Why We’re All Crony Capitalists, Like It or Not? Big business and big government are inextricably linked in ways that fans of free markets may not like but can’t really avoid

Why We’re All Crony Capitalists, Like It or Not

JUNE 19, 2014

Neil Irwin

If there’s one thing that populists on the left and right can agree upon, it is disdain for crony capitalism. It is a distaste for the cesspool of Washington influence, in which big-business lobbyists canoodle with lawmakers to get their way. It is anger at corporate welfare enriching America’s biggest companies at the expense of the little guy.

But when you dive into the debate, it also offers something else: A fascinating case study in how modern economies really work, and the ways big business and big government are inevitably intertwined in ways that believers in free markets may not like — but may not be able to avoid. In short, we’re all crony capitalists, whether we like it or not.

So what is the Ex-Im Bank? Its job is to provide financing for American exports. When a Brazilian airline buys a Boeing 737 or a Turkish electric utility buys General Electric turbines, they can receive financing through the bank at more favorable interest rates than would be available in the private market. Smaller American companies that are looking to export can borrow working capital to help float the costs of selling their goods overseas.

The borrowers pay interest on those loans and loan guarantee fees, which allows the bank to return cash to taxpayers; the Congressional Budget Office projects that using standard government accounting rules the bank will refund $14 billion over the next decade to the Treasury Department. But taxpayers are subsidizing the bank to the tune of $2 billion for the same period of time if you use “fair value” accounting, calculating the values of the guarantees and below-market loans the bank issues.

So why should the government be running what is, in effect, a very specialized bank? For smaller companies, getting trade finance through privately owned banks is hard simply because only the biggest and most global institutions are in that business.

Good luck going to your neighborhood bank branch and asking for a $1 million loan to finance the shipment of industrial equipment to Uruguay, a transaction that includes all types of exotic risks (currency, political, etc.) that will leave your banker scratching his head.

Bigger companies — the Boeings and G.E.’s of the world — have access to the huge global banks that are used to dealing with those types of risks. But America’s corporate giants have to fight for business against competitors that benefit from advantageous, government-subsidized trade finance. Boeing might have plenty of access to capital from Citigroup or JPMorgan to help its customers finance airplane purchases, yet it has to fight for business against Europe’s Airbus, which is aided by subsidized loans from Europe’s equivalent of the Ex-Im Bank.

And there’s the rub for those who want to shut down the Ex-Im Bank. It’s all well and good to assail crony capitalism and to say that taxpayers shouldn’t be subsidizing private industry. But it also would amount to unilateral disarmament on the international stage, essentially putting American exporters at a clear disadvantage compared with European and Asian competitors.

More broadly, the debate over the Ex-Im Bank exposes an uncomfortable truth about global capitalism. As much as a purist might believe there exists some state of nature in which governments neither subsidize nor obstruct business, and capitalism represents a pure survival of the fittest, that isn’t the world we actually live in.

The terms of global trade are determined by high-stakes negotiations between countries over tariffs, market access and common regulatory standards. Tech companies spend vast sums obtaining and defending patents, which are essentially a state-granted monopoly granted to the first one to invent something. American diplomats fight for the interests of American oil companies, among other industries, in their interactions with foreign governments.

And the banks that would be expected to fill the vacuum of providing trade finance if the Ex-Im Bank were disbanded were themselves bailed out on a vast scale in 2008, and continue to be intensively regulated.

Here’s a delicious irony: One of the leaders of the push to shut down the Export-Import Bank is Delta Air Lines, which doesn’t like the fact that international competitors are able to buy Boeing airplanes more cheaply thanks to American taxpayers.

“The bank hurts Delta in a very serious way,” the airline’s chief executive, Richard Anderson, told The Seattle Times in an interview this week. “Our tax dollars are being used by the U.S. government to subsidize our foreign competitors to take jobs from the U.S.”

In his mind, it boils down to “the government picking and choosing between industries in our country.”

That, of course, would be the same Delta Air Lines that was bailed out by the federal government after the Sept. 11, 2001, terrorist attacks, transferred its pilots’ pension obligations to the federal Pension Benefit Guarantee Corp., and which to this day benefits from rules that strictly prohibit foreign air carriers from competing with Delta by flying routes within the United States.

There’s a principled libertarian case to be made that this world we live in of big companies and big governments working hand in hand stifles competition and makes consumers worse off. It is less clear that the current push to get rid of the Export-Import Bank would do much of anything to change that.




About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (, a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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