Back in the heady days of the Tea Party, an unruly bunch of free market congressmen and senators stood up to Wall Street, K Street, Boeing, and the Chamber of Commerce and temporarily killed a corporate-welfare agency and, in the process, created a natural experiment about the effects of industrial policy.
A new study from two economists finds that absent taxpayer-backed financing, Boeing saw only a very small downturn in exports and that most of the subsidized exports would have happened anyway.
WRAY LIED ABOUT NOT TARGETING CATHOLICS
The Export-Import Bank of the United States is a federal agency that subsidizes U.S. exports by extending financing (loans and loan guarantees) to overseas buyers, such as foreign governments and companies.
Starting in 2012, Ex-Im became a flashpoint of debates over crony capitalism, as conservatives argued against its reauthorization, while the industry and President Barack Obama fiercely defended it.
Democrat Denny Heck, then a Washington state congressman and now the lieutenant governor, said that if Ex-Im was trimmed at all, “we could wake up in 20 years and still have a duopoly in terms of airplane production in this world, but unfortunately, it would be Airbus and the state of China and their C919.”
Heck believed that Boeing could not exist without its subsidies from Ex-Im.
Frank Gaffney, a dedicated Ex-Im defender, said that without Ex-Im subsidies, Boeing and other exporters “would likely see their opportunities for overseas sales vanish as foreign competitors use government loan guarantees and credits to close deals, despite offering what are often inferior products.”
Amid these warnings, conservatives such as I argued that the free market would fill the void.
Conservative lawmakers blocked Ex-Im’s reauthorization in the summer of 2015, and then they blocked new appointees to Ex-Im’s board. The result: For four years, Ex-Im couldn’t issue very large finance subsidies, and thus, for four years, Boeing’s overseas customers had to find their financing in the private sector.
What happened? The conservatives were right.
“Commercial Aircraft Buyers Enjoy Unprecedented Capital Access,” Aviation International News reported in 2017. We saw “unprecedented levels of competition” among lenders seeking to finance airlines’ purchase of jets.
The new study, from business scholars Efraim Benmelech and Joao Monteiro, suggests that most of Ex-Im’s subsidies before 2014 went to buyers who could have and would have lined up private sector financing. When Ex-Im stopped subsidizing aircraft purchases, “for airlines in countries with a developed financial system, the number of Boeing aircraft delivered to treated airlines did not decline.” Boeing did lose some sales thanks to Ex-Im’s suspension. All of those sales were to poor countries with poorly developed financial systems.
That is, Boeing didn’t lose business to Airbus. Boeing lost business to the economic weakness of illiquid airlines in poor countries.
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The folks who defend industrial policy say that it is necessary to compete against foreign governments' industrial policies. This study suggests that's not true. The best-case defense of Ex-Im is that it helps poor countries develop more rapidly. But Ex-Im is not calibrated to be an international development tool. It is pitched as a creator of American jobs.
But the natural experiment created by the brief conservative victory shows us that Ex-Im mostly doesn't make U.S. exports happen — it mostly displaces what the private sector would have done.