When it comes to economic policy, nearly every conservative is in lock step support of free markets. They will happily vent their anger about the Affordable Care Act or complain about the president’s ever growing book of rules and regulations. Even the Republicans who have chosen to side against free trade in the fight over Trade Promotion Authority do so only in opposition to expanding President Obama’s executive powers. It is puzzling, then, that this pattern of consensus does not seem to apply to the debate surrounding the renewal of the Export-Import Bank.
Founded in 1934, the Ex-Im Bank authorized $27.3 billion in direct loans, loan guarantees, and credit insurance in 2013. Ex-Im is meant to aid U.S. exporters by loaning to foreign buyers of U.S. goods. It also offers insurance to U.S. suppliers of loans to foreign buyers.
Think tanks such as the Cato Institute, the Heritage Foundation, and even Economics21 have all come out against the Ex-Im Bank. A majority of the GOP’s elected officials have also committed to ending the agency. Yet important Republican leaders have still not agreed to let Ex-Im’s charter expire on June 30. John Boehner is a staunch supporter of the bank and may unilaterally thwart an attempt to kill it. A large number of GOP lawmakers in the House Republican Study Committee are also planning to back reauthorization. Even some conservative think tanks are supporting Ex-Im. The American Action Forum has recently been a leading advocate.
The Ex-Im Bank is a perfect example of everything wrong with Washington’s economic policy. It is a form of corporate welfare that encourages cronyism. Ex-Im’s intended mission is to create and sustain U.S. jobs by financing the sale of U.S. exports. It is meant to be a lender of last resort for firms that could not otherwise obtain financing for their sales through private lenders. But Ex-Im has strayed far from this mission. Instead of supporting small businesses that otherwise would not be able to export overseas, Ex-Im has become a slush fund for large companies that do not need assistance to get a leg up on their competition.
In 2013 Caterpillar, a massive construction equipment firm, was the second largest beneficiary of Ex-Im loan guarantees. That year, nearly 10 percent of Ex-Im’s assistance went to funding the export of Caterpillar products. Caterpillar did not need help from the U.S. government. It could have easily obtained financing from any number of private sources or even its own financing subsidiary. Instead, it used Ex-Im to supply its buyers with subsidized loans. Rather than relying on its ability to outperform its competitors in the market, Caterpillar attempted to get ahead using politics. Last year Caterpillar used $15 million in Ex-Im financing to sell equipment to one of its own foreign subsidiaries.
When most supporters of Ex-Im argue in favor of the bank, they cite its role in assisting small business. This is a mischaracterization of reality. By far the largest beneficiary of Ex-Im is Boeing. Since 2008 Ex-Im has financed approximately one third of Boeing’s exports, or $8 billion to10 billion a year. In 2014, 40 percent of all Ex-Im loan authorizations and 68 percent of its long-term guarantees went to Boeing. In comparison, only 25 percent of Ex-Im’s authorizations went to small business.
Ex-Im has recently attempted to reform its financing rules after criticism that its loaning practices negatively impact non-subsidized U.S. companies. However, this process has been hijacked by Boeing. Boeing has spent $69.2 million on lobbying for Ex-Im since 2012. As a result, Ex-Im has actively reached out to Boeing for help in drafting its new rules, which were initially supposed to resolve controversy surrounding Boeing’s unfair marketplace advantage. Boeing was able to influence the new final rules to ensure its position was untouched. But this is not even the worst of Ex-Im’s cronyism. Just last year four Ex-Im officials were removed for accepting gifts as compensation for attempting to award federal contracts to favored companies.
Ex-Im’s supporters are quick to point out that eliminating Ex-Im could deal damage to the U.S. economy. However, they are overstating their case. Over 98 percent of U.S. exports do not involve any assistance from Ex-Im and the 2 percent of exports that do receive assistance would likely occur without the agency. Boeing, Caterpillar, GE, and other beneficiaries of Ex-Im have their own financing subsidiaries that they can expand to supply loans to their buyers. Businesses would continue to have plenty of access to the capital necessary to finance their exports. Instead of expanding the U.S. economy, Ex-Im simply picks winners and losers. When Caterpillar receives a low-interest loan through Ex-Im it hurts American companies that have to pay a higher price for Caterpillar’s products. Likewise, when Boeing obtains cheap financing, Delta and other American airlines suffer, leading to higher fares for American fliers.
Ex-Im does not pick winners based on the quality of their products or the efficiency of their assembly lines. In the private sector, lenders must decide whether to fund a project or not based off the risk of failure. If a project is not likely to succeed, private lenders will not fund it because if it fails they will lose their investment. The Ex-Im Bank operates within a different incentive structure. Since the bank operates under the full faith and credit of the U.S. government, it is able to make risky loans without the fear of bankruptcy. Since Ex-Im has no incentive to worry about the consequences of its investment choices, its process for approving loans is quite lax. According to the Inspector General, “Ex–Im Bank lacks a systematic approach to identify, measure, price and reserve for its portfolio risk.”
The final argument made by supporters of Ex-Im to justify the bank’s existence is that it actually earns revenues for taxpayers. This has not, and will not always be the case. In the 1980s Ex-Im accumulated a $5.3 billion deficit when it borrowed money at a higher interest rate than it loaned it. If the climate for lending takes a turn for the worse as it did in the 1980s, it is U.S. taxpayers who will once again foot the bill. Even without a disadvantageous economy Ex-Im is likely to cost taxpayers money.
While Ex-Im expects to make $14 billion over the next decade the CBO disagrees. Using its “Fair Value” accounting method the CBO has estimated that Ex-Im will lose $2 billion over the next decade. But regardless of the cost to taxpayers, the government should not be in the business of picking winners and losers.
If the GOP is to maintain its legitimacy as the party of the free market, it must not reauthorize Ex-Im. Conservatives should not sit by and watch while corporate welfare continues to skew the playing field against businesses without political influence. By ending the Ex-Im bank, conservatives can finally begin to start a broader legislative push to get rid of unnecessary government subsidies.
Patrick Holland is a contributor for Economics21.
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