The new House majority leader, Kevin McCarthy, has announced his opposition to renewing the charter of the Export-Import Bank. Kudos to him. The Ex-Im Bank is ripe for elimination.
The 80-year-old agency, created by executive order under President Franklin Roosevelt and chartered as an agency by Congress a decade later, extends loans and loan guarantees to foreign companies that seek to buy U.S. products. The bank has become a shining example of U.S. government cronyism.
At first glance it would seem that the Ex-Im bank plays an important role in promoting American exports. After all, the U.S. trade deficit has been cited as a major factor in the newly-revised 2.9 percent contraction of U.S. GDP in the first quarter of this year. But over 98 percent of U.S. exports do not depend on the Ex-Im bank, and most of the 2 percent that do would occur without the support of the agency. American exporters are readily able to send their products abroad without government assistance.
Throught the Ex-Im Bank, foreign companies can access cheap financing from the bank to buy products from American producers. Supposedly, this increases the demand for U.S. exports. While this may sound appealing in theory, in practice it raises prices for U.S. buyers that do not have access to Ex-Im funding. In effect, the bank subsidizes foreign companies at the expense of domestic ones.
One of the largest beneficiaries of Ex-Im funding is aircraft manufacturer Boeing. In fiscal year 2013, the Ex-Im Bank authorized $12.2 billion of loan guarantees to foreign companies. Sixty-six percent, or $8 billion, of these guarantees went to foreign companies purchasing products from Boeing. This is a boon for Boeing and its foreign customers, but it hurts American companies such as Delta which have to pay a higher relative price for their jetliners. These costs are passed on to consumers in the form of higher airline fares. One estimate claims that the reduced competitiveness of U.S. airlines due to these higher prices has cost the industry 7,500 American jobs.
Proponents of the Ex-Im Bank argue that it is needed to compete with other countries such as France that provide generous support for their exports. However, the vast majority of U.S. exports do not depend on subsidies from the bank, and the subsidies that do occur hurt American consumers by raising prices. The U.S. should increase efficiency by ending corporate welfare, not participate in an export-subsidy arms race.
The bank’s authorizations are backed by the full faith and credit of the U.S. government and may require a bailout should the bank’s debtors default on their loans. In the private sector, there is a risk of failure, so banks have to make loans based on the profitability of the project . The backing of the government transfers this risk to taxpayers.
With no risk of failure, the Ex-Im Bank chooses to support certain businesses on the basis of their connections or lobbying power, not on their merit. Boeing, the bank’s largest beneficiary, spent $15.2 million on lobbying in 2013, an indicator of its extensive political reach. Among the bank’s other beneficiaries, the story is even more insidious: several officials at the bank are currently facing investigations for accepting gifts or bribes in exchange for Ex-Im financing.
Mr. McCarthy surprised the business world when he said the bank is “something government does not have to be involved in. The private sector can do it.” Mr. McCarthy is right. When the bank’s charter comes up for renewal later this year, Congress should decide to shut it down. Doing so would be an important first step towards reducing the cronyism so common in Washington.
Preston Cooper is a rising senior at Swarthmore College an intern at the Manhattan Institute. You can follow him on Twitter here.
Interested in real economic insights? Want to stay ahead of the competition? Each weekday morning, e21 delivers a short email that includes e21 exclusive commentaries and the latest market news and updates from Washington. Sign up for the e21 Morning eBrief.
Clik here to view.
Clik here to view.
