Tuesday, July 8, 2014

Why Killing The Ex-Im Bank Is Crucial To The Future Of Capitalism

By David Stockman

The surface facts make abundantly clear that the case for the Ex-Im Bank is truly lame. In the most recent year (2013), its credit guarantees and other programs accounted for $37 billion of exports or less than 2% of the $2.2 trillion of exports generated by the US economy.  Moreover, by the bank’s own reckoning only about $12 billion of these Ex-Im deals deployed taxpayer subsidies in order to “meet competition from a foreign, officially sponsored export credit agency”.

So suppose those latter export deals which purportedly faced unfair competition from foreign governments would not have happened absent Ex-Im financing. We are talking about 0.6% of exports and 0.1% of GDP. That is, we are talking about economic “noise” that is so feint that even Janet Yellen could not detect it!

Actually, we are talking about something even more spurious. Fully $8 billion or two-thirds of this $12 billion in competitively disadvantaged exports were attributable to a single customer
—the Boeing Corporation (BA). Moreover, the company’s own financial director publicly admitted that it could “find alternative funding sources” without the Ex-Im Bank.

So the issue is not $8 billion of commercial jet sales or nothing. Its about the marginal cost of export finance, and whether any incremental costs needed to offset the dumb subsidies of foreign governments should be absorbed by the taxpayers of America or the shareholders of the Boeing Corporation. And the answer to that question is not very hard to ascertain.

Even if the present value of foreign credit subsidies amounted to 10% of the purchase price—a level well beyond current practice—there would be nothing to prevent Boeing from discounting its selling prices by enough to make up the difference. That would be about $800 million in the most recent year. Yet such a “painful” discount would amount to less than 13% of Boeing’s LTM pre-tax income or about $0.75 per share on a net income basis.

At the end of the day, that’s what its all about—-whether BA would earn $6 per share or $5.25 during its most recent LTM reporting period. Needless to say, that modest spread has no bearing on the pubic interest whatsoever. And the loss of $0.75 per share of taxpayer largesse most likely would not crimp even the style of the fast money traders who move in and out of BA’s stock, either.

In fact, during the last 18 months Boeing’s LTM earnings have posted in a narrow band between $5.30 and $6.00 per share, but it stock price has fluctuated widely between $70 and $130. The far greater amplitude of the latter, in turn, reflects the short-run trading games among the hedge funds, which have caused Boeing’s PE multiple to swing wildly between 13X and 25X. Stated differently, its market cap has ranged from $50 billion to $100 billion based on huge fluctuations in it capitalization rate, not its bottom line.

So let Boeing fund its own concessionary export credit where it is needed and let the hedge funds figure outs its appropriate capitalization multiple. But since the taxpayers of America have no dog in either of those hunts, there is absolutely no reason for the continued existence of the Ex-Im Bank.

Indeed, as this core Boeing example makes clear, the fundamental issue is the incidence of Ex-Im Bank subsidies, not the level of US exports, jobs or GDP. And it is here where the dirty crony capitalist secret hides. Last year the top ten beneficiaries of Ex-Im subsidies accounted for 75% of the total, but virtually all of this largesse went to American exporters of heavy capital equipment and projects—including Boeing, General Electric, Caterpillar, John Deere and Bechtel.

The common characteristic of every one of those suppliers of airframes, jet engines, power plants and oilfield, construction and mining equipment is that they incur heavy fixed costs—including amortization of the substantial research, development, testing and engineering costs(RDT&E)—in the process of bringing these goods to market. Accordingly, Ex-Im’s core customers are maniacally focused on variable contribution.That is, at the competitive margin they do not hesitate to discount their lists prices in order to make a sale that provides positive variable contribution to their heavy burden of RDT&E overhead and fixed manufacturing and supply-chain costs.

Needless to say, these discounts—which are aimed at a host of competitive threats and which would include offsets to foreign government export subsidies if they were required—come straight out of variable profit contribution, and therefore flow directly into earnings per share. Accordingly, there can be no doubt that the discounts avoided owing to Ex-Im subsidies accrue to the shareholders of the handful of giant, global corporations that absorb the overwhelming share of its taxpayer funded largesse.

In a general sense, the true evil of crony capitalist subsidies—whether through credit, grants or tax breaks—is that the incidence of the benefits rarely accrues to the greater public good of jobs and GDP, as advertised. More often than not they are captured by upstream factors of production such as suburban land bank owners in the case of subsidies to buy or build homes. But in the case of Ex-Im Bank, the route of subsidy capture is crystal clear: it goes overwhelmingly to the shareholders of Boeing and GE, and to the respective bonus and stock option pools of their top executives.

And therein lies the deeper stakes in the currently raging legislative battle over extension of the Ex-Im Bank’s authorization after September. Yes, Boeings, GE and the handful of big cap clients of the bank have considerable beltway clout through the usual channels of PACs, K-Street lobby operations and targeted mobilization of local suppliers and unions.

In truth, however, the constituency and money politics base of the Ex-Im is exceedingly narrow. Preservation of the bonuses and prerogatives of even GE’s Jeff Immelt, the nation’s most unabashed crony capitalist, does not automatically confer a winning hand in a beltway food fight. So there is something beyond mechanical interest group politics involved here.

Indeed, the magnitude of the beltway mobilization in behalf of Ex-Im leaves no doubt that what is really at stake is the modern bipartisan predicate that American capitalism is a fragile flower that requires constant state interventions and inducements in order to stay on the path of growth and prosperity. Accordingly, job #1 in the beltway is everywhere and always bucking up the GDP and boosting the job count. Extending the Ex-Im bank authorization, therefore, is just another project in pursuit of business as usual.
Not surprisingly, therefore, the entire machinery of bipartisan influence peddling is being mobilized, as aptly described in a recent Wall Street Journal update:

With the 80-year-old agency’s charter expiring Sept. 30, the battle over its future has intensified. Its backers are redoubling their efforts, which include showing members of Congress how the agency benefits their districts.

“There’s a full inside-the-Beltway, outside-the-Beltway push,” said Christopher Wenk, senior director of international policy at the U.S. Chamber. “We’re burning up shoe leather.”

Lawmakers at a recent House hearing on the future of the Export-Import Bank were given an extra piece of reading material: a personalized index card laying out exactly which companies in their districts benefit from the financing agency and how many people they employ.

The cards, which supporters of the bank plan to give to every member of Congress in coming weeks, are part of a lobbying push by corporations such as Boeing Co.

The business groups have brought in big names such as former House Majority Leader Dick Gephardt, a Democrat, and former Mississippi Gov. Haley Barbour, a Republican, to promote the bank’s worth. Hamilton Place Strategies, hired to lobby on the issue for the manufacturers, has created a “war room” to provide rapid response to counter critics via email and social media.
Here’s the thing, however, The overpowering and incessant statist economic management of the American economy, as reflected in the Ex-Im extension mobilization now underway, is causing the engines of capitalist prosperity to shutdown. The main culprit, of course, is our monetary central planners in the Eccles Building. But they are only the leading edge—–the exemplar that tells Washington day in and day out that without constant ministrations by agencies of the state, our capitalist economy would continuously under-preform and tumble into the ditch.

In the years since the unfortunate arrival of Alan Greenspan at the Fed, the Fed have systematically destroyed decentralized, spontaneous  “price discovery” in the financial markets and replaced it with a regime of “price administration” operated according to the writ of 12 economic overlords. Now all market participants chase the Fed’s unrelenting emission of liquidity and word clouds; interest rates 
are pegged, bond prices are propped, Wall Street gamblers are showered with endless free money for the carry trades.

But the Fed’s parlous regime has only intensified the statist assault on market capitalism that has been underway for nearly a century. At the center of this assault is the wrong-headed notion that capitalism is an economic cripple that is inherently prone to drastic cyclical instability, and that absent enlightened  management and intervention from Washington— society would be constantly in harms way.

The truth of the matter, however, is just the opposite. During the last 100 years it has been the misguided projects and interventions of the state that has caused capitalist prosperity to be interrupted and eroded. The Great Depression, for example, was the step-child of the economic and financial havoc caused by World War I, and the phony prosperity stimulated by the Fed and other European central banks during the 1920s. All of this was designed to paper over the legacy of wartime inflation, debt and destruction of the pre-1914 regime of robust international trade, capital flows and sound, gold-anchored national currencies.
Likewise, all ten of the post-war business cycles reflected either the temporary cooling off from war-fueled booms—such as after the Korean and Vietnam wars—or central bank induced credit booms that had to be curtailed with monetary restraint, most notably the “Volcker cure” for double-digit inflation in the early 1980s.  And most recently, as the Fed has become a serial bubble machine, macro-economic dislocations have been directly attributable to the liquidation of malinvestments and economic bloat induced by speculative excesses during the bubble inflation period.

So what is at stake in the Ex-Im battle is the future of market capitalism itself. If Washington lacks the capacity to say no to the shareholders of a few big US corporations that can be counted on one hand, then the statist predicate will triumph finally and for ever more.

Unfortunately, the script is already evident. When push-comes-to-shove during the run-up to the fall congressional elections, Speaker Boehner can be counted up to come to the rescue of GE in his home state, and sell-out the tea party insurgents yet again.

And this time it will be game over. After the Ex-Im is given a new lease on life there will be no place for free market conservatives in the Republican party at all. Going forward, crony capitalism will be readily managed by the statist politicians who dominate the beltway regardless of notional party affiliation and banquet speech ideologies.

David Stockman was the Director of the Office of Management and Budget during part of the Reagan Administration, from 1981 to 1985. He is the author of The Great Deformation: The Corruption of Capitaism in America and The Triumph of Politics: Why the Reagan Revolution Failed.

 The above originally appeared at David Stockman's Contra Corner and is reprinted with permission. 

No comments:

Post a Comment