For decades, the Export-Import Bank limped along at the margins of American politics, a rightfully obscure program regarded as neither particularly interesting nor important but sustained by and subject to the banal to-and-fro of interest group politics. It was criticized politically, to the extent it was criticized at all, mainly on environmental grounds as a funder of dirty energy projects. But a long-shot reformist presidential candidate by the name of Barack Obama also criticized it as an example of the kind of wasteful corporate welfare he thought the country shouldn't tolerate.
Later, as president, Obama came to see the virtues of the bank’s central purpose of providing a subsidy to big American manufacturing companies and the jobs they support. But a surge of ideological rigorism associated with his Tea Party opponents, some money from the Koch brothers, and a little old-fashioned lobbying from a major airline made killing the bank a right-wing cause célèbre.
Then along came Donald Trump.
Trump is not exactly an ideological rigorist. Nor is he a person whose life and career bespeaks a deep aversion to crony capitalism. He ran for president as a booster of American manufacturing and a fierce proponent of the view that international trade is a game with winners and losers. That seems to make him a perfect fit for the bank. And indeed, when moderate Democratic senators from states Trump won met with him on February 9 to discuss possible areas of collaboration, they emerged saying that Trump was on their side on the Ex-Im Bank. This impression was reenforced when Trump made a well-received campaign stop at a Boeing plant in South Carolina, since Boeing is the bank’s main interest group backer.
It was surprising, then, when the New York Times reported on Friday that Trump’s Office of Management and Budget team was preparing a budget that would eliminate the bank. This sets the stage for a renewed policy battle that is interesting in its own right, while also highlighting the unique dynamics around the Trump administration’s ideological proclivities. The president campaigned in many ways on the idea of moving the GOP left on economic issues. But the victorious outsider has staffed his administration with Republicans who largely dissent from the party leadership in the exact opposite direction.
The Export-Import Bank subsidizes manufacturing exports
The agency at the center of this controversy is not really a bank at all in its current form. What it does instead is offer loan guarantees to private banks that are willing to lend money to foreign companies that are interested in buying American manufacturing exports. A company in, say, Guatemala might want to buy some heavy industrial equipment and might need a loan to afford it. If the Guatemalan firm is willing to consider purchasing said equipment from a US-based manufacturer, a bank could get the loan guaranteed by the Export-Import Bank in exchange for a small fee.
Since the US government is guaranteeing the loan, there is little to no risk to the bank. That means the bank is willing to make the loan for a lower interest rate than it would demand for a regular loan. That makes the industrial equipment cheaper to buy, and that makes the American manufacturing company more likely to win the contract.
In a practical sense, far and away the biggest beneficiary of the bank was Boeing, which at one point was gobbling up about 40 percent of Export-Import Bank money. An airplane is, however, the kind of big, complicated product that is itself assembled out of many smaller components. So loans to support the purchase of Boeing aircraft have downstream benefits for a larger range of stakeholders.
The Export-Import Bank is profitable — but it’s not costless
The key conceptual issue around the Export-Import Bank is that it operates at no fiscal cost to the American government. Because the US federal government is an extraordinarily creditworthy institution (after all, if it goes bankrupt, every other borrower of dollars is going to have a worse problem), it can borrow dollars at a lower interest rate than anyone else. That makes borrowing money and then lending it out again, which is essentially what the Ex-Im Bank does, a pretty lucrative line of endeavor for the American government.
A really poorly managed loan program could, of course, still make money. But a moderately competent one — and the Ex-Im Bank qualifies — turns a pretty steady profit.
But that doesn’t mean federal credit programs are costless. If they were, it would make sense to extend loan guarantees to everyone. But the way the American economy works is that the Federal Reserve essentially rations credit across the entire economy — raising interest rates to prevent inflation from getting out of control or cutting them to spur growth.
This means that in normal times (a boring caveat that will be important later), the cost of a federal loan guarantee is ultimately born in tiny increments by each and every American who doesn’t get a special loan. The guarantee can’t expand the total amount of credit in the country, just funnel it toward certain favored purposes.
The bank debate has implications for student loans
Free marketers don’t like this very much, and they especially don’t like the fact that loan guarantees’ lack of fiscal cost makes them politically appealing. Consequently, a movement has been underfoot for years to abandon the current account practice around loan guarantees and instead use something called fair value accounting. Under fair value accounting, loan guarantee programs would be assessed as if the government’s borrowing costs were the same as the private sector’s. This would more accurately capture the economic value of the subsidy involved, though at the cost of doing some violence to understanding what’s literally happening on the government’s balance sheet.
If you apply fair value accounting to the Export-Import Bank, it no longer registers as profitable, which makes it a lot less politically compelling.
What’s more, while the Export-Important Bank isn’t a particularly big deal in the grand scheme of things, the federal student loan program is a huge deal in higher education. The same basic accounting debate that applies to the Ex-Im Bank also recurs in the context of student loans. The bank is a much politically softer target than the student loan program, but a fair amount of the logic behind killing the bank has implications that would imperil or limit student loans.
Legally speaking, these are separate issues. But accounting for the student loan program under fair value rules would end up forcing loan rates up, restricting their availability, or both.
The Ex-Im Bank nearly died in 2015
One wrinkle in Ex-Im Bank politics is that it boosts exports of manufactured goods but not exports of services.
If a European airline flies an American-made plane full of people to the United States, the United States is exporting a manufactured product (an airplane) but is not exporting any services. But, if an American airline flies a European-made plane full of people to the United States, the United States is exporting a whole bunch of services (the plane flights) without exporting any goods. Consequently, the Export-Import Bank is in effect subsidizing US-based airlines’ competitors. That, understandably, annoys them, and Delta (which has been investing in wide-body Airbus planes from Europe lately) in particular began lobbying during Obama’s term to kill the bank.
Delta was joined in this by the Koch brothers, major conservative donors who were trying to refashion the conservative movement as more ideologically zealous about free markets and less transactionally solicitous of big business. With major legislative accomplishments essentially off the table as Obama closed out his final two years in office, these forces persuaded conservative Republicans in Congress to make a major stand against the Export-Important Bank in 2015.
Business groups normally aligned with the GOP supported the bank, but the party’s increasingly vocal right flank bucked them and prevented Congress from reauthorizing the bank, causing all new loan activity to cease on July 1, 2015. The bank’s defeat proved illusory, however, as Republican leaders allowed a bipartisan transportation funding bill that passed in December to also provide for the bank to be recharted through 2018 — simultaneously saving the bank and confirming Tea Partiers’ sense that Republican leaders had never truly been on board for their crusade.
Trump seems like he should love the Ex-Im Bank
The major critique of the Export-Import Bank — that it doesn’t make sense to ask a huge number of Americans to each pay a small price in order to help prop up a relatively small number of manufacturing jobs — is essentially identical to the main criticism one would make of trade protectionism in general. Since Trump, rather famously, upended the Republican Party’s recent decades of opposition to trade protectionism, it seems like you would expect him to look favorably on the Export-Important Bank.
What’s more, another key argument for the bank is that the United States is not the only country out there with an export finance agency. If we choose to get by without one, that won’t usher in a free market utopia — it would just render our exporters uncompetitive, playing on a slanted field.
Trump, as we all know, loves to compete and win.
So it wasn’t a huge surprise when West Virginia Democrat Joe Manchin emerged from a meeting with Trump saying that the president had told him, “I’ve seen how it functions and what it can do and we can’t compete if we don’t have a functioning Ex-Im Bank.” After all, shortly after the meeting, Trump was speaking at a Boeing plant about how great the airline’s made-in-America aircraft are. So why wouldn’t he support an agency dedicated to promoting the competitiveness of American manufactured goods — especially planes — on the world stage?
Trump campaigned left, but staffed right
The basic Trump formula on the campaign trail was to embrace hard-line rhetoric and policy stances on issues directly touching on ethnic identity, while shifting to the left on some big economic policy issues. Trump disavowed Republican efforts to cut Social Security and Medicare, embrace congressional Democrats’ longstanding criticisms of free trade deals, and promised vaguely but repeatedly to replace the Affordable Care Act with something “terrific” that would “take care of everybody.”
This brought him into considerable conflict with the party establishment over the months, so it’s natural that much of the staffing of his administration has a somewhat anti-establishment flare.
The wrinkle is that before Trump came along, “anti-establishment” conservative politics consisted almost exclusively of dogmatically right-wing politics — things like rebelling against party leaders in an effort to get the Export-Important Bank killed. The Heritage Foundation, a very down-the-line right-wing think tank and advocacy organization, wound up playing a key role in the Trump transition project. And Heritage was a leading crusader against the Export-Import Bank. So was Mick Mulvaney, a South Carolina House Republican whom Trump has tapped to run his White House budget office. So it’s not entirely surprising that a Mulvaney-headed office likely staffed with like-minded midlevel people is preparing a budget that endorses the orthodox conservative view of the Export-Import Bank rather than a Trumpier one.
This pattern is likely to recur on issue after issue. Even though Trump campaigned against Tea Party absolutism on economics, his administration is, on a rank-and-file level, staffed with Tea Party absolutists and will probably default to those positions. On a high priority issue like Social Security, the letter of Trump’s campaign promises will almost certainly trump the underlying sentiments of his team. But Trump isn’t nearly disciplined, organized, or committed enough to have created a team that reflects the underlying spirit of Trumpism or an overarching Trump philosophy.
That’s how you get an administration that says one thing in a meeting with Manchin while drawing up a draft budget that does the opposite. Where the final Trump proposal actually lands will tell us a lot about the balance of forces inside the White House, and how serious Trump about trying to push forward his new ideological synthesis.