Export-Import Bank's Success Means Crony Capitalism

(Image of Boeing 747 via Boeing's website)

Recent news reports regarding the Export-Import Bank (Ex-Im Bank) have been notably upbeat. Most cite the bank’s recent “investment” success, noting that it enjoyed a record number of transactions in fiscal year 2012. Yet, these stories and facts largely miss the point. As a government-backed institution, Ex-Im can not only put taxpayers on the hook if it makes bad investment bets, it can also rig the odds against other businesses that would rather not play Washington’s game.

While the Ex-Im Bank benefits from press coverage praising its portfolio – giving the impression it is particularly well suited to help the U.S. economy – many of these articles confuse the difference between loans that don’t need a taxpayer bailout and crony capitalism. In a crony-capitalist world, investments are made by government-chartered entities, often in products and companies that have failed the test of the marketplace: the ability to attract willing financiers on sound economic merits. Instead, money can be steered to ventures with only tenuous promise (which can fail) or with political appeal (which can succeed, but to the disadvantage of non-subsidized companies).

Those failures have proven embarrassing – for instance, $10 million of now-bankrupt Solyndra’s federal largess came from the Ex-Im Bank. Yet, the lesser known long-term effect of this or any similar government-sanctioned intrusion can be quite destructive. Favoring the most politically-connected businesses entails a blatant disregard for companies that don’t have friends in high places – even if that means passing over the best, cheapest and most effective products. It also means viable alternatives are artificially handicapped in their ability to compete. This is the last thing the U.S. needs as our economy continues to sputter.

And here is the central dilemma Ex-Im faces. In order to keep its portfolio from sagging and putting taxpayers on the hook for future Solyndras, the bank must often invest in large, established firms that are already highly profitable. Over the years this has included firms such as General Electric, Caterpillar, and Dell. Another example is aerospace giant Boeing. In 2012, nearly 83 percent of the loan guarantees issued by the Ex-Im Bank benefitted Boeing, meaning of the $14.7 billion in loan guarantees, $12.2 billion helped bolster the company’s sales. 

Ironically, Ex-Im’s mission of aiding U.S. companies like Boeing in their battle against often-subsidized foreign competitors means collateral damage here at home. Domestic carriers have been forced to cut jobs and international routes as they suffer from an unfair system where the U.S. underwrites equipment-financing for foreign airlines. One U.S.-based carrier estimated that the Ex-Im Bank costs the domestic airline industry up to 7,500 jobs and $684 million per year.

And the bleeding is likely to continue: in just the last few weeks it has been reported that the bank approved $500 million to finance the export of Boeing Dreamliners to Poland, as well as “backing bonds issued by Ethiopian Airlines of Addis Ababa to finance the export of four of ten Boeing 787 Dreamliner aircraft to Ethiopia,” according to the government agency’s site.

This comes on the heels of news reports that debt-ridden Air India has been unable to find a lessor for five of its Boeing aircraft, which the Ex-Im Bank helped finance.

Thanks to Ex-Im’s murky approval process, Americans have largely been left to guess how and why the money flows. Critics on the left and right – ranging from self-proclaimed socialist Senator Bernie Sanders to the editorial page of The Wall Street Journal – have argued that politics can play an alarming role in the decision making process. Ex-Im’s Fiscal Year 2013 Advisory Committee includes Christine Gregoire, governor of Washington, where the company was founded, and Owen Herrnstadt of the International Association of Machinists and Aerospace Workers, which is the chief union that engages in bargaining with Boeing and represents tens of thousands of its workers. Is it any wonder Ex-Im has been dubbed “Boeing’s Bank”?

Fortunately, though, lawmakers demanded some modest reforms when the bank’s re-authorization came up for a vote in the spring. Concerned Members of Congress were able to insert language into the bill that at least contemplates a phase-out of the bank’s subsidization practices, as well as more transparency in the loan-evaluation process.

Washington would better serve our economy by working to tear down trade barriers and subsidies, not creating more of own in response to what other countries do. Most important, our leaders must act on comprehensive tax reform emphasizing lower rates, simpler rules and a broader base of taxation that doesn’t discriminate against anyone – whether it’s an airplane manufacturer, an airline or a bank. But for now, at least, the Treasury Secretary would be well advised to follow the path paved by the last reauthorization bill; hopefully, it could mark the beginning of a combined effort on both ends of Pennsylvania Avenue to wind down the bank’s activities.