Right now, both detractors and supporters of the Export-Import Bank are playing a waiting game. Everyone knows that, despite the lapse of Ex-Im's authorization this summer, legislators will try again to revive it. Some think it will come as part of the next spending resolution. Others think it could be attached to the next highway bill. Regardless, the debate continues.
From Ex-Im's defenders, we hear several arguments. First, they say that Ex-Im is needed to balance the competitive disadvantages created by the similar banks of foreign nations. Second, they claim that without an Ex-Im Bank, there'd be little incentive for American manufacturers to make their goods in the United States. And third, they point out that Ex-Im returns money to the Treasury — and claim it does so providing vital services that private-sector companies do not.
These arguments seem overstated, as total Ex-Im activity in 2014 equaled 0.198 percent of U.S. exports. But it's worth looking at all three in more detail, as we do in our recent publication, "Basic Economics of the Export-Import Bank of the United States."
As we show, export subsidies used to "level the international playing field" actually create a deadweight loss in the domestic economy. The bottom line is that the gains from a retaliatory subsidy are less than the costs of that subsidy. While Ex-Im may benefit the firms it subsidizes, the bank's overall impact on the U.S. economy is negative.
Speaking of the firms Ex-Im subsidizes, we also demonstrate that the bank amounts to a special privilege for the connected few. For example, nearly $8 billion of the $12 billion in Ex-Im Bank loan guarantees in 2013 went to support Boeing exports. In fact, of that $12 billion, 97 percent supported the sales of just ten firms.
What about the claim that Ex-Im protects American jobs? Some jobs at subsidized firms may indeed be eliminated without the bank's activities. And indeed, the associated goods and services may be produced by firms outside our country at a lower cost.
But the reality is that free and open trade creates jobs at the same time that it destroys jobs, and it leads to better and lower-priced goods overall. Upon the removal of a special privilege to one business or industry, other jobs may be created within other, better-positioned businesses or industries. The reallocation of resources to more efficient uses can be a painful process, especially in the short run, but in the end it creates a better-functioning economy.
Ex-Im supporters also point out that: (1) The institution returned $1.057 billion to the U.S. Treasury in FY 2013 and approximately $2 billion over the past five years and (2) the Ex-Im Bank's active default rate was 0.175 percent as of Sept. 30, 2014. Proponents say these results demonstrate that the bank's services are needed and that the bank is well managed. They further say that private banks do not — and, by implication, cannot — offer the services Ex-Im provides.
We must take issue with this last claim. Again, the vast majority of exports — 99.802 percent in 2014 — are already financed privately. Ex-Im steps in only to support marginal transactions that private commercial banks do not want to fund or do not want to fund on the terms that the Ex-Im Bank is willing to offer.
In other words, taxpayers are bearing financial risk at below-market prices to promote additional exports. The Ex-Im Bank is not solving a failure of private markets, but is instead crowding out properly priced transactions. As long as the Ex-Im Bank is able to price these transactions at below-market rates, the private market will not be competitive in those marginal deals.
We should not assume that the marginal transactions would be unable to secure funding if the bank were to be eliminated. The private market would likely step in for most of those transactions, though perhaps at a higher price or with additional requirements. The transactions that did not receive private funding would be ones that lenders deemed too risky at that price. Steering capital toward the best projects, and away from the worst, is a key feature of a well-functioning financial market; it is not a flaw.
Letting Ex-Im's funding lapse was the right decision for the U.S. economy. Ex-Im financing was little more than a subsidy that accrued to a select few industries within our economy — and the benefits to those firms are smaller than the cost paid by taxpayers. Let the private financial markets supply appropriately priced and structured financing for our nation's exports.