Victims of government financing | VICTIMS OF CRONYISM


Tim Carney: The US government subsidizes businesses
in all sorts of ways, including grants, tax breaks, protectionism, and regulation.
A favorite way to subsidize businesses, though, is through loans and loan
guarantees. But when the government acts like an investment bank to help some
businesses, it harms other businesses and places taxpayers at risk. Many federal
agencies loan out money or guarantee loans. The businesses that receive this
financing benefit, as do their customers, but, of course, this puts taxpayer money
at risk. The US government finances billions of
dollars in aircraft purchases. That allows airlines to better afford the
jets. But what happens if the customer goes bankrupt? Well, the taxpayer picks up
the tab. Something just like this happened after the Energy Department in
2009 guaranteed a large loan to a solar company in California. Joe Biden: I’m really happy,
along with the secretary, to announce today that we’ve closed a 535 million
dollar loan guarantee for Solyndra, more than half a billion dollars. Tim Carney: Things soon
turned south, and Solyndra went bankrupt, leaving taxpayers with the tab. Similarly,
when government-sponsored housing financiersFannie Mae and Freddie Mac
went under in 2008 taxpayers, bailed them out. Defenders of these programs, though,
argue that government can absorb these costs, and that most of these taxpayer-backed finance programs, quote, “turn a profit.” Fred Hochberg: Ex-Im makes money for taxpayers.
That’s not corporate welfare. Tim Carney: But even when they’re not sticking taxpayers with the tab, government creates other victims when it acts as a bank or a venture
capital firm. Most obviously, when government subsidizes a company, it’s
hurting that company’s competitors. Delta Airlines, for instance, was harmed when
the US Export-Import bank financed foreign airlines. Ex-Im does this in order
to help the airlines buy Boeing jets and General Electric engines. Richard B. Hirst: Ex-Im’s support of
Boeing means that it supports our competitors.
Ex-Im’s support for Emirates provides them with a subsidy of about 20 million
dollars in aircraft, and that kind of subsidy — that level of impact — has an
impact on Delta’s ability to compete with Emirates. Tim Carney: And that’s not the only
way the Export-Import Bank creates victims. When Ex-Im subsidizes foreign
buyers, that increases demand for what they’re buying.
Increased demand means increased prices for the US buyers who don’t get the same
subsidy. This is a matter of basic economics. As trade economist Stephen
Saran of it writes: “When a large exporting country implements an export
subsidy, it will cause an increase in the price of the good on the domestic market
and a decrease in the price in the rest of the world. Sometimes, instead of making
direct loans, government gives guarantees to the loans made by regular banks. In
that case, the government is choosing who gets the loan. This creates another
victim — the borrower who would have gotten the loan if Uncle Sam hadn’t
propped up its own favored borrower with a guarantee. This is why economists agree
that such government financing, quote, “merely shifts production among sectors
within the economy, but does not add to the overall level of economic activity.”
The final victim is the entire US economy. When the government is a lender,
or is directing lenders through guarantees, money goes to the politically
favored businesses instead of the most economically promising. That harms
economic efficiency, especially because politicians aren’t exactly the best at
figuring out where economic promise lies. Steven Chu: As you can see if you build a better
solar panel the world will beat a path to your door. Building a smarter solar
panel is exactly what Solyndra has done. Tim Carney: So while government financing helps some
lenders, manufacturers, and foreign buyers, it creates many victims. US taxpayers
bear the risk for this lending. American companies who compete against subsidized
companies become at a disadvantage. US consumers suffer as subsidized buyers
bid up the price of goods. And US businessmen who don’t have access to
Uncle Sam’s backing find it harder to get financing. And the US economy as a
whole suffers as politicians instead of market players
allocate financing around the economy. It’s just one more example: Every time
the government tries to pick an economic winner, it creates economic losers. These
are the victims of cronyism.

Author Since: Mar 11, 2019

  1. It is what people always tend to forget when pointing to how we need subsidies…
    I'dbe more on board with tariffs when they target countries not having the same production standards.
    After all, forbidding certain harmful practices to the environment or exploitation of workers at home but still allowing goods produced utilizing them from abroad is rather hypocritical.

  2. So… drop the corn and oil subsidies. They have outlived their usefulness and are just problematic corporate socialist endeavors at this point.

  3. The student debt debacle is a direct result of the government giving these loans to anyone who applies for one. As a result, the cost of college has skyrocketed without any measurable increase in the quality of education they provide. They have spawned an education-industrial complex.

  4. No one FORCED you to have kids or take out a loan. Live within your means and this crisis would have never came to pass.

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