Crony Capitalism is Never Good

The Export-Import Bank came into being 80 years ago when President Roosevelt promoted it to finance trade with Russia. It became an independent agency in 1945. The Bank borrows money from the Treasury to provide below market loans, loan guarantees, and capital and credit insurance to facilitate US exports. Is that really the best use of Treasury funds and a proper role of government? In a world that is interconnected by global trade, it is hard to make a case for the government using financing mechanisms to supplement market forces.

If the bank was providing financing to spur economic development in emerging markets in Africa and Latin America that private investors found too risky, there might be a legitimate argument in the Bank’s favor under very special and limited circumstances. But, that is not the case. Last year, the biggest recipients of the Bank’s loans were firms in the United Kingdom, one of the world’s wealthiest nations and a center of global finance.

Whatever merits existed when the Ex-Im Bank was created, they have long since lost relevance. The fact that Congresses and Presidential administrations of both parties have kept the Ex-Im Bank alive long after international market forces were leading to a growth in trade is a testament of Ronald Reagan’s observation that the closest thing to perpetual life is a government program. The Ex-Im Bank is nothing more than a “fund for corporate welfare”, so said Barack Obama.

Political rhetoric about job creation and damage to the economy by shutting the Ex-Im bank down cannot withstand close scrutiny. Almost all serious economists know that subsidizing exports does not add to the strength of an economy. Actions that lead to a misallocation of resources lead to less efficient use of capital which makes a nation poorer. Proponents of the bank also argue that it is necessary to subsidize export sales because other countries subsidize their companies’ exports. They claim that it levels the playing field for US companies. If Congress is really interested in providing a level playing field it would quit passing industrial policy legislation and would lower the corporate tax rate to bring it in line with those of our international competitors. That other countries choose to make dumb economic decisions and adopt industrial policies is no reason for us to do the same. Indeed, US consumers benefit from the subsidies that other countries make for their exports if they result in lower prices.

Who are the beneficiaries of Ex-Im financing? Large multi-national corporations. The members of the Aerospace Industries Association and firms like Caterpillar, Bechtel, and GE that lobby for Ex-Im Bank loans and loan guarantees to sell their products abroad.

Subsidizing large multi-national firms is absurd on its face and it is an example of how practitioners of crony capitalism gain at the expense of taxpayers and competitors. When the Bank lends to foreign companies so they can buy US built equipment it puts less well connected US firms at a competitive disadvantage since the foreign firms get below market financing. It is mind boggling that a US agency would help foreign companies potentially take market share from US firms.

A recent article in the National Review—the Ex-Im Bank in Action: Crony Capitalism in Action—made the case that the Bank is corrupt and poorly managed. It said, “The bank has a long history of dealing with dodgy firms and doling out suspiciously large amounts of loans to certain companies.” This conclusion was not from some extreme ideological source, it was drawn from reports written by the Bank’s Inspector General (IG). The IG concluded that “Ex-Im “exaggerates the numbers of jobs its loans create…(and) doesn’t bother calculating default rates for specific sectors of its portfolio”.

None of this should be surprising because the public choice school of economics makes clear that all too often agencies pursue their own self-interest and end up rewarding special interests and bureaucrats instead of representing taxpayer interests. In spite of a record of malfeasance, and mismanagement, and repeated criticism by the Inspector General, Congress has turned a blind eye as it considers reauthorization.

The Ex-Im Bank is just a symbol of the problem we have with a federal government that has grown ever more powerful. Firms have strong incentives to invest in lobbying to get favorable treatment by agencies that can impact their economic well being. The more successful they are, the more they invest in gaining rewards from influence which always is at the expense of competitors and taxpayers. Market forces should determine winners and losers, not government policies or programs. More and more government is making those choices, which is why in recent years we have had examples like Solyndra, Fisker Motor, A123 Batteries among others.

There is an abundance of evidence that we have more government than we need or can afford. Terminating the Bank would be one small step in addressing bloat and one small step away from government trying to subsidize success. It has been over 80 years since the last major government reorganization—The Hoover Commission. The time for a major restructuring of the federal bureaucracy is long overdue. Each federal agency fights for larger budgets and more regulatory authority and federal money and authority create incentives that promote crony capitalism. In the past 30 years, the Federal Register has grown by more than 50%. New regulations get added, few if any ever get cancelled. As a result, we have become an over governed and over regulated nation. We need a smaller, more focused federal government that restores a more productive balance between central government and the states.


This article appeared on the National Journal’s Energy Insiders weblog at

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