Restive Republicans Target the Ex-Im Bank, and the wrong ‘crony capitalism’

By William A. Galston

The populist crowd is going after the wrong ‘crony capitalism’ target.

tea-party-rally-2013House Majority Leader Eric Cantor‘s shocking primary loss has exposed the divide between establishment and populist conservatives over economic fundamentals.

The most recent survey from the Pew Research center sheds light on the core differences between these two groups, who together account for 70% of the Republicans who pay close attention to politics and vote in nearly every election. The survey shows that 71% of populist conservatives believe that too much power is concentrated in large companies, versus only 35% of the establishment conservatives. Among the establishment, 74% think that Wall Street helps the economy more than it hurts; only 49% of populists agree.

These differences shape stances on particular issues. The survey finds that 68% of establishment conservatives believe that free-trade agreements benefit the U.S., compared with only 39% of populists. On immigration, 64% of the establishment thinks that immigrants strengthen our country, a view shared by only 17% of the populists. And by a margin of two to one, populists reject any and all reductions in Social Security benefits, while a plurality of the establishment believe that such reductions need to be considered.

In light of these differences, it was understandable that Mr. Cantor’s defeat would be taken to spell the end of hopes for immigration reform in this Congress, and perhaps the next as well. Less predictably, it has also jeopardized the reauthorization of the Export-Import Bank, a venerable if modest institution whose mission is to promote U.S. exports by providing financing for transactions in which the private sector declines to participate.

The majority leader’s successful challenger castigated him for being too close to Wall Street and for encouraging what populists of the left and right call “crony capitalism.” The Export-Import Bank, which Rep. Cantor supported, has become the poster child for this allegedly corrupt, self-dealing relationship between government and the private sector.

Kevin McCarthy, the favorite to replace Mr. Cantor, was also an advocate for the bank. But Bloomberg reports that on June 18, the day before Republicans were to vote on a new majority leader, a group of populist members met with Mr. McCarthy and told him that the Ex-Im Bank must go. Three days after winning the election, he went on national television to announce that he had withdrawn his support from the bank, sparking panic in the ranks of business groups who had long relied on the House Republican leadership’s steadfast defense of the bank against its critics.

Most of these critics are restive rank-and-file members. But not all. At the beginning of a hearing convened in June 2013 to assess Ex-Im’s progress reforming its risk-management policies, House Committee on Financial Services Chairman Jeb Hensarling (R., Texas) noted that President Obama had once described the bank as “little more than a fund for corporate welfare,” adding that “I could not agree more.” (Mr. Obama made his statement during the 2008 campaign. As president, he has supported expanding Ex-Im’s financing authority.) Former vice-presidential candidate Paul Ryan is also opposed to reauthorizing the bank.

As always, the real issues are more complex than the public debate. In fiscal 2013, Ex-Im supported the exports of more than 3,400 small businesses that probably could not have obtained commercial financing, for reasons unrelated to the creditworthiness of the prospective borrowers or to the quality of their proposed transactions. (Transaction costs and unfamiliarity with foreign businesses are two often-cited reasons for this commercial lending gap.)

The relationship between Ex-Im and big business raises murkier issues. Of the roughly $12 billion in long-term loan guarantees the bank extended in fiscal 2013, the top 10 beneficiaries received 97% of the total. Boeingalone received nearly $8 billion—about two-thirds of the total.

At first glance, this looks indefensible. But the manufacture and sale of commercial aircraft is far from a free market. Boeing’s major competitor—Airbus—receives massive export subsidies from a European consortium. In the best case, Europe and the U.S. would negotiate the mutual elimination of subsidies. But until that happens, say Ex-Im’s supporters, it would be self-destructive for the U.S. to stand down unilaterally.

They have a point. Still, large corporate beneficiaries of Ex-Im financing should be required to prove that they could not compete profitably in overseas markets without this assistance. We should not be asked to take Boeing’s word for it—all the more so because the bank is working with our tax dollars.

Although Ex-Im boasts that it returns money to the Treasury each year, a former bank president told me that if it were subject to standard capital adequacy requirements and accounting standards, it would not be reporting a profit. After everything that has happened since 2007, taxpayers deserve to know the real subsidies they are paying and risks they are running.

“Crony capitalism” may be a populist rallying cry, but it is too blunt for the complex reality of market failure and government subsidies in today’s cutthroat competition for global exports. Populists should train their fire instead on the epicenter of crony capitalism—our corporate tax code.

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