Monday, July 14, 2014

Taking Interest in the Export-Import Bank and Whether Its Charter Should Expire

There has been a lot of hullabaloo lately, particularly in the think-tank world and the libertarian blogosphere, about the Export-Import Bank, also known as Ex-Im. What is the Export-Import Bank? It is the official export credit agency of the United States federal government. What this means is that Ex-Im finances corporations with government-backed loans to finance the foreign purchase of United States goods for customers incapable of taking on the risk. Think of it as the IMF's role "lender of last resort," except on a national level. Although the Ex-Im has been around since 1934, its charter is up for reauthorization this September. Unless Congress votes to reauthorize the charter, the Ex-Im will cease to exist. Proponents of Ex-Im believe that the Bank serves a vital role of stimulating the American economy. Opponents view Ex-Im as a form of corporate welfare with little to no benefit to anyone else. Who is right? Should we even care about the fate of Ex-Im? Let's take a closer look as to what Ex-Im actually does.

Ex-Im subsidizes American exports through government direct loans and loan guarantees to other countries. According to Ex-Im, not only do they "turn export opportunities into real sales," but the idea behind this intervention is to "level the playing field" because if other governments are doing it, why shouldn't we? Ex-Im naturally wants you to believe that they make a positive difference. It's called self-preservation. However, since it is a financial institution that deals with numbers, it should be relatively easy to measure the fiscal magnitude of such government interaction.

The Congressional Budget Office (CBO) recently published a report on Ex-Im and its costs. When assessing costs here, one has to be able to differentiate between the FCRA's (Federal Credit Reform Act) method of accounting, which the Ex-Im uses, versus fair-value accounting. The CBO describes this in further detail. What fair-value accounting accounts for [that the FCRA does not] is the idea of market risk. The Wharton School's Financial Economist Roundtable, Price Waterhouse Cooper, and the Harvard Business Review also found fair-value accounting is preferable because the accounting process Ex-Im uses understates the costs of Ex-Im's programming. What the CBO found in its study on Ex-Im is that when using fair-value accounting, Ex-Im actually costs $1.6B over the next decade (CBO, p. 2), which is different from the $14B gain that proponents tout.

Furthermore, we should not substitute political decision-making for market-based decision making. Why? Because when you do that, you heavily subsidize large companies that milk the system to further line their pockets. In spite of Ex-Im's claim that 90 percent of its transactions are with small businesses, the vast majority of the money that Ex-Im loans goes to large corporations. Take a look at the firms that receiving funds, and it reeks of corporate welfare: Boeing, Caterpillar, General Electric, Ford, Exelon.

What doesn't help is the recent charges of fraud. It doesn't exactly help that only a third of its portfolio goes towards offsetting foreign subsidies, which is its primary goal. Even the jobs numbers that it claims are most probably overstated (General Accountability Office, 2013). What annoys me about proponent claims is that the claim of jobs numbers and export numbers assumes a static model, i.e., if Ex-Im, nothing would replace it, which is decidedly not the case. It's hard to see the victims because we cannot simultaneously compare the net economic benefits of a hypothetical world without the Ex-Im. If we take a brief look at the economics of export subsidies, export subsidies reduce world consumption and consumer efficiency. Looking at the evidence I have already presented, theory seems to line up with practice.

The 98 percent of the $2.2T in annual exports America already have private loans and function just fine. In a $1.6B loss in ten years is small in an economy that has a GDP of $16T a year, yes, this is relatively small. Even with its $107B portfolio ($113.8B according to the Congressional Research Service), it's a drop in the bucket compared to what the Federal Reserve Bank does. This would not be a solution to deal with the size of the federal government debt, but rather send the message that corporate welfare and crony capitalism, or what I like to call "crapitalism," are unacceptable. The symbolism behind Ex-Im acts more as a litmus test of small government than anything else.

It doesn't matter if we stop with the protectionism and other countries don't because they are still harmed. Just because other countries metaphorically jump off the bridge with their protectionist policies doesn't mean we should follow suit. There are better ways of going about improving the state of our exporters without subsidizing them, which is all the more true since the largest beneficiaries are large corporations that can easily adjust their financial practices. Reduce regulatory burdens. Make meaningful tax reform, particularly with the corporate tax. We don't need an Export-Import Bank financing large companies to improve upon our economic wellbeing, and that really should be the message behind allowing Ex-Im to end its charter.

8-27-2014 Addendum: The Mercatus Center presents a good argument against export subsidies in the video below.

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