Kill Big Business's Bank
Taxpayers Provide the Cash, Exporters Collect the Profit
DECEMBER 01, 1997 by DOUG BANDOW
Filed Under : Subsidies
Doug Bandow, a nationally syndicated columnist, is a senior fellow at the Cato Institute and the author and editor of several books, including Tripwire: Korea and U.S. Foreign Policy in a Changed World.
The federal government is full of programs designed to benefit one or another special interest. Like the Export-Import Bank.
The Bank, which provides loans, loan guarantees, and loan insurance for the purchase of American goods, has long been known as Boeing’s Bank, given its support for Boeing aircraft sales. But most major U.S. exporters share in the windfall. In fact, ExIm beneficiaries are a Who’s Who of the Fortune 500: 80 percent of its subsidies go to medium and large companies, with about half of those benefits collected by just 15 big firms. Like Boeing, which, after its merger with McDonnell Douglas, will have total sales of $48 billion.
And those firms are not shy about showing their support. When the Senate Subcommittee on International Finance of the Committee on Banking, Housing and Urban Affairs held hearings earlier this year on reauthorizing the Bank, eight of nine witnesses endorsed more money for the institution. Half of them represented companies supping at the federal trough. Business organizations like the National Association of Manufacturers, which always extoll their commitment to free enterprise, devote almost as much energy to increasing benefits to business as to battling regulations on business.
Of course, none of the firms admits that self-interest animates its lobbying on behalf of ExIm, which has spent $3.7 billion over the last five years. Bank supporters argue that if the U.S. government doesn’t provide cheap credit, American companies will lose out to foreign firms, many of which are subsidized by their home governments. The result would be lost jobs. Thus, ExIm advocates contend, their fight for subsidies for their firms is actually a fight for jobs for America.
A Flawed Argument
There are two major flaws with this argument. The first is the belief that government can provide a free lunch, that the money channeled to the purchasers of U.S. exports is somehow costless. But it isn’t. When the Bank makes a loan, or uses guarantees or insurance to direct someone else’s loan, less credit is available for use by other firms and individuals. University of Arizona economist Herbert Kaufman estimates that every $1 billion in federal loan guarantees crowds out between $736 million and $1.32 billion in private investment. That means fewer deals and lost jobs. As the General Accounting Office acknowledges, “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.” The ExIm Bank, then, redistributes rather than creates jobs—after exacting an administrative charge.
There’s neither moral nor economic reason to enrich those companies lucky enough to benefit from Bank activities at the expense of the rest. Rather, the institution offers lawmakers political benefits: visible subsidies to companies that reciprocate with campaign support and invisible costs to the public, who remains inert.
The second misleading claim made by ExIm enthusiasts is that the Bank undergirds U.S. exports. In fact, the vast bulk of export financing comes from the private sector. Bank deals account for but 2 percent of total exports. And the $16.5 billion in subsidized trade this year, a record, is a mere blip for a $7 trillion economy.
Equally important, it is virtually impossible to assess which deals are dependent on ExIm subsidies. Undoubtedly some are, but every participant in the process—borrower, banker, exporter, bureaucrat—has an incentive to claim that the subsidy clinched every transaction. Yet surveys have long shown credit to be but one of many factors in making a purchase; one review of aircraft sales ranked credit terms eighth of twelve. And that is America’s experience in practice. Last year ExIm dropped any financing of work for China’s massive Three Gorges Dam project (allegedly for environmental reasons). That hasn’t stopped several American firms from providing as much as $100 million worth of equipment and services so far. Thus, in many cases the buyer does what he would have done anyway and simply pockets ExIm’s gift.
The Bank, created in 1934 to help underwrite trade with the Soviet Union, has never found a government too brutal to subsidize. Today China is a leading beneficiary, having borrowed some $5 billion. Nevertheless, ExIm supporters complain about the Bank’s withdrawal from the Three Gorges Dam project, as if $5 billion was not enough taxpayer support for the globe’s last major communist state.
Nor is China the only thuggish recipient of the forced largesse of American taxpayers. Indonesia is another major Bank client. Over the years ExIm handed out cash to Nicolae Ceausescu’s Romania, a regime bizarre even by communist standards, and Saddam Hussein’s Iraq. Haiti, Nigeria, the Soviet Union, Sudan, and Yugoslavia have also been beneficiaries of Bank aid.
As for the argument that foreign countries and companies couldn’t purchase U.S. products without ExIm subsidies, Ian Vásquez of the Cato Institute points out that “44 percent of the Bank’s guarantees in FY 1996 went to Argentina, Brazil, China, Indonesia, Korea, Mexico, Singapore, and Thailand—all emerging economies that have no problem obtaining investment from the private markets.” Other nations have more trouble raising funds and paying their debts, of course, but that is a reason to deny them Bank credit.
ExIm has also interfered with markets at home and abroad. For instance, by subsidizing Boeing sales to foreign airlines, the agency has effectively used taxpayer dollars to put American airlines at a competitive disadvantage. The Bank has had the same deleterious effect in foreign nations, routinely underwriting failing state enterprises that should have been privatized rather than subsidized. Mexican economist Roberto Salinas-León points to the Bank’s $5.6 billion loan to Pemex, the oil monopoly, a decade ago. More recent has been ExIm support for Gazprom, the Russian gas monopoly.
But let’s assume the theoretical case for the Bank. Other nations are subsidizing their exporters and there are some deals that, all other things being equal, should go to American firms. ExIm can restore “balance” and shift the work back to America. It all sounds very nice, but what evidence is there that federal officials have special commercial or political knowledge that justifies turning them into international loan officers? Surely Washington has had enough experience with grant and loan programs to demonstrate that they always operate to fulfill political, not economic, objectives. There is not the slightest chance that ExIm provides money only when it is “efficient” to do so.
More basic still is the issue of principle. What justifies mulcting Americans to enhance corporate profits? The fact that other governments loot their citizens to boost exports is no argument. The fact that some U.S. firms suffer when other nations do so is no argument. The money being spent and lent by ExIm does not belong to it or to Washington. Rather, it is the taxpayers’ funds. Businesses have no moral claim to seize that money for their own benefit.
There is perhaps no better example of corporate welfare than the ExIm Bank. The deal is simple: taxpayers provide the cash, exporters collect the profit. That’s neither fair nor efficient. It’s time for legislators to acknowledge that 60 years of corporate welfare is enough and to dismantle the Export-Import Bank.