The Crony Capitalism Machine
The Export-Import Bank is inefficient and immoral.
Congress will soon debate the fate of the U.S. Export-Import Bank, an outfit that doles out money to favored corporations and foreign governments. For 80 years, the bank and the crony capitalists it supports have defeated every attempt to shut it down.
But that may slowly be changing. In recent months a few Republican lawmakers-including Reps. Jeb Hensarling of Texas, Tom McClintock of California, Scott Garrett of New Jersey, Mick Mulvaney of South Carolina, and Justin Amash of Michigan, along with Sens. Mike Lee of Utah and Ted Cruz of Texas-have been working to put an end to the boondoggle.
Back in the 1980s, then-Budget Director David Stockman tried but ultimately failed to abolish the Ex-Im Bank. He did manage to cut the institution's lending budget from $7 billion in 1981 to $3.2 billion in 1986, but that victory was short-lived: By 1989, lending had grown back to $12.5 billion, and taxpayer exposure rose to roughly $58 billion.
Since then it's gotten worse. Last year, the Ex-Im Bank authorized $27.3 billion worth of direct loans, loan guarantees, and capital and credit insurance. The transactions are seen as low-risk since they are backed by the "full faith and credit" of the federal government. This has encouraged Democrats and Republicans alike to rack up $134 billion in outstanding liabilities, any of which will be covered by taxpayers if something goes wrong.
The program's advocates argue that foreign enterprises wouldn't otherwise be able to access sufficient credit to purchase new exports from American companies. Helping the foreign customers of U.S. exporters, they say, therefore boosts American companies and creates thousands of jobs.
But those claims don't withstand scrutiny. Although some of the loans have gone to companies that could not have gotten financing without the Ex-Im Bank, a significant amount of Ex-Im lending goes to corporations that wouldn't have any problem accessing credit, such as Indonesia's largest privately run airline, Lion Air.
Even worse, Ex-Im meddling too often encourages poor countries to take on debt they can ill-afford.
In many ways, the Export-Import Bank is repeating the tragic mistakes of the early 21st century housing bubble on an international scale. Since 1996, the International Monetary Fund and World Bank have maintained a list of Heavily Indebted Poor Countries (HIPCs), which face debt burdens their governments cannot sustainably manage. Since fiscal year 2007, the Export-Import Bank has added to the debt levels of 20 of the 39 countries listed in some phase of the HIPC Initiative's debt management process.
Just as Fannie Mae and Freddie Mac convinced low-income Americans to take out risky loans to purchase homes they otherwise wouldn't dream of buying, the Export-Import Bank sways governments in developing countries to splurge on shiny new air fleets, futuristic wind farms, and unnecessary luxury tour buses-all made, of course, in the U.S.A.
Ex-Im's records show that $180,000 in insurance was extended to Honduras to cover an aircraft deal with Atlantic Airlines, but the records are incomplete and Ex-Im's website does not mention this deal. Tanzania, too, took on an estimated $2.5 million in debt in 2013 to purchase aircraft from Cessna at Ex-Im's urging.
According to its own records, the Export-Import Bank extended almost $3 billion in financing to HIPCs from 2007 to 2014. Assuming that the Bank covered the standard 85 percent of the loan value, this could mean that these already indebted countries took on another $3.5 billion in debt so that companies like Boeing could make a little more money each year.
Indeed, super-wealthy companies such as Boeing, with its market capitalization of $91 billion, and Lockheed Martin, with its $50 billion profit in 2013, are the Ex-Im Bank's true masters. The program allows them to sell more of their products abroad without the headache of doing the hard financing work themselves.
Obviously, these companies do not need the U.S. government to seal foreign deals. Boeing has a financing arm worth $4 billion and could easily extend loans to prospective clients.
Claims about the Ex-Im Bank's ability to create jobs should also be taken with a grain of salt. In fiscal year 2013, the bank's claims that $27.3 billion helped sustain 205,000 export-related American jobs. If true, that would mean for every $131,200 in taxpayer exposure, one job was "sustained." Such a ratio does not an effective jobs program make.
And there's no particular reason to believe these numbers. First, there is very little evidence that most of these jobs would disappear without the bank's intervention. More importantly, according to a May 2013 Government Accountability Office report, the bank doesn't actually count jobs related to its projects; it simply extrapolates based on Bureau of Labor Statistics data that measures how much of the output (revenue) of an industry goes into the input (production) of another industry and its employment equivalent. There are many limitations to this methodology, starting with the fact that it does not differentiate between full-time, seasonal, and part-time jobs. As a result, it is likely to double-count jobs that actually exist while also counting many that don't.
But the biggest problem with the Ex-Im Bank is that government-backed loans, and subsidies in general, distort the economy. Every loan program transfers risk from lenders to taxpayers. This creates what economists call a moral hazard: Because the loan amount is guaranteed, banks have less incentive to evaluate applicants thoroughly or apply proper oversight.
These programs privatize gains and socialize losses. Lenders get to loan billions of dollars and collect high fees, yet they bear almost none of the risk if the borrower defaults. The biggest lenders behind Ex-Im loans are the usual suspects: politically connected giant banks like J.P. Morgan and Citibank.
Meanwhile, by favoring subsidized projects over private transactions, guarantees and loan programs distort crucial market signals that determine where capital should be invested. If loans reward one activity over others, companies have an incentive to divert resources toward that activity, independently of demand and profitability. That can lead to an oversupply of a particular good, which can cause serious challenges when the resulting bubble finally bursts.
For the last two years, analysts have been wondering whether an aircraft bubble is in the making. Take the leading advisor to the aviation industry, Adam Pilarski. He has been arguing that the incredible surge in orders for fuel-efficient designs for carriers such as Lion Air and India's Kingfisher was unsustainable. As Aviation Weekly summarized in April 2012, "High fuel prices, plentiful financing backed by government export-credit agencies and aggressive selling by two airframers aiming to hold off new competitors have created a hyper demand that is unsustainable." It wouldn't take much of an increase in interest rates or drop in fuel prices to end the boom.
A sharp change in the economic conditions in China or other countries could also spell trouble for the airplane market, The Wall Street Journal's Holman W. Jenkins wrote in July 2012, as would a reversal from the European Union on high "CO2 taxes, which further goose the appeal of fuel-efficient jets."
At their worst, Ex-Im loan programs introduce political incentives into business decisions, creating the conditions for companies to seek financial rewards by pleasing political interests rather than customers. The economic costs this cronyism imposes are real and inexcusable.