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Fun Accounting and the Export-Import Bank

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The establishment types in Washington have become really worried in recent weeks because one of their major troughs, the Export-Import Bank, may not be reauthorized by Congress. The Ex-Im Bank has long been a favored source of below market loans for Boeing, General Electric, and other major companies. If these companies have to pay market interest rates on their loans, it will cost them tens of billions of dollars in profits over the next decade.

The problem became serious after Republican majority leader Eric Cantor's surprise defeat in a Republican primary. As a close ally of big business, Cantor could be counted on to push through re-authorization of the Bank before the September 30 deadline for the current authorization. However his replacement as majority leader, Kevin McCarthy, is more likely to give in to Tea Party demands to end this subsidy to big business.

This prospect prompted the most hysteria among the Washington elite since the financial crisis threatened to lay waste to Wall Street following the collapse of Lehman. As we know, when major companies have their profits on the line, the pundits get worried and truth goes flying out the window.

We had panicked pieces pressing the urgency of reauthorization from ordinarily level-headed columnists like Joe Nocera and Neil Irwin, the latter of whom told us, "we are all crony capitalists." They warned us that our exports will collapse without the subsidies provided by the bank.

Even my friend Paul Krugman got into the act, arguing for re-authorization of the bank on the more honest grounds that any spending in the current economy will create jobs and boost growth. This is true, but the same argument could justify appropriating billions to pay people to dig holes and fill them up again, since in a time of mass unemployment even paying people to do pointless tasks will create jobs.

The basic story is a simple one. The Ex-Im bank subsidizes politically connected firms by providing them with below market loans. This can boost exports, but the bank also subsidizes imports, leaving its direct impact on the trade balance uncertain. As any graduate of Econ 101 knows, the subsidies provided by the bank effectively raise the cost of capital to other firms. When the higher interest rates paid by less well connected firms are factored in the bank would likely be a net loser of jobs and detriment to growth.

If you need to be convinced of this point, suppose that we had a government policy of just providing a flat subsidy of 10 percent to selected exporters. No economist would argue that in normal times (not the depressed economy we see now) such a subsidy would lead to additional jobs and growth. The Ex-Im Bank is such a subsidy, but it takes the form of a loan at below market interest rates, nonetheless it amounts to the same thing and everyone with any background in economics knows it.

But the best part of the debate is the silly stuff that serious people have to say to promote the bank. Perhaps the best line in this category is that 80 percent of the loans supported by the bank are for small businesses. We should have great sympathy for any political figure/policy type who is forced to say this line since they know it is complete garbage.

What matters is the percent of the money, not the percent of the loans. If the bank backs $80 billion in loans for Boeing, General Electric, or Enron (a favorite in past days), and $20 billion for small businesses, it doesn't matter that the $20 billion in small business loans accounted for the bulk of the transactions. Most of the money went to big businesses. That is what matters and everyone touting the share of small business loans knows it.

The other area for fun accounting is the claim that we make money on the bank. This is true in a literal sense, but not in a way that any economist/policy type would take seriously under other circumstances. The federal government is one of the lowest cost borrowers in the world. By splitting the difference between the cost of borrowing to the federal government and the cost to private companies, the government can virtually always guarantee itself a profit.

This is a simple and widely understood form of arbitrage. The government could also make money by lending billions of dollars to Dean Baker's Brilliant Hedge Fund, which would invest in a broad stock index and pay the government an interest rate 0.25 percentage points more than its borrowing costs.

Needless to say, the Ex-Im supporters will not back loans to Dean Baker's Brilliant Hedge Fund, even though the profit to the government would be as assured as with the Ex-Im Bank. The point is that it would be allocating capital in ways that serve no obvious economic purpose and likely are worse than the market allocation.

This was essentially the same story as the widely touted profit on TARP and related Fed lending. In the middle of a financial crisis, we made vast amounts of money available to favored banks at far below market interest rates. Since the lending pit was essentially bottomless -- there would be no more Lehmans in the words of Treasury Secretary Timothy Geithner -- it was pretty much in evitable that the banks would survive and the money would be repaid. But the end of the story is that the otherwise bankrupt Wall Street bankers are rich, and the rest of the economy is still in recession.

Anyhow, the Ex-Im battle is a brief foray back into TARP land. There is much less at stake in this one, but it is still striking to see how the establishment types are willing to throw out all their rules and principles in order to secure re-authorization. Given their power, they will almost certainly win, but the rest of us should at least enjoy the show.