Among the nation’s failing financial institutions the Export-Import Bank has received little notice. Now, however, the House and Senate are considering whether to reauthorize the bank. They should not. It was a bad idea to begin with, and the market is currently developing better ways to meet its stated goals without putting taxpayer money at risk. It is time to do away with this outdated mercantilist institution.
Why do we have a bank to subsidize exports at all? This stems from a fundamental economic misunderstanding — that exports are good and imports are bad. In fact, both are beneficial to an economy. Essentially we export goods to pay for the goods we import. If we are wealthy enough to pay for the goods we import without exporting, we are still better off.
When we subsidize exports, we are paying to export things with money we could be using to import more things we actually want. To be competitive, imports need to be more affordable than home-grown goods. Therefore, imports lead to savings. That means that we free up wealth to use elsewhere in the economy, which is why the idea that we should subsidize exports to provide jobs is also a myth.
There is no economic case for the Export-Import Bank. Yet its supporters claim that it is solving a case of market failure by providing taxpayer money for risky ventures that are unable to attract conventional funding. Unfortunately for this line of argument, the Ex-Im Bank has a dual mandate — to subsidize these ventures but also to lend money only when there is a reasonable chance of repayment.
It is difficult to square that particular circle. If something has a reasonable chance of repayment, private sector funding should be available for it. If something is too risky for conventional funding, that is what venture capital is for. Using taxpayers’ money to finance the venture is the worst possible choice. As former Obama adviser Larry Summers acknowledged in comments about the Solyndra boondoggle, government makes a terrible venture capitalist (though he put it somewhat more crudely).
Moreover, today it is becoming easier than ever for investors to back projects they like. Many are familiar with “crowdfunding” methods like Kickstarter and Indiegogo, which raise capital for small start-ups and risky ventures that probably could not get conventional bank loan funding. It is quite conceivable that more sophisticated versions of these vehicles will evolve to back the sort of export ventures that the Bank funds, but at no risk to the taxpayer.
The government, in its wisdom, is blocking such an evolution. Arcane rules put in place supposedly to protect investors are in fact blocking willing investors from linking up with entrepreneurs. As a result, the number of Initial Public Offerings has fallen dramatically over recent years, and companies are becoming more and more dependent on debt financing, with all the risks that entails.
The bipartisan JOBS Act, which seeks to promote crowdfunding, is currently held up in the Senate as defenders of the status quo, like Senator Jack Reed of Rhode Island, seek to protect the Wall Street-centered fortress of securities regulation that was designed for an era long before the Internet. This intransigence is all the more perplexing in light of the fact that the JOBS Act is expressly designed to spread risk and stop the chance of anyone losing his shirt.
The efforts to reauthorize the Export-Import Bank are the other side of this intransigence — a defense by the Washington establishment of a system that uses taxpayer money to defend special interests. In this case, the proposal is to spend up to $160 billion of taxpayer money on risky projects that have a solid chance of repayment.
Of course, the Senate being the Senate, its leadership’s view of compromise is to attach these two contradictory approaches together under one bill. Thankfully, enough Republicans realized this that they have stopped the attempt to conflate the two issues, but that may make it more difficult for the JOBS Act — which even Maxine Waters voted for in the House — to pass the Senate.
There will also surely be another attempt to reauthorize the Export-Import Bank, but it remains a clear case of two wrongs not making a right. Either way you look at it, the Export-Import Bank math doesn’t add up.