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This article is from the September/October 2014 issue.

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Crony Capitalism, or Plain-Old Capitalism?

By Arthur MacEwan | September/October 2014

Dear Dr. Dollar:

Congressional Republicans and the Heritage Foundation are making a big deal about the Export-Import Bank, calling it “crony capitalism.” Are they right? Does the Ex-Im Bank serve a useful purpose, or is it just propping up the profits of trans-national corporations? —Arnie Alpert, Canterbury, N.H.

By the time you read this, the Export-Import Bank dispute might be over—at least for now. But the basic controversy will not go away.

The Export-Import Bank, created in 1934, is a federal government agency that supplies loans or guarantees loans to foreign firms to finance their purchases of U.S. exports. Its supporters argue that it strengthens the U.S. economy and creates jobs in the United States by bolstering demand abroad for goods produced here.

For the Export-Import Bank to stay in existence, Congress must reauthorize it by the end of September. Its existence, however, has come under attack by the anti-big-government forces of the right. They claim that there is no justification for the government to provide this support for U.S. firms. If the buyers abroad of U.S. goods cannot get financing for the purchases from regular banks—i.e., in the “free market”—the U.S. exporters are charging prices that are too high. That is, the U.S. firms are not effectively competing in the “free market,” and it is not the job of government to subsidize their inefficient operations.

These critics of the Export-Import Bank claim it is simply “crony capitalism,” where well-connected firms are able to get handouts from the government. This, they argue, is not the way “real capitalism” should and can function. For example, in the June 25 edition of National Review Online, with an article titled “The Ex-Im Bank: Crony Capitalism in Action,” the editors wrote that the Bank “hands out generous loans and credit guarantees to a select number of corporations [and] is corrupt and poorly managed. …The bank has a long history of dealing with dodgy firms and doling out suspiciously large amounts of loans to certain companies.”

The Export-Import Bank has long been supported by the establishment of both the Republican and Democratic parties. Helping business sell good abroad, they have argued, is a good way to create jobs in the country. The Bank’s supporters argue that foreign governments provide similar subsidies to their firms, and thus we must provide subsidies to our firms so they can effectively compete. They frequently cite the support that European governments provide to Air Bus, the primary competitor of the U.S. firm Boeing. (Back to Boeing in a moment.) The Export-Import Bank also touts itself as a supporter of small business. Yet its support in fact goes mostly to a few large firms. In 2013, the Bank made loan guarantees totaling $12.2 billion, of which $8 billion, 65%, were for purchases of the goods from one company, Boeing; another 8.2% of the guarantees went to finance the exports of the giant engineering firm Fluor.

Of the $6.9 billion in direct loans that the Bank provided in 2013, 81% went for purchases from just five firms—Bechtel, General Electric, Applied Materials, Fluor, and Komatsu America. The total direct loans and guarantees of about $19 billion is tiny (less than 1%) compared to the United States’ total 2013 exports of about $2.3 trillion. Still, they are important for Boeing and these other firms.

But the Export-Import Bank’s support for these large firms is not “crony capitalism.” The firms are not getting support because their CEO’s relatives or friends sit in Congress. They are getting support in the same way very large firms always get support: by spending money to influence elections and gain access to government officials and by using their power to create the belief that what’s good for their profits is good for the economy. Whether it is via this Bank or through U.S. ambassadors around the world and various government-led “trade missions,” the U.S. government has long promoted sales by U.S. firms abroad.

Rather than “crony capitalism,” this is “real capitalism,” the way the system regularly works. Consider, for example, lax regulation of financial firms, subsidies to fossil-fuel firms, or patent rules that treat pharmaceuticals so favorably. The right-wing arguments against the Export-Import Bank could just as well be applied in these and many other cases. The so-called “crony capitalism” of the Bank cannot be so easily carved out from the operation of real capitalism.

The right-wing attack on the Export-Import Bank focuses attention on the way real capitalism works. It also reveals the division among conservatives. The Republican establishment has long ballyhooed the “free market,” while making sure the government has provided plenty of support for big business. There are, however, many conservatives who seem to be true believers in the “free market.” These two groups have long managed to stay together, promoting a common rhetoric. For better or for worse, the crack in the conservative political bloc represented by the Export-Import Bank dispute may portend some major political changes.

is professor emeritus of economics at UMass-Boston and a Dollars & Sense Associate.

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