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Commentary

Let the Ex-Im Bank Fail


     
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Neither you nor I can open an account at the Export-Import Bank in Washington, but major U.S. exporters and foreign buyers of those exports can and have. The list of the bank’s largest clients includes global business behemoths like Boeing, John Deere, Ford Motor Co. and the giants Merck (in pharmaceuticals) and Bechtel (in engineering). China, Saudi Arabia and other destinations of American exports also are on the list.

A legacy of FDR’s New Deal, the Ex-Im Bank was created at a time when the Great Depression and protectionist international trade regulations (the infamous Smoot-Hawley Tariff Act of 1930 is the chief culprit) had caused American exports to shrink dramatically. Agriculture was hit particularly hard by that manmade economic disaster and the prices farmers received for their crops had fallen off a cliff. The Ex-Im Bank, crafted in 1934, and headed initially by George Peek, an old Washington insider from WWI’s War Industries Board and, later, a top administrator of the Agricultural Adjustment Act of 1933, subsequently declared unconstitutional by the U.S. Supreme Court, was supposed to help prop up domestic farm prices by subsidizing agricultural exports to Europe and other overseas markets.

Fast forward to 2014, when Congress will consider legislation to “reauthorize” the bank’s charter, which expires on September 30. Last year, the Ex-Im extended roughly $27 billion in loans, loan guarantees and credit insurance to both domestic and foreign companies in order to promote exports of American goods overseas, bringing the bank’s total contingent liabilities to about $140 billion.

The Ex-Im Bank supplies credit to U.S. companies to “facilitate” exports by guaranteeing any loans exporters offer to purchasers in foreign nations buying American goods on extended repayment plans. Because every dollar of the money obligated by the Ex-Im Bank is backed by the “full faith and credit” of the federal government, the overburdened American taxpayer is on the hook if any borrower fails to repay.

Readers can be forgiven for thinking that this sounds a lot like the recent financial crisis, which was precipitated by now-insolvent Fannie Mae and Freddie Mac’s guarantees against default on the home loan portfolios of commercial banks and other mortgage lenders. If the federal government underwrites loans to anyone, lenders will be less careful in making them.

But in any case, Boeing—one of only two assemblers of long-distance commercial aircraft in the world (other than Canada and Brazil, which specialize in smaller, “regional” jets)—hardly needs a U.S. government guarantee to sell its planes to China, Saudi Arabia and elsewhere. Nor do the state-owned airlines in those nations need such guarantees to buy them. True, Boeing’s main competitor, Airbus, is a government-financed enterprise, but because European taxpayers bankroll Airbus is no reason for the United States to bankroll Boeing.

Somewhat ironically, the Ex-Im Bank’s reauthorization may be in trouble not from opposition by taxpayers or some economists, but because of labor unions’ resistance.

A recent editorial in the Detroit News reports that miners and the companies that employ them in Michigan’s Upper Peninsula are outraged by a loan to an Australian iron ore producer (owned by that nation’s richest woman) to subsidize the purchase of equipment because it threatens a shift of mining jobs to the Antipodes. Delta Airlines and the American Pilots Association also have sued the Ex-Im Bank for granting guaranteed, low-interest loans to foreign airlines, which give them a competitive advantage over U.S. air carriers.

It is a truism of international economic theory that “imports pay for exports.” When Americans buy goods from suppliers overseas, those suppliers in turn earn dollars that can be used to purchase goods manufactured in the United States.

Any public policy that interferes with the free flow of international commerce (whether it subsidizes exports or penalizes imports) makes the world poorer.


William F. Shughart II is a Research Director and Senior Fellow at The Independent Institute, J. Fish Smith Professor in Public Choice in the Jon M. Huntsman School of Business at Utah State University, and editor of the Independent Institute book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.


  New from William F. Shughart II!
TAXING CHOICE: The Predatory Politics of Fiscal Discrimination
So-called “sin taxes”—the taxing of certain products, like alcohol and tobacco, that are deemed to be “politically incorrect”—have long been a favorite way for politicians to fund programs benefiting special interest groups. But this concept has been applied to such “sinful” products as soft drinks, margarine, telephone calls, airline tickets, and even fishing gear. What is the true record of this selective, often punitive, approach to taxation?






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