Home > The Economics Profession > What the Export-Import Bank debate tells us about economists

What the Export-Import Bank debate tells us about economists

from Dean Baker

In the recent debate on trade policy most reputable economists argued for fast track trade authority and the approval of Trans-Pacific Partnership (TPP), which is likely to be the first trade deal to be covered by the new fast-track rules. Their argument was simple; the reduction of tariffs and other trade barriers will increase efficiency and economic growth. This is the standard argument for free trade.

Given the general view within the economics profession that TPP is good policy, it is striking that so few economists have been outspoken in opposition to the reauthorization of the Export-Import Bank. The reason is that the whole point of the Export-Import Bank is to have the government subsidize selected companies by giving them access to credit at below market interest rates. This is 180 degrees at odds with free trade. It means the government is allocating credit rather than markets. It would be expected to lead to the same type of economic distortions as tariffs and quotas.

The arguments put forward in support of the Ex-Im Bank should have been especially painful to economists since they are exactly the same arguments made in support of protectionist trade measures. For example, proponents of the Ex-Im Bank routinely talked about the number of jobs supported by the bank’s loans, implying that all of these jobs would somehow disappear without subsidized loans from the Ex-Im Bank.

This would be comparable to adding up all the jobs in the U.S. auto industry and arguing that these jobs would be lost if we eliminated trade barriers to imports. This is wrong first because the vast majority of the jobs would still be there without the subsidized loans or trade barriers, and second, jobs lost in one sector will be replaced by jobs gained elsewhere. There is the textbook free trade story.

The other argument that should have been painful to economists was the claim that we make a profit on the Ex-Im Bank. This is true. The government is the lowest cost borrower in the country because no one questions its creditworthiness. This means the government can always profit by lending at interest rates that are between the market rate for its borrowers and its own borrowing rate.

No economist would argue that this “profit” means that such loans are good policy or carry no cost. It means that the government is effectively diverting capital away from some companies to go to the ones it has favored with below market interest rate loans. Invariably, these are huge companies like Boeing and General Electric, who always account for the vast majority of Ex-Im lending. This is only good policy if we think that the government is likely to do a better job than the market in allocating credit.

At the end of the day the Ex-Im Bank is not that big a deal. There is not all that much money involved. But the silence of most economists on this issue, or worse, their willingness to ignore their principles and actually argue for the bank, speaks to the corruption in the profession. After all, on economics the Ex-Im Bank should not be a close call. It involves exactly the sort of government intervention that most economists argue against vociferously in other contexts.

This is worth mentioning in the context of another area where most economists seem happy to ignore basic economics: patent protection for prescription drugs. The economics on patent protection are straightforward: it is a government imposed monopoly that allows drug companies to charge prices that are several thousand percent above the free market price. Drugs that would sell for $10 a prescription as generics can instead sell for hundreds or even thousands of dollars because of patent monopolies.

These monopolies have all the bad effects that economists predict when the government interferes in a market, except in the case of drugs it isn’t just money. It is also a matter of people’s health and their lives.

At the most basic level, there are many people who don’t have insurance coverage and can’t afford themselves to pay hundreds or thousands of dollars per prescription. These are people who would have benefitted enormously if the drugs were sold at their free market price. This is the classic gains from trade story, except the gains are far larger than in the usual story. We spend close to $400 billion a year on drugs that would probably sell for about $40 billion in a free market.

In addition to this massive loss to consumers, we also have the corruption that results when the government props up prices above their free market level. Drug companies have an enormous incentive to mislead the public about the safety and effectiveness of their drugs, which they do on a regular basis. As a result, people get inferior treatment, and often suffer severe side effects or even death.

Patent monopolies also divert resources to less productive areas, as companies will often try to innovate around a competitor’s patent, producing a copycat drug, in order to share in the rents, rather than develop a drug for a condition for which no treatment exists. Drug companies also keep much of their research secret in order to avoid giving competitors an advantage, thereby slowing progress.

Patent supported drug research would be a necessary evil if it was the only way to finance drug research, but it isn’t. We already spend $30 billion a year supporting basic biomedical research through the National Institutes of Health. We could have more public funding to replace the patent supported research by the drug industry. It’s also not necessary to do an abrupt switch to a different system. The clinical testing portion of drug development could be paid for through public funds even as the drug development portion continued to rely on patent protection.

But we will never move from the current corrupt system to a better one until people are prepared to point out the problems in the current system. If economists were true to what they argue in other contexts, they would be leading the charge to eliminate the antiquated patent system. But, they seem willing to put principles aside to benefit powerful interests in the case of the Ex-Im Bank, so why shouldn’t economists look the other way when good economics would jeopardize the interests of the big drug companies?

View article at original source.

  1. paul davidson
    July 30, 2015 at 5:48 pm

    Dean get over blindly supporting the textbook fairy tale of free trade advantages. Among other things the free trade argument ASSUMES full employment before and after trade– with trade being based on different production techniques used in each trading partner — based on advantages due to differing resource endowments, different climates, etc in each trading partner..

    First full employment before and especially AFTER trade is not assured in the real world –hence the claim that jobs lost to imports will be immediately offset by new jobs created [in more productive activities?] is not automatically assured –especially when nations run persistent trade surpluses (e.g., China) to build up huge foreign exchange reserves.. Building such reserves is the international equivalent of oversavings in a closed economy where the oversavings leads to lost jobs in the aggregate.

    Secondly, as even Keynes [1933] noted on his way to writing the GT, “A considerable degree of international specialization is necessary in a rational world in all cases where it is indicated by wide differences in climate, natural resources….But over an increasingly wide range of industrial products….I become doubtful whether the economic costs of self sufficiency is great enough to outweigh the other advantage of gradually bringing the producer and the consumer within the same ambit of the same national economic and financial organizations [to assure full employment]. Experience accumulates to prove that most modern mass production processes can be performed in most countries and climates with equal efficiency”.

    Free trade with “equal efficiency” processes in trading nations may create huge unemployment problems for those nations which have laws to protect workers rights to a civilized life with occupational safety rules, prohibition of child labor, minimum wages, etc

    Thirdly , free trade argument assumes Marshall-Lerner conditions is applicable and even Bernanke in his textbook with Abel wrote: “the assumption [that the Marshall-Lerner condition prevails] may not be valid for shorter periods… and in some case, even for several years”.

  2. July 31, 2015 at 3:17 pm

    Krugman promoted the free trade argument in a Scientific American article in 1994 using stolper samuelson theorem, which of course assumes 0 unemployment. In a later article in AER (Am Ec Rev) Samuelson —perhaps his last one since he was in his 90’s—noted actually that was an assumption which didnt apply to this world.

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