Tag Archives: Veronique de Rugy

The unseen costs of the Ex-Im bank

The great 19th Century French economist Frederic Bastiat had good advice when thinking about economics. Actions, habits, and laws, he said,

[produce] not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

The good economist, he said, “takes into account both the effect that can be seen and those effects that must be foreseen.”

So it is with the US Ex-Im bank.

The independent federal agency helps foreign firms finance the purchase of American-made products. They do this by selling insurance to these foreign purchasers, by directly loaning them money, and by guaranteeing loans that others like Goldman Sachs make to these firms.

Ex-Im’s activities produce some seen benefits and these are widely touted by the bank and it’s boosters, such as the National Association of Manufacturers. These seen benefits are:

The gains to foreign purchasers

Since most foreign purchasers are sub-prime borrowers (what could go wrong, right?), the bank’s assistance allows them to obtain credit that private lenders would otherwise be unwilling to extend. At least in the short run, this helps these foreign purchasers.

The gains to U.S. manufacturers

Ex-Im’s loans, loan guarantees and insurance all increase demand for some domestic manufacturers’ products. This allows them to sell more stuff and to sell it at higher prices than they otherwise would. The bank boasts that, on average, “87% of transactions benefit small business exporters of U.S.-made goods and services.” Note the use of the words “transactions” and “small.” The bank is slicing the data here in a way that isn’t entirely honest. More on which below.

But as Bastiat would tell us, these seen benefits are less than half the story. There are also a host of less-conspicuous effects, and all of them are bad. These include:

Excessive risk

Rational lenders are unwilling to finance risky bets unless they are compensated with higher rates of return. These higher interest rates, in turn, make risky borrowers think twice about undertaking bad investments. This is a feature of a well-functioning financial system, not a bug.

Like all goods, capital is scarce and this feature helps ensure it isn’t wasted, steering it to the projects where it can do the most good for people. Ex-Im’s activities, on the other hand, steer capital—at artificially low interest rates—to sub-prime borrowers so they can buy big, expensive products. This is bad for the world economy because it misallocates capital. But in the long run it’s bad for many of the borrowers themselves because it encourages them to take on risks they can ill-afford (which is why I hedged above when I said they gain “in the short run”). Another great French economist, Veronique de Rugy, highlighted this fact in a recent post. As she points out, this isn’t just a hypothetical concern:

In the 1990s, the Ex-Im Bank was so excited to “support” the people of the Republic of Nauru by extending financing assistance to Air Nauru to purchase some, you guessed it, Boeings. When Air Nauru defaulted in 2002, the Ex-Im Bank seized Nauru’s only jet straight off of the runway — leaving the country’s athletes stranded on the tarmac after the Micronesian Games.

Higher prices for manufactured products

Next consider the unseen effect on domestic purchasers. Like Air Nauru, domestic airlines such as Delta, United, Southwest, and dozens of others also buy Boeing aircraft. Unlike Air Nauru, these firms don’t receive loan subsidies. This hurts all of them once, and some of them twice.

First, the international carriers among this group like Delta lose market share to Ex-Im-privileged firms like Korean Air and Emirates Air. This explains why Delta has filed a lawsuit against Ex-Im.

Second, all US carriers—even those like Southwest that only serve the US market—end up paying higher prices for planes because Ex-Im privileges increase the demand for, and therefore the price of, airplanes. As Vero notes in this piece, this has many air carriers worried about a jet plane bubble. Simple economics, of course, predicts that some of this cost will be passed on to consumers in the form of higher ticket prices.

Privileges for banks

Presumably, many of the legislators who routinely vote to reauthorize Ex-Im do so because they want to subsidize domestic manufacturers. Unfortunately, the laws of economics dictate that the actual beneficiaries of a subsidy need not be the intended beneficiaries.

In the case of Ex-Im, a large chunk of the benefit is captured by privileged banks instead of by manufacturers. Thanks to Ex-Im’s loan guarantees, banks are able to make loans to foreign buyers while unloading most of the risk. This is yet one more way in which banks, “privatize gains and socialize losses” (to borrow a phrase used by Nobelist Joseph Stiglitz at an Occupy Wall Street rally).

This privilege sits on top of a pile of other privileges. The IMF recently estimated that in most years the biggest of these privileges—the too big to fail subsidy—is larger than bank profits!

Few gain at the expense of the many

Consider, again, the bank’s assertion that 87 percent of its “transactions” benefit “small business” exporters. Why focus on transactions? Wouldn’t it be more transparent to focus on the size of these transactions? When you break it down this way, as Vero does in this piece, you see that 81 percent of the value of Ex-Im assistance goes to “big businesses” as the bank defines them.

And just how do they define big and small business? Answer: not in the same way others like the Small Business Administration do. Ex-Im’s definition of “small” manufacturers and wholesalers is three times larger (by number of employees) than the SBA’s definition and it includes firms with revenues as high as $21.5 million a year.

A host of pathologies

As I emphasize in the Pathology of Privilege, these favors to a select few domestic manufactures and banks come with a host of problems. In short, privilege “misdirects resources, impedes genuine economic progress, breeds corruption, and undermines the legitimacy of both the government and the private sector.”

But Ex-Im and its beneficiaries don’t want you to see that.

9 Farm Bill Figures

In my last post, I made the case that the farm bill (which has now emerged from conference committee and just passed the House) makes an excellent teaching tool.

Many students, of course, are visual learners. So I thought I might suggest a few farm bill figures.

Let’s begin with farm subsidy outlays. These are the most conspicuous privileges afforded farmers. As Veronique de Rugy’s figure below shows, these were around $13 billion per year in the late ‘90s, then surged up to $28 billion in 2000, then settled into annual levels that were about twice their pre-surge levels after that (readers of Robert Higgs will recognize this as a “ratchet” pattern in government growth).

farm-subsidies-chart-original (Click on any image in this post to enlarge it)

The last bar in Vero’s chart shows projected subsidies of about $29 billion in 2014. Another of Vero’s charts, however, suggests that this figure may be optimistic. The chart below shows projected and actual farm bill spending for the last couple farm bills (note: these figures include the entire bill not just subsidies, which is why the numbers are so much larger than those in the previous chart). 


Though subsidies are the most conspicuous privilege afforded to farmers they are by no means the only or even the most important. In addition to cash outlays, farmers also benefit from an assortment of trade barriers (some of which have gotten us into trouble with the WTO), various marketing programs, and artificial price supports. My chart from last week shows how active farm assistance programs have grown over the years (along with farmer incomes):

The chart below by Vero shows how one of these price support programs drives up the price of sugar:


As I write in my Mercatus on Policy piece: 

This might seem trivial, but sugar isn’t the only item that is more expensive because of agricultural price supports. The House version of the farm bill imposes artificial price floors on wheat, corn, grain sorghum, barley, oats, long and medium grain rice, soybeans, oilseeds, peanuts, dry peas, lentils, chickpeas, sugar, and dairy products.

Farm privileges are often justified on the common assumption that farming is unprofitable. But this isn’t so. The figure below, taken from Vincent Smith’s paper on the 2013 bill, shows that both median and mean farm household income has exceeded median and mean US household income for more than a decade. Today, the average farm household makes 53 percent more than the average US household:

Farm income

Farm supports are also often justified on the basis that farming is uniquely risky. As Smith explains, though, the business failure rate of the typical American business is 14 times greater than the failure rate of the typical farm. Moreover, as the figure below from his report demonstrates, the agriculture sector’s debt-to-asset ratio is lower than that of other sectors and has been falling for two decades:

Though the average farm has done quite well, it is not the average farm that receives privileges. As demonstrated by Smith’s chart below, since 1995, 83 percent of subsidy payments have flowed to the largest 15 percent of farms:

As I put it in my piece, “Given that these subsidies and price supports distort free market signals and transfer wealth from the relatively poor to the relatively wealthy, one would think they would face bipartisan opposition.” Why, then, do they persist?

This chart by Vero, showing annual lobbying expenditures by the sugar industry is one explanation:

Finally, this chart from my piece shows that political donations tend to be concentrated on those who actually write the bill:

Privileges for some, punishment for others

In case you missed it, Veronique de Rugy’s chart from last week is a must-see (and must-share):

This chart uses two measures of the revenue impact from taxing the rich (blue bars): the FY2013 amount and the 10-year average tax collection. The business and energy tax extenders (red bar) alone take away $67.7 billion from federal revenue in 2013.

Taxes collected from increasing rates on the rich in FY2013 amount to $27 billion, while tax revenue collected based on the average over 10 years is roughly $62 billion. Even in the best-case scenario for tax collection, the increases in revenue are lower than the amount being paid out to businesses and energy subsidies.

If President Obama had let all of the special tax breaks for businesses and energy companies expire, he would have raised more revenue than his tax hikes on high-income earners. The president’s actions contradict his professed desire to ensure that “the wealthiest corporation and individuals can’t take advantage of loopholes and deductions that aren’t available to most Americans.”

Privileges for some, punishment for others

Here is the chart:


(click on the image to see large)

Read the whole post here.

Also, don’t miss Vero’s latest blog post. It addresses a newly-discovered provision in the fiscal cliff deal. The provision reduces Medicare payments for one and only one firm, a company that happens to directly compete with another firm that figures prominently in the Senator Majority leader’s state.

The Bush Tax Cuts

This episode should have advocates of limited government asking themselves an important question: are tax cuts without spending cuts good for the cause of limited government? Decades ago, Milton Friedman answered this question with a resounding yes. Cut taxes, he counseled, and starve the beast. With less revenue, spending will fall too. Tax cutters from Ronald Reagan to George W. Bush have been convinced of “starve the beast” ever since.

But there is another Nobel laureate with free market bona fides who begs to differ. James Buchanan, a founding father of public choice economics—which uses the tools of economics to shed light on the incentives of policy makers—has long questioned “starve the beast.” When politicians are legally and politically permitted to run deficits, he warned, they will simply fund government by borrowing. In this case, tax cuts give voters the illusion that government spending is cheap. And with government seeming less-costly, voters will be happy to have more of it.

That’s me, writing on the Bush Tax Cuts in the latest issue of Reason. It was part of broader piece, edited by Peter Suderman on the fiscal cliff and it includes great essays by Charles Blahous, James Pethokoukis, Veronique de Rugy, Tad DeHaven, Susan Dudley, Maya MacGuineas, and Marc Goldwein. The whole piece can be found here.

Also this week, I did a podcast with the Heartland Institute on the Bush Tax Cuts, based on my research with Andrea Castillo.

Finally, Lars Christensen has some insightful comments on our paper here.

On behalf of all of us at Mercatus and Neighborhood Effects, Happy Holidays to all.


The Political Economy of Infrastructure Stimulus

Economists have long recognized the value of infrastructure. Roads, bridges, airports, canals, and other projects are the conduits through which goods are exchanged. In many circumstances, private firms can and should be allowed to provide this infrastructure. But in other cases, there may be a role for public provision at the local level. But whatever its merits, infrastructure spending is not likely to provide much of a stimulus.

That is my colleague, Veronique de Rugy, and me. In our latest working paper, we examine the macroeconomic literature on infrastructure stimulus. In my view, the most significant problems with stimulus have less to do with macroeconomic theory and more to do with its real-world application. Lawrence Summers, an eminent Keynesian famously noted at a Brookings event a few years ago that:

Fiscal stimulus is critical but could be counterproductive if it is not timely, targeted and temporary.

In the real world, it seems that most stimulus—especially infrastructure-type stimulus—fails one or more of these tests.

The bottom line: even if it did work in theory, the political apparatus seems incapable of implementing Keynesian stimulus in the ways that Keynesians want them to. That seems to explain why Lord Keynes himself grew skeptical of the policy tool. Near the end of his life he wrote:

Organized public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organization (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle.

Here is Veronique on our piece.

S&P: Don’t Default & Commit to Serious Debt Reduction

S&P has issued two warnings: one that triggers a downgrade if we default on  debt payments and another that triggers a downgrade if the U.S. fails to commit  to serious debt reductions when the debt ceiling is raised or shortly after. We  don’t have the luxury of choosing which one to address. We must deal with both — and soon.

That is Veronique de Rugy, writing in the Daily Caller.  Read the entire piece.

de Rugy on State Bankruptcy

In many states, bankruptcy will be an option only if powerful unions and other entrenched interest groups see it as a way to force budget problems onto the state’s bondholders rather than public employees. Bankruptcy in these conditions would allow the state to continue budgeting under the same structure as before, basically giving statehouses a clean slate without providing incentives to change the core of their financial problems: overspending in education, excessive public pensions and benefits, and a swollen state work force. You wouldn’t want to pay down your sister’s credit card balance without taking away her ability to pile up new debt.

That’s Veronique de Rugy, writing on state bankruptcy in the latest issue of Reason Magazine. It is an excellent accounting of the arguments, pro and con. Read the whole piece.

Entitlement, Entitlements, Entitlements

There is a cancer eating away at the budget from within, one that steadily drains American wealth, sends much of it overseas and only gets worse over time. It is the interest America pays on its national debt.

That is Gerald Seib, writing in today’s Wall Street Journal. My colleague, Veronique de Rugy has been making this point in charts, papers and talks for quite a while now. To help illustrate the problem, I have made a short video graphic using two of her charts:

The first chart illustrates the course of all non-interest spending over the next several decades.  Note, first, that that the biggest drivers of spending growth are Medicare and Medicaid. Without growth in these two programs, our long-term budget problem actually looks quite manageable. Note, also, that spending on these programs actually crowds-out or displaces “other spending” (a category which includes everything from national defense and administration of justice to agricultural subsidies and education funding). In other words, not only do Medicare and Medicaid take over an increasingly large share of the economy, they also take over an increasingly large share of the federal budget. (As Mr. Seib notes, liberals ought to be just as concerned about this as conservatives since their most-cherished programs are likely to get squeezed).

But the story gets worse. Because we are borrowing so much to pay for these programs, our interest payments begin to climb…and climb…and climb. The second chart rescales the first to make room for these interest payments. They eventually take over most of the budget. On this path, the federal government’s spending will eat up four-fifths of our entire economy by the time my daughter reaches retirement.

So what is the moral? We must rein in the cost of debt. To do that we must rein in those programs that are the chief drivers of that debt: Medicare and Medicaid. Unless and until we get serious about entitlement reform—which, so far, has not been a feature of any of the budget negotiations in Washington—the economic cancer will continue to grow.

Me on CNBC

I was on CNBC yesterday morning debating Professor Harley Shaiken on the Wisconsin situation. Here is the video:

Here is a link to Professor Shaiken’s website.

Here is a link to the GAO report I referenced. If you think the budget gaps of the last few years have been bad, you ain’t seen nothing yet: States face a $9.9 trillion shortfall over the next several decades.

In order to close these long-term gaps, the GAO estimates that states need to immediately cut 12.3 percent (or increase taxes by the same amount) and maintain these changes each and every year for the next 50 years. To put that in perspective, last year states cut 5.9 percent out of their General Funds (total spending, which includes borrowed funds, other state funds and federal funds actually increased!). So, as painful as the last few years have been, states are nowhere close to doing what they need to do in order to address their long-term problems. 

Professor Shaiken mentioned studies that find public-sector employee pay is comparable to private sector pay. Here is one such study. And here is another.

Here is Andrew Biggs and Jason Richwine from yesterday’s Wall Street Journal on why these studies are flawed. To wit: a) they typically don’t account for health benefits, b) they fail to accurately compare the value of guaranteed 8 percent returns in public pensions with 4 percent guaranteed returns in private 401(k)s, and c) they do not take account of greater job security among public sector workers. Here is a link to Biggs and Richwine’s analysis. Here is Veronique de Rugy on the matter. Here is Megan McArdle. Here is a New York Times graphic that focuses just on Wisconsin employees (counting only cash compensation, the median Wisconsin public employee–who is typically more-educated–earns 22 percent more than the median Wisconsin private employee).

Here is a paper that assesses the empirical link between public sector unionism and government spending.