Bipartisan Corporate Welfare

On June 7, the Senate Banking Committee voted to back Fred Hochberg’s second term as president of the U.S. Export-Import Bank without bothering to ask the Obama administration about the future of that expensive, inefficient New Deal–era agency. The vote, in which 28 Republicans joined 54 Democrats in supporting Hochberg, was not a good sign for anyone hoping that the GOP’s latest promises of fiscal restraint would prove more trustworthy than all the broken promises before. 

The bank, also known as “Ex-Im,” provides taxpayer-backed loans, loan guarantees, and insurance to foreign companies, such as Air China, to buy products from some of the richest U.S. exporters, such as Boeing. It is a textbook example of Washington’s bipartisan corporate welfare. Yet only two Republicans, Sens. Tom Coburn (R-Okla.) and Pat Toomey (R-Pa.), voted against Hochberg. In an online statement Toomey explained his reasons for withholding support. “I opposed his nomination due to serious concerns that the Ex-Im Bank is using taxpayer-backed loan guarantees to help some companies at the expense of other U.S. companies,” he said. “The way to help U.S. exports is to reduce the tax and regulatory burden on businesses, not to pick winners and losers.” 

This was not the first time, of course, that Republicans have failed such a test. Last year they voted to reauthorize the Ex-Im charter through 2015 and increase the bank’s portfolio (and taxpayers’ exposure) to $140 billion from its current limit of $100 billion. 

That increase followed a four-year expansion of the bank’s annual lending, from $12.6 billion in 2007 to $32.7 billion in 2011. In 2012 Ex-Im provided an unprecedented $35.8 billion in total authorizations—up more than 9 percent from the year before. The number of Ex-Im clients has jumped from 23 in 2008 to 59 in 2012, while the number of companies whose products were purchased with bank-backed funds grew from 647 in 2007 to 789 in 2011. 

What are we getting for all this money and risk? A more level playing field for U.S. exporters who often find themselves operating in hostile political or legal environments, bank advocates claim. Free marketeers might reply that it’s not the federal government’s role to help private companies make money in unstable markets. 

But far more important is the fact that all those Ex-Im Bank subsidies are a drop in the vast ocean of global trade. According to Census Bureau data, U.S. exports supported by the Ex-Im Bank represent less than 3 percent of total exports. In comparison to the whopping $2.2 trillion in U.S. goods and services exported last year, estimated exports backed by the Ex-Im bank amounted to a relatively skimpy $50 billion.

So the Ex-Im Bank manages to be both pointless and ineffective. Even young Sen. Barack Obama denounced the program in 2008 as “little more than a fund for corporate welfare.”

The theory underlying export subsidies is what Reagan budget director David Stockman described in his 1986 book The Triumph of Politics as “a mercantilist illusion, based on the ideological position that a nation can raise its employment and GDP by giving away its goods for less than what it costs to make them.” The truth, Stockman explains, is that “export subsidies subtract from GDP and jobs, not expand them.”

The idea that export subsidies will create jobs and increase GDP is yet another example of the single-entry bookkeeping mentality that has larded the federal budget with so many subsidies and payments to special interests. The idea here is that if the government helps a foreign company get access to a loan in exchange for buying an American product then the U.S. company will make profits and create jobs. This account fails to take into consideration the opportunity cost. What might the return on those dollars have been if they were put to work somewhere else in the economy or even left in the pockets of taxpayers?

Back in 1981, when he was fighting to get rid of the Ex-Im Bank, Stockman documented that it bestowed about two-thirds of its subsidies on a handful of giant, profitable manufacturers: Boeing, General Electric, Westinghouse, and the like. Little has changed since then, and what has changed has mostly been for the worse. 

Ex-Im’s own data show that bank activity is highly concentrated in a few industries—primarily aviation, gas and oil exploration, and manufacturing. The aircraft industry alone benefited from $11.5 billion worth of loan guarantees in 2012. 

Boeing was the recipient of almost 50 Ex-Im Bank deals worth $12.2 billion (including insurance, loans, and guarantees). This one company, with its army of lobbyists, brought in roughly 80 percent of Ex-Im’s loan guarantees. 

Ex-Im’s defenders argue that it is profitable and that its default rates are extremely low. But the profits and low default rates are only a product of the way the bank measures its own performance. 

A May 2013 Government Accountability Office (GAO) report explains that Ex-Im doesn’t actually count up its own defaults. Instead, the bank currently uses economy-wide historical default and recovery rates to calculate program costs, which may not be accurate in predicting default rates in the future, the GAO warns.

And the bank’s alleged profit is almost surely an accounting illusion. “The government’s official accounting rules effectively force budget analysts to understate the cost of loan programs…by excluding, or not factoring in the cost for market risk,” Jason Delisle and Christopher Papagianis wrote in March 2012 at the economics and public policy research blog, e21. 

The underestimation of market risk can be attributed to rules like the Federal Credit Reform Act of 1990, which require budget estimates to discount expected loan performance using interest rates on risk-free U.S. Treasury debt rather than rates that match the actual riskiness of the loan itself. Citing a November 2011 study by MIT finance professor Debbie Lucas, Delisle and Papagianis note that the bank’s lending activities, when measured by the private sector’s fair market accounting, cost taxpayers $200 million in 2012. 

The continued existence of the Ex-Im Bank does not bode well for American capitalism. A few select companies benefit from this unhealthy marriage between private industry and government, but most don’t. When China Air gets a loan guarantee so it can buy Boeing planes at what is effectively a discounted rate (due to the advantageous borrowing conditions), Delta Airlines, which doesn’t get the same deal, suffers from unfair competition. The free market is needlessly and gratuitously distorted.

Such special favors create bad incentives, moral hazards, and inefficient outcomes. Last September, the bank’s inspector general issued what should have been an eye-opening report about the institution’s poor management, lack of systematic portfolio risk measurement, and perilous overconcentration on the airline industry. The report recommended that the bank put itself through a stress test to weigh its exposure to risks and other market shocks, limit its loan concentration, and be subjected to more oversight by Congress to avoid exposing taxpayers to future bailouts. Returning president Hochberg has rejected these suggestions, illustrating his disregard for U.S. taxpayers. 

More than a century ago, the French economist and polemicist Frederic Bastiat noted that many economic fallacies persist because the beneficiaries of government actions are easily visible while the victims are harder to identify. The Ex-Im Bank is a classic example. All the subventions to the organized clients of Republican and Democratic lawmakers may be satisfying for those receiving them, but they represent an unfair benefit to a few winners at the expense of the rest of us.