Why Crony Capitalism Hurts Us All

The summer showdown over the Export-Import Bank, which ended in something of a stalemate in September, as Congress authorized a nine-month extension of the bank’s authority, brought to center stage a mounting discontent—on virtually all sides—with the increasingly codependent relationship between business and government. Ex-Im Bank, which in fiscal year 2013 backed $37.4 billion of U.S. exports worldwide (about 2 percent of all U.S. exports), has since become a battered symbol of cronyism. According to the Heritage Foundation, fully two-thirds of Ex-Im financing benefited a single company: Boeing.

“More than half of the U.S. public said “strong and influential” corporations are “bad,” even if they are promoting innovation and growth.”

Analysis by the Mercatus Center at George Mason University further concludes that the top 10 companies supported by Ex-Im, which include Caterpillar, GE and Applied Materials, accounted for 97 percent of the loan guarantees made in 2013. Meanwhile, critics of the bank argue, the risk for the financing is borne largely by individuals; taxpayer exposure for Ex-Im’s loan guarantees is expected to exceed $140 billion by the end of 2014.

“It’s the quintessential example of cronyism,” says Veronique de Rugy, senior research fellow at the Mercatus Center at George Mason University. “Ex-Im is relatively small but serves primarily very large companies; and in the process, it creates a lot of distortion in the capital markets. It also creates a totally [uneven] playing field because there are just a few exporters getting subsidized, while most are not. So, essentially, it’s the government picking winners and losers.”

Boeing, for its part, claims that without the government support, it would be at a competitive disadvantage vis-à-vis foreign competitors that receive state support. But in a climate of cronyism, it’s a zero-sum game; providing cheaper financing to foreign competitors puts U.S. companies at a disadvantage, as Delta CEO Richard Anderson has pointed out numerous times. “I don’t understand why my government finances my state-owned enterprise competitors in foreign countries that really are governments, not airlines,” Anderson said in July.

C.J. Prince :C.J. Prince is a regular contributor to Chief Executive and other business publications.