Back in April, President Trump announced the nomination of former New Jersey Representative Scott Garrett to be president of the Export-Import Bank. Garrett would replace Fred Hochberg, a longtime liberal and devoted friend of the Clintons. Trump also announced the nomination of former Representative Spencer T. Bachus III to the Ex-Im Bank’s board.
When it comes to the Bank, the only thing the nominees have in common is that they were former Republican congressmen. However, they differ widely in their views on the Bank. On one hand, we have Representative Garrett who was a great ally in the fight some of us in the free-market movement led against the crony agency over the last four years. On the other hand, you have Representative Bachus who has repeatedly embraced the redistribution of privileges from the federal government to large and wealthy manufacturers and foreign companies in the name of our need to boost U.S. exports – in spite of evidence that the Bank accomplishes neither goal.
Unfortunately, the ideological differences that exist between the two men don’t matter much to those of us who have fought hard to see this quintessential example of cronyism disappear once and for all. If the two are confirmed, the Bank will return to full operational capacity after some 20 months in which the agency was unable to extend loans exceeding $10 million due to the lack of a board quorum.
Indeed, since July 1, 2015, the Bank has been unable to engage in its most outrageous activities: extending billions of dollars in direct or guaranteed loans to foreign firms so that they can buy goods — goods they likely would have bought without the handout — from multinational companies such as Boeing and General Electric.
GE CEO Jeff Immelt has argued repeatedly that the government’s failure to finance his buyers’ loans (or to back them with taxpayer dollars) is outrageous, while at the same time railing against President Trump’s anti-trade position. That’s funny since it is the existence of industrial policies that try to artificially boost U.S. exports, through agencies such as the Ex-Im Bank, that make Trump’s trade policy “protectionist.” But you can understand why GE loves the handouts provided by Ex-Im, even if the company doesn’t really need them: They boost the company’s profit artificially and give it an edge over competitors. GE loves those handouts so much that it actually receives them from many other governments. In fact, the company — which employs more people outside of the U.S. than domestically — is one of the top-ten beneficiaries of the European version of the Ex-Im Bank.
It is worth noting that both GE and Boeing are also major players pushing for the destructive border-adjustment tax that would eliminate all taxes on revenue generated by exports. That’s a sweet deal for them — but awful for importers who get stuck with the bill. These companies are a great example of why Milton Friedman and my colleague Matthew Mitchell often said/say that cronysim is the greatest threat to capitalism: We now have many companies that rely on extracting major favors from the government at our expenses. They want low taxes and light regulations with a side of government subsidies, cheap loans, and government rents.
Back to Garrett, it is pretty funny to see how the many pro–Ex-Im Bank lawmakers in Congress are freaking out about Garrett’s nomination.
“I think there is a legitimate concern about whether this nominee will fulfill the commitment we have to American workers to get the bank up and running,” said Senator Heidi Heitkamp, Democrat of North Dakota, who helped make the case to Mr. Trump that keeping the bank alive was aligned with his goals of promoting American manufacturing. “You have to make sure you are not putting someone there who is a saboteur.”
And here is what Republican senator Lindsey Graham had to say:
“You can want to reform the bank, that’s OK,” said Sen. Lindsey Graham, a South Carolina Republican and bank supporter. “If you’re going to try to be a Trojan horse, try to shut down the bank, you probably won’t get confirmed. . . . I just don’t want somebody who doesn’t believe in it being chairman of it.”
I’m not sure what all the hype is about. Garrett can’t “sabotage” the bank without the help of Congress or a willing board. And, unfortunately, Congress lacks the discipline and principle to do what’s right. I assume that’s because many on Capital Hill can’t see the difference between being pro-business (pro-cronyism) and pro-market. Heitkamp and Graham’s freakout seems unwarranted.
I also assume that, like Graham, Heitkamp is open to reforming the Bank. Or does she actually like it the way it operated under Hochberg? Does she hope that the Bank can return to business as usual? I hope not — because that would mean spending massive amounts of our money, and letting the corruption, fraud, and abuse in the Bank continue while refusing to implement the reforms mandated by Congress.
So assuming that reasonable people can see the need for reforms, what is needed is someone who is fully aware of the Bank’s profound dysfunction and can take the lead in reforming it. This is why — while the best policy would be to close the Bank entirely — I believe that Garrett can be a strong voice for reform.
Here are a few ideas:
Investigate corruption, fraud, and abuse at the Bank and take measures to end those practices;
Redefine “small business” to actually reflect small business, not large companies;
Increase the quota for how much of the Bank’s money goes to small-business lending. My preference would be to go from 20 percent to 100 percent; but I would be relatively satisfied with 60 percent. That would be consistent with the desire of President Trump — who has claimed that his flip-flopping on Ex-Im Bank (he opposed the Bank during the campaign) is in large part due to the Bank’s support of small businesses.
End the rationale for the Ex-Im Bank’s lending as a way to countervail foreign subsidies. Export subsidies don’t boost overall job numbers or GDP, nor do they affect the balance of trade. As a Congressional Budget Office report explains: “Subsidized loans to exporters will increase employment in export industries, but this increase will occur at the expense of non-subsidized industries: the subsidy to one industry appears on other industries’ books as increased costs and decreased profits.” Even the pro–Ex-Im American Action Forum admits that “export financing merely redistributes jobs across the economy rather than create more overall jobs.” In fact, academic research has shown that when you take under consideration all the costs shouldered by non-subsidized companies and consumers, the net effect of Ex-Im can be negative. As such, it is time for Congress to understand that if France wishes to subsidize its exporters at the expenses of its economy, we should let them do it.
End the environmental quota;
Prohibit lending to state-owned companies;
Prohibit lending to companies that have access to credit elsewhere (they would need to show evidence of that rather than just state that they can’t get credit, as they do now);
Move to a fair-value accounting system so that taxpayers can actually know what Ex-Im actually costs them. If this accounting technique is good for the private sector, it should be good for government agencies too;
Make the agency more transparent on all fronts. We should require full disclosure of all borrowers, lenders, domestic beneficiaries, and all terms for every transaction and a detailed report of the rationale behind the lending; require publicly issued monthly transaction reports (including any defaults that took place and the expected costs of the defaults, as well as a credible calculation of the subsidy costs — including the effects on non-subsidized firms and workers.)
I have more ideas but let’s start with those.