On this episode of The Great Antidote podcast with Juliette Sellgren, she is joined by guest Tim Carney. In their discussion, Juliette and Tim cover the Export-Import Bank (EXIM), corporate welfare, and all the forms of cronyism in the United States.
Timothy P. Carney is a resident fellow at the American Enterprise Institute, where he works on economic competition, cronyism, civil society, localism, and religion in America. He is concurrently the senior political columnist at the Washington Examiner.
Mr. Carney’s latest book, “Alienated America: Why Some Places Thrive While Others Collapse” (HarperCollins), was published in February 2019. His previous books include “Obamanomics: How Barack Obama Is Bankrupting You and Enriching His Wall Street Friends, Corporate Lobbyists, and Union Bosses” (Regnery Publishing, 2009) and “The Big Ripoff: How Big Business and Big Government Steal Your Money” (John Wiley & Sons, 2006), which was awarded the 2008 Culture of Enterprise award by the Intercollegiate Studies Institute.
In addition to his Washington Examiner columns, Mr. Carney’s work has been published in a variety of magazines, websites, and newspapers, including The Atlantic, New York Post, The New York Times, Reason Magazine, and The Wall Street Journal. His television appearances include CNBC, CNN, Fox News, MSNBC, and the “PBS NewsHour.”
Mr. Carney has a bachelor’s degree from St. John’s College in Annapolis.
Juliette: Hi, it is my pleasure to welcome back, not back, sorry. Okay, starting now. Hi, it’s my pleasure to talk to Tim Carney, a columnist at the Washington Examiner and a fellow at the American Enterprise Institute. Tim is the author of Alienated America, a book that I’m reading right now and it’s really great. Ten out of ten recommend. Tim, I would love to have you back at some point to talk about it but today, I want to talk about cronyism, an issue that you’ve brought a lot of attention to in the last two decades. I’ve talked about a few different crony programs like the Jones Act and occupational licensing certificate of needs. But today, I want to talk to you about cronyism in general and specifically the export-import bank. Welcome, Tim.
Tim Carney: Thank you for having me, Juliette. I love talking about cronyism.
Juliette: Me too. So before we jump into that, I want to ask you a question that I ask all my guests which is what is the most important thing that people my age or in my generation should know that we don’t?
Tim: I would say two things. The very specific thing is that a lot of young people who really benefit from community and institutions don’t realize it because it’s the air that they breathe. So this is me talking very briefly, cheating, and talking about Alienated America very briefly but where you find your life and your meaning, you don’t realize this if you’re lucky enough to have them but the things that you belong to, the people that you get to see every day or every week, the things you can count on, the places that give you a sense of purpose, where you play a role that gives you support when things go bad, this doesn’t just come from having friends or anything like that. It comes from belonging to something – a club, a school, a team, even in a close-knit physical neighborhood. So I would say that don’t take that for granted, that’s really important in your life. And then a broader picture, twenty years of being a journalist and writing opinions and stuff, I think that the biggest thing I’ve learned is things are more complicated than you think and it’s good to have hard-and-fast rules and principles, but it’s crucial to be nimble and able to realize that how complicated and how many exceptions there are.
Juliette: As I’ve been reading your book, I’ve been trying to be more aware of the communities I have around me and the things that are impacting the way I see issues and the way I interact with different issues. And I don’t know, it’s just been kind of an interesting journey for me and also, just now also to your second point, I don’t know, things are very complex like every issue is way deeper than I might have initially thought. And so, I don’t know, it takes a lot of time to think through a lot of things and I’m sure like all of this, I’m still going to be struggling to not only comprehend it, but just kind of analyze it and continue to, I don’t know, interact with it for the rest of my life, probably.
Tim: And I would say, don’t be afraid to be wrong. If you’re young and you’re overwhelmed and you’re thinking, “Oh my gosh, I don’t know how I wrap my mind around this,” being afraid to be wrong is paralysis. What you have to do instead is just acknowledge that you will come to conclusions and that some of those will be wrong.
Juliette: Yeah. And, I mean, I know that I’m going to be wrong and that’s scary. I try to let that go. So you’ve been at the forefront of the fight to end the export-import bank but before we dive into that, let’s first kind of go back and look at a reminder of what the overall issues with cronyism are. So some call it cronyism and other people like Matt Mitchell at the Mercatus Center call it a government-granted privilege and things like that. But, ultimately, corporate welfare boils down to an unhealthy marriage between connected corporations or different industries and the government and it takes a lot of forms like monopoly status, favorable regulation, subsidies or bailouts, loan guarantees, targeted tax breaks, protection from competition, and non-competitive contracts – that’s a long list but that’s not even all of it. You’ve been persistent and a persistent advocate for the end of corporate welfare even at a time when not that many people cared about it or were aware of its large impact. You wrote a book about it and it’s called The Big Rip Off: How Big Businesses and Big Government Steal Your Money. Corporate welfare has many names, can you tell us why you’ve spent so much of your life fighting corporate welfare?
Tim: Well, I have a real concern for fairness is one part of it. And the other part is, as a journalist, you have to look for what issues aren’t being covered well enough, and that’s where your opening is. For instance, I never wrote a lot about congressional earmarks because when conservatives were battling against that, there was a ton of journalists battling against that too. But when I came here in 2000 to DC, I saw that the people who were criticizing big business were all doing it from the left and that people who are defending free markets were all writing as if their job was to defend big business and they assumed the big business was there a lie. So the sort of unexploited fact there was exactly what you just articulated – big business often lobbies for and profits from bigger government. And the fairness thing really matters. A lot of free-market people, a lot of self-identified libertarians don’t like to talk about fairness. They like, to sort of say, well, if you can compete in and make a profit or whatever, it sounds a little too judgmental or moralistic but I’m ultimately a moralistic guy and I think that making a profit in free and open competition is morally a good pursuit, but that making a profit by rigging the game, by outlawing your competitors, by using your connection to the government to get the money, that’s ultimately unfair and unjust. Then also, there’s the economic cost and we can go on about that but it makes the economy less efficient when wealth is allocated according to political favor rather than the demands of the markets and what people want.
Juliette: And, I mean, cronyism while it represents a big amount of the federal budget somewhere between like a hundred and a hundred fifty billion dollars a year, some of the biggest problems as you were talking about have nothing to do with the budgetary costs, a lot of it is just it’s unfair, unjust. Can you tell us what some of these problems are specifically?
Tim: Yeah. And then also, there are economic distortions more than the budgetary cost. So part of it is the way Congress works and I don’t know if you’ve had conversations about the public choice on this podcast, but it’s a really helpful way to think about it, that politicians have incentives, that those incentives are not identical to the incentives of the public that they’re supposedly serving. But one of them, and we can talk more about this later, but one of the interesting things here is that directly transferring money from taxpayers to special interests is easily identifiable and often rooted out fairly quickly. So right now, there are very few programs that do that. They just, sort of, take your money as a taxpayer and hand it over to Boeing or General Electric or whatever. Usually, it works through more complicated means. And so, for instance, there’s a lot of regulations that are not really aimed at public safety or the environment or worker protection, but the purpose of those regulations is to protect incumbent businesses, and sometimes politicians who aren’t that smart admit it as much with the local food truck ends. There were Chicago City aldermen who were restaurant owners themselves who said, “The food trucks pose a threat to the restaurants. We want to save the restaurants so we are going to outlaw the food trucks.” Now, of course in DC, they said, “Oh, well, it’s about crowding on the sidewalk, that could be unsafe. That’s why we need to outlaw the food trucks.” In the end, in DC, we have tons of food trucks, the restaurants were killed by the government, the Covid lockdowns, of course, not by food trucks.
Juliette: Yeah, I was about to say.
Tim: And so that’s a real problem, you’re denying. I think if somebody can drive a truck and park it in a way that’s safe and sell food that meets all safety standards to people on the sidewalk who want to buy it, that it’s immoral for the government to say, “You know what? We prefer sit-down restaurants, so we are going to stop this sort of competition.” That’s really a moral problem. If you’re going to intervene between two people in a willing exchange, you have to have a really good reason and I don’t think saving sit-down restaurants is a good one but also that’s overblown to say it’s saving sit-down restaurants. It’s keeping companies from having to compete. Often isn’t a question of they’re going to go under if they have to compete. It’s often a question of they’re going to have to change the way they do business if they have to compete. And that, again, is just not a moral way to do it.
But there’s a bigger problem here especially when you think of Congress. It corrupts our public officials and it corrupts our businessmen. When our businessmen see that their job is to win friends in power, they then engaged in sort of these venal activities on a day to day, instead of trying to improve their product and find ways to lower their prices, and our politicians realize, “Wait a second. I can cash out to one of these industries that I’m subsidizing and regulating,” that makes it too tempting for them to not serve the public interest but their own private personal.
Juliette: And, I mean, it’s kind of in a sense, the government is picking who wins the battle instead of the people who are voting with their dollars and just buying what they want, buying the services, the goods they want. The government says, “Oh, well, sit-down restaurants – we have to protect them,” and then, well, what if I don’t want a sit-down restaurant? Well, too bad, sit-down restaurants won, so.
Tim: Yeah. Think about, again, the character traits that are being cultivated in these different settings and free and open competition, often you get really greedy people who try to rip people off and don’t treat their employees well and even try to rip off their consumers and that often gets policed by lawsuits and some level of regulation, but ultimately, they get punished, but they are punished by the market. Most Americans know not to buy super cheap, made-in-China stuff and to buy something a little bit nicer a lot of times. So what gets rewarded is reliability, people who deliver what they promise, people who work hard, people who build networks and have lots of friends, and all sorts of ways. What gets rewarded in cronyism and more regulated, more subsidy size markets are more just sort of short-term cleverness, having the right friends, and sort of shamelessness. And so we make our culture worse the more we inject government into the market because we’re not cultivating the virtues that the market does.
Juliette: And generally, the winners of cronyism are easier to spot but the victims are not so easy to see in comparison. You have done a series of videos on this exact topic where you look at the victims of the subsidies, of the regulations, and of government financing and we’re going to talk about government financing more in-depth in a bit. But, first, can you tell us what cronyism looks like in the form of regulation and who those victims are?
Tim: Yep. So, again, regulation is typically framed as a way to protect consumers, employees, the environment from greedy capitalists and there are times that that regulation does directly say, “Hey, this profitable thing is dangerous and we’re not going to allow it for you.” Requiring airline pilots to actually be licensed and trained. You don’t want Southwest saving money by throwing untrained pilots in the cockpit. And then there are places where you have asymmetric information where there might be no good way to know what’s going on inside the kitchen of a restaurant so you do want there to be food safety regulations and not just have it be litigated when people get food poisoning. But so many regulations are there to protect incumbent businesses from competition or just to funnel business towards those incumbent businesses. So, I used a food truck example earlier, another one, there is a regulation that makes it almost mandatory for investment companies to mail out the prospectus to people who own a mutual fund. This is legitimately the most boring stuff in the world. It’s a hundred-page document explaining what’s in my S&P 500 thing that I picked precisely because I don’t want to know and I’m not going to get it until I retire three hundred years from now. So why is Charles Schwab or Fidelity sending me this hundred-page document? If I have to get it, why can’t they just send it to me by email? Well, they can as long as I go out of my way to opt-out of the mail-thing, so why is it the government requiring it to be mailed instead of just saying mail or email? I’m not joking. It’s the envelope lobby and the paper mills have lobbied for this regulation to require that it be mailed with certain exceptions.
Juliette: That’s ridiculous.
Tim: It’s legitimate destruction – trees are being wasted, paper is being wasted for the benefit of these companies and paper mills are not giant big crony companies, so I don’t really want to make them out to be the bad guy, but they’re the bad guy. So the victims of this are pretty hard to see in this case because it really is just, it’s not Charles Schwab, they just add a little bit of, they pass the whole cost along to the investors. So maybe my retirement account loses a dollar a year and it doesn’t add up to that much, but then over thirty years, et cetera, it goes on, it compounds. So everybody is paying a really small cost to transfer a significant amount of money to these businesses so this what we call the concentrated benefit and diffuse costs but then you realize that in our life, there are a thousand special interests that are doing this. But since you mentioned regulation, the real people who are harmed by it are the businesses that get driven out, the food truck that gets told, “Sorry, you had to go out of business,” so now the person who owns that doesn’t get to do it. But even more, what we never see are the businesses that were never formed. The guy who’s still the deputy chef in the restaurant because he realized it would be illegal for him to start a food truck. And then, of course, the would-be consumers of those businesses that were never formed. So the beneficiaries are easier to see, the restaurants, but the cost sometimes is almost invisible but they’re real.
Juliette: How many food trucks or other businesses am I missing out on that just were never created? It’s kind of a really sad thing to think about because it’s, like, first, that sucks for the people who would have created these businesses but it really sucks for me, that’s kind of selfish, but it sucks for me and maybe people who have actual problems but those problems couldn’t be fixed because X solution was illegal from the get-go or like one thing that would have led to that solution was never even possible, even though the solution itself wasn’t necessarily illegal.
Tim: No, that’s right. And the one thing that makes these unneeded regulations be frozen into place is that they’ve developed a constituency supporting it. You mentioned the Jones Act earlier, requiring anything shipped between US ports to be on a US flagship. Making life more expensive in Hawaii and Puerto Rico is not just a little bit inconvenient, it means that moms have to make sacrifices and say, “Sorry, you don’t get Summer Camp because of the amount of money we spend on whatever it is that we’re getting – toilet paper, sneakers, et cetera, is too high.” Allow those prices to come down. People’s lives legitimately get better if the market is able to operate.
Juliette: So cronyism through regulation, what level of government does this occur on? Is it more like a local or state thing or is it only at the federal level?
Tim: It definitely happens more on a local and state thing level for sure because that’s where there’s more of that ability for special interests to create, sort of, undetected, and more of gullibility, to some extent, on the behalf of the local governments. But it certainly happens a ton on the federal level. These days more through executive action than through congressional action. So, for instance, the Obama Administration implemented a rule that ends up getting struck down by the federal courts, but the rule said, “If you’re going to prepare anybody’s taxes, you have to pay X amount of money, have this much training, follow these rules,” and the bureaucrat who wrote the rule was a guy who had, a few months earlier, been the CEO of H&R Block. And I found out about this Juliette because I was reading this investment document, something saying, “Hey, investors, you might want to invest in H&R Block because they’re going to profit a lot when this new regulation goes in because smaller competitors will all be driven out of business.” So certainly on the federal level, it happens and often behind the scenes in these regulatory processes.
Juliette: This sort of stuff to me, it just seems so blatantly unfair and so obvious when you see kind of everything that’s happening in the background, that you wouldn’t necessarily see just by looking at the legislation. That is just so frustrating. Part of me wants to laugh, like, “Ah, you got us,” but it’s so sad, it’s just, ugh, that’s okay.
Tim: And the perverse thing is for me when I find these things, I get all excited, it makes me happy. Somebody talk to me once, they said, “Have you heard about the casinos trying to outlaw internet gambling?” I said, “Oh, I love that.” They said, “You love that?” I mean, “No, I love that as a story. It’s a really good story.”
Juliette: Yeah. Well, because when I hear stuff because I always look for the super ridiculous examples that are so easy to laugh at but then also just so easily show how ridiculous the impact of a certain thing is that I’m like, “Oh, great. This is a great story, this is completely–” and then people are like, “What?” I’m like, “No, it’s great because it’s a prime example of how dumb this is.” Okay, so what about cronyism in the form of subsidies? What does that look like and who are the victims of that?
Tim: So, often, companies get direct handouts and Coronavirus was interesting because the first round you had like Paycheck Protection Program. And the reason I didn’t go after that as cronyism is because it was available to almost everybody. In other words, there wasn’t picking of winners and losers. There were some losers like lobbying firms that weren’t allowed to get it, and I was kind of like, “I understand where you’re coming from with that but you don’t want lobbyists lobbying directly for money to the lobbyists.” But on the other hand, if the government is going to just hand out money to everybody that can be socialism or in the case of Coronavirus, almost restitution – we force you to shut down, we force your economy to shut down so we’re just sending checks to everybody. But it was all the other bills that went out, well, we’re going to give money to the airline, well, the airlines were already struggling before this but on the other hand, maybe you can justify it, and so that’s how it creeps in is there’s some justification for it, but often it’s a direct check.
Now, again, there’s not as much of this going on as there used to be, but a lot of times the federal government, so farm subsidies, some of it goes to poor small-town farmers but the biggest checks go to major, sort of, millionaire farmers. They get paid not to grow, or with some crops, it’s different. They get paid a guaranteed minimum price on top of it. Sometimes it’s called a tax credit but it has nothing to do with your taxes, it’s not like we’re cutting your taxes, it’s here’s a tax credit that you get even if you owe zero taxes, that’s the way the ethanol subsidy worked for a long time was the refiners got paid for blending ethanol into their gasoline. So the money actually went to like Exxon and some of those companies but, of course, if you look at the market position that puts the ethanol companies in, they’re saying, “Look, we know you’re going to get a massive tax credit for buying this ethanol from us. So we’re going to make the price double because the government is going to pay for half of that.” So sometimes even those direct transfers have a bank shop because Congress kind of doesn’t want to just take your money and hand it to Boeing or Archer-Daniels-Midland or whatever.
Juliette: So, does that happen more at the federal level?
Tim: It used to be bigger at the federal level but it was easier for journalists to point it out and say, “This is corrupt.” So that sort of thing is more present if you look in history and Congress has gotten clever enough to make these things more indirect more bank shots.
Juliette: That’s frustrating but also it shows at least that they can learn in some ways. So I’m kind of like, I mean, it’s bad but it’s also like they learn from something, I don’t know.
Tim: They at least know that it’s wrong what they’re doing.
Juliette: Yeah. There are some actions that Congress takes as a whole that it’s like, oh, the fact that you did this, it’s like, oh, you realize that it’s wrong but then you just made it more difficult to stop you from doing that. Okay, let’s talk about the export-import bank. This is kind of a complex topic but it fits right along with what we’ve been talking about. So what is it? What does it do?
Tim: So it’s called a bank because it kind of does bank-like stuff but it’s part of the federal government. What it does is it tries to subsidize US manufacturers by giving loans or loan guarantees to foreign companies and foreign governments that would buy US stuff. So, mostly, and I mean mostly like half of or at least 40 percent in normal years of the money, it doles out to foreign buyers and to foreign buyers is to by Boeing Jets. So Air China, for instance, if they want to buy ten Boeing jets, they don’t pay cash for any more than the average person pays cash for a home. They borrow 90% of it. And so what the export-import bank will do is say, “Okay, Citibank, you’re loaning this money to Air China, we are going to guarantee that loan.” I mean, if Air China doesn’t pay Citibank back, the US taxpayers will pay Citibank back through the export-import bank. And sometimes though it’s a direct loan, sometimes the export-import bank will loan money directly to some company in Czechoslovakia so that they can then buy something that is made in Indiana.
Juliette: Learning what a loan guarantee was and kind of, I was like, oh, loan guarantee that sounds kind of like nice, helpful, makes it so that you want to take a loan, well, it does but when you kind of look at the specifics of it, oh, it just means that we will pay for it if the company doesn’t pay for it and then it’s like, I don’t know a single person that would hear that and then be, like, “Yeah, of course, I would love to.”
Tim: Well, so my favorite one was one of the Obama administration’s initiatives was, because they saw how much XM was subsidizing Boeing Jets. And they said, “Well, we should subsidize smaller jets too, to be fair.” Now, not small jet makers, it doesn’t really exist but not small companies that make jets, but companies that make small jets. So like a Cessna or those other private corporate jets. So this was like equality in crony capitalism was we’re going to subsidize corporate jets and private jets. And so there was one point where the Chinese government has an agency called China– I mean, forget the name of the agency but the Chinese government, oh, the Industrial and Commercial Bank of China and the Industrial and Commercial Bank of China, ICBC, is the largest company in the world and it’s owned by the Chinese government. ICBC wanted to buy some of these jets, corporate jets, basically. The company that made them was at the time owned by Goldman Sachs. So, Goldman Sachs was selling corporate jets to the largest company in the world, which is a state-owned communist company, and the export-import bank came in and guarantee the loan so that if the largest company in the world failed to pay back Goldman Sachs for the corporate jets, you the taxpayer would cover the cost.
Juliette: A perfectly ridiculous example.
Tim: Or Caterpillar selling equipment to its overseas subsidiary. So Caterpillar was just shipping their own stuff overseas and somebody pointed out, “Well, if you have one part of Caterpillar sell the equipment to Dutch Caterpillar, then you can get a loan for that.” So in case, Caterpillar fails to repay Caterpillar, the US taxpayer is going to be on the hook for it.
Juliette: That sounds exactly like something I would sign up for. No, that is so frustrating. So who are the biggest beneficiaries of XM, both here domestically in the United States and also abroad?
Tim: The Chinese government, I mentioned them, and I don’t just mean like all companies in China, but state-owned Chinese companies are by far, the biggest beneficiaries, and that this was one thing that Trump Administration tried to change. But at least they’re starting line. What the Bush and Obama administrations had done is primarily when state-owned companies in China are buying things, they’re the most likely ones to get the financing from the US. So, the irony of that, of course, is that the justification for the export-import bank is, well, China, which subsidizes everything is going to get all these sales if we don’t do it, the agency supposedly that’s battling China is mostly subsidizing China. Back before Russia invaded Ukraine, the Russian government was number two as far as a foreign recipient of it. And then the top exporter as I mentioned is Boeing, 40% of all XM Financing subsidizes Boeing, selling its jets overseas. And then the top lenders are exactly who you would think it is. It’s Citibank mostly, but also Wells Fargo, et cetera, getting their loans guaranteed. I go to the export-import bank annual conference whenever I can and I once went into a reception that was available to everybody who’s signed up for the conference and one of the bankers said to me, he said, “It’s free money, it’s the best.” And then in the remarks, the Citibank guy says, “There’s nothing a bank loves more than a government-guaranteed loan.” So, I would say the Chinese communist government, Boeing, and Citibank are the three biggest beneficiaries.
Juliette: I feel like you can’t complain about China if you think that this is a good idea, I don’t know, that’s just the logic here.
Juliette: Yeah, I don’t know. It’s just more than a little frustrating. So you kind of mentioned a bit of this before but what are the arguments for why we need export subsidies specifically like XM and why are those arguments wrong?
Tim: So the main argument that you’ll hear is that other countries are subsidizing their manufacturers and so, in order to compete, we need to subsidize our manufacturers. So the first reason this is wrong is that it’s like the West Side Story where the Jets show up with weapons because they know the Sharks are going to show up with weapons and the Sharks only have weapons because they know the Jets are going to show up with weapons. You’re talking about the UK and France and Germany, which for years, they stopped subsidizing Airbus when we stopped subsidizing Boeing, and Boeing and Airbus still made a bunch of sales but the taxpayers weren’t on the hook. All the financing they got was from banks and that sort of stuff. So just proved that we can disarm and convince the other guys to disarm and then everybody is still doing fine and when these are our allies, who are all in the WTO, we’re supposed to all be committed to free trade, it would not be hard to do multilateral disarmament. China’s a different question, that’s the other justification, but again, XM mostly subsidizes China. If you were to create a government agency that combats China, it would not be doing that. XM mostly does not subsidize to combat foreign subsidies, they keep track of this is why we extended financing and it’s a minority of their deals that is combating foreign financing.
But also the people who are trying to study what China has done to prop up their exports have concluded that China is hurting its economy by propping up its exports. So why is China doing it? Because the major manufacturers who export are politically connected companies. It’s not a stretch, it’s not hard to believe that the Chinese government would be taking actions that hurt their people, but help the top Communists in charge and that’s what China’s doing. We should not try to outdo them on that. We should not try to beat China on really large walls. We should not try to beat North Korea on really tall hotels. We should not try to beat any of these countries on crony capitalism.
Juliette: So, I mean, what are the impacts of XM, things like that on, first, like American consumers but also on our economy and our businesses?
Tim: Yeah. So these again, the cost gets hidden but they’re real. One thing is just to imagine you’re a farmer. John Deere makes a bunch of tractors. You want to buy a tractor. Well, if John Deere suddenly gets a lot more interested buyers over the Netherlands, you say, “Okay, now I have to compete with Dutch Farmers to buy the tractor,” but you know what, a lot of times that’s just the way the market works. Like I’ve always loved bacon and then all of a sudden, bacon became a lot more popular, and so then, the price of bacon went up. That’s sometimes life. I liked it when everybody thought bacon was really unhealthy. But what if the government started subsidizing other people buying bacon? Then I’d have a right, as a taxpayer, and not a taxpayer, citizen, to be angry and say, “Why are you making it more expensive for me to buy bacon and US farmers pay more for their tractor?” Because the government is subsidizing John Deere’s foreign company. So they’re picking a winner, John Deere, over a loser, John Deere’s domestic customers.
The other thing is other manufacturers who don’t get it. There might be a smaller tractor manufacturer who now has to compete against John Deere, who’s getting these subsidies. Those subsidies don’t just help John Deere get these specific sales to the Netherlands but also by increasing the profit of the company allow them to do other things that allow them to maybe crush smaller companies. And then we talked about the loan guarantees earlier, having the loan guaranteed means the bank, Citibank, say, doesn’t have to set aside as much money to back up the loan to Air China, as it would in an unsubsidized loan, but still, it does decrease the amount of lending that Citibank can do. So, there’s some guy who’s going to start his food truck because maybe he lives somewhere where they got rid of the food truck laws. He needs a loan and the bank is going to choose the government-chosen, government-guaranteed one over the food truck guy. So, again, you don’t see him because he never got the loan, so he never started the business but that’s one of the other victims of it. And if you ever did have a massive collapse in the airline industry and the satellite industry, then XM would be on the hook to pay for a lot of these things at which point the taxpayers are handing over all the cash to all the people who financed these foreign airlines.
Juliette: Yikes. In your video about the victims of government financing, you point out that companies like Solyndra– I keep pronouncing it wrong.
Tim: Solyndra – it’s cylinder solar panels.
Juliette: Ah, that makes sense, I just did not make that connection. So, that received a loan under the 1705 Green Energy Loan Program and then went under and left taxpayers with more than 500 million dollars to repay. That’s a lot of money. I’ve never seen that much money in my life. I was imagining I’m never going to see that much money in my life in one place. XM is different, that on paper it doesn’t cost the taxpayers any money and leaving aside the question of whether it means that this is evidence that XM is extending loans to well-off companies that don’t need help, the budgetary cost doesn’t mean there are no victims, right? So who are the victims directly of XM? Like we talked about the business that never came to be and all of that but even internationally, who suffers from this?
Tim: Yes, so the US businesses that never come to be, the domestic consumers of the same product that’s being subsidized to be sold overseas, so all these things are distortions. The US economy becomes a little smaller because the capital is being allocated according to some bureaucrats on Vermont Avenue, a block from the White House, rather than allocated according to free enterprise. Overseas, there are companies, I mean, we’re propping up the Chinese government, that’s bad for the Chinese people, it’s bad for the people who live in the countries that are next door to China that we’re propping up the Chinese government with this, their foreign competitors, so the companies that get subsidized. If we’re subsidizing a particular German manufacturer, well, Germany’s a bad example because we usually only subsidized sort of smaller countries, but in particular, Czech manufacturer, then the Czech company that competes against that manufacturer is going to suffer. So that’s how to think of it is mostly through distortions that when you pick a winner, you’re picking a loser. It’s almost impossible to pick a winner without picking a loser and that loser, 50% chance that they would have won in a free market and there were solved, but the bigger picture once again is if the winners are less determined by the market and more determined by politics, then the whole economy is going to be a little bit smaller than it otherwise would have been.
Juliette: The export-import bank was almost dormant from 2015 to 2019, so, first, can you kind of explain what that means? What this almost dormant state is? But also, can you tell us whether the companies that usually use XM and benefit from XM, were they in trouble? Did this affect them negatively? What were the results of this?
Tim: Yeah, I know. So this was the thing the Tea Party did really was kind of temporarily kill XM. The political backstory of it was that you happen to have the chairman of the House Financial Services Committee was Jeb Hensarling who really opposed export-import bank. And then the Senate Banking Committee was chaired by Richard Shelby, who really opposed it. Paul Ryan was the Speaker of the House, he opposed the export-import bank. And Mitch McConnell was a senate majority leader, and, well, he was a little ambivalent on it, he didn’t really like it either. And so the four people who had the most say and Republicans control Congress, said, “We don’t think of the export-import bank should get renewed because it has a charter that has to get renewed every few years,” and so they let the charter laps. Then Democrats with a few corporatist Republicans were able to bring it back to life, so it was kind of dead-dead for about four months, but when they brought it back to life, there is no longer a quorum on the board so they couldn’t approve large deals. So small business deals were still going through the export-import bank, but the big deals, the Boeing, General Electric, Caterpillar-type deals, those weren’t happening for years until the Trump Administration finally refilled the board. So the biggest loser here, of course, was Boeing.
So what did Boeing do? Boeing together with former employees of the export-import bank, kind of created its own private sector, export-import bank. They literally made a sort of coalition of lenders and insurers and all these companies. They’ve won awards for how innovative they got in lining up aircraft financing because it turns out if you take away this one clumsy big government tool, the private sector will get creative. And so, Boeing’s overseas customers had more financing when XM went under for a few years than they ever had before and it’s because you had private sector innovation. So Boeing didn’t actually suffer in their ability to sell their aircraft overseas except possibly to some particularly uncreditworthy, buyers, and the other big manufacturers also found private financing. So it was just a great experiment that what we predicted that the private sector would step in and that some particularly unworthy sales wouldn’t happen, we were exactly right. But I have to admit, I underestimated how robust the private sector’s financing for overseas aircraft would be. And why was it so robust? Oh, because you had a really motivated company in Boeing out there to say, “We’re going to actually spend money to build an infrastructure to allow us to finance aircraft when the government is not there to do it for us.”
Juliette: What happened to this private sector response after XM was reinstated and the charter came back?
Tim: To some extent, it still exists, but I haven’t looked at closely and maybe I’ll call, maybe there’s some financers there who lost their job because the government came back but a lot of them are doing the same thing. Now, they can also get a government guarantee in addition to the private sector guarantee that they’re doing. What you just gave me, Juliette, was a great assignment for a follow-up research project.
Juliette: And what happened to the opposition that closed down XM and let the charter expire? Where did it go? Was it just a change in who was in charge in Congress or was there more to that?
Tim: The two biggest things was Trump, who campaigned and said, he used the word featherbedding. He said, “This is just featherbedding for the manufacturers,” and it was brilliant work because it was sort of unnecessary, it wasn’t making that many sales happen. It was just making them slightly more profitable by putting the risk on the taxpayers. When he got into power, he immediately tried to get very close to Boeing and they got his ear, and then the Republicans who resisted it under Obama weren’t willing to resist it under Trump. Now, I should be careful when I say Paul Ryan didn’t have a change of heart on it, Jeb Hensarling was term-limited out as Chairman of Financial Services and he retired, part of it was a personnel turnover in Congress but mostly it was a Republican Congress who was willing to fight crony capitalism when Obama was the president who then went along with it when Trump was president.
Juliette: You mentioned it a few times but kind of the nature of the relationship between these businesses and the government, the White House, Congress, whatever, what does that look like compared to other companies and their relationship with the government?
Tim: Wait, say that again, what company am I talking about?
Juliette: Just any company like big businesses that benefit especially from XM. So, like Boeing.
Tim: So when you look at big businesses that have been around for a while and compare it to sort of new up-and-coming skyrocketing business, the biggest difference is that the big businesses that are around for a while have realized that they have to invest in government and it’s always sad because every company you see go through this phase where they say, “Wait, no, we’re following all the rules, you don’t get to tell us what to do,” and they sound like cowboy capitalist and then within a few years, they’re saying, “We’re very glad to be partnering with the administration on XY and Z.” So, I mean, here in Washington, there’s massive massive spending, there’s direct lobbying, but a lot of it is even beyond that. General Electric hired a thousand people in their tax department and they help lobby to change the tax law, they helped say, “Oh, here’s how we pay our complicated taxes,” but they also helped steer the company, GE, towards changing its business practice so as to minimize taxes, which as you can imagine is not the same as maximizing for productivity or customer demand. They’re minimizing their corporate taxes. And then similarly, in General Electric, in my second book, Obamanomics, I had a whole chapter dedicated to GE. I call them the for-profit arm of the Obama Administration, they would determine what to invest in based on where they saw the subsidy is going. So it was high-speed rail, it was stem cell research, it was medical equipment when they saw Obamacare going in a certain way, it was Finance when the bailouts were coming, and then they moved away from Finance when some of those regulations were coming, et cetera.
And so, these big companies, some of them, they determine their businesses based on the government. Nobody spent more on lobbying in the Obama years than General Electric. But here’s the thing and this is what we should talk about now maybe is – it didn’t work. No member of the Dow Jones Industrial Average fared worse during the Obama Administration and the next five years than General Electric. They actually got kicked out of the Dow Jones, which was sort of amazing. So they tried to play the government game and in the end, it meant that they were just chasing too many fairies, and they weren’t really chasing good business practices.
Juliette: Yeah. So why is that? I mean, I can assume part of it is definitely because they were focusing on the wrong thing to survive as a company but if you’re partnering with the government and the government is willing to do all of this and to be all crony and all that, how come it didn’t work?
Tim: Yeah, so I mean, I think it generally works in the short run, particularly if the government is going to grant you a monopoly but there are all sorts of stories where it doesn’t end up working. Part of it is because the dynamism of free enterprise, I think, is kind of a cultural thing and you have to constantly be changing in order to keep succeeding, that getting in bed with the government is largely about trying to freeze things in place and so that in the long run ends up failing and not paying off for all sorts of reasons. One is sometimes that happens in the form of – you go from free enterprise to cronyism and then socialism comes in. So, Student Lenders is a great example. Student loans were subsidized like crazy and every five years, they added a new subsidy, a new guarantee and do this, and do that. And then during Obamacare, Obama stood up and just said, “The banks are just profit-taking middlemen. We should just get all the money coming in and out of the federal government.” And some Republicans stood up and said, “No, that’s socialist.” And I said, “What Obama said is actually true, the banks are not taking on any of the risks, the government is, why are we letting the banks be these profit-taking middlemen?” Now, of course, the solution would be to stop this massive subsidy program, tuition will come down, people won’t need loans as much and the banks and the people who get the construction projects, building some new building on campus will be the losers and students and taxpayers will be the winners. But we didn’t do that. We moved a lot of it over to the federal government.
So that’s one way that they end up losing is – you don’t have any grounding to argue to be left alone or are you to be allowed to survive once your profit is dependent on government favor. So, sometimes people end up losing out, but I think that the culture in these companies becomes corrupted by their closeness to government, and that gets in the way of their ability to innovate a profit.
Juliette: That’s so interesting. I had no idea that that was like how that entire thing went down. I mean, it’s kind of astonishing, but at the same time, not really because, of course, their solution makes sense given the government track record. So, I read a bunch of reviews about your book, The Big Rip Off, when it came out and many of the reviews were saying how it was refreshing to read a book that was acknowledging the alliance between big businesses and between government and it wasn’t written by someone on the left. And you kind of mentioned this a bit earlier. I thought it was interesting because today it seems like fighting against cronyism when it happens is fairly bipartisan. So can you explain why back then, it was such a big thing and kind of what happened with that?
Tim: Yeah, it was. And again, I pursued cronyism as my main beef precisely because it seemed to me, there were tons of examples of it and not enough people writing about it, not just examples of it but that it was central enough to the way Washington worked. And so when I did start writing on it, it was sort of novel, I got pushed back some libertarian said, “Oh, but you should not be criticizing big business for profiting this way because they should profit whatever way they want.” And some people said, “You should not be criticizing big business because that plays into the hands of the socialist,” and my counter-argument was always, “No, you can’t defend free enterprise unless the pursuit of profit is connected to people actually selling other people what they want.” But the part of the reason that it was lost was that, in Washington, the people who preach free enterprise almost always made exceptions when big business came knocking. There just weren’t many Republicans who oppose corporate welfare. You look back at the export-import bank votes in the early 2000s or late 90s and in the House of Representatives there would be about 25 out of 200 plus Republicans would vote No, and Bernie Sanders when he was in the House was the only Democrat who would vote No.
Export-import Bank was supported by 90% of Republicans and 99% of Democrats in part because the Democrats who claimed their against big business have no problem with the big government supporting it. And the Republicans, I mean, their Chiefs of Staff had become the lobbyist for these companies. They’re the fundraisers they were going to were by the lobbyists for these companies and rather than simply chalk it up to bribery, they’re taking the money from these guys and so that’s why they’re doing their bidding. It was who were you hanging out with on a Tuesday night? It was these lobbyists was like, “Hey, I’m free market just like you but we need to make sure that people are buying ethanol. So let’s mandate it.” And that there wasn’t a strong counter-argument and I’ll brag and say I think I helped start getting their B momentum to change that. And some of the people who were policy experts at a think tank or whatever, when I started writing a lot about this in ’02 and ’03 by 2010, they had become Congressional Chiefs of Staff or the Head of Heritage Action or editors at magazines. And so younger conservatives, and libertarians, we had sort of built up a momentum for it and then some of these people were in charge and then sort of for a brief fleeting moment, we actually fought against it in the Tea Party when Obama was in charge, but at least now it’s sort of permanently injected enough into the way we think about it. That you can still kind of shame Republicans, at least for supporting corporate welfare.
Juliette: So, a final question on cronyism before we wrap up. Looking at your writings on the issue, it becomes more clear almost every day for me that cronyism is a major part of every piece of legislation that goes through Congress and just everything, like most things the government does, can you name a few areas that you’ve written about in recent years that suffers from serious cronyism? I know XM is like cronyism-central, but other than that.
Tim: Well, so, I would say right now if you think about either canceled culture or censorship or big tech or some of that sort of thing, this is a good demonstration because it shows that the cronyism corporate welfare lobbying is not just big business getting ahold of government and using it to their means. But it’s this sort of uncomfortable, mutually exploitative, mutually self-reinforcing relationship between big business and big government. What I mean is this – when Twitter and Facebook kicked off Donald Trump and other people after the capital riots on January 6th, they did it because they were after– I shouldn’t say because I don’t know why, but they did it after they were asked to do so by Democratic lawmakers, okay? And then when Amazon kicked parlor off of its web hosting platform that was again after Democratic lawmakers said parlor should not be allowed. And then now, you’ve got Democratic lawmakers saying to cable companies, “You should no longer carry Fox News.” And so what this is, politicians who are in power say implicitly, “Amazon, Twitter, Facebook, we can either give you subsidies and regulations that protect you or we can give you higher taxes, regulations that crush you and antitrust enforcement. We’re the ones in charge, we control your fate. So why don’t you go ahead and do the political hatchet work that we can’t do because it would infringe on the First Amendment?”
That’s what I’m looking at now, that’s what’s really disturbing. And so it’s not a case of big business getting bossed around by big government so much as it’s big business knowing that getting in bed with big government to protect itself involves helping the people in power get more power and protect and enrich themselves.
Juliette: I mean, it’s kind of a scary reality to think about because it’s only growing and I don’t know, I feel like it’s becoming more prominent and that kind of scares me and I’m going into college and that’s where, especially with all this like free speech stuff, it’s like off the handle. I don’t even know how else to explain it but I’m somewhat worried. I try to be optimistic but it’s a bit difficult.
Tim: I’m sorry. Come up with a question, one last question for me to end on a happy note or something.
Juliette: So, okay, well, thank you for speaking to us about cronyism but this is kind of the last question that I always ask which usually is somewhat more optimistic, it’s like, oh great. So let’s end with this and if not, then I’ll come up with another question.
Juliette: What is one thing you believe in at one time in your life that you later changed your position on and why?
Tim: I would say I used to be an atheist and now I’m a Catholic. And so I used to believe that what we had in front of us in this world, what we could touch and see and smell and measure with scientific devices was the entirety of what there was. And so, what made me change that? Well, it started in college. I went to a private liberal arts college and just realized that figuring out the nature of the universe and whether humans had purpose was definitely a worthwhile undertaking. But also studying the history of modern science, realizing that a lot of it was coming up with ways to explain almost by metaphor what we couldn’t explain actually that the universe is not really three-dimensional time and space are kind of the same thing, light and energy, matter and energy are all kind of the same thing. Realizing that the way we perceive the world is not the way it is, that it’s infinitely more complex. And so there was no more barrier to me accepting that there is a supernatural and that there is God and that freed me up to pursue what I really believed in and ended up with me in the Catholic church with a wife and six kids.
Juliette: Six kids. That’s a lot of kids. I’m like, I have one sister, that’s a lot of sisters for me. No, I love her. I find that very optimistic. Thank you so much for sharing.
Tim: Thank you, thank you for having me. This is a great talk.
Juliette: Yeah, I had a lot of fun. I mean, it’s a frustrating topic but it’s also fun to talk about it. I hope that– no, I know that my listeners learned a lot from this and will learn a lot and I think getting it out there is an important part of all of this. So thank you for this and for all the work you’ve done in the field.
Tim: Absolutely. Thank you.
Juliette: Well, that’s all the time we have for today. I’d like to thank Tim once again for his time and his insight. I would also like to thank everyone who listens, subscribes, and shares The Great Antidote Podcast. If you would like to be on the podcast, or if you have a guest in mind, please feel free to reach out to me at The Great Antidote at thecgo.org. Bye.