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The Export-Import Bank is an 80-year-old government agency that subsidizes US exports in a big way — it authorized almost $27 billion in export support in 2013. But despite a long history of bipartisan support and strong backing from the business community, it has become a major target for tea party and conservative activists who see it as an example of crony capitalism, and on June 30th, Congress failed to renew its charter and the agency shut its doors. The question now is whether Congress revives it in the coming months.
What is the Export-Import Bank?
On June 30th, the Export-Import Bank closed down — at least temporarily — because Congress failed to reauthorize its charter. The closure was a victory for tea party and reform conservative groups who managed to overcome aggressive lobbying by heavyweight business groups like the Chamber of Commerce and the National Association of Manufacturers and took down an institution that few thought vulnerable.
Which raises an obvious question: what is the Export-Import Bank?
The Export-Import Bank is an 80-year-old government agency that subsidizes foreign purchasers of US-made products. It does this by loaning money to foreign buyers of US products, by guaranteeing private-sector loans to foreign buyers of US products, and by insuring foreign buyers of US products against risk.
In practice, this can look a bit strange: the Ex-Im Bank (as the nerds call it) will help foreign airlines purchase Boeing jets, but it won't help Delta purchase Boeing's jets. What's more, the bank won't subsidize many classes of service exports (as opposed to manufacturing exports) — so Delta can't get a subsidy for exporting travel services to the foreigners who fly Delta to the US. This isn't a hypothetical example: airplanes are a major element of the Bank's portfolio and so Delta fights against it (though they don't want to see the Bank terminated altogether).
Other examples of Ex-Im Bank projects, culled from a 2014 Congressional Research Service report, include: a $48.6 million direct loan for a biogas project in Brazil that uses renewable energy technologies from California's Firmgreen, a $19.9 million guarantee on a loan from HSBC Bank to a Nigerian company purchasing a liftboat from Louisiana's Offshore Liftboats, and a $694.4 million loan to Australia's Roy Hill Holdings for the purchase of mining equipment from US manufacturers like Caterpillar and General Electric.
The scale of the Export-Import Bank's operations is impressive: the Bank authorized almost $27 billion supporting exports in 2013. But it chooses its loans carefully and actually made a $1.1 billion profit in 2013. And while $27 billion is a lot of money, the US exports a lot of goods: only about two percent of US exports are backed by the Ex-Im Bank.
The Ex-Im Bank's charter was set to expire in September 2014, and some congressional Republicans threatened to let the institution dissolve altogether. House Republican Leadership, however, managed to extend the Bank's charter until June 30th. A second reprieve wasn't forthcoming, however, and the Bank shut down. Some believe that the closure will be temporary, and Congress will move forward on legislation to reauthorize it in July.
The fight has become a testing ground for "reform conservatives" who want to see their party hack away at the ties between big business and big government.
What's the case against the Export-Import Bank?
A good summary of the criticisms against the Export-Import Bank can be found in this brief from Cato's Sallie James.
"The Ex-Im Bank claims to correct market failure, but it introduces distortions into the economy and inserts politics into what should be purely commercial decisions," she writes "By diverting resources from the private sector, the bank's activities produce a less-efficient economy and lower general standard of living than would occur in a free market for export finance."
The point about introducing politics into commercial decisions is key. The Export-import Bank has become a symbol for conservative concerns about "crony capitalism": the idea that when big businesses and the government begin working together, it undermines the free market by giving incumbents an advantage they can use to crush new firms, and it strengthens the government by giving it powerful allies in the business community.
Many reform conservatives want to see Republicans take down the Export-Import Bank as a statement against crony capitalism. They also believe it will help Republicans show that they're for free markets, not just big businesses. As the American Enterprise Institute's Timothy Carney put it, "Defense of free markets is often caricatured by the left as being, 'This is just a defense of big business of corporate America.' ... The best way to show that the defense of free markets is about free and open competition is for the leaders of free enterprise to stand up and fight against corporate welfare."
Or, as Carney's colleague Michael Strain explained, "Ex-Im exists in a political context, which is that conservatives are increasingly comfortable saying the following: Taxpayer-financed corporate welfare and crony capitalism are bad. Growing comfort with that phrase is a good thing. My hope is that the Battle of Ex-Im will be the first in a long war that will unwind other instances of corporate welfare and crony capitalism. For its symbolic importance alone, the bank should not be reauthorized."
What's the case for the Export-Import Bank?
There are a few key arguments for the Export-Import Bank. The biggest, perhaps, is that the countries America is competing with have similar institutions — and so if America lets its Export-Import Bank close, American manufacturers will lose out on key deals.
"Particularly for expensive, long-lived capital goods such as aircraft, nuclear reactors, locomotives and earth-moving equipment, U.S. companies are bidding in competition with foreign companies that are backed by very generously funded export credit agencies of their own," explained John Murphy, vice president for international policy at the US Chamber of Commerce. "Bids from all tenders must come with official export-import credit agency backing, which Ex-Im uniquely provides in the United States. So the bottom line in those cases is that without Ex-Im, U.S. companies aren't even able to bid."
The bottom line, according to the Bank, is that their work creates jobs. The Export-Import Bank claims that "by financing the export of American goods and services, Ex-Im Bank has supported 1.2 million private-sector, American jobs since 2009, supporting 205,000 jobs in 2013 alone."
There's some disagreement among economists about the long-term effect on jobs in the absence of the Bank. But there's more agreement that given the depressed state of the economy right now, the Export-Import Bank is creating jobs. "This is exactly the moment when ending an export-support program really would cost jobs," wrote Paul Krugman.
AEI's Michael Strain, an opponent of the bank, agrees. "In a low-demand economy like ours, it probably is the case that the Ex-Im Bank can support employment. So in an ideal world we would keep the Ex-Im Bank until the labor market recovered, and then wind it down."
Who supports the Export-Import Bank?
The political coalitions around the Export-Import Bank are fluid. But to generalize, support traditionally comes from business-oriented Democrats and Republicans while opposition emerges from the more liberal and conservative wings of the two parties.
This is in part because every business interest you can think of backs the Bank. The Chamber of Commerce and the National Association of Manufacturers have been lobbying hard on the issue. This presentation the Chamber created gives you the flavor of their campaign:
They've also mobilized local businesses to lobby individual members of Congress, which tends to be among the most effective ways of securing votes. "Members of Congress having been hearing more from companies of all sizes — particularly from the smaller companies that are their constituents — about how important Ex-Im is to them," John Murphy, VP at the Chamber of Commerce, told the Washington Examiner. "So we're starting to see members of Congress gain a broader understanding of the Bank's value and how it supports jobs.
President Obama also supports reauthorization. This is a reversal from his 2008 campaign where he declared the Export-Import Bank "little more than a fund for corporate welfare" that could be safely excised from the federal budget.
The Obama administration explains their current support for the Bank as being partially the result of some 2012 reforms that strengthened oversight on large loans and boosted borrowing to small businesses (the Bank brags that 90 percent of their loans go to small businesses, though this is somewhat misleading, as the loans that go to large business are much bigger in size and account for a majority of the Ex-Im Bank's budget). They also note that, given the depth of the 2008 recession, this isn't the time to end programs that support hundreds of thousands of jobs.
The Export-Import Bank was last reauthorized in 2012. The vote in the House was 330-93, and the vote in the Senate was 78-20.
Who opposes the Export-Import Bank?
Opposition to the Export-Import Bank right now is primarily on the right. Influential Republicans like Reps. Jeb Hensarling and Paul Ryan, as well as Sen. Rand Paul, have come out against the Bank. So too have important conservative interest groups, like the Club for Growth, and it's become something of a uniting cause among reformist conservative intellectuals.
The movement against the Bank became much stronger with the unexpected defeat of House Majority Leader Eric Cantor. Cantor was a strong supporter of the Bank who had been essential in its 2012 reauthorization, but after his defeat, he was succeeded as majority leader by Kevin McCarthy, who quickly announced that he would oppose the Bank's reauthorization. McCarthy told Fox News that the Bank is "something government does not have to be involved in. The private sector can do it."
While most handicappers in Washington believe the Export-Import Bank will survive, it's by no means a sure thing. It's important to note, in particular, that all that has to happen for the Bank to fold is...nothing. Keeping the Bank alive requires the passage of new legislation but killing it simply requires that Congress do nothing, and in general Congress is better at doing nothing than something.
The Export-Import Bank also looks likely to become an issue in the 2016 presidential campaign — and particularly in the Republican primary, where it will be a way for insurgent candidates to signal their opposition to the Republican establishment in Washington. Texas Governor Rick Perry, for instance, went gone from begging Congress to reauthorize the bank in 2014 to telling Congress to let it die in 2015. Louisiana Governor Bobby Jindal, another 2016 hopeful, has also called for closing the Bank.
The Export-Import Bank has historically had many liberal detractors, too, but opposition among Democratic members of Congress has quieted in the Obama era. There were zero Democratic votes against the Bank's 2012 reauthorization.
How much does the Export-Import Bank cost?
One of the complexities of the Export-Import Bank debate is that unlike most government programs, it doesn't cost anything. In fact, just the opposite — the Export-Import Bank is a profitable business that the government happens to run. So eliminating it would slightly increase the budget deficit.
How much?
Well, over the past five years profits have amounted to $2 billion after accounting for loan defaults and all administrative expenses. During a really bad recession year, the Bank might be afflicted by a huge wave of defaults and lose money. But then again, one can easily imagine five-year runs for the world economy that go better than the past five years during which the Ex-Im Bank would turn an even larger profit.
There are no guarantees for the future, but historically the bank has been a moneymaker. What's more, the public-private partnership aspect of the bank ensures that money goes to projects that private financial institutions think are likely to be profitable.
Of course just because something makes money doesn't mean it's a good idea. Heroin vending machines in public high schools would make money, but we don't install them anyway. Nevertheless, the lack of identifiable budgetary costs to the Export-Import Bank is a challenge for its opponents — a challenge they try to meet with fair value accounting.
What's Fair-Value Accounting?
Fair-Value Accounting (FVA) is a methodology that opponents of the Export-Import Bank and other federal loan or loan-guarantee programs like to use.
The way FVA works is that instead of looking at the amount of interest the federal government actually pays to borrow the money to finance a credit program, you look at the market rate of interest that a private entity would have to pay. Since the market rate of interest is always higher than the federal government's cost of funds, FVA tends to make profitable federal credit programs look unprofitable.
The FVA concept captures two ideas very well.
One is that by using the market rate of interest it illustrates the real value of the subsidy received by the beneficiaries of federal credit programs. The other is that by using the market rate of interest it illustrates the opportunity cost to the federal government of using funds to make cheap loans rather than market rate loans. These are both important ideas, and an excessively simplistic look at the cost of federal credit programs will overlook them.
On the other hand, using FVA principles in a budget-writing context (as FVA proponents tend to demand) is a bit of an odd idea. Budgetary costs aren't the be-all and end-all of public policy analysis, but they really are the be-all and end-all of budgeting. FVA is essentially a proposal to incorporate non-budgetary issues into the budget.
The important thing to remember is that, at the end of the day, it is not that impressive for the federal government to construct a program that turns a profit. Unlike a business, the federal government can print money which would be a trivially easy way to turn a profit. The government's cheap borrowing costs are fundamentally a consequence of its money-printing ability (since it can't run out of money there's no risk of default), and those cheap borrowing costs are what make federal loan programs profitable.
What are some other good sources on the Export-Import Bank?
- The 2014 Congressional Research Service report is an excellent overview of what the Bank does and how it does it.
- If you want to dig into the accounting arguments around the Export-Import Bank, Congressional Budget Office Director Doug Elmendorf's testimony before Congress is the most authoritative source.
- Fred Hochberg, President and Chairman of the Export-Import Bank, made the case for the Bank before Congress.
- Sallie James' brief for the libertarian think tank Cato is a good summation of conservative arguments against the Bank.
- If you want to see the two sides go head-to-head, this debate between Tony Fratto, a supporter of the Export-Import Bank, and Tim Carney, a critic, is worth watching.
