Former CBO Director and now American Action Forum President Douglas Holtz-Eakin is a solid economist and champion of pro-growth tax policy. But no one is perfect, as illustrated in this case by his misguided defense of the Export-Import bank. Though acknowledging reforms are needed, he makes two arguments in defense of Ex-Im that I find unconvincing.
First, he says that while government subsidies typically create market distortions, it’s acceptable in this case because “Ex-Im does not operate in an otherwise open market. Instead, essentially every competitor country has its own ECA. Ex-Im permits the U.S. to offset their subsidies and creates a limited role for Ex-Im as part of a pragmatic trade policy.”
Other countries do indeed engage in such behavior, but that’s no argument for doing so in the United States as well. When other nations subsidize our purchases of their products, they are transferring wealth in our favor. Their citizens are being taxed in order to increase the purchasing power of foreign individuals or companies, which includes Americans. That is to our benefit, not theirs. It requires no policy response.
While universal adoption of free trade is best, I agree with Milton Friedman that even unilateral free trade is preferable to domestic protectionism. That other nations routinely shoot themselves in the foot with subsidies and other misguided government interference is not reason for us to do so as well.
His other point attempts to deflect claims that Ex-Im amounts to crony capitalism. He explains:
A second charge is that Ex-Im financing is simply crony capitalism. However, it is not quite that simple. The economic benefits of Ex-Im financing do not automatically accrue to the U.S. corporations involved in export sales. In those instances where buyers have competitive options and are price-sensitive, the subsidy implicit in Ex-Im financing would largely accrue to the seller, its workers, its suppliers, and its equity investors. In contrast, when the sale involves little competition and price insensitive buyers, those buyers will capture the benefits of Ex-Im financing.
This strikes me as a much weaker argument than the first. He argues we shouldn’t consider the Ex-Im bank to be crony capitalism because not all of the benefits go to American companies – some are captured by their buyers. US taxpayer wealth, in other words, is being transferred to both politically connected American corporations and the foreign companies that buy their products. And that’s supposed to make it better? Anyway, the semantic debate is a red herring. It doesn’t matter whether you call the Export-Import bank crony capitalism or just bad policy, so long as it’s finally allowed to die.
