Progress Toward a Failed State: Where the Tea Party Is Taking Us

Editor’s Note: This article previously appeared in a different format as part of The Atlantic’s Notes section, retired in 2021.

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?

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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.

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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.