The Lexington Institute’s Weak Defense of Boeing’s Bank

Over at the Lexington Institute’s website, Loren B. Thompson has a blog post going after Heritage Action for their attack on the Export-Import Bank. He might as well add me to the list of those “free-market ideologues who do not understand how the global trading system works,” alongside “companies seeking to limit the bank’s operations in support of narrow corporate agendas.” This is an odd line of attack, since one of the main problems with Ex-Im is that it’s corporate cronyism at its worst, and most of its loan guarantees go to a single corporation: Boeing, hence the nickname “Boeing’s Bank.”

The Lexington Institute, in fact, is the one receiving money from a narrow corporate interest — Boeing.

Let’s look at the claims he makes about the benefits of the Ex-Im Bank:

1. “[Heritage Action] says Ex-Im is a ‘model of special interest-fueled cronyism’ that gives ‘upwards of 80-percent’ of its funding to airplane-maker Boeing.  In reality, most of Ex-Im’s support for manufactured exports last year went to items other than aircraft.”

First, the Heritage Action post clearly states that the Ex-Im Bank gave “about 80 percent of its loan guarantees to Boeing” in 2012. Thompson uses data from 2013. More important, Thompson attempts to discredit the claim by looking at loans and loan guarantees, when the point was just that the preponderance of Ex-Im’s guarantees went to Boeing. Here’s what the Ex-Im’s own data reveals about 2012:

  • The bank’s activity is highly concentrated in a few industries – primarily aviation, oil-and-gas exploration, and manufacturing.
  • The aircraft industry alone benefited from $11.5 billion worth of loan guarantees in 2012. 
  • Boeing got roughly 80 percent of Ex-Im’s loan guarantees. 
  • Boeing was the recipient of almost 50 Ex-Im Bank deals worth $12.2 billion (including insurance, loans, and guarantees). 

These data make it hard to argue that the Ex-Im Bank isn’t main about propping up Boeing’s exports. 

2. “[Heritage Action] also complains about Ex-Im’s ‘backing of the failed solar panel company, Solyndra.’ Ex-Im never gave money to Solyndra.  All it did was loan money to a Belgian bank so imports of U.S. solar panels could be financed; the money has been paid back with interest.” 

He is technically correct: The Ex-Im Bank only guaranteed a loan to a Belgian bank to buy Solyndra’s solar panels. But only a fool or a shill would deny that the direct goal behind this action was to support the sales of Solyndra products independent of what merits the market ascribes to them. 

That’s only one of the many problems with these loan-guarantee programs. The government picks a “winner,” in this case Solyndra, and provides incentives to lenders (in the case of the 1705 green-energy loan program), and to other companies and foreign banks (in the case of the Ex-Im Bank), to invest in the chosen company. More often than not, political fashion and personal connections, rather than entrepreneurial merit and value creation, dictate the winners.

Contrary to Thompson’s claims about a “level playing field,” this kind of cronyism tilts the scales towards certain businesses and away from others. Without the manifold incentives provided by these government loans, would a U.S. lender have extended a loan worth almost half a billion dollars to a company that went bust very soon thereafter? Without the incentives provided by the Bank, would the Belgian bank have invested in Solyndra products? These are the questions that Ex-Im supporters like Thompson need, but neglect, to answer.

3. Thompson claims both that “Ex-Im uses no taxpayer money” and that “Ex-Im turns a profit each year (about a billion dollars in 2013).”

Ex-Im’s defenders argue that it is profitable and that its default rates are extremely low. There’s an uncomfortable contradiction here: If Ex-Im activities are indeed so profitable, why must the government provide them? Are we really to believe that profit-seeking businessmen would simply leave these opportunities on the table?

As someone who understands the bank, Thompson must know that its impressive numbers are an illusion created by strange internal performance measures. A Government Accountability Office (GAO) report from May of 2013 explains that the Ex-Im Bank doesn’t actually count up its own defaults, but instead uses economy-wide historical default and recovery rates to calculate program costs. This method may look good on a financial report, but the GAO has repeatedly warned that the Ex-Im Bank’s creative accounting may not be accurate in predicting default rates in the future and therefore its accurate costs.

As I noted previously, Jason Delisle and Christopher Papagianis provided more background on how these alleged profits in 2012 were almost surely an accounting illusion. “The government’s official accounting rules effectively force budget analysts to understate the cost of loan programs . . . by excluding, or not factoring in the cost for market risk,” they write at e21.

Rules like the Federal Credit Reform Act of 1990, which require budget estimates to estimate loan performance and risk based on risk-free U.S. Treasury rates rather than rates that match the actual riskiness of the loan itself, contribute to this wild underestimation of costs. Citing a November 2011 study by MIT finance professor Debbie Lucas, Delisle and Papagianis note that the bank’s lending activities, when measured by the private sector’s fair-market accounting, actually cost taxpayers $200 million in 2012. I am sure that the same trend holds true for 2013. 

4. Thompson claims that “Ex-Im is prohibited from competing with private-sector lenders,” so it’s not tilting the playing field.

The non-compete clause is indeed one of the Bank’s “principles,” but it’s safe to say any enforcement is terribly subjective and largely irrelevant.  For one thing, it would only apply for their actual loans, since government-backed loan guarantees and insurance products are, by definition, not something private competitors can offer. Further, I suspect that if a potential borrower can show they’ve either been denied credit or have been provided “unreasonable terms” from a private lender, that satisfies the non-competition principle. Like the others, this “defense” is paper-thin.

5. This one is my favorite: Thompson boasts that “about 90% of Ex-Im’s export transactions last year were for small businesses.”

Is this guy trolling? The 90 percent figure is calculated by merely looking at the ratio of the number of deals involving small businesses and the total number of deals. When you look at the ratio of the appropriation amounts, however, the picture looks quite different — and considerably less flattering for the Bank.

Here are the data: For FY 2013, 3,413 of the 3,842 total deals, or 88 percent, were marked as “small business.” However, when you look at the amounts of money we are talking about you get a very different picture: Only $5.2 billion of the $27.3​ billion in total authorization amounts, or 19 percent, was designated as “small business” activity on the Ex-Im Bank’s annual report. (If Thompson doubts these figures, he should perhaps consult his own report for confirmation of my points!)

As far as terrible pro-Ex-Im arguments go, we’re just getting started. Supporters claim that the Ex-Im Bank fills an important “gap” in supporting U.S. exports. These claims are not borne out by the data, which reveals that U.S. exports would be virtually unchanged without the Ex-Im Bank’s tomfoolery.

Using both Census and Ex-Im data on U.S. exports from 2000 to 2010, we see that Ex-Im-backed activity accounts for approximately 2 percent of all U.S. exports. The same is true of looking at any single year. Take 2012, for instance: Total U.S. exports were $2.2 trillion, while the estimated export value of Ex-Im activity was about $50 billion, around 2.2 percent of activity.

The GAO has made this point since 1992, stating that “export promotion programs cannot produce a substantial change in the US trade balance.” The data also debunk the claim that ending the Ex-Im Bank would “hurt America.”

It would undoubtedly hurt individual firms whose profits have been protected by Ex-Im activity, like Thompson’s friends at Boeing. There is no doubt that the companies who are benefiting from Bank’s largesse like it and would have to adjust if this cronyism ended. But the fact that cronyism benefits a few companies doesn’t mean it benefits the whole country. In fact, the opposite is almost always the case, as my Mercatus colleague Matt Mitchell points out in his excellent report “The Pathology of Privilege.”

For more information about the Ex-Im Bank, you can check out these charts I made using data from the Ex-Im Bank’s annual reports. Go take a look at some of the biggest financial beneficiaries – I think you’ll see some recognizable names. 


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