The Corner

What Is Seen and What Is Unseen, Ex-Im Edition

The Chamber of Commerce, as you know, is a key supporter of the Export-Import Bank and a leader of Big Business’s “all hands on deck” lobbying effort to reauthorize the bill this year. As part of that effort, it released a presentation called “Don’t Myth the Facts: 5 Things You Need to Know About the Export-Import Bank.” 

Since the Chamber is so eager to separate myth from fact, I thought it would be useful to help them straighten out their own myths. Here is each myth and the corresponding facts that the Chamber overlooked:

1) The Chamber claims that the bank makes a profit for the Treasury, but the CBO recently debunked this falsehood, showing that on a fair-value basis Ex-Im will actually cost taxpayers billions over the next decade. At the very least, the Chamber should mention this information.

2) The Chamber claims that the bank supports small-business transactions, which is a convenient way to hide the fact that the bank’s own records show that only 19 percent of the amount of Ex-Im assistance went to small businesses last year. No amount of spin will change this reality: the Ex-Im Bank is in the “big business” business.

3) The Chamber claims the bank boasts a healthy default rate, but the bank’s own Inspector General has criticized its default reporting and calculation practices for years, warning that “Ex-Im Bank’s limited definition of default may result in an understatement of Ex-Im Bank’s historical default experience.”

4) The Chamber claims that Ex-Im supported over 200,000 American jobs in 2013, but the Government Accountability Office reports that Ex-Im’s job methodology calculation is terribly flawed. As the GAO suggested, any mention of this number should be accompanied by a warning about the limitations behind the methodology so that groups like the Chamber of Commerce don’t unintentionally mislead people.

And, of course, the numbers don’t consider the potential loss of employment wrought by the artificial boost granted to a specific industry or company. For instance, when Ex-Im ”facilitates” the sale of Caterpillar equipment to Australian Gina Rinehart’s mining group, Hancock Prospecting, for her Roy Hill iron-ore project, it ends up harming other U.S. companies like the iron-ore-mining firm Cliffs Natural Resources. (For more examples of these Ex-Im-induced tragedies, read the excellent new report on the issue by economist Diane Katz.)

Surely the Chamber doesn’t believe that the livelihoods of Caterpillar employees are more important than the livelihoods of the U.S. mining employees who lost their jobs because of this deal. However, its actions do indeed favor certain jobs over other jobs. The Export-Import Bank is not so much “pro-jobs” as it is “pro-jobs for companies that we like.”

5) Finally, the fear mongering: The Chamber claims that “billions of dollars in U.S. exports and tens of thousands of American jobs will be put at risk.” Oh, please. The Bank subsidizes less than 2 percent of US exports each year. The other 98.4 percent of non-subsidized US exports have gotten on fine without the bank – and the bank’s flawed jobs math means that concern is way overstated too. While it is true that a recipient of an Ex-Im handout would rather have it than not, it is incorrect to argue that none of the 1.6 percent of exports backed by Ex-Im would happen without Ex-Im. Who believes that the richest woman in Australia doesn’t have access to capital? 

But I can already hear the complaints from the Ex-Im boosters. They will smear anti-protectionist activists against Ex-Im subsidies as callous traitors who don’t care about U.S. companies, U.S. exports, or even actively sympathize with foreign firms.

Here’s an example:

“Republicans are being encouraged to self-destruct again in a misguided pursuit of ideological purity,” said Fratto, a former spokesman for President George W. Bush. “The bottom line is this: Failure to reauthorize the Export-Import Bank would wreak havoc on U.S. exports and export growth. . . . Foreign firms will cheerfully compete for overseas  by Savings Hen”>business with their own export credit support.”

Fratto here is Tony Fratto, the current managing director at Hamilton Place Strategies and the Export-Import Bank’s unofficial one-man cheerleading squad. As you can see, Fratto sees no problem with subsidizing private corporations. Frattonomics dispenses with the large economic literature on the harmful effects of subsidies; including market distortions, malinvestment, and painful regressive readjustment periods that hurt economically vulnerable populations the most (and, yes, even the firms that receive subsidies get hurt in the long run). Instead, he believes that ending subsidies is not “free market” stuff, just an inconvenient fixation of ideological purists.

It does not take an “ideological purist,” however, to check the Census records, as I have reported above, and check how few exports are backed by Ex-Im.

But let’s address his claim that “the idea that U.S. exporters — and only U.S. exporters — should go into a global trade market without export credit support is dumb.” That’s not really what opponents of Ex-Im cronyism argue, but for the sake of argument, let’s consider the claim in the most charitable light. Is it true that the Export-Import Bank’s activities primarily counteract massive foreign export subsidies?

The data show that the bank is a clear leader in the very offenses that Mr. Fratto claims it’s necessary to counteract. Indeed, the U.S. is one of the largest export-credit subsidizersMore important, according the Ex-Im Bank’s own data, we know that that less than one third of the bank’s portfolio actually even goes toward meeting this kind of foreign subsidized competition. Ending political favoritism to this tiny portion of U.S. exports is hardly the stuff of “wreaking havoc,” wouldn’t you agree?

But there’s also a simple theoretical reason to be skeptical of arguments that cutting U.S. subsidies would be a “disaster” for the U.S.: Protectionism has great unseen costs.

What about normal people like you and me, who don’t have federal connections, corporate press offices, and manufacturing might? What about other companies who get hurt by Ex-Im’s policies? For instance, what about businesses who got crowded out of financial markets because they lacked the government guarantee that their competitor received? We’ll never see the business that could have been. Perhaps these businesses would have been better, more efficient, or more conscientious than the politically connected firm who secured the subsidy. And what about the consumers? What about domestic airlines that have to compete with foreign airlines like Air China or Lion Air, the lucky winners of Ex-Im deals? What about airline consumers who are likely to face higher prices because of Ex-Im activities?

These are the critical, unseen costs that Fratto and other Ex-Im boosters appear happy to overlook. 

It’s not that Washington doesn’t know about these costs. A Congressional Budget Office (CBO) report on the Bank from way back in 1981 explains that, under normal conditions, “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.”

As the great 19th-century French economist Frederic Bastiat so presciently pointed out in his fantastic essay “What is Seen and What is Unseen,” the disparate effects of government intervention are pervasive, preemptive, and pernicious. Any pharaoh can steal his subject’s money and build a pyramid or a General Electric turbine and boast of his glory to the world. He can even come up with a list of talking points to fool citizens into thinking these vanity projects are for their own good. But only just and wise rulers will consider what is best for the greatest number of people, not merely those who are paid to flatter them at the court.


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