Most Americans have lived their lives in blissful ignorance of the Export-Import Bank, founded under Franklin Roosevelt and still based in Washington D.C.
But people in international commerce have relied upon its backstop and confidence-building role for decades. Customers making multi-year, multi-billion-dollar purchases have preferred the idea that governments are also standing behind the deal, even when the world’s biggest corporations are involved.
That all changed this summer, when a rump group of Tea Party Republicans plus some allies on the left (notably including, to his discredit, Bernie Sanders) succeeded in blocking the previously uncontroversial reauthorization of Exim. The notes collected on this page go into the ramifications of this move. The Exim bank can still administer its old loans but not issue any new ones. Here’s how its homepage looks now:
Why does this matter? To repeat the point, since it’s left out of so many public discussions, it’s because high-stakes, big-ticket international commerce often depends on governments backing or at least blessing the deals. We’re talking about the billion-dollar sales of large numbers of aircraft; about years-long programs to build power plants or transport systems; about deals that are enormously consequential from both the buyer’s and the seller’s perspective, and where they foreign purchases are often governments (or government-related) themselves.
The ExIm Bank actually makes money for the U.S. government, rather than costing money. For students in Ec 101, this might suggest that some private bank could just step in to fill the gap. But, again, in the real world, purchasers in Europe or China or Latin America or the Emirates want to know that the U.S. government is standing behind the transaction. That is How The World Works.
The ExIm’s opponents can’t be bothered with any of this, because they think that in theory companies “shouldn’t” need ExIm’s help. And they shouldn’t. But they do. Thus we have what I described yesterday as a drive toward the failed state, in which basic functions of governance are undone. Below are more real-world accounts of the damage such zealotry is doing.
From a reader with extensive, first-hand professional experience in the international aircraft business:
• The issue of subsidizing Boeing and GE had already been addressed in the Aircraft Sector Understanding at the OECD. Details here. There was concern that export credit was supporting [ie, subsidizing and thus distorting] OECD trade and it was felt that this was inappropriate, so minimum rates had been agreed and published with regular updates … to ensure that Boeing and Airbus and GE and Rolls Royce don’t use export credit as an unfair trade tool to developed countries.
The rates were already causing a fall off in export credit utilization. The countries that remained attractive were the lesser jurisdictions and credits. The Tea Party was solving a problem that was already solved.
• The periods when ExIm lending to aviation increased were after 9/11 and then during the financial crisis, two major events that Boeing and GE did not create but had to deal with anyway. After the market settled, lending went back to private markets.
To put this issue in perspective, the first 737 went into service in 1966, 49 years ago. When Boeing plans a model like the 787, they’re looking at 5 or so decades of production for investment return and given the current rate of financial crisis, this implies 2 or so funding market crises per decade, or perhaps 10 during the useful life of the factory. I think it only rational for Boeing and GE to look for help elsewhere given this strategic fact and their significant investment.
• The fact that ExIm has a low loss rate has a lot to do with strategic advantages the private sector cannot reproduce. Countries do not want to default on the US government, but they don’t give a damn about JPMorgan as they’ll just turn around and go to Deutsche Bank the next day. ExIm can also interfere with things like USAID and other bilateral negotiations if they have an outstanding balance. Again, an advantage that cannot be duplicated in the private sector.
• Curious, why aren’t the banks complaining? Are they not the ones who are losing the spread income because the government has crowded them out?
***
I’ve been watching up close for 3 years. I’ve reviewed the portfolio at ExIm [in a professional role]. I’ve built several risk pricing models while at [a major manufacturer] for internal transfer pricing and I wrote the business case for [an international assessment of possible subsidies].
I’ve run [a very large] derivative hedge portfolio and have been pricing risk in one form or another for roughly 30 years. The upshot is, It’s stupid on several fronts to close it down, financially, strategically as a lender of last resort when markets fail, and strategically as a facilitator for marginal jurisdictions where individuals and corporations would get fleeced by the locals.
I have listened to the silly libertarian dogma since my undergrad days and find it as empty as Marxism and just as lethal.
***
From someone not directly involved in these industries:
I grew up in Texas and was a Reagan Republican, but I've decided to never vote for any Republican that doesn't stand up to the Tea party idiots. Boehner made a start, calling them false prophets, but only after he quit….
As far as the Export-Import Bank, maybe there is a free market solution to the problem, but my wife works in a bank, with small business customers that import and export, and I'm told it's insane to just shut down the bank. We need to do this over a period of time, because it will harm the small businesses that use it.
Finally, from an American entrepreneur who several years ago started his own manufacturing and travel-related business:
Last month, in the midst of the very busiest part of our season we received a notice from the IRS that we owed a 10% penalty on our 2012 wages. (10% of our entire wages paid. Not 10% of the taxes owed, 10% of all 2013 wages).
The reason for the penalty had nothing to do with non-payment of any sort. The reason was that we had not filed the W-2s for our employees during an early construction phase of our project. This was supposed to have been done by our payroll service, but apparently was missed. Again, all associated taxes had been paid. Four slips of paper with figures accounted for in other tax documents had not been filed and the IRS did not notify us of our oversight for three years.
When we inquired why it took them till 2015 to get in touch with us for a 2012 tax issue the agents response was that with the various government shutdowns, sequesters and whatnot they did not have the staff to get to things in a timely fashion…
I suppose the "fire-breathing caucus" of the GOP would be happiest if we simply didn't have tax collection, or regulatory oversight of the design and construction of [vehicles in our business]. But in the meantime we do, and in the meantime not having enough government is making my life as a small businessman harder, not easier.
Here’s another challenge for the press — and members of the American public, and people in the rest of the world affected by U.S. debates — in reckoning with this moment in U.S. political history. It’s one that Paul Krugman, with whom I’ve sometimes disagreed about politics, mentions almost as a throwaway line in his column early today, as shown at right.
The United States still has two major parties. But one of them is no longer interested actually in governing. And we’re dealing with the consequences.
Running any government, in any country subject to any kind of non-Kim Jong Un-style checks and balances, involves compromises, tradeoffs, making the best of imperfect choices. As John Boehner put it yesterday (a phrase I didn’t imagine myself writing) in explaining his frustration with his fire-breathing caucus, “You know this is the part that I really don't understand. Our founders didn't want some parliamentary system where if you won the majority you got to do whatever you wanted to do. They wanted this long, slow process.”
That Republican party competition now is over positions — who can be more anti-Obama (and Obamacare), pro-Israel, anti-Planned Parenthood, anti-climate science and EPA — rather than over policies, which imply the tedious work of operating a government, is a familiar point. Here are two less familiar reminders than the momentum in the party is not about this or that policy detail but effectively against governance itself.
1) From Australia, the American security-policy veteran Aaron Connelly (now with my friends at the Lowy Institute in Sydney) writes about the damage that anti-governance paralysis in Congress has done to America’s position in Asia. You should read the whole essay, but here is his description of the key points:
There are three core arguments:
· First, while partisan gridlock in Congress has hindered the execution of US foreign policy overall, it has disproportionately affected US policy towards the Asia Pacific, because the region has had few champions in either house in recent years. See, for example, the unequal treatment of ambassadorial nominees for the Middle East and and East Asia during the GOP lockdown on appointments last year, which I address in the paper.
· To the extent individual members have focused on the region in recent years, it has often been in pursuit of narrow objectives focused on a single country or issue area, without reference to a broader strategy...
· Though there are signs of increased interest in the region among more junior members of the current Congress, the nature of that interest and whether it can be sustained will depend on how the White House and its partners in the region engage them. The problems of Congressional dysfunction, as you well know, aren’t going away soon. But we can cultivate leaders who better understand the stakes.
So when it comes to the region that contains the world’s most populous nations and its fastest-growing economies, and where long-term U.S. security interests are enormous in both a positive and a potentially negative sense, today’s posturing Congress cannot be bothered to do such things as confirming ambassadorial nominees.
***
2) From General Electric, an announcement that it is moving 350 jobs from the United States to Canada because of the ongoing Tea Party stand of blocking the Export-Import Bank.
Could this be posturing by GE to shift an American policy? Yeah, maybe. But if it were just about politics, would GE really care enough to put its own resources at risk? Far more convincing is this line from the WSJ account (emphasis added):
GE says that financing from an export credit agency such as Ex-Im is required for some $11 billion of projects for which it is preparing bids, including power turbines, generation equipment and aircraft engines….
GE says the Ex-Im fight is one of necessity because export financing is a condition to qualify for bidding on many projects, and other countries are willing to supply financing in exchange for GE shifting manufacturing work to their shores.
In the real world of big-ticket, high-stakes, often government-involved infrastructure and aerospace purchases, purchasers often require sovereign government backups, from the likes of ExIm or its counterparts, as a condition for a deal. But today’s party that doesn’t like government doesn’t care about destroying the governance on which real-world business depends.
***
When I began these ExIm chronicles ten days ago, I wrote the following, which for a moment I considered rash. Unfortunately I realize that it is not rash. It’s just plain accurate:
I could be polite about this, but I won’t. The people bringing down the Export-Import bank are zealots who care more about their theories than the completely foreseeable damage they are doing to American workers and companies.
We see nations with dysfunctional governments and call them “failed states.” This is not the announced destination of an anti-governance drive, but it is where it leads.
Thanks to our new threaded-notes feature, you should see all previous installments in this series below. The purpose of this one is to give some answer to the question “Why on Earth should I spend two seconds thinking about the Export-Import Bank??” for the 99% of the U.S. population that has never previously spent even a single second that way.
A Scot in unusual headwear, producing a distinctively keening bagpipe sound. Also shown: a bagpiper with kilt and sporran. (Hardee har!) Everything Donald Trump has said about immigration could, with equal “accuracy,” be applied to the Export-Import Bank. (2010 Reuters photo / David Moir)
Here’s why: you could think of it as a parallel to the immigration debates, or in different ways to the culture wars, or the impending struggle over shutting down the government, or other extremism-vs.-centrism pressures in national politics and within the GOP. In all these cases, we have real-world trends that indicate one thing, and fevered political rhetoric that indicates another.
In immigration, the real world trends are:
illegal immigration from Mexico has long been falling;
in a number of recent years more people have moved from the United States to Mexico than the other way;
immigrants (legal and illegal) have lower rates of criminality than native-born Americans; and
the process of assimilating outsiders, which has always been disruptive throughout U.S. history (involving German and Irish in the mid-19th century, Eastern Europeans after that, Chinese before and after, a broad sampling of the world’s people since the 1964 reforms that reduced the preference for white-European immigrants; Latinos through the southwest; refugees from the Soviet empire and Cuba and Vietnam and Somalia and elsewhere), has overall been a tremendous source of American economic and cultural success and vitality. There is no evidence that the assimilative process is proving less effective now than it was in the 1840s or the 1880s or at other high-inflow times.
But immigration as it appears in the GOP debates is a two-minutes-to-midnight threat to everything precious in the country. (“They’re sending rapists” etc.)
So too with ExIm! In reality it makes money for the federal government (let me repeat that: it pays money into the federal treasury, rather than drawing it out); it matches in much less intrusive ways what other governments do; it gives no evidence of causing serious distortions in market workings; and it has been part of the successful ecosystem both for some of America’s largest and most generally admired tech giants (Boeing, GE) and also the smaller-company supply chain they buy from. Presidents of both parties have supported it. Through the George W. Bush era funding measures passed the House and Senate by unanimous or overwhelming votes.
Yet in the political rhetoric that has succeeded in defunding the ExIm bank, the reality is the reverse. The bank wastes taxpayer money; it exposes the taxpayer to huge risks; it badly distorts markets; and stopping it is a step toward rolling back the over-extended crony-capitalist state.
For the most reasonable-sounding, University of Chicago version of this argument, please see the previous entry. That one also included a response from Robert Rackleff, a former Bank staffer (and longtime friend of mine), on the realities of how the bank operates. Now, a few more logs on the fire.
***
Mike Lofgren was for many years a Congressional budget staffer, mainly working for Republicans. He has become well known through his book The Party Is Over, an essay on “The Deep State,” and an upcoming book on the deep-state theme. He writes:
Robert Rackleff is absolutely correct. The premiums and interest ExIm receives serve to reduce the federal deficit that conservatives and libertarians profess to be so horrified about, demonstrating that this is not about the functional competence of government (“the government can’t run a lemonade stand” is a perennial conservative dirge). It is, instead, about dogmatic theology operating in the minds of rigid ideologues.
When I was on the Hill, various Republicans made numerous runs against ExIm, but our empirical determination on the Budget Committee was that eliminating it increased the deficit, and that we would have to find savings elsewhere to offset the cost.
Another reader writes to ask about what he considered an un-addressed point in the anti-bank critique:
One point your Ex Im bank critic made that I don’t think you have addressed is that these are loans that could be made by private lenders (banks, etc.).
Now, it’s been my understanding that some of the loans or loan guarantees made by the Ex Im Bank are made because the foreign purchasing entity insists that the loan or guarantee come from a state entity rather than a private entity. Is this correct? If not, why shouldn’t the private sector fulfill this function?
That is, if this function really was so important, wouldn’t companies as big and credit-worthy as Boeing and GE find other sources for their financing? I turned the question back to Rackleff, who replied that during his time at ExIm:
… foreign buyers preferred, and sometimes required, that Exim be part of the financing -- even if its terms for borrowers could be somewhat more expensive than some private financing alternatives -- for several reasons:
1. Exim due diligence and underwriting standards are reasonable, but strict, in determining creditworthiness and market conditions, so participants know that the deal is financially sound.
2. With Exim participation, foreign governments and businesses like the idea that the U.S. government is involved and will be supportive and reliable. This gives them confidence that red tape can be cleared more easily. It also helps attract other investors.
3. Exim financing is predictable, compared to private lenders (who can precipitously call in loans), so there would be fewer ugly surprises.
4. Sometimes the borrowers simply want to diversify their array of lenders, so they add Exim to the mix.
In all the above cases, American workers win. Exim requires that at least 85 percent of a financed deal is domestic content, which means more American jobs
***
A Boomer-era reader in California writes to connect the tone of the immigration debate, with the anti-government fury, with the ExIm Bank controversy. He says:
The current Republican Party doesn't want to govern.
One evening during the last Presidential election I fell asleep watching C-SPAN while they were running election speeches. It must have been around 2 AM, as I was starting to wake up but still half asleep, I began to listen to the speech currently on the TV.
I was struck at how agreeable it sounded and wanted to know which politician it was. Turns out it wasn't a contemporary politician. C-SPAN had switched to showing historical speeches and what I was listening to was President Eisenhower's Republican Convention Nomination Acceptance speech in 1956.
If you want to see how far the Republicans have fallen just read that speech.
1950s-model GOP leader (Wikipedia)
Which I did! Quite a speech. A few passages of Ike’s, to match up with current rhetoric. Its heart was a presentation of five reasons why the GOP was the Party of the Future, not of the past. Here is one of them:
The Republican Party is the Party of the Future because it is the party that draws people together, not drives them apart.
Our Party detests the technique of pitting group against group for cheap political advantage. Republicans view as a central principle of conduct--not just as a phrase on nickels and dimes-that old motto of ours: "E pluribus unum"--"Out of many--One."
Our Party as far back as 1856 began establishing a record of bringing together,. as its largest element, the working people and small farmers, as well as the small businessmen. It attracted minority groups, scholars and writers, not to mention reformers of all kinds, Free-Soilers, Independent Democrats, Conscience Whigs, Barnburners, "soft Hunkers," teetotallers, vegetarians, and transcendentalists!
Not sure any national-level politician since then has referred to the Transcendentalists (well-regarded here at the Atlantic!), let alone the “soft Hunkers.” But how about that clarity of detests for the tactic of sectoral divisiveness. (“They’re sending rapists...”)
And one more reason why, according to Ike, the Republicans owned the future:
It is the Party which concentrates on the facts and issues of today and tomorrow, not the facts and issues of yesterday….
The present and the future are bringing new kinds of challenge to federal and local governments: water supply, highways, health, housing, power development, and peaceful uses of atomic energy.
With two-thirds of us living in big cities, questions of urban organization and redevelopment must be given high priority. Highest of all, perhaps, will be the priority of first-class education to meet the demands of our swiftly growing school-age population.
The Party of the young and of all ages says: Let us quit fighting the battles of the past, and let us all turn our attention to these problems of the present and future, on which the longterm well-being of our people so urgently depends.
This was the Eisenhower Republican tradition that I actually grew up in. This is a kind of reality-based resistance to hysteria we could certainly use more of. And what did Ike think about ExIm? He was a fan. Here is his message to its employees on its 25th anniversary, in 1959:
The record of this Bank is for fair dealing, for human understanding, and for acting in a businesslike, canny way--not only for the welfare of the United States but for other nations. Your record of repaid loans and repayable loans, your infinitesimal portion of written-off loans is one that I can do nothing except to say congratulations to your Directors, the President, and to all of you.
By the way, about No. 4: only one reader ever figured out the actual identity of “the Atlas Shrugged guy” whose writings I quoted extensively back during the 2012 election cycle and who now lives in Alabama (and who never carried out his threat to close his company if Obama got a second term). But yesterday three people immediately wrote to say that they had figured out the real name and location of the profanity-bound West Point grad I quoted recently, prompting me to further vague-up the description of him in the post.
Two reader messages this time. The first is from an ExIm bank critic. He thinks, incorrectly in my view, that there has been no discussion of the substance of how the bank works. But let’s hear some specific criticisms from him:
I encourage you to read his note carefully, since it sums up many of the “serious” as opposed to splenetic critiques of the bank:
I find myself rather surprised that your examination of the ongoing debate regarding the Ex-Im Bank seems to merely focus on the opinions of those concerned regarding the Ex-Im Bank, rather than the mechanics of what the Bank actually does, and whether these functions should be undertaken by a government entity.
One of the chief functions of the Ex-Im Bank, as you are aware, is the insurance of payment to exporters. While this may seem like a relatively low-risk endeavor (only a 0.2% default rate!) the same sort of consideration was given to FHA loans not long ago. Obviously in hindsight we now realize that such insurance exposed the U.S. government to an enormous amount of risk, and now the government has absorbed many hundreds of billions of dollars in losses on defaulted loans.
This same thinking can be extrapolated to the Ex-Im Bank portfolio. [JF note: Yes, sure — if there were anything in its portfolio remotely comparable to the “securitized” but ridiculously valued sub-prime real estate of the early 2000s.] What would happen if just a single large customer of Boeing defaulted on loans totaling several billion dollars? Boeing would be made whole by the Ex-Im Bank at an enormous cost to taxpayers.
Meanwhile the secondary function of the Ex-Im Bank, the origination of loans to foreign purchasers of exports, is fraught with complications as well. While it may seem at first glance to be wholly beneficial to the U.S. economy for a government entity to issue loans to purchasers of exports, this has unintended consequences.
When a foreign airline receives a substantially below-market rate loan to purchase airplanes from Boeing, this is indeed beneficial for Boeing, but what is the effect on U.S. airlines, which directly compete with the foreign entity? As U.S. airlines are unable to access Ex-Im loan rates, their cost of capital is higher than that of the foreign entities, putting U.S. airlines at a competitive disadvantage, one that is solely attributable to the existence of the Ex-Im Bank. [JF note: see if you can find anyone working in the aircraft or airline industries who thinks this is a significant real-world problem. In the first installment, I mentioned the gap between economics-textbook situations and the operations of the real world.]
Aside from the anti-competitive aspects of the Ex-Im Bank and the accompanying market distortions, we are left puzzled as to why such loans could or would not be offered by private entities. General Electric, a massive international corporation, has an in-house financing arm, G.E. Capital, that amounts to more than half of the corporation's revenue, a sum of many billions of dollars. Yet G.E. Capital is apparently unable or unwilling to perform the financing and insurance functions of the Ex-Im Bank, despite the origination and guarantee of similar loans being a core, commonplace occurrence for the business, and such business being apparently quite profitable for the Ex-Im Bank.
Why would G.E. Capital not want to compete in such a lucrative, profitable field that would seemingly complement existing business? Obviously the answer is that the Ex-Im Bank's loans and guarantees are priced significantly below market rates, and that the Ex-Im Bank is willing to bear a much greater risk than private entities would be comfortable with at a given price point, given that the Ex-Im Bank has the ultimate backstop on defaults, which private entities do not have.
The conclusion to be drawn [JF note: the passive voice is our enemy. What the reader means is, “The conclusion I draw from this is...”] from this is that the Ex-Im Bank is performing a dangerous function for which the risks and market distorting effects have not been properly considered. The past performance of the Bank should not be considered predictive of future results, as the financial condition of foreign entities has become increasingly perilous in recent years.
The two entities most in favor of national trade finance agencies, the E.U. and China, now sit on far more precarious financial footing than in the past, and defaults have become increasingly likely. The time to end the Ex-Im Bank is before taxpayers are hit with crippling defaults, all for the purpose of ensuring that Boeing and General Electric bear no risk in exporting goods.
OK, that is a fair sample of the reasonable, non-ad-hominem criticism of the ExIm bank. Judge for yourself. On my side I am sounding a little judgmental, because I have considered such theoretical points for decades, since my own days as a graduate student in economics, and I don’t find them matching the actual world.
***
But, you don’t have to listen to me. I give you Robert Rackleff, a former ExIm bank official (and a friend and colleague of mine from back in the Carter administration days). Two years ago he heard a very similar “horrors! this is mercantilism!” analysis from a Washington think tank. You can click here to read the whole thing. Two points of relevance to the preceding discussion:
Cost to taxpayers. How big a burden, really, is ExIm? Rackleff answers:
Ex-Im finances its operations from fees and interest from customers and receives no appropriations of taxpayer funds... Ex–Im borrows from the Treasury, paying the same interest rate that money center banks pay the Treasury when they borrow.
Ex-Im returns more to the Treasury than it borrows. It is a “negative subsidy program,” which the GAO defines as “those in which the present value of estimated collections is expected to exceed the present value of estimated payments.”
Ex-Im transferred $1.1 billion in excess earnings (also known as profits) to the Treasury in fiscal year 2012 and the first quarter of 2013.
Exposure to risks, of the sort the previous reader mentions:
[Another critic] raise alarms about risks of defaults on bad loans, but cites no evidence that this is bound to happen. She fails to acknowledge that Ex-Im’s very low default rates (0.26 percent as of July 2013) could be the result of prudent management by Ex-Im staff and directors.
This prudence is deeply imbedded in its policies and procedures, which include the following.
• Ex-Im authorizes financing only when there is a “reasonable assurance of repayment” determined by rigorous due diligence by a staff with a proven record of success.
• Ex-Im finances no more than 85 percent of a transaction, requires risk-based “exposure fees” and, when advised, additional collateral.
• Once they disburse the funds, staff update a transaction’s risk rating at least annually after assessing an obligor’s capacity to repay, the value of pledged collateral, ability to weather adverse market changes, and on-site visits....
• Fiscal year 2012’s default rate was only 0.34 percent of its active portfolio. (It was 0.26 percent in the most recent quarter ending June 30, 2013.) That reflects a steady decline of defaults in recent years, and was significantly less than 2006’s default rate of 1.6 percent.
Much more to read. We’ll see if any of this makes its way into the Congressional “debate.”
This next installment is meant to represent the range of incoming sentiment. We begin with someone in the insurance business, who addresses the point of whether ExIm is for giant corporations only:
My company brokers over 500 Ex-Im Bank export credit insurance policies, more than any other insurance broker in the country. Most of our trade finance business is underwritten in the private sector, but small business exporters find the support they need only at Ex-Im Bank.
Over the past year I’ve visited Capitol Hill, alone and in numbers, to advocate for the agency’s reauthorization. But these exercises in people power have barely registered. This is inside baseball politics at its most venal.
Not just Boeing and G.E. but also small business exporters are being impacted. Hopefully the House GOP leadership will get it together sooner vs. later and bring a vote to the floor.
Just as significantly, the resulting reauthorization will hopefully be durable and Ex-Im Bank will not be rendered as ineffectual as some other once-meaningful federal programs now relegated to perpetual short-term stopgap legislating.
On a similar front, the governors of 26 states, plus Guam and Puerto Rico, sent a letter to Congressional leaders this past summer urging re-funding of ExIm. This was quite a diverse group — the Tea Party Republican Paul LePage, of Maine, along with the Democratic grandee Jerry Brown, of California; Republican Nikki Haley, of South Carolina, along with Democrat Kate Brown, of Oregon; Republican Mary Fallin, of Oklahoma, along with Democrat Maggie Hassan, of New Hampshire; all in all representing a genuinely bipartisan bloc. I can’t think of a similarly broad governors’ group agreeing on anything like this before. You can read the full text of their letter via PDF here. A sample:
And similarly, from a reader who has worked at ExIm’s headquarters:
The lack of action to reauthorize Exim is one more sign that Republicans have become the crazy party in succumbing to even crazier Tea Party forces. Our trade competitors, of course, are delighted.
***
Next, the meta-reasons for increasing skepticism of ExIm. Another reader writes:
Related to your other reader's comments about Boomers is that it seems the sentiment "what's good for American companies is good for America" is much less widely shared than it used to be.
As people hold increasingly negative views of "big business', they're more likely to reflexively see something like ExIm as just another example of corporate welfare, of their hard-earned tax dollars going into the pockets of millionaire CEOs.
For most people, both well and poorly informed alike, views on ExIm and other similar issues (TPP was another good example) reflect snap judgments based on the more basic question of "how do I feel about big business in this country?"
And from another reader, connecting the ExIm debate with the controversy over the Iranian nuclear agreement:
I noted with interest your reader who mentioned the difficulty of non-experts forming opinions regarding complicated matters. That is certainly true of the Iran deal.
I support the deal, not because I have any specific knowledge of the details, but because I have confidence in the Administration, its allies and the various security and nuclear experts who say it’s a good deal. I also support the general political view that the international sanctions regime was designed for this very purpose and would not hold together if the deal is rejected. While in an ideal world it would be great if Iran remained financially hobbled, that’s an unrealistic, and perhaps illegitimate, goal.
Interestingly, many of the Democratic Senators and Congresspeople announced their support with relatively lengthy explanations of how they reviewed the terms, talked to experts and came to a conclusion. To the best of my knowledge, no Republican in Congress indicated any sort of careful analysis or consultation with experts, and I would venture to guess that none of them attended the Administration’s sessions with various groups of experts.
Of course, many Republicans opposed the deal for strictly partisan reasons, or because they were reluctant to buck the party line, or for the same reason that Netanyahu opposed it—they were opposed to any deal with Iran which ended sanctions..
So may contemporary issues and policy choices depend on expert information that those of us without expertise inevitably have to decide who we are going to listen to. It’s disheartening that one of our major political parties doesn’t seem to care what knowledgeable folks think or have to say.
***
Another way to approach a complex issue. The note below is from a West Point graduate and one-time Army officer now working in the IT industry. I know his real name, business address, and related details but don’t think I should publish them. In one of his online profiles he says that he has “well-honed communication and presentation skills,” which is an interesting set-up to the note below (and which I know, from trying, might will not be enough for you to identify him via Google.)
Even though this is a family magazine, I decided to leave the well-honed profanity as is, since bowdlerizing it would look even stranger. And I quote it because a lot of the anti-bank mail takes a similar tone:
Only a dried up, Carter administration, 70's retread Liberal fuckstick like yourself could make a reference to the movie "Idiocracy" and fail to realize that the Liberal tolerance for mediocrity and love of populism is what that movie lampoons.
And your article about the ExIm Bank is one extended ad hominem attack puncuated by supportive statements from company reps whose companies are firmly latched onto the ExIm teat.
Like most Liberals, you subscribe to feelings and nuance over facts and intelligence. Which is why we will never venture to Mars or live outside our galaxy. Can you imagine what a clusterfuck the Apollo program would have been if NASA in the 60's had been staffed with Progressive policy wonk assclowns like you, instead to pragmatic scientists and engineers? (who tend to vote Republican, by the way. Only you useless asstards with BA degrees vote Democrat)
So please, stick to writing what you know: how to maintain a huge Federal bureaucracy and how tasty you find Barack Obama's ball-sweat.
Leave grown-up topics o the grown-ups.
Oh, one more thing: fuck your mother.
You can always find this sort of thing in comment sections or if you go looking for it. I mention it here because it wasn’t only this one guy, and he is getting his views from somewhere.
Now several readers with a different angle—namely, that we’re seeing another front in the Boomers-against-the-world generational struggle. Let’s start with this one:
[The original] Ex-Im bank piece made perfect sense to me. I’ve been in international trade the last 10 years or so. You are completely correct regarding both mercantilist policies and the idiocy of some of the right-wing blather about them.
I wonder, is this more an overall generational issue than anything else? Specifically, I think these policies may be an effort on the part of Baby Boomers to get theirs while the getting is still good, meaning while they are young enough to benefit from policies but old enough that the bill will effectively not come due during their lives.
As this point I'm legally obliged to note that I am one of these unloved Boomers. At least by this reader's logic I'm arguing against the interests of my actuarial class. The reader goes on:
I was born in 1980, putting me at the magic divide between Gen X and Millenials, but old enough to have a good view of the baby boomers.
I would suggest that what is really driving all of this is government policy that was fundamentally geared towards the good of the Baby Boom generation for the last several decades. My thought is that the right wing loves policies that are fundamentally supportive of the older, whiter generations, such as increased Medicaid spending or tax cuts.
Defunding the Ex-Im bank, ignoring climate change, not funding infrastructure, cutting spending on education, all seem to me like policies [whose long-term consequences won’t matter to the] Baby Boomers and therefore [aren’t worth doing if such investments would] take away from spending on things they do want.
I don’t think it was accidental that the United States supported higher education when the Baby Boomers were in school or enacted massive tax cuts when Baby Boomers were in their peak earning years. Nor do I think it is accidental that the estate tax is on the block again, now that the Baby Boomers parents are at the end of their lives. The only difference now is that the bill for past largesse is now due, and people are pissed about it.
I further suggest that similar dynamics have been seen in other countries. Specifically, Argentine under and after Peron (chickens in pots) comes to mind. I also think the current Chinese government has fundamentally the same challenge. It is hard for me to believe that all those girls in high heels with new smartphones are likely to accept that normal rates of growth are acceptable without fighting about it.
***
Now, from another reader, on the modern manifestation of the problem Walter Lippmann wrote about in his Public Opinion nearly a century ago. Namely, how the non-expert general public can be expected to develop views on issues so complex that any one of them would require full-time expert study (and even then might lead to disagreements). The reader says:
Had the same thought reading your second piece as I had after Pres. Obama announced the Iran deal: Americans have a tendency to weigh in on issues that they've read 5 paragraphs about like they know the whole problem and how to fix it. The Iran deal is such a complicated issue, one that I'm sure Obama had staff at the Pentagon and in other agencies going over full time for months before signing on to the final agreement. How can virtually any of us have an opinion on this, given how little we know?
It makes me think about the book Can Gun Control Work?, the book that James Jacobs (of NYU Law School), spent years researching and writing. It outlines the major issues with gun control, such as the 2nd amendment, the problems with having open mental health records, the problems with the "assault rifle" label, and the vast number of guns already in private hands in the US.
But when it comes down to it, this matters to very few people. Most people would just prefer to say "Guns are bad" or "Gun ownership is my right".
Here’s the relevance to the current discussion. I took a “God save us from this insanity!” tone about the ExIm showdown precisely because this is an issue I think I know something about. Over the decades I have thought, learned, debated, and written about it to feel that I know the pros and cons. You may think my conclusions are wrong, but I’m not pulling them out of thin air.
Interestingly, the people upset about the idiocracy tone all said they didn’t consider themselves experts on the ExIm front. Thus my mistake — even in our new, breezy Notes section! — was in not fully showing my homework, on the thinking behind the idiocracy claim.
***
To round it out, a view from the academy. This is from an economics professor at a well-known liberal arts college, who deals with the theory/reality gulf in economics that I think underlies the ExIm discussion and much else.
I've been teaching at [the liberal arts college] since 1989. One of the perennial habits I encounter among my students is the tendency to believe the economic theory is "true.” Frequently this belief is based on an ignorance of some important underlying assumptions in the theory.
IF you go back to the original Ricardian comparative advantage model we find the sneaky assumption that "people endeavor to employ their capital as close to home as possible." In other words, if capital is immobile Ricardian trade theory finds trade is almost always beneficial. When we relax the assumption of capital mobility maybe not so much.
I try to explain to my students that economic theory is a map, not a religion. It does not describe reality perfectly, and it's a good idea to have more than one type of map depending on the situation. When I'm on my boat on the river I want the navigation map, when driving to work, the traffic map.
Unfortunately, many of my fellow PhD economists also fall into the same trap of treating economic theory as a religion. Religious beliefs can never be fallible or falsified, irrespective of evidence to the contrary.
Fred Hochberg, CEO of the now-defunded ExIm Bank (ExIm photo)
Last night I wrote an impolite item arguing something I actually believe: that the Tea Party-led effort to defund the Export-Import Bank represented the destructive triumph of ideological posturing over real-world effectiveness.
Summary version of the case: Sure, in principle, big, rich companies like Boeing, GE, and Caterpillar “shouldn’t” ever have to rely on taxpayer subsidy. Also, government support can bring gross corruption at worst and market distortion at best; and the public costs of mercantilist policies often outweigh the public benefits.
Those are the principles, which I recognize well enough from my economics courses.
But the principles are a poor match for real-world complications.
If you have had any working exposure to the way big aviation, infrastructure, telecom, agricultural, or other high-stakes business actually gets done around the globe, you realize that the departures-from-market-optimum created by ExIm are tiny compared with those caused by governments in Asia, Europe, Latin America, the Emirates, etc. If you’d like to read about this at length, I invite you to check out my books Looking at the Sun and China Airborne.
Thus in an economic system modeled solely in a classroom, or consisting entirely of the United States, ExIm would be a waste. But in a world where Boeing, GE, Caterpillar, etc are dealing with usually more subsidized competitors from Asia and Europe, doing without ExIm is a form of unilateral disarmament. I say this based on what I have actually seen over the decades.
(And, yes, I also recognize that according to purist theory, even “unilateral disarmament” in trade competition still makes sense, in maximizing consumer welfare. For why I don’t think that’s the end of the discussion, please see “How the World Works” from back in the 1990s. I’m all in favor of expanded trade! But the U.S. did not grow rich by applying pure Ricardian trade theory, nor did England or Germany or Japan or any place else.)
Here’s a parallel: In principle, all military spending is a big waste. Armies destroy things. Their contracting systems are historically rife with corruption. Everybody would be much better off if military spending everywhere went down.
I can agree completely with that in-principle goal — and yet still consider it an idiotic blindness to realities if someone tried to defund the entire Pentagon to reinforce this theoretical point.
***
In last night’s installment, I didn’t fully spell out the pro-ExIm argument the way I had in books or 20-plus years ago in the magazine. Instead I just leapt to the end point, saying that willful blindness to real-world consequences amounted to idiocracy. Readers beg to differ! And also take offense at the term. Here is a sample.
One of the friendlier-toned dissents:
I don't think that opposition to the EX-IM bank ranks on the idiocy scale anywhere near the Republicans denial of global warming or their claims of a link between vaccinations and autism.
There are legitimate concerns about any government subsidy. Government subsidizes things like sports stadiums and single family housing; when these things are subsidized, there are opportunity costs--other parts of the economy must shrink. Similarly, the EX-IM bank subsidizes large multinational exporting companies such as Boeng and GE.
You apparently hope that these government subsidies trickle down to U.S. workers and to smaller suppliers to these corporations, and perhaps some of the benefits do trickle down. But these benefits are the result of exporters offloading the default risk on financing exports from themselves to taxpayers. Additionally, at least to a minor extent, when loanable funds are used to subsidize exports, this competes with and might crowd out funding for non-exporting businesses.
I don't know enough about this particular issue to say more. But generally you are even-handed in your analysis of issues. In this case, you should at least acknowledge the potential costs of the EX-IM bank.
Agreed: any subsidy brings risks and costs. In my judgment and observation, the costs and risks would be worse from doing without. Now, from a writer who generally supports public efforts for the public good:
Obviously I don't think I'm a zealot, and I like Fred Hochberg [chairman of ExIm, whom I also know and like], and I think I've been as outspoken about the wackadoodle GOP as anyone...but I think the Republic would survive the loss of the ExIm Bank.
I find the everybody-else-does-export-subsidies argument somewhat persuasive, but on the whole I doubt we really need a government bank to provide 99.8% safe loans to Boeing and Pemex and the emirate of Dubai.
I think those of us who believe government has a very important role to play in fighting climate change and providing universal health insurance and so forth ought to support getting rid of marginal government roles that it can focus on doing those important things well.
I wrote him back giving my pitch on “this is the flawed world we live in, and you have no idea what mercantilism looks like until you’ve checked out the Chinese / French / etc.” He replied:
That’s fair. I bet I would feel differently if I knew anything about foreign affairs...
I guess what I would say is that it doesn't seem completely cut-and-dry, and that defenders of the ExIm don't usually acknowledge that the gross mercantilism you mentioned is gross. I also think the corruption scandals that inevitably seem to pop up at obscure money-sloshing institutions like this really do give government a bad name.
I agree that it’s important to acknowledge the costs and distortions of institutions like ExIm, and insist that they be run well.
Finally, a scolding letter from a reader who I believe is an MBA student at a leading business school. He started with complimentary remarks about my past practice of airing dissenting views. But …
That is why I found the attitude in your latest post on the Ex-Im bank to be so disappointing.
You write that "The people bringing down the Export-Import bank are zealots who care more about their theories than the completely foreseeable damage they are doing to American workers and companies."
I don't have a strong view one way or the other on whether the Ex-Im bank is good policy (my sense is that in a perfect world we wouldn't need it, but in our imperfect world I'm not sure whether it is better or worse than other feasible "second-best" policies). But I do have a strong view that the attitude in the above quote in particular, and your entire post in general, is out of character, factually incorrect, and dangerous.
It is out of character because, as I mentioned earlier, you have a long and admirable history of giving a respectful representation of those that disagree with you (your series on the Iran nuclear deal is one recent example of this).
It is factually incorrect because the opponents of the Ex-Im bank are self-evidently not Ayn Rand fanatics. The opponents include not only the conservative Greg Mankiw and the libertarian leaning but hard to classify Tyler Cowen, but also Senator Obama in 2008. [JF note: this was a throwaway reference in a campaign speech, unrelated to anything Obama has said or done since.] Perhaps in the last few years Obama has started inserting block quotes from the Fountainhead into his speeches, but if so I have somehow missed it.
It is dangerous because it is an example of a habit of thought that closes our minds and prevents us from learning. As soon as we explain our enemy's disagreement as resulting from some defect in their intellect or character, we feel safe to ignore any of the actual good arguments that identify flaws in our own position. The problem is that it is much easier to find some reason that our enemy is a knave or a fool than it is to question our own beliefs. If this habit is left unchecked, we get our contemporary politics: one group on either side of the aisle, each totally convinced that they are the party of honest, right-thinking folk defending the truth and the light against the pack of morons and zealots on the other side.
This is an easy pattern of thought to slip into - it may even be automatic. But for that reason it is all the more important to consciously fight against it. You have historically been at the vanguard of this fight. I hope that this post is merely a temporary stumble.
I wrote back saying that the tone was a decision rather than a stumble, but that it was based on observations I hadn’t bothered fully to spell out this time. Rather than take the argument through any more cycles right now, I’ll thank these readers and others for weighing in, and encourage readers to look more closely into the issues at stake with ExIm.
***
Still: I think it would be a big, pointless, self-inflicted, and self-indulgent policy error to kill off the ExIm Bank.
Because I have been wrapped up in print-magazine obligations (check your mailbox in one month, and subscribe in the meantime, including for our great new issue), I didn’t stop to mention the idiotic Congressional effort to defund the Export-Import bank while that debate was underway.
The anti-ExIm push has succeeded for now, and the results of this self-inflicted folly are starting to come in. The GOP/TeaParty case against ExIm was that it was another case of big government over-reach, and crony capitalism as well. As one of the Koch brothers-originated lobbying groups working against the bank piously puts it:
FreedomWorks explains it to us
Let’s not stop to marvel at this spectacle: an industrial combine whose mining, pipeline, refinery, and other operations have been intimately connected with, and frequently protected by, government policies, inveighing against the crony-capitalist state.
The anti-ExIm argument was that big, rich companies like Boeing or GE should not depend on taxpayer help for financing their sales to customers overseas. That might sound true enough, within the confines of the 11th-grade Ayn Rand Debating Club.
In the actual world we inhabit, those firms are competing with others from Europe, China, Japan, Brazil, Russia, South Korea, etc. From places, that is, where government officials dozed through (or laughed at) the Ayn Rand part of the economics courses and are happy to promote their own exporters.
And this similar report about changes in the industrial landscape, from an American reader with extensive experience doing deals in China, the U.K., other parts of Europe, and Russia. He writes:
I met in London today with developers of a huge infrastructure project who told me that the manufacture of several key large components is being switched from the United States to Europe because of the expected nonavailability of export financing support from the US, because of the import export bank financing debate.
Thanks, GOP.
As the NYT said today in a strikingly sassy editorial, the circa-2015 version of the GOP has convinced itself that the details of actually running the government don’t matter. All that matters are the talking points.
The ExIm consequences are just one example of where that know-nothing posture leads, and not even the most destructive.
The anti-vaccine blather of this week’s GOP debate, which to their discredit the two doctors on stage let pass without rebuttal, may cause life-and-limb harm, rather than just economic loss. The chest-beating about “day one” strikes around the world is more ominous still. And then there are the climate issues…
But if you want a simple, clear example of why flat-Earth, who-cares-about-the-consequences posturing matters, you’ve got it here with the ExIm bank.
Idiocracy: it’s not just a movie any more.
Update I see just now that my friend (and former Texas Monthly colleague) Joe Nocera is weighing in on this point in his NYT column. He writes:
The damage this is doing to our economy is starting to become clear. In recent weeks, Boeing, America’s largest exporter in dollar volume, made two sobering announcements: first, that Asia Broadcast Satellite canceled an $85 million satellite contract expressly because there was no Ex-Im support. (Boeing is hoping to renegotiate.) More recently, Kacific, a Singapore-based satellite company, told Boeing not to bother bidding on a satellite contract, again because of a lack of Ex-Im financing.
As a result, McNerney told me, “layoffs in the hundreds” have taken place in Boeing’s satellite division.
I could be polite about this, but I won’t. The people bringing down the Export-Import bank are morons zealots who care more about their theories than the completely foreseeable damage they are doing to American workers and companies.
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