Ex-Im, To Live or Let Die?
There is a lot of talk about the Export-Import Bank (the Ex-Im) shutting down for the first time in 80 years. Although it has received bipartisan support for a long time, it has recently become quite the topic of heated debate on Capitol Hill. The problem is that not many people know what it is, what it does and whether it actually works or not.
What is Ex-Im?
The Ex-Im bank was brought to life with an executive order signed by Franklin D. Roosevelt back in the 1934, as the country was trying to recover from the Great Depression. The purpose of the bank was to finance purchases of American goods for international buyers. The bank would incentivize foreign buyers of American products by providing loans, guarantees, and insurance for them — thus boosting sales for U.S. businesses. So, foreign buyers win because they can purchase our awesome products with loans that the Ex-Im bank facilitates and U.S. workers and businesses win because they are making stuff that people can afford.
How Does It Work Though?
Say a foreign Airline Company, let’s call it Air XYZ, wants to purchase a plane from an American Plane Maker, APM. Since planes aren’t exactly the cheapest products to buy, Air XYZ goes to a bank to take out a loan, but the bank says, “Whoa, whoa, whoa! That’s a whole lot of money. What if you don’t pay me back? Is there some sort of collateral that can match up to the $270 million loan you’re asking for?”
Enter Ex-Im. The Ex-Im bank tells the bank, “Hey, we got you. If Air XYZ defaults on his loan, we’ll guarantee you for up to 85% of the loan. Go ahead and hook it up.” Boom! The bank lends out the money to Air XYZ and the ridiculously expensive American plane from APM is bought.
According to the Observatory of Economic Complexity over at MIT, the top five exports for the U.S. are: Cars (4.4%), Refined Petroleum (4.2%), Planes, Helicopters, and/or Spacecraft (3.2%), Packaged Medicaments (3.1%), and Gas Turbines (2.4%). Obviously, these products are all on the costly side, so the EXIM bank’s ability to facilitate credit towards their purchase really comes in handy.
The Ex-Im bank prides itself on how it helps small businesses in the U.S. and secures domestic jobs. With the huge increase in exports since the Great Recession of 2009, the Ex-Im is brushing its shoulders off as it claims to have supported 164,000 jobs in 2014 alone. It also boasts over its low default rate and claims to hold reserves 17 times its default rate. Over the past 20 years, it has apparently generated $7 billion more than it costs to run the joint, doing its part to bring down the federal deficit.
This Ex-Im bank is the bee’s knees, right? Maybe for some people. You can watch a Youtube video of Matthew Mitchell, Senior Research Fellow at the Mercatus Center of George Mason University, for a more in-depth look at how the bank works.
The critics of the Ex-Im have three main arguments.
There seems to be some level of crony capitalism, in which businesses that are in cahoots with politicians benefit and small businesses are at a further disadvantage. These “hook-ups” — that range from lower interest rates to straight up cash injections to soften pricing — screw up the prices of the goods by artificially raising the prices. Raise your hand if you like higher prices on stuff you want to buy. No worries, I know you didn’t raise your hand.
Although the bank claims to be earning profits every year, the accounting is shady and loan guarantees are actually at a loss for taxpayers. (Keep in mind, that the money Ex-Im uses to guarantee loans for foreign buyers are tax dollars.)
Environmentalists claim that the Ex-Im is negatively affecting climate change by subsidizing and financing oil purchases. A “fossil-fuel binge,” they call it.
According to Veronique de Rugy, senior researcher at Mercatus Center and one of the leading opponents of the Ex-Im bank, the Ex-Im increases exports alright — mainly for 10 particular companies, especially Boeing. There are 14 other aircraft makers in the U.S. How come they aren’t getting that Ex-Im hook-up? She argues that — blatant favoritism toward particular companies, not jobs, will disappear if Ex-Im is dissolved.
When it comes to seeing a healthy economy, it’s almost always good to be rocking exports. For years, Ex-Im has received ovations from presidents on both sides of the aisle as it really does help American businesses sell their expensive products to the world. It allows for foreign buyers to invest in our economy and come out winning with state of the art U.S. tech. To illustrate, imagine the Ex-Im bank is a small trampoline in front of the basketball hoop (the price of the sale) that you can use to get an awesome dunk (the financed sale).
However, critics have noticed that in front of the trampoline there is a “bouncer” (pun intended) that is picking and choosing who gets to use the trampoline to dunk. If you aren’t the “bouncer’s dawg,” he might pull the trampoline farther up to the 3-point line, making it really hard to dunk. Put simply, some businesses and countries are getting better deals than others, distorting the prices of the goods and hurting potential buyers and sellers.
For a private bank, having Ex-Im as your backer when loaning out money is pretty sweet, the bank will always come out a winner. The problem is that Ex-Im is backed by tax dollars — and these purchases are huge! Seeing as the private bank will always win, it is incentivized to lend money to buyers that may not be so creditworthy and may do so through artificially low interest rates. If you know you’ll get most of the money back no matter what, wouldn’t you be a little more reckless?
The Ex-Im bank is set to expire on June 30 and for the first time, even proponents of the bank, are bracing themselves for its demise. Now that you know a little about what it is, how it works, and the pros and cons, let us know if we should let the U.S. Ex-Im bank live or let it die.