Scott Sumner  

Whither the Ex-Im Bank?

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The Ex-Im Bank is often considered a near perfect example of crony capitalism. But the politics of Ex-Im are very messy, perhaps the most confusing and complicated of any issue:

1. Obama opposed Ex-Im as a candidate, and then supported it in office.
2. Trump opposed Ex-Im as a candidate, and has recently signaled that he will support it.

But that's just the beginning. Is Ex-Im an example of special interest politics that almost all idealistic pundits oppose, like sugar subsidies? Is it a left/right issue? Is it a pragmatist/ideologue issue?

And if Trump does support Ex-Im, why does the budget his staff is preparing call for abolishing Ex-Im.

Matt Yglesias has an excellent article on Ex-Im, which looks at the issue from many different angles. (He does a good job explaining why Trump's staff doesn't agree with Trump.) But it's such a complex issue that even he doesn't really cover all the bases. For instance, Yglesias implies that support for Ex-Im is the "left" position on this particular issue. But he doesn't really explain why the left would favor crony capitalism subsidies for big corporations like Boeing. Yes, jobs are one argument, but since when does the left believe in "trickle-down economics"?

Matt also suggests that Trump would be expected to support Ex-Im because he favors protectionist policies that favor a few special interests at the expense of the broader American public. That's a good argument, but an equally strong argument can be made the other way. Protectionist policies tend to reduce the amount of international trade, both imports and exports. An export subsidy like Ex-Im tends to have exactly the opposite effect. It tends to boost both exports and imports, hurting American companies that compete against Mexican and Chinese exports. Does Trump know this? Trump also seems to oppose a stronger dollar, but Ex-Im makes the dollar stronger.

In the end I believe that the complexity of the Ex-Im issue is due to the fact that divisions occur on multiple fault lines:

1. Ideology: Interventionism vs. laissaz-faire
2. Ethics: General interest vs. special interests
3. Factual: Does Ex-Im create jobs, or not? Does it boost GDP?
4. Regional: About 40% of Ex-Im loans go to Boeing

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I always find the factual debates to be the most interesting. It's hard to know where the "left" should stand on this issue until one can resolve the factual issues surrounding things like job creation. The fact that some on the left support Ex-Im while opposing cuts in corporate tax rates suggests to me that they have a fairly primitive model of public finance. Some people on the left (and right) would benefit from reading Bastiat on "What is Seen and What is Not Seen".

On the right, it exposes a division between the ideologues and the pragmatists. But it's often hard to distinguish between normative and positive disagreements. It's quite possible that these two groups within the GOP also differ on the key factual questions. I've noticed that even people who are not utilitarians (which is most people) often resort to utilitarian arguments to make their case. They seem to (implicitly) believe that it's the only thing that will convince the other side.

As is often the case, I'm a pragmatist who ends up siding with the ideologues, and all because my view of the "factual" issues differs from the view held by the vast majority of people. And that's because I pay more attention to the "unseen" than most other people. One thing that makes Yglesias's post so good is that he's one of the rare non-economists who actually do pay attention to the unseen:

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.


PS. One other point. Like government subsidies to NPR, the Ex-Im bank is largely a symbolic issue. There are far worse examples of crony capitalism, such as agricultural subsidies. And it's almost infinitely less important than the differential tax treatment of debt and equity.

Update:
Daniel Klein directed me to a very interesting article looking at how liberal and conservative pundits reacted to (or ignored) the debate over the Ex-Im Bank.




COMMENTS (10 to date)
Mike W writes:

What is the "cost of a federal loan guarantee" if the guarantee is not exercised and the interest payments cover the administration costs?

Don Boudreaux writes:

Scott: Nice post. Here's my proposed, even simpler answer for why Trump supports the Ex-Im Bank: Trump is a classic mercantilist. Mercantilists believe that countries are enriched by exports and impoverished by imports. When Trump learned that Ex-Im stimulates "seen" U.S. exports, he concluded that it is a dandy institution.

Scott Sumner writes:

Mike, It could lead to capital being misallocated to areas that are less productive (the point Matt makes in the passage I quoted.)

Don, Yes, and would you agree that mercantilists are often unaware that export subsidies also subsidize imports?

Don Boudreaux writes:

Scott: Yes, I agree. Mercantilism makes no economic sense to anyone who understands economics, but it does make sense to many who do not.

AlanG writes:

Trump's background as a real estate developer makes him look loaned money as important. This is exactly the job of the Ex-Im bank. Would Boeing sell as many aircraft if they didn't get the money? We don't know and of course their principal competitor Airbus is highly reliant on government(s) funding. Perhaps the rational case can be argued that the Ex-Im bank levels the playing field for Boeing vs. Airbus.

I liked your PS regarding agricultural subsidies and would like to see some of your thoughts. In my mind I wonder if these are even needed as sophisticated farmers can always hedge positions. Additionally, why shouldn't an dynamic insurance industry take the place of subsidies?

Tyler Cowen writes:

Think of Ex-Im as a tool of the executive branch *for foreign policy* and handing out goodies to recalcitrant governments, mostly to build other deals. Presidents will tend to favor it, Congress much less so.

Thomas L. Knapp writes:

A suggestion:

I knew that "the Ex-Im Bank" refers to the Export-Import Bank of the United States before I arrived at this post.

I suspect most other readers did as well.

Most.

Not all.

You might want to identify what you're talking about in full before spending an entire article referring to an abbreviated name for it.

Just sayin' ...

Andrew_FL writes:

Ex-Im supporting being "left wing" is a good example of how people like to define the polarity of ideology in a historically contingent way rather than with reference to timeless principles or ideas.

Ex-Im is a New Deal program and a policy that was supported by Obama when in office. Opposed by Tea Party candidates and the KOCH BROTHERS [thunderclap]. Ipso facto, leftwing.

This is not a very helpful way of defining ideological positions if you want to have rational discussion-especially about history-but it is how people like to define "left" and "right"-I suspect because it makes weaponizing them as terms of abuse more easy.

mariorossi writes:

I don't really understand the debt versus equity arguement you make very often.

Assuming that an investor is in the top income tax bracket, the tax differential between equity and debt is not very big.

Let's assume I need to fund a venture: I can loan money to it, or I can buy equity in it. Assuming I am the soler owner, the economics wouldn't be very different. If I loaned the money, I would need to pay 39.6% tax on any interest payment, plus ACA surcharge so about 43.6%. If I bought equity, I would pay 35% tax rate on corporation tax, plus 20% capital gain tax on the remaining 65%, for a total tax of 48%. Assuming I can mitigate my corporation tax in any way, the tax rate is very similar.

This is a bit different for someone in a lower tax bracket (who would benefit more from buying bonds rather than equity).

Given that the effective corporation tax rate is significantly lower than the official 35% (due to all kinds of incentives), the total equity tax rate is actually significantly lower.

In the UK, the tax regime is set-up so that there is no tax advantage to fund a company through equity or loans: the tax rate is exactly the same. The main reason to prefer debt to equity is that returning capital is potentially more complicated: you need permission from existing bondholders to reduce capital base below a certain amount, while no such constraint exists on loans. On the other side, there is a small advantage to equity in terms of tax deferral (you only pay income taxes when you liquidate the investment). Whenever the governemnt changes any tax rate, they adjust the others so that

(1 - corporate tax rate) * (1 - divided tax rate) = (1 - top income tax rate)

I don't think the same concept applies to the US, but the net effect is not very different.

In the US you have some distortion from the tax deferral on overseas income, but I doubt it's huge. You can just lend the money to a bank from offshore and simply borrow it back onshore. This is just a wash for you, which simply allows you to defer corporation tax indefinetly. Most US corporations have done this recently which likely makes equity investment overall cheaper than debt.

I agree the entire concept of taxing corporations is a bit pointless. They are a convinient place where to get the money, but they do make things more complciated.

Modigliani-Miller simply assumes no personal taxes, but that's not the bulk of the market, even it can be a significant percentage given tax exempt institutions (which mostly get tax deferrals to be honest so it's a weaker effect than at first sight).

Scott Sumner writes:

Alan, Governments should not be trying to "level the playing field" by copying the bad policies of others.

Tyler, Does the executive branch control who gets loans?

Thomas, OK.

Andrew, I think you are agreeing with me (that it's odd that support for Ex-Im is viewed as left wing).

Mario, Interest is tax deductible, dividends are not.

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