The New York Times’ crusading columnist Joe Nocera is an unlikely supporter of crony capitalism. Yet this week he has come out unabashedly in favor of the Export-Import (Ex-Im) Bank, on the grounds that it is a “most useful government agency.” Yet a look at how it works suggests that that supposed usefulness is based on a outdated economic fallacy, and that what is useful to firm A is in fact harmful to firm B.
Think of it this way: What do Solyndra and the Ex-Im have in common? Solyndra was a politically connected company funded by taxpayers. The Ex-Im Bank provides loan guarantees for export projects that are considered too risky for private lenders, which most of that money going to politically connected businesses. In essence, they both embody cronyism at its worst. But there’s one difference: Ex-Im is still around and we’re still paying for it.
Where is that money going? One would expect some of the biggest recipient of loans would be poor countries, where public or private financing might not be available for industry to purchase equipment from the United States. Not so. Instead, the biggest recipient of Ex-Im Bank loans last year was my native country, the United Kingdom, with almost $2 billion in loans, according to the bank’s own figures. You read that right. Through Ex-Im, American taxpayers are subsidizing one of the world’s wealthiest countries, home to the global center of finance and a modern and growing economy. Almost half the bank’s current exposure is to loans and guarantees made to OECD countries. The bank is subsidizing the developed world.
That’s just the beginning. In terms of current total exposure, the biggest recipient of Ex-Im funding has been Mexico, our partner in the North American Free Trade Area and a growing economy, with over $9 billion in loans, guarantees, and insurance. Vibrant, emerging India is next, with $8 billion, followed by oil-rich Saudi Arabia and the United Arab Emirates, with over $6 billion each. Clearly, the products provided by Ex-Im are not going to economies where private funding is unavailable.
But let’s take a step back and ask why government would need to subsidize exports in the first place. As Henry Hazlitt pointed out in his brilliant primer, Economics in One Lesson, “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” With an export guarantee we should just look not just at who benefits, but at who doesn’t benefit from the scheme.
Companies whose exports are not guaranteed suffer. In fact, a company in such a situation might be prevented from coming into existence in the first place, having been placed at a disadvantage to its politically connected competitors. As Hazlitt put it, “What is put into the hands of B cannot be put into the hands of A.”
When government backs “risky” ventures, it risks creating another Solyndra. Bureaucrats make unnecessarily risky bets with taxpayer money. Yet, bureaucrats at the Ex-Im Bank still seem to think this is a good idea based on mercantilistic notion of “exports good/imports bad.” Have they heard of Adam Smith?
The free market allows firms and individuals to manage great risk — and great reward — quite well, when it is allowed to function. By discouraging foolish investments, it is the best risk management mechanism yet devised. In the field of international trade, it’s time to set the market free. The Export-Import Bank is an 18th century solution to a 21st century problem. It is outdated, blinkered, and not even fit for purpose. It is time for Congress to drop its guarantee.