The world economy is getting rattled this week by the consequences of excessive government debt. Greece may be cut off from its international creditors, and Puerto Rico announced that it cannot make full payments on its massive debt. In both cases, years of excessive spending are sadly dealing a crushing blow to the living standards of millions of average citizens.
These jurisdictions have fallen into the abyss, but debt has risen to dangerous levels in many places around the world, including in our federal government. The root of the problem is Keynesian economics, which has taught governments since the 1930s that deficit spending is good for the economy. That message has been fiscal catnip for politicians, who have eagerly run deficits year after year, and built up debt to massive levels. To compound the problem, some economists—such as Paul Krugman—have been falsely recommending that we not worry too much about rising debt because it is “money we owe to ourselves.”
The effects of Keynesianism can be seen in federal budget data. From 1791 to 1929, the federal government balanced its budget in 68 percent of the years. But from 1930 to 2015, the government balanced its budget in just 15 percent of the years. The result is that federal debt has risen to levels unprecedented in our peacetime history.
“Alexander Hamilton was a brilliant man and an important Founding Father, but he was on the wrong side of the crucial debt issue.”
Economist James M. Buchanan pointed his finger squarely at Keynesianism for the decline in beneficial “Victorian fiscal morality,” which had constrained the political incentive to deficit-spend in our early history. With the rise in Keynesianism, the “modern era of profligacy” was born, he said. Looking ahead, official projections show federal debt soaring in coming decades unless we get the profligacy under control.
Battles over federal government debt go back to the beginning of our nation, as I discuss in recent testimony to the House Budget Committee. On one side in the 1790s were Treasury Secretary Alexander Hamilton and other Federalists, who favored a perpetual federal debt, believing that it would create economic and political benefits.
On the other side were Thomas Jefferson and Albert Gallatin, who were appalled by high debt, and led the opposition to Hamilton’s fiscal policies. They believed that government debt was economically dangerous and politically corruptive. And they argued that debt enriched the financial elite at the expense of the people, while unjustly imposing burdens on future generations. They were right on all counts.
Fortunately for the nation, Jefferson’s election to the White House in 1800 was the beginning of the end for the big-government Federalists. Jefferson and his Treasury Secretary Gallatin substantially cut the debt before the War of 1812 intervened. After the war, Jeffersonian leaders pushed once again to run surpluses and pay down the debt. That anti-debt drive succeeded with the complete extinction of federal debt under President Andrew Jackson in the mid-1830s.
Jefferson’s anti-debt views more or less held sway in national politics through to the 1920s. The government racked up debt during wars, but it always paid it down in subsequent years. The rise of Keynesianism in the 1930s ended all that, reviving misguided Hamiltonian ideas in favor of government spending, debt, and central planning. Those ideas have caused a great deal of damage in recent decades, and have led to perpetually unbalanced federal budgets.
The Treasury recently announced plans to replace Hamilton on the $10 bill. Hamilton was a brilliant man and an important Founding Father, but he was on the wrong side of the crucial debt issue. If he is going to be replaced, we should swap him out for Albert Gallatin. Gallatin’s absence on any of our coins or notes is a major oversight given that he was a highly accomplished Treasury Secretary for 13 years, serving much longer in that post than Hamilton.
Gallatin was also a congressman, senator, foreign minister, a founder of New York University, and an expert on Native American languages. Gallatin was a stellar public servant, and he was on the right side of the government debt issue. He also favored transparency in government finances, and worked to present full and accurate Treasury accounts to the public. Furthermore, Gallatin played a leading role in the Whiskey Rebellion, opposing an unfair excise tax scheme pushed by Hamilton.
With the perils of government debt now more clear than ever, it would be a good time to give Gallatin his due and feature him on our currency. That would honor a man who was every bit as smart as Hamilton, but showed more foresight in recognizing that politicians and credit markets are a toxic combination.Chris Edwards is editor of www.DownsizingGovernment.org at the Cato Institute.
Yesterday, the Uber France CEO and Uber Western Europe’s general manager were arrested in Paris. Both are charged with running an illegal taxi business and will go on trial in September. News of the arrests came only a few days after violent anti-Uber protests across France. The arrests and the recent protests are only the latest examples of 21st Century Luddism and lawmakers’ unwillingness to keep up with popular and innovative technological changes.
Taxi drivers in France, who last week set at least one car ablaze, erected barricades, and attacked Uber drivers are not happy about what they see as the unfair competition posed by UberPop, Uber’s European ridesharing service. According to a representative from the FTI taxi union, French taxi drivers have experienced between a 30 percent and 40 percent decline in revenue in the last two years.
“If French taxi drivers want to survive in the long term perhaps they should consider developing an app to rival Uber’s or changing their business model.”
French officials are not happy either. Following last Thursday’s protest Interior Minister Bernard Cazeneuve ordered police in Paris to implement an UberPop ban. Two hundred police officers have reportedly been tasked with tracking down drivers using UberPop. A court ruled last December that UberPop could operate in Paris. However, the French Interior Ministry claims that UberPop violates regulations that came into effect at the beginning of this year.
Uber has continued to offer UberPop in France amid the legal challenges and protests. Its behavior may be perceived by some as arrogant, but that hasn’t stopped the San Francisco-based technology company from attracting 400,000 French UberPop users. Whatever one might think about Uber’s strategy in France and elsewhere around the world, it is clear that the company is at least as good at making customers fall in love with its product as it is at frustrating regulators and taxi companies.
It is easy to see why taxi drivers in France are upset about the rise of Uber. UberPop drivers are not complying with the same regulations governing taxis. At first glance it might seem that Uber and taxi companies are basically the same and that Uber is unfairly flouting taxi regulations. But there is an important difference between Uber and taxi companies: UberPop drivers are using their own vehicles on their own time. Uber provides drivers and passengers with a technology that lets them find each other. Unsurprisingly, this innovation has proven popular not just in France but around the world.
The technology that allows Uber to operate is not going anywhere. No matter how many cars French taxi drivers set on fire or how many regulations French lawmakers pass, demand for Uber’s technology will remain high.
If French taxi drivers want to survive in the long term perhaps they should consider developing an app to rival Uber’s or changing their business model. The absurd and embarrassing Luddite behavior on French streets last week and the arrest of Uber executives ought to prompt French lawmakers to consider a policy of taxi deregulation that will allow taxis to compete more easily with Uber. Unfortunately, French regulators and officials have a history of preferring protectionism over promoting innovation.Matthew Feeney is a policy analyst at the Cato Institute.
The Export-Import Bank dies tonight when its charter expires. After 81 years, what is commonly known as Boeing’s Bank is headed toward Washington’s trash bin.
When Congress returns it could revive Ex-Im, which primarily subsidizes big business exports. But a proper burial for what Barack Obama once called “corporate welfare” would save Americans money, reduce economic injustice, and promote economic growth.
The Bank was established in 1934 to promote trade with the Soviet Union, ExIm now is one of a score of federal agencies tasked with encouraging exports. The agency exists to borrow at government rates to provide credit at less than market rates for select exporters, mostly corporate behemoths.
ExIm claims to be friendly to small business, but cherchez the money: it goes to Big Business. According to Veronique de Rugy of the Mercatus Center, between 2007 and 2013 the Bank subsidized $66.7 billion in sales by Boeing. ExIm also underwrote $8.3 billion for General Electric, $5.2 billion for Bechtel, $4.9 billion for Caterpillar and its subsidiary Solar Turbine, $3.2 billion for CBI Americas, $3.0 for Exxon Mobil, $2.1 billion for Applied Materials, $2.0 billion for Westinghouse, and $1.4 billion for Noble Drilling. During that period Boeing enjoyed 35 percent, GE 4.4 percent, and Bechtel 2.7 percent of the Bank’s largesse.
In 2012, noted Timothy Carney of the Washington Examiner, the aircraft maker accounted for 83 percent of all loan guarantees. The following year just five firms collected 93 percent of the loan guarantees. Also in 2013 the top ten ExIm beneficiaries accounted for two-thirds of the Bank’s total activities: Boeing, General Electric, Bechtel, Applied Materials, Caterpillar, Space Systems/Loral, Komatsu America, Case New Holland, Ford, and Sikorsky Aircraft. Other frequent beneficiaries include Dow Chemical, John Deere, and Lockheed Martin.
Giants of the financial world, such as Citibank and JP Morgan Chase, also do well by the Bank. Loren Thompson of the Lexington Institute thought he was arguing in favor of ExIm when he observed: “Private lenders often don’t like the risk profile of countries seeking export assistance” and “want the kind of protections available to lenders who finance the exports of other countries.” Of course they do. But the U.S. government’s role is not to protect profit-making private firms from risks at home or abroad.
The Bank denies providing subsidies since it charges fees and interest and claims to make a “profit”—more than $1.6 billion since 2008. But if ExIm operated like a normal commercial bank there would be no need for it. Anyway, economists Jason Delisle and Christopher Papagianis explained that the Bank’s “profits are almost surely an accounting illusion” because “the government’s official accounting rules effectively force budget analysts to understate the cost of loan programs like those managed by the Ex-Im Bank.” Most important, there is no calculation for market risk. Including that would provide “a more comprehensive measure of federal costs” concluded the Congressional Budget Office.
Alas, politicians understandably hate accurate assessments of costs. Delisle and Papagianis estimate counting everything would make ExIm’s actual expense more than $200 million a year. CBO comes to a similar conclusion, figuring real losses over the coming decade likely to exceed $2 billion. However, this might be on the low side. Federal Reserve economist John H. Boyd also looked at the “opportunity cost, a payment to taxpayers for investing their funds in this agency rather than somewhere else.” He estimated that the Bank’s real cost averaged around $200 million annually in the late 1970s and rose to between $521 million and $653 million by 1980.
If the financial markets get ugly again—witness the ongoing global shock waves from le affaire Greece—taxpayers could get hit with a big default bill. Total outstanding credit is $110 billion, yet the agency’s own inspector general warned that Bank practices create the risk of “severe portfolio losses.”
The agency is supposed to create jobs by throwing cheap money at purchasers of American products. However, if business subsidies are the way to prosperity, why stop with exporters? More business handouts generally would mean more deals and jobs. Underwriting domestic producers would have the added advantage of keeping all the economic benefits at home. The higher the subsidy, the more jobs would be created. If government paid the entire bill, the benefits should be infinite.
“ExIm’s closure is a very rare victory for the good guys in Washington.”
First, the Bank backs only about two percent of U.S. exports. That’s not enough to redress the trade deficit, which Thompson cited as an argument for ExIm. The Bank simply doesn’t matter much in an $18 trillion economy.
Moreover, there is plenty of private money available for trade deals. A Goldman Sachs analysis last year predicted that the impact of a Bank closure “would be fairly limited given the robust financing environment at present.” Even Boeing CFO Kostya Zolotusky went off-message two years ago when he indicated his confidence that buyers would find “alternative funding sources” if the Bank closed. No doubt foreign buyers prefer that Uncle Sam bankroll American companies, but the U.S. was a major exporter before the Bank was created and will remain so long after the Bank is gone.
Indeed, subsidies do not correlate with exports. Overall commercial flows largely reflect macroeconomic factors and international competitiveness. My Cato Institute colleague Sallie James found that since 2000 “Germany and the United States, historically two of the smallest users of export credit programs, had the highest export growth in absolute terms out of the rich countries.” Reforming capital gains and corporate tax rates, and rationalizing regulation would do more to aid exporters. So would dropping economic sanctions which Washington uses so prolifically but often ineffectively against a host of nations.
Second, no one knows which deals are sealed only with ExIm funding. A host of factors affect any purchase decision, starting with price and quality. One study of aircraft sales, heavily subsidized by what has been called “Boeing’s Bank,” rated financing as only eighth out of twelve factors. Often purchasers would have bought anyway, but everyone in the process has an incentive to claim that ExIm assistance was vital.
Years ago Congress barred the Bank from participating in sales involving China’s environmentally-destructive Three Gorges Dam. ExIm President Martin Kamarck told corporate America not to worry: “This decision does not in any way limit or impede U.S. companies from doing business in the Three Gorges project on private terms and with financing from other sources. Already, several U.S. companies have sold between $60 million and $100 million worth of equipment and services to this project without ExIm Bank support.”
Third, even when a deal is sealed with federal backing, all that we know is that the buyer chose a subsidized American product over one or more alternatives—including unsubsidized American products. The Bank does not aid against foreign competition but against all competition, including other U.S. concerns. In that case the jobs gained by one company might be lost by another. Years ago CBO acknowledged that subsidies increased jobs in favored industries but only “at the expense of non-subsidized industries.”
Fourth, the Bank underwrites foreign companies which compete against U.S. concerns. ExIm isn’t supposed to make deals causing “substantial injury” to American companies, but the Bank polices itself. The most obvious problem comes from subsidies for direct rivals of U.S. concerns, almost always the case with Boeing aircraft sales, for instance.American miners objected to agency backing for an Australian iron mine. U.S. financial institutions which concentrate on international transactions, such as American International Group and DC Factoring, also compete with ExIm and private financial firms backed by the Bank.
That’s not all, however. Many U.S. companies effectively pay to subsidize a few exporters. My Cato Institute colleague Dan Ikenson estimated that the agency’s activities were equivalent to an annual tax of $2.8 billion on U.S. competitors of both domestic exporters and foreign consumers. He explained: “for nearly every ExIm financing authorization that might advance the fortunes of a single U.S. company, there is at least one U.S. industry—and often dozens or scores of industries—whose firms are adversely impacted because supply is being diverted, market power is being shifted, and the cost of capital is being lowered for their foreign competition.”
Fifth, if government subsidies really create jobs and wealth, it would be better to keep the money at home, underwriting American rather than foreign buyers. Then U.S. citizens would benefit on both sides of the commercial equation. As AEI economist Michael Strain testified on Capitol Hill, “even if the Congress chooses to offer financing to selected sectors to support employment, exports would not be high on the list of firms or industries to target.” Economists would recommend different beneficiaries.
Sixth, as Nobel Laureate Milton Friedman once observed, there ain’t no such thing as a free lunch. The government can’t create wealth ex nihilo. Unless the money being lent was a gift—perhaps from some oil-rich sheikh—it had to come from other Americans. If those resources didn’t go to ExIm’s lucky clients, they would have gone to someone else. Thus, the unsubsidized someone else produces and sells fewer goods and services, and creates fewer jobs. Moreover, explained de Rugy, “capital market distortions have ripple effects. Subsidized projects attract more private capital while other worthy projects are overlooked. The subsidized get richer while the unsubsidized get poorer—or go out of business.”
Moreover, increasing purchases of exporters’ products increases their demand for goods and services, raising the price to other American firms. Shifting resources to export firms also reduces domestic production, raising prices in those industries. As Strain testified, this puts companies in unsubsidized industries at a disadvantage.
The Bank’s most important flaw is that it redirects rather than creates economic activity. This is common sense as well as basic economics. For instance, the World Bank’s Heywood Fleisig and Catharine Hill warned that devoting scarce financial resources to export promotion cuts “domestic investment, consumption, or government expenditure.” Such subsidies only increase export-related employment “at the expense of employment elsewhere.” No one knows the exact trade-off, which likely varies depending on economic conditions. Years ago University of Arizona economist Herbert Kaufman figured that $1 billion in federal loan guarantees eliminated between $736 million and $1.32 billion in private financial activity.
Government economists have made the same point. Shayerah Ilias with the Congressional Research Service concluded that export subsidies perform “poorly as a jobs creation mechanism” because they don’t raise employment levels, but instead merely alter “the composition of employment among the various sectors of the economy.” The Government Accounting Office’s JayEtta Hecker similarly testified that “government export finance assistance programs may largely shift production among sectors within the economy rather than raise the overall level of employment in the economy.” Thus, ExIm claims of jobs created “may not represent net job gains.”
Is there any other argument for ExIm? The expansion of global capital markets puts the lie to the contention that there is a “market failure” in providing export financing. The mere fact someone somewhere said no to a deal is not a “market failure.” Most international commerce is privately financed. The Bank’s foreign clients are mostly prosperous participants in the global marketplace with many other potential sources of funds.
The best argument for ExIm is that there are 59 foreign credit subsidy agencies like the Bank, though most are smaller. But “everyone else does it” never is a good reason to do something stupid. Foreign subsidies play only a small role in global commerce. As noted earlier, just two percent of export transactions are backed by the Bank. Of those, between 2002 and 2010 ExIm tagged less than 40 percent as necessary to “meet competition.” That number certainly is too high, since the seller and Bank both want to justify more subsidized-credit. Against any lost business from foreign subsidies must be balanced the lost business of companies harmed by ExIm’s activities.
Proving that Samuel Johnson was correct when he said patriotism was the last refuge of the scoundrel, a gaggle of former national security officials called the Bank a “critical element” of U.S. security. The Senate’s advocates of constant war, John McCain and Lindsey Graham, also back ExIm as a tool of American foreign policy. Retired Gen. James Jones warned that killing the Bank would result in “a less stable and secure world.” David Petraeus, one-time military commander and CIA director, and Michael O’Hanlon of the Brookings Institution, contended that the Bank strengthens America’s declining manufacturing base, which is critical for the nation’s international position. Conservative blogger and radio commentator Hugh Hewitt called the Bank “Soft power at its best.”
But the interests of particular exporters are not the same as of all Americans. The U.S. economy, not a federal agency, is real soft power. And the economy is not strengthened by allowing politicians to redirect resources for political reasons. Ikenson warned Congress that ExIm penalizes newer, more dynamic firms in a process that “undermines the strength of the U.S. economy, which is crucial to reaching U.S. security and foreign policy goals going forward.”
Thompson complained that even with the Bank the U.S. was losing ground economically to China, yet last year, noted Carney, the biggest recipient of ExIm largesse was China, America’s most important geopolitical competitor! Russia, with whom the U.S. is involved in a bitter confrontation over Ukraine, was number five. Some of the foreign firms benefited have exported arms and nuclear technology, contrary to U.S. policy. The Bank even subsidies the foreign export agencies used to justify the agency’s existence. Explained Carney: “The largest foreign companies and banks all get subsidies from U.S. ExIm, and China’s ExIm gets direct subsidies from U.S. ExIm.” If Washington believes it has a geopolitical reason to underwrite a foreign government, it should do so directly, through Defense, State, or U.S. AID, rather than pretend the deal is a commercial transaction.
Nor does the Bank promote Third World development. In the energy field, for instance, Americans have subsidized Brazil’s Petrobras, Mexico’s Pemex, and even Russia’s Gazprom. Alas, explained James: “When the Bank finances public-sector borrowers, it delays privatization and other free-market reforms that would aid economic development.” De Rugy noted that ExIm also has inflated the debts of half of the countries listed as Heavily Indebted Poor Countries by the World Bank and IMF.
Finally, export subsidies have a more basic, debilitating political effect: encouraging more companies to engage in what economists call “rent-seeking,” using government to extract rather than create wealth. Complained Chris Rufer, founder of The Morning Star Co.: “I have observed too many of my fellow business leaders blatantly work with the government to increase their profits at taxpayer expense.” The Chamber of Commerce and National Association of Manufacturers launched major lobbying campaigns for what can rightly be described as corporate welfare. The U.S. has sacrificed its republican roots for spoiled corporatist fruit.
Should the U.S. help American exporters? Absolutely. Encourage free trade. Roll back economic sanctions. Adopt responsible budget policies. Lower and simplify the corporate income tax. Cut regulations on business. Stop subsidizing the defense of prosperous trade competitors. But don’t turn the U.S. Treasury into a source of corporate welfare.
ExIm’s closure is a very rare victory for the good guys in Washington. Crony capitalism is running rampant in America, undermining confidence in a market economy. As usual, the capitalists are proving to be the greatest enemies of capitalism, with many businesses trekking to Washington seeking handouts. Although the Bank’s Lazarus-like return can’t be ruled out, tomorrow Boeing and the rest of America’s corporate elite will enjoy one less special privilege at everyone else’s expense. One down. Hundreds more special interest subsidies to go.Doug Bandow is a Senior Fellow at the Cato Institute and a former Special Assistant to President Ronald Reagan.