House Financial Services Committee Hearing
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INTRODUCTION
In gathering to discuss the past and uncertain future of the
Before delving into the weeds of export credit finance, there are two fundamental realities to keep in mind.
First, export promotion programs, like Ex-Im finance, are not critical to US exports. Second, the Bank's mission is inherently contradictory.
First, Ex-Im yields a minuscule influence on US exports. At most, Ex-Im can claim to influence roughly 2 percent of both the value of total US exports and the total number of export-related jobs. n1 Since the Bank's methodologies have been criticized by the General Accounting Office and its own inspector general, the Bank's true influence is likely smaller.
Second, Ex-Im's mission refutes itself. The Bank's charter instructs administrators to extend assistance to projects that cannot find financing in private markets; these projects must also provide a reasonable chance of repayment. If a project cannot find private finance, it is probably too risky to repay the borrowed funds. But if a project has a good chance of repayment, it should easily find private finance. Any single project the Bank finances cannot meet both conditions of its charter.
This tension results in a bifurcation of the Bank's portfolio: profit-generating projects, like those involving
With these heavy caveats in place, I will now contribute to this conversation by providing contextual information about the Bank's history, processes, and portfolio, adapted from a forthcoming
I will then consider the claims made by both Ex-Im supporters and critics. Specifically, I will examine the validity of arguments that the
1. plays a critical role in promoting US exports;
2. maintains or creates US jobs;
3. substantially benefits small business;
4. levels the playing field for US companies that compete against foreign companies that receive benefits from their countries' export credit agencies; and
5. is a good deal for taxpayers.
I conclude that a close examination of its activities and outcomes shows that the
EX-IM BANK BASICS
This 116-page document contains guidelines and proscriptions for the many pet programs that have developed in its 80-year history, including instructions regarding small business lending, green energy projects, engage-ment with sub-Saharan Africa, and prohibitions against aiding "Marxist-Leninist countries" or financing "defense articles."
The main tools n4 provided to the Bank to achieve these ends are n5 (1) loan guarantees, (2) working capital guaran-tees, (3) direct loans, and (4) export credit insurance.
Through loan guarantees, which presently constitute the largest portion of Ex-Im financing, the
Total Ex-Im authorizations, or the total amount of funding that the Bank commits to finance a higher total value of exports, increased from
The total amount of exposure--defined by the Bank as "authorized outstanding and undisbursed principal bal-ance of loans, guarantees, and insurance" plus "unrecovered balances of payments made on claims . . . under the export guarantee and insurance programs" n7--has grown consistently over time.
What benefits do US taxpayers receive from the
Claim 1:
This claim has two branches: that the
Some high-value projects go unfunded, the argument runs, because unusual or untenable investment risks scare off private financiers. The federal government should step in and fund the projects that the private market rejects. Without this federally provided export finance, US exports would be significantly dampened.
The assumptions behind this argument are inherently flawed because private investors are not likely to leave value on the table. It is proper that high-risk projects should not always find financing. Prohibitively high risk rates serve as a signal that investment funds could be more effectively spent elsewhere. As a CBO report on the
Instead of making the difficult case that the Bank should subsidize losing projects, Ex-Im supporters prefer to use euphemistic language about "financing gaps" and "leveling the playing field." Nothing changes the fact, however, that these projects failed to attract private capital because their profit opportunities did not warrant investment.
Second, the data do not bear out the claims that the
Export data from the Census and the
It is has long been known that export credit corporations cannot substantially influence broader national trade outcomes. The GAO stated back in 1992 that "export promotion programs cannot produce a substantial change in the US trade balance, because a country's trade balance is largely determined by the underlying competitiveness of US industry and by the macroeconomic policies of
Reforming the broader macroeconomic policies that are more likely to harm our trade position will help our exports far more than anything the
Claim 2:
Supporters of federal programs often point to tangible outcomes, like the number of jobs created through federal spending, to justify their existence. Immediate employment effects are easily seen and therefore provide a potent shield against claims of ineffectiveness or waste. However, as the French economist Frederic Bastiat first astutely pointed out over 150 years ago, good economists and students of public policy must also consider the unseen effects of government interventions to accurately perform a cost-benefit analysis. n14
This job creation claim is correct in the narrowest of senses. Indeed, it is hard to imagine how a government -program could spend billions of dollars without yielding some kind of immediate gross employment effect. In the case of the
Even if we take the
Furthermore, this claim only represents the "seen" side of the story. To get a complete picture of the true eco-nomic effects of the
First, foreign companies that receive Ex-Im financing are not necessarily purchasing more goods from US firms, but often simply buying different kinds of goods. Ex-Im interventions shift resources away from unsubsidized projects and toward artificially cheaper projects that the Bank subsidizes. Many of the jobs the Bank claims to "create" are in reality redirected from unsubsidized firms.
This creates a cascading effect. A government-subsidized company becomes an artificially safe asset that attracts more private capital than it would have if simply judged on its merits. Capital therefore becomes less available to unsubsidized projects that might have had higher probabilities of success. This only amplifies the downward pressure on job creation for unsubsidized firms.
Financiers, in other words, are unseen beneficiaries of Ex-Im activity as they have access to artificially protected and inexpensive investment opportunities. Under the loan guarantee system, lenders can extend large, extremely low-risk loans to subsidized projects since the government assumes the risks of 85 percent of the loan value. Lenders can collect handsome fees from borrowers and enjoys the value of an interest rate on 100 percent of the value of the loan. These risky profits are privatized to political allies while any risk of losses is socialized to the American public.
These unfortunate consequences have long been known to
These increased costs and decreased profits take place through different channels. First, nonprivileged exporters lose when their competitors get help, and so do non-exporters. Second, anyone who competes with the privileged foreign buyers loses market share. Third, consumers trying to buy the good whose demand is artificially high must pay a higher price. Finally, as previously mentioned, anyone trying to obtain capital loses since lenders are likely to prioritize demand for capital from borrowers with a government guarantee independently of the merits of the project.
This argument forms the basis of a suit by
Indeed, Ex-Im did not earn its nickname, "
In that sense, the 205,000 jobs claimed by the Bank are not net-new jobs, as they do not incorporate the negative dynamic secondary effects that intervention often creates. From the perspective of
Moreover, there is no reason to believe the Bank's assumption that these 205,000 jobs could not have existed without its intervention. Indeed, from 2012 to 2013 the total number of export-related jobs in
As we will see later, despite the talk about "financing gaps," most of the loan value backed by the Bank benefits large and well-established companies n22 that have ample alternative financing options. n23 Even small businesses that receive support were often profitable well before Ex-Im operatives came knocking. n24
Last but not least, the federal government's own GAO finds that the Bank's job calculation method leaves much to be desired. A
Additionally, Ex-Im does not control for selection effects wherein Ex-Im-supported firms or industries may differ from the "average" firms or industries that the Bank purports to similarly benefit. Finally, and most critically, GAO criticized the Bank for not considering the unseen counterfactual of how many jobs would have existed without any intervention at all. Putting all these weaknesses together, the Bank's pretty "205,000 jobs" number is far from a true reflection of sound economic analysis and transparent data methods.
If the
All this evidence suggests that the
Claim 3:
In
Ex-Im's FY 2013 Annual Report states that "the Bank approved a record 3,413 transactions, or 89 percent, for small businesses." n30
This statement is curiously incomplete. It is true that 89 percent of the total number of deals involved firms that fit the Bank's definition of a "small business." However, when you look at the total amounts that the Bank distrib-utes, the picture is decidedly different. During FY 2013, for instance, only
Additionally, the Bank employs a rather unconventional definition of "small business." While the term invokes images of mom-and-pop stores and enterprising startups, Ex-Im's definition is considerably more expansive than that of the
According to the Bank's data for FY 2013, much of its direct and indirect subsidies benefit giant manufacturers and well-connected exporters. For instance, America's number one exporter, the
Claim 4:
Another popular argument is that the
Few would disagree that it would be much preferable if US exporters only had to compete on price and quality against unsubsidized foreign companies. However, the fact that other countries choose to engage in bad economic policy does not immediately justify
If the
For a long time, the Bank did not specify the exact purpose of each transaction in its reports, so it was difficult to determine how much of its portfolio was dedicated to which goals. However,
According to the Bank's 2013 Annual Report, n38 only
What's more,
Additionally, much of this financing goes to large corporations that are unlikely to be incontrovertibly harmed by foreign export credit agencies. For instance, roughly 66 percent of the value designated to "meet competition from a foreign, officially sponsored export-credit agency" went to the
And, as previously mentioned, if export subsidies were truly so critical to competing abroad, then we would expect far more than 2 percent of total US exports to receive Ex-Im assistance. Yet somehow, the other 98 percent of unassisted US exports thrive and successfully compete in the global marketplace.
Subsidies may seem like a good deal for those benefiting from them. n42 In the case of Ex-Im, the list includes the private lender who gets to collect high fees and extend a loan at very low cost, the foreign company that receives the loan guarantee, the domestic company whose goods are purchased with the borrowed money, Ex-Im bureau-crats, and the politicians who defend the Bank in exchange for financial support from other Ex-Im beneficiaries.
However, in most cases, economists have found that subsidies end up being a bad deal for everyone, including the so-called beneficiaries. n43 The unseen costs of export subsidies negatively impact normal Americans, unsubsidized businesses, and even subsidized businesses in a number of unpleasant ways. As mentioned before, subsidies can trigger waves of malinvestment by encouraging companies to make marginal investments in a subsidized activ-ity without regard to its true opportunity costs, or by encouraging consumers to buy a subsidized good without accounting for its true cost. Tax revenues are siphoned from productive businesses and their employees and directed to others with political clout. In addition, subsidies hurt consumers since they usually artificially increase the price of the subsidized good.
Subsidies also trigger wasteful spending for political favors. n44 Not only do subsidized industries use domestic tax dollars to make a profit, the existence of subsidies creates incentives to use resources for lobbying rather than productive investment. Economist
Ironically, subsidies also damage recipients in the long run by dulling their competitive edge. n47 Subsidized busi-nesses often grow complacent and lazy because they know they can rely on government assistance. When mar-kets change and pressures mount, subsidized industries find that they simply cannot keep up--so they come to
Most importantly, subsidizing exports actually harms US consumers and helps foreign consumers. Indeed, this is one of the selling points of Ex-Im programs. n48 When foreign export agencies subsidize their exporters, they actually help US consumers at the expense of their own citizens. In subsidizing our own exports in response to foreign subsidies, the
Little has changed since
The fact that others engage in an activity is never prima facie evidence that one should do the same. Despite the apparent fashion of export subsidies, the economics is clear that these policies harm national consumption in exchange for tiny, short-term benefits to a few connected companies. Supporters of the
Claim 5:
Defenders of the
If this is indeed the case that the Bank makes robust profits, then it contradicts the claim that its activities do not compete with private capital because it is correcting a market failure (i.e., the absence of private capital) and that it takes a conservative approach to lending and finance. The reality, however, is not as straightforward. One part of the Bank's activities (aircraft) is indeed profitable while others aren't and are being subsidized. In other words, it is likely that none of the transactions financed by the
Let me illustrate this point with an example. The large commercial aircraft guarantee program does generate a lot of cash flow. Let's say that on average, Ex-Im authorizes
That means that profitable Bank projects, like its healthy aircraft portfolio, should have no problem finding private financing. This portion of the Bank's activities should be privatized. On the other hand, if the private sector won't finance the other activities offered by the Bank, the money-losing activities, it is a signal that taxpayers shouldn't be exposed to the risk, either.
Furthermore, even if the Bank were profitable today, we could not rely on the Bank to earn profits for American taxpayers for years to come. The Bank ran a deficit several years in a row in the 1980s and was reported to have considered requesting a
Financial projections are only as sound as the methodologies employed to produce them. Many have been skeptical of the Bank's risk analyses, default assumptions, and accounting methods for years, as Heritage regulatory fellow
An alarming 2012 report from the Inspector General of the
The methods that Ex-Im does have in place are likewise inadequate to reflect the Bank's underlying portfolio. n59 The Inspector General also warned that the Bank "does not reserve or price for the incremental risk deriving from its portfolio concentrations." n60 In other words, the Bank's loss credit methodology does not account for the potential co-variance of risks among asset classes. Aircraft transactions represent over 51 percent of the total value of the Ex-Im portfolio, but new airline transactions are priced and structured according to the same guidelines as any other transaction. If the aircraft industry were to slide into a downturn, n61 the Bank's portfolio would be far more exposed than its numbers currently predict. The Inspector General also reports that the Bank does not perform portfolio stress tests, thus leaving administrators in the dark when trying to effectively manage this concentra-tion risk. n62
Even when more appropriate processes are in place, the Inspector General reports that "loan officers and bank personnel did not always document sufficient evidence for borrower statements regarding the need for financing." n63 In many cases, employees did not even perform background checks to determine borrower eli-gibility before disbursing funds. Federal regulators would not tolerate this kind of carelessness from private institutions. It is all the more unacceptable coming from a federal steward of taxpayer money like the
Additionally, the Bank's default assumptions vastly obscure the Bank's true financial position. A
Improper accounting may yield impressive illusions in the short term but will not prevent financial disaster in the event of an unexpected downturn. For many years, Ex-Im skeptics could only point to the dire pleadings of the GAO and Inspector General to bolster their case that the Bank's "profits" may be a misleading accounting fic-tion. The collapse of the US housing market, prompted partially by the risky underwriting of federal mortgage corporations
It was once also common to support
We do not need to wait for an economic collapse to reveal the financial fallout of the
If
The CBO notes that administrative and servicing costs were not included in their analysis because they did not have access to those figures. The fiscal picture of
To understand why fair value methods are a better accounting tool for the cost of Ex-Im activities, we need to under-stand the difference between the two accounting methodologies.
The bottom line is that supporters of the
CONCLUSION
The data provide no support for the most popular arguments for the
The Bank cannot claim to play a "critical role in promoting US exports" as the total export value of its annual portfolio only accounts for roughly 2 percent of the total value of US exports each year. The Bank cannot claim to be filling the purported "financing gap," either, as most of its portfolio assists large, connected firms that would have no trouble procuring alternative financing. Finally, economists have long known that export credit agencies have, at best, a tiny effect on national exports compared to potent broader economic trends.
The Bank does not substantially benefit small businesses but disproportionately benefits large corporations like
The Bank cannot claim to level the playing field for US companies that compete against foreign subsidized com-petition, either. For one,
The Bank cannot point to profits for taxpayers because its internal reporting is significantly flawed and CBO analy-ses show that the Bank will actually cost taxpayers billions of dollars over the next decade. What's more, numerous audits by the CBO, the GAO, and the Bank's own Inspector General show that the
n1.
n2.
n3.
n4. The Bank also engages in a number of special financing programs dedicated to boosting exports in a particular industry, like its aircraft finance program, or providing an unusual financial technique, like "project finance" plans for long-term infrastructure projects.
n5. For a detailed overview of Ex-Im products, see Shayerah Ilias, "
n6. Annual Report 2013,
n7. Ibid.
n8.
n9.
n10.
n11.
n12.
n13.
n14. Frederic Bastiat, Selected Essays on Political Economy, trans.
n15.
n16.
n17. "Delta sues
n18.
n19.
n20. In the Bank's most recent annual report following the GAO job methodology criticisms, for instance, the Bank does provide details about the flaws in their calculations, but they bury this information several pages into the report and far away from the dataset that it qualifies. See Annual Report 2013,
n21.
n22.
n23. A managing director of
n24.
n25.
n26. "
n27. Annual Report 2013,
n28.
n29. "
n30. Annual Report 2013,
n31. Ibid.
n32. Sec. 2(b)(1)(E)(v), Ex-Im Charter,
n33. "Small Business Defined,"
n34. Ibid.
n35. "Summary of Size Standards by Industry Sector,"
n36.
n37. Export-Import Reauthorization Act of 2012, H.R. 2072, 113th Cong. (2012), http://www.gpo.gov/fdsys/pkg/BILLS-112hr2072enr/pdf /BILLS-112hr2072enr.pdf.
n38. Annual Report 2013,
n39.
n40.
n41.
n42.
n43.
n44.
n45.
n46.
n47.
n48. Ex-Im administrators often implicitly acknowledge this bias towards foreign consumption in their press statements. For instance, current Ex-Im Chairman
n49.
n50.
n51.
n52.
n53. Current rates can be found at the OECD website, see: "2011 ASU: Quarterly Update of MRS and of Resulting MPR - Q2/2014," Organisa-tion for Economic Co-operation and Development, accessed
n54.
n55.
n56.
n57. Ibid.
n58. Ibid.
n59. Administrators that manage politically induced market interventions often underestimate the many silent risks that accumulate beneath the surface. For a detailed treatment of this topic, see
n60. Thorum, "Report on Portfolio Risk," 2012..
n61. There is evidence that the Bank's activities are inflating a bubble in the aircraft finance and manufacturing industry. Forthcoming.
n62.
n63.
n64.
n65.
n66.
n67. Pub. L. No. 112-122, [Sec.] 3, 126
n68. "Report of the Special Examination of
n69. "Fair-Value Estimates of the Cost of Selected Federal Credit Programs for 2015 to 2024," Congressional Budget Office Report (
n70.
Read this original document at: http://financialservices.house.gov/UploadedFiles/HHRG-113-BA00-WState-VdeRugy-20140625.pdf
| Copyright: | (c) 2010 Federal Information & News Dispatch, Inc. |
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