The Specific Inefficiency Emanating From the Export-Import Bank
In response to one of his critics–who said Don was being naive for ignoring the reality of the “trade war” the US has with China–Don Boudreaux wrote the following:
With respect, what you (and many others) call a trade war is quite the opposite of war. It’s peaceful trade. And through such trade we Americans are made better off the less we export in exchange for what we import. So to the extent that the Ex-Im Bank succeeds in its mission to artificially increase American exports, it makes us worse off by arranging for us to sacrifice for the imports we receive an unnecessarily larger amount of exports. Put differently, the Ex-Im Bank obliges us to work harder to maintain and improve our standard of living. How are we enriched by such an outcome? In what universe is such an outcome a victory rather than a defeat? [Emphasis in original.]
Now folks, as always with my blogs about Don and his Sisyphean struggles against protectionists, I am just quibbling here to make sure we all understand the case for free trade better. I totally agree that the Ex-Im Bank is inefficient and makes Americans poorer, but Don’s statement above might mislead people as to exactly how it makes us poorer.
I am not even saying Don himself necessarily was trying to convey this, but I think the casual reader of his remarks above might think something along the following lines: “In a free market, the US would export (say) $1 trillion worth of American-made goods, and we import (say) $1.5 trillion worth of foreign-made goods. Trump and Wilbur Ross would be horrified at that ‘trade deficit’ of $500 billion, but it actually reflects our economic strength. Now comes along the Ex-Im Bank which subsidizes exports, so that in the new equilibrium the US is exporting $1.1 trillion worth of goods, in order to obtain the $1.5 trillion worth of imports. So the trade deficit now falls to $400 billion, but how does this help Americans? We are getting the same amount of Chinese TVs and French wine as before, but now we have to ship foreigners more units of aircraft engines and software. We’re poorer, not richer.”
So my point in the present blog post, is to argue that the above (hypothetical) viewpoint is incorrect. To the extent that the Ex-Im Bank provides taxpayer subsidies to exporters, and hence expands exports, it simultaneously expands imports. So at a first pass, I don’t think even “successful” Ex-Im Bank actions would reduce the trade deficit; it might arguably even increase it.
To see where I’m coming from, suppose that the Ex-Im Bank works in the following way. (This isn’t accurate, but it helps to see what I’m saying.) Suppose the Ex-Im Bank makes it known to foreign companies, “For every $1,000,000 you buy of American exports, we, the Ex-Im Bank, will send you a check from the U.S. Treasury for $50,000.”
Now what would happen in this scenario? Compared to the original equilibrium, foreign companies would increase their demand for US exports (from the perspective of US exporters). With reasonable parameters, I think there would be an increased demand for US dollars in the forex markets. (Measured in US dollars, US exporters would see higher revenues.) This would make the US dollar strengthen against foreign currencies. That in turn would make foreign goods appear cheaper to US importers, and so Americans would import more goods, relative to the original equilibrium.
Thus, the Ex-Im Bank’s subsidy to exports would simultaneously function as a subsidy to imports. If that sounds weird to you, review the Lerner Symmetry theorem.
In light of this discussion, I don’t think it’s precise to say, “The Ex-Im Bank makes Americans poorer by making us send more exports to get a given amount of imports.” (Again, Don might not have been saying this exactly, but his commentary is consistent with it.)
Rather, I think it’s more accurate to say, “The Ex-Im Bank artificially expands the trade sector and (through taxes) artificially shrinks the domestic manufacturing sector. Americans end up getting goods from foreign producers–which they pay for with exported goods–even though Americans would prefer to consume fewer of those foreign-produced goods, and instead consume more US-made goods (which would be feasible to produce, if we weren’t having to produce so many exports).”
AN ANALOGY: In case you’re not seeing the distinction, consider an analogy with a subsidy given to a domestic good. Suppose the government says to all Americans, “For every movie you watch in a US theater, we will send you $1 taken out of tax revenue.” This subsidy would increase the demand and hence quantity produced of movies. This is inefficient, though.
However, I think it would be a bit misleading to say, “Consumers are richer if we can produce movies with fewer resources, not more. So by transferring more resources to theater owners, Americans end up paying more for their movies than they need to.” Rather, I think it would be more accurate to say, “The subsidy artificially expands the movie sector, and shrinks the other sectors. For the amount of movies being viewed in the new equilibrium, that’s the amount of resources that are necessary; we moved along the supply curve of movie producers. However, this is inefficient because it induces Americans to spend more of their income on movies than on other goods and services.”
Anyway, maybe I’m being nitpicky, but I think those are slightly different explanations.
“In light of this discussion, I don’t think it’s precise to say, “The Ex-Im Bank makes Americans poorer by making us send more exports to get a given amount of imports.” (Again, Don might not have been saying this exactly, but his commentary is consistent with it.)”
I think that is what he is saying, and that it follows logically: The division of labor is profitable because it allows people to acquire more at a lower opportunity cost.
Forcing foreigners to sell their goods with a tariff attached makes foreign goods more cost prohibitive for consumers to purchase than would otherwise be the case.
It’s not Americans that benefit from such protectionism, but the domestic producers. *They* get richer at the expense of consumers who have to pay more for the same goods than if there weren’t a tariff.
The point of all actions being, ultimately, consumption, Americans tend to be poorer – consumers in the present, and producers in the long term as they consume capital rather than engaging in a greater division of labor with foreigners.
guest, right, I think we all agree on why tariffs are bad. But we’re not talking about tariffs, we’re talking about export subsidies.
Ok, you lost me here. Citing the Lerner theorem works perfectly, but the citation assumes that a subsidy is a tax with a negative sign doesn’t it? Otherwise the theorem, which is about tariffs, doesn’t apply. But now you distinguish them. So I don’t get it.
Craw (I’m violating my embargo because I was worried about the same thing you are, and this is a subtle point that I should clarify), I think the more precise answer I should have given to “guest” is that what he is saying about tariffs, is actually not analogous to what Don claimed about export subsidies.
So, I agree with the statements guest is making about tariffs, but I don’t think Don made the mirror-image statements about export subsidies.
‘ Suppose the Ex-Im Bank makes it known to foreign companies, “For every $1,000,000 you buy of American exports, we, the Ex-Im Bank, will send you a check from the U.S. Treasury for $50,000.”’
Perhaps I’m missing the point here or oversimplifying – but isn’t this the functional equivalent of a situation where the free market determines the pattern of trade and the US govt then imposes a tax to fund Ex-IM – which gives the tax-dollars raised to random foreigners. Those foreigners then use the money to buy and consume goods that otherwise would have been bought and consumed by the people who paid the tax . This seems to be consistent with what Don says.
I agree that there will be other affects of a more targeted subsidy – but these will be secondary to the main affect of the US govt giving away resources it has raised from taxation to foreigners.
If the government imposes a tax on me that it uses to subsidize various goods that I buy so that my total consumption remains the same – then it has just changed my consumption patterns and messed with my total utility
If it taxes me and gives the money away to others it has lowered my consumption by the full value of the tax. I think this would be true even if all the taxation raised is given to people as a subsidy .for buying the good I produce. Does that sound right ?
well, OK – in the case where the taxation raised is given to people as a subsidy .for buying the good I produce, I’ll get some of my own money back – but most will stay with others.
What you are saying is that the individual perspective does not align with any “Americans as a whole” perspective.
If I make a profit out of slurping subsidies paid by your tax money then there’s no possible way I’m going to be convinced there’s a problem with this for “Americans as a whole”.
There might be a problem for you.
These economist arguments fail to convince anyone… the people getting ripped off don’t need convincing that their taxes are too high; and the people stuffing their pockets won’t get convinced to voluntarily stop doing that.
Transformer, I think the effects would be largely similar if the Ex-Im Bank, instead of subsidizing US exporters, instead subsidized US importers. Would that screw up the way you’re currently thinking about it?
yes it would change things, because in that case US taxes would be used to transfer claims on resources from one set of US residents to another. In this case I agree the effects would be as you describe for the US as a whole (but not necessarily for individual taxpayers).
When taxes raised in the US are transferred to people outside of the US to subsidize imports I think that as well as these effect there would be another (almost certainly larger) effect due to the transfer of claims on resources.
Here is an example of what I mean: I am an exporter of widgets and sell $50,000 worth each year. The govt introduces a tax on me of $10000 and uses the tax to pay Ex-im to subsidize my product. Even if I am able to expand my sales by the full $10000 given in subsidies I still have to work harder to get back to $50000 in post-tax revenue. And most likely I have to work harder and still get less than $50,000 in post-tax revenue..
As Don says: ‘The Ex-Im Bank obliges us to work harder to maintain and improve our standard of living’
But according to the Lerner Theorem it shouldn’t be different. If it is you made an error; that,s Murphy’s point.
I’m probably wandering out of depth here, but from the very brief description of the Lerner theorem in Bob’s link I take it to mean that as imports = exports a tax that increases imports will have the same effect as a tax that increases exports.
But I’m not clear that this is relevant to the issue at hand. If a subsidy on exports causes the monetary value of both imports and exports to increase this doesn’t mean that the people whose taxes are used to fund the subsidy are not worse off (and not just because of price distortions) does it ?
Example:
I work 1000 hours , 200 of them producing goods that are exported in exchange for imported goods. I consume them all.
The govt taxes me the equivalent of 100 of of work.
This is used to subsidies exports, so now I export 250 hours worth of goods in exchange for more imported goods than before.
As well as the distorting effect on the amount of foreign trade that Bob mentions – I am just plain worse off. I used to consume the equivalent of 1000 hours of labor, and optimized my utility with 20% of foreign trades. Now I consume the equivalent of 900 hours of labor, 25% of which is used in foreign trade.
Transformer wrote:
I’m probably wandering out of depth here, but from the very brief description of the Lerner theorem in Bob’s link I take it to mean that as imports = exports a tax that increases imports will have the same effect as a tax that increases exports.
But I’m not clear that this is relevant to the issue at hand. If a subsidy on exports causes the monetary value of both imports and exports to increase this doesn’t mean that the people whose taxes are used to fund the subsidy are not worse off (and not just because of price distortions) does it ?
OK I think you are getting mixed up.
Start with free trade. For simplicity, assume no trade deficit.
Now the U.S. government imposes a tariff on imports. This makes Americans poorer. Yes, some particular domestic firms get richer, but the losses to consumers and other producers more than outweighs their gains.
So what the Lerner symmetry theorem says is that if instead of the tax on imports, instead the U.S. government imposed a comparable tax on exports, then the impact would be largely the same, at least at a macro level. Americans would be poorer in general. There would be some domestic firms (who produce for American consumers) that would benefit, but the losses to others would outweigh their gains.
I think that was more-or-less my understanding of the Lerner Theorem and agree that its affects would be as you describe in your post.
However I am attempting to make a more fundamental point.
If US tax payer money is used to subsidize US exports, those US taxpayers will be worse off for a reason totally independent of the reasons given in your post – some of their income has been given away..
Is that point off-base ?
I understand that there’s a necessity to communicate and therefore keep the language as simple and direct as possible. However, I’m regularly getting upset over the use of “us” and “we” in these discussions, phrases like “we Americans are made better off” or like “it makes us poorer”.
In a situation like national defense, there could be argued to be a tangible “we” in as much as the overwhelming majority want to avoid being invaded and enslaved by a foreign power. There’s argument as to the best approach towards achieving that (details not relevant here) but at least the concept of “we” is valid for that context, in as much as it indicates a common objective.
However, look at this situation, in comparison:
OK, you have one particular sector artificially expanded… that’s really GOOD for the people who enjoy going to movies, and for the people who work in that sector. It’s BAD for the people who don’t want to go to movies, and who work in other competing sectors (like book publishing for example, or maybe painters). There is no “we”, because there is no common objective amongst all Americans in this particular context.
The movie subsidy is a boon for some individual people, at the expense of other individual people. Unless you can find a calculation that aggregates the “utils” of all these people, you cannot say anything about America as a whole. There is absolutely no Pareto optimization available here.
Similarly, if one cheap Chinese television is imported, that benefits the owner of the television, and the retail store that made a profit, but it certainly does not benefit Americans as a whole.
“Unless you can find a calculation that aggregates the “utils” of all these people, you cannot say anything about America as a whole.”
I reject the notion that utils exist because I reject cardinal utility.
If they did exist, they could, indeed, be aggregated and calculations could be made on them.
This would be all that is necessary for Keynesianism to be correct, in my view, since the existence of utils would logically imply that utils could, in fact, be scientifically managed – because maths.
For what it’s worth, Bob, in his dissertation, argues that cardinal utilities exist.
Maybe he will bring up the issue again so we can talk about it.
It’s certainly relevant to the point you raise, but mainly I’m just trying to bait a discussion. Heh.
You are welcome to make that choice, but the implication of rejecting cardinal utility is that you also make the claim that all statements of collective utility are complete nonsense. For example, “we Americans are made better off…” cannot be part of a meaningful sentence.
There is no “we” of utility ever, unless at least the approximation of cardinal utility can exist. It’s hypocritical and self-contradictory to pick it up sometimes and drop it at other times.
“For example, “we Americans are made better off…” cannot be part of a meaningful sentence.
“There is no “we” of utility ever …”
Yes, I completely agree with this.
I sometimes get sloppy because it’s easier to write it that way.
Tel, surely we all moved along the supply curve, which was good for some and bad for others. By saying we moved along the supply curve, this is saying that a new level of production and price has resulted.
What if we set up an agency that breaks your arm unless you devote an extra hour a week to making items for export and using the items you get in exchange. Are we better off?
No.
Well the guy who has only one skill (being extremely good at breaking arms) is better off when you consider that he now has a nice little earner of a job; and last week he was breaking arms at less than minimum wage.
If by “WE” you mean that guy and his buddies… then yeah looks like “WE” are better off.
Don’t laugh, Mr Arm Breaker has a friend who runs a survey company where the two of them come knock your door at 3AM and ask if anyone has anything to complain about. Survey company gets very detailed scientific empirical reports saying “WE” are better off… and you know they talk to a whole lot of people, so what I told you was true, from a certain point of view.
A certain point of view?
Luke, you’re going to find that many of the truths we cling to depend greatly on our own point of view.
‘Now the U.S. government imposes a tariff on imports. This makes Americans poorer. Yes, some particular domestic firms get richer, but the losses to consumers and other producers more than outweighs their gains’
Posting on a different thread as its a totally different point to my other comments – and I think this may be Tel’s point.
I do not see how we can assume the bit about ‘the losses to consumers and other producers more than outweighs their gains”. We can’t measure subjective utility so we have no way of knowing.
If we could measure subjective utility then consider the following:
A tax is imposed on luxury car imports and the money raised used to subsidize shoe imports. The util-meter tells us that this leas to 1000 luxury car buyers losing an average of 100 utils, while 100000 shoe buyers gain an average of 100 utils. The tax/subsidy policy has a net benefit on social utilty !