- Some libertarians believe that a fallen world can make do with the Garden of Eden’s governing institutions
- The world is not one frictionless credit market, and it is harder to seize the assets of a debtor in Sierra Leone than in Spokane
- What we have here, then, is a federal-government program of at most negligible cost that helps exporters compete with foreign firms
The Export-Import Bank is under attack, more so than ever since its founding in 1934. The federal agency, responsible for providing export financing to American businesses, has quite suddenly become a lightning rod for some conservatives and libertarians. These critics of the bank see it as a “Petri dish of corruption and graft” and the “very definition of corporate welfare.” They believe that it should be “put out of its misery” to “level the playing field.”
Where these emotions come from is quite clear. When the 2008 financial crisis brought the U.S. financial system to the brink of collapse, the Bush administration designed the Troubled Asset Relief Program (TARP) to purchase distressed assets and provide liquidity to struggling financial institutions. The bill authorizing this program initially failed to pass the House of Representatives, but a fiercely negative market response led to its eventual passage, and some of the key players at the heart of the subprime mortgage crisis were bailed out with taxpayer money. This was an unfortunate necessity, and it did not sit well with large swaths of the voting population. A backlash against crony capitalism ensued, and opposition to bailouts grew to be widespread.
This opposition is welcome: private gains and socialized losses form a poisonous mix that produces precisely the kind of moral hazard from which costly crises are born. That said, like so many well-intentioned sentiments, it is easily taken too far. This is particularly true when it leads one to embrace the utopian views of some libertarians, who believe that a fallen world can make do with the Garden of Eden’s governing institutions. The combination of visceral opposition to any kind of government interaction with the private sector and a desire to exploit popular discontent about the supposedly pernicious practices of Big Business can do real damage to the free-enterprise system and to the constancy of the laws and policies upon which it relies.
The fight over reauthorization of the Export-Import (Ex-Im) Bank is a case in point. The Ex-Im Bank is a federal-government agency that provides export financing in the form of working capital guarantees, export credit insurance, loan guarantees, and direct loans to foreign buyers. Why would the federal government want to engage in those kinds of activities? Because the world is not one frictionless credit market, and it is harder to seize the assets of a debtor in Sierra Leone than in Spokane. One need only have a look at the tremendous difficulties Argentina’s creditors have faced in recouping loans that came due over a decade ago to see that there are real barriers to the unhindered flow of credit in the global marketplace. Because of its sheer size, it is much easier for the federal government to take on credit risk, and by holding a large, diversified portfolio of loans and guarantees, the Export-Import Bank has managed to run a small profit, or, according to its detractors, using different discounting rules, an annual loss of about 0.000% of the federal budget.
What we have here, then, is a federal-government program of at most negligible cost that helps exporters compete with foreign firms, in foreign markets, on, yes, a level playing field. It provides exporters with help that compensates to some extent for the barriers imposed by borders, for the rules and regulations that differ widely from country to country, and for the imperfections of the rule of law once trade crosses national boundaries. There may be some who believe that international law and international courts are instruments powerful enough to take care of these frictions. A quick look at the progress made on the international criminal-law front should make those people reconsider their position. The skepticism many conservatives have traditionally shown toward such solutions seems more than justified in this case.
It should not come as a surprise, then, that the kinds of loans and guarantees provided by the Ex-Im Bank are highly effective. For many exporters, credit constraints limit the growth of their sales and reduce the numbers of workers they are willing to hire. Evidence from Germany, a major exporter with government-provided export-financing programs similar to those supported by the Ex-Im Bank, suggests that firms that receive export guarantees see their sales grow by over 4 percent and their workforce by 2.5 percent. These programs are, naturally, most crucial in sectors where credit constraints are particularly important, such as aviation and shipbuilding. It should be reassuring that the Ex-Im Bank has indeed managed to focus on such sectors: Boeing, for example, is often cited as an important customer of the bank.
Overall, then, the Export-Import Bank plays a useful role in sustaining a truly global marketplace, in which firms compete based on productivity and service, without being subject to the frills of fussy governments. For that reason alone, the Export-Import Bank deserves to be reauthorized. But perhaps even more importantly, drastic changes of course, like the sudden abolition of a sizable federal agency, should not arise out of the blue. Such policy making, particularly when it is not driven by new evidence, insights or events, produces the kind of maddening uncertainty and unpredictability a prudent government should strive to avoid.