When it comes to being pro-big business, conventional wisdom says the Republicans are most likely to distribute the goods. It’s a valid criticism. Republicans are indeed big supporters of business interests. But these days, they are second to the Democrats.
Case in point: The congressional Democrats’ recent and unanimous support for the Export-Import Bank. A bill recently introduced by Democrats would reauthorize the bank’s charter for seven years and expand its lending ability by $20 billion.
The ExIm Bank has been around for decades. Its primary activity is to extend cheap loan guarantees and direct loans to foreign companies to buy U.S goods under the pretense of boosting exports and creating jobs.
Don’t buy it. Economists have shown that these kinds of export credit subsidies will never raise the overall level of trade. The subsidies are also hurtful (PDF) since they simply redistribute wealth away from unsubsidized American firms, employees, and consumers and direct it toward a tiny number of beneficiaries.
And that is where Democrats have some explaining to do: The bank’s data show that it overwhelmingly benefits some of the biggest, most politically connected firms in America. In fact, in 2013, 64 percent of the bank’s activities benefited 10 companies, such as Boeing, General Electric, and Caterpillar. And these companies’ customers aren’t poor either. For instance, the bank subsidizes wealthy foreign borrowers—like mining heiress Gina Rinehart, owner of the Ex-Im-financed Roy Hill Iron Ore Mine and Australia’s richest woman. She could easily find private capital without government privileges. It also subsidizes numerous state-owned companies in wealthy countries like Saudi Arabia and fast-growing airlines (PDF) like Lion Air and Air Emirates.
Maybe more interesting is the fact that the biggest beneficiary on the foreign buyer side is a company named Pemex. It is a super gigantic Mexican state-owned petroleum company with a market capitalization of $416 billion. And yet it has benefited from $7 billion in U.S.-taxpayer-backed financing since 2007. I wonder how Democrats reconcile that handout with their well-known anti-fossil fuels stance.
But the biggest beneficiaries of all are probably the lenders who earn interest on loans whose risk is borne by American taxpayers. No one explained it better than a JP Morgan banker (whose firm just happens to be the biggest private lender that benefits from Ex-Im), when he said that the bank is “free money”—that is, for the firms who know the right people.
This is exactly the kind of favoritism for Wall Street that Senator Elizabeth Warren says she opposes. So why does she support the bank? Warren offered the empty, canned defense that Ex-Im “helps create American jobs and spur economic growth,” but the truth is that the bank exists to serve the interests of a powerful few at the expense of the not-so-powerful many she claims to champion.
Public choice economics tells us that one reason that programs that should be terminated but aren’t is that their benefits are concentrated on the few while the costs are spread among millions. Program beneficiaries have strong incentives to coordinate and protect their privileges. Lawmakers who are on the receiving end of the political pressure and gifts, even Democrats, have little incentives to resist them. Unfortunately, the average Americans who bear the cost do not have the time or information to organize enough opposition to defeat these programs.
Now, the Democrats claim that their support has nothing to do with big businesses. They argue that it is the interests of small businesses that they are protecting. That could be true, provided you think that businesses with up to 1,500 employees and $21.5 million in revenue qualify are small, as the bank defines them. Also, if you follow the money in 2014, you will see that only 25 percent of it went to “small” businesses. Subsidizing giant companies so “small” businesses can get the crumbs doesn’t seem like a good excuse to me.
Republicans aren’t blameless either. Many do support this cronyism. But, this time around, many Republicans, under the leadership of House Financial Services Committee Chairman Jeb Hensarling, are actually fighting to kill it. In addition, a policymaker’s position on the Ex-Im Bank is now officially a litmus test for how serious he or she is in promoting small government and opportunity for all, rather than just for a well-connected few. During a recent Club For Growth meeting, every aspiring Republican presidential candidate was asked to take a position on Ex-Im, and every one of them said they would support killing it in one way or another.
Unfortunately, the Democrats’ support for cronyism doesn’t stop at Ex-Im. Their voting records suggest that not unlike many Republicans, Democrats rarely miss an opportunity to support big businesses with government handouts. They support the Department of Energy’s 1705 loans, which mostly go to wealthy energy companies (PDF), and they never fail to join Republicans in saving other corporate energy subsidies. They support Obamacare, which among other things amounts to a huge giveaway to the insurance industry. They supported the auto and bank bailouts, and for all their complaints about Wall Street, they passed a law, Dodd-Frank, that in some ways protects the big financial institutions that they claim to despise.
To be sure, the institutions of government make it remarkably easy, and tempting, for lawmakers to do the bidding of special interests at the expense of everyone else. Unfortunately, the Democrats’ support for the Ex-Im Bank demonstrates that point.