earn the moral authority to reform the social welfare state unless we first reform the corporate welfare state? Let the Democrats own corporate welfare by themselves.

I prefer a more ecumenical approach. Opposing corporate welfare is something on which both parties should agree—and outside the Beltway, they often already do. People favoring a level economic playing field should put pressure on Republicans and Democrats alike to end their cronyist habits, not just the GOP. After all, Ex-Im’s traditional critics come from the left, not the right. The two sides’ role reversal is a recent, and puzzling phenomenon.

Hensarling is doing some impressive yeoman’s work in getting his party on the right side of the Ex-Im issue, but that’s only half the battle—or slightly more than half, given the House’s current composition. Still, progressives are natural allies in the fight against Ex-Im, and for several decades they were the free market’s only allies in that battle. They should not be ignored.