Does the Export-Import Bank Make or Lose Money?

Suppose your aunt decides to start a business making pizza ovens. She will design and build the ovens, and her daughter will manage operations. A bank is ready to lend her $100,000 to get started, but it wants someone to co-sign and be on the hook if she misses any payments. She offers to pay you $6,000 to do so.

A business-savvy friend tells you that missed payments on such a loan average $2,000, usually less, occasionally much more. He also reports that $7,000 is the going rate for co-signing.

Those insights spark lively family debate. Your aunt believes her proposal is a no-brainer. She would get to start her business, your niece would get a better job, and you would come out $4,000 ahead on average. It’s a win-win-win for the family.

Your spouse disagrees. Yes you’d net $4,000, on average, but you would get $5,000 by co-signing a similar loan in the marketplace. Your aunt is asking you to bear the financial risk of her loan without fully compensating you. In a worst case scenario, you might end up owing the bank $100,000. You deserve to be fairly compensated for taking that risk. Co-signing would help her and your niece and may be best for the family. But the deal is not a win all around. You would be bearing real financial risk, effectively giving your aunt $1,000, and everyone in the family should acknowledge that.

Co-signing the loan would thus make you $4,000, according to your aunt, or cost you $1,000, according to your spouse. But which is it? And should you co-sign the loan?

Those questions are at center stage as Congress debates the fate of the Export-Import Bank, whose charter expires September 30. The details are more complex—imagine the Bank co-signing a loan to a restaurant in Ethiopia that wants to buy an oven from your aunt—but the issues are the same.

Like your aunt, Bank proponents argue that guaranteeing loans is a win-win-win. American exporters will sell more abroad, a win for shareholders and a win for their workers. Bank fees more than cover expected losses, so taxpayers win as well. Indeed, the Congressional Budget Office estimates the Bank will net $14 billion from new guarantees over the next decade.

Like your spouse, however, others reject the idea that the Bank is really a win for taxpayers. While it might generate $14 billion over the next decade, the Bank would gain even more—$16 billion—if taxpayers were fairly compensated for the risks they would be taking. By offering loan guarantees at below-market rates, the Bank will effectively lose $2 billion over the next decade, again according to CBO.

Your view of the Bank’s profitability thus depends on what you measure it against. Official budget accounting, which shows the gain, compares the Bank’s performance to a scenario in which it doesn’t exist. CBO’s alternative, which shows the loss, compares the Bank’s performance to a scenario in which it does exist but charges fair market rates.

Both comparisons are important. The $14 billion represents the expected fiscal gain if the Bank is reauthorized for another decade, while the $2 billion represents the subsidy that exporters get from taxpayers who aren’t fully compensated for bearing new financial risks. The Bank’s specific activities are costing taxpayers, but in purely monetary terms that is more than offset by the gains from being a commercial lender.

If the Bank’s purpose were solely to make money, we’d do better to replace it with a commercial venture that operates on market terms. But making money is not the Bank’s mission. Instead, its goal is to support American exporters, particularly in competition with foreign firms that also receive government backing.

Policymakers thus confront the same tradeoffs that arise for almost any policy. The Bank creates winners and losers. Just as you need to balance the personal cost of co-signing your aunt’s loan at below-market rates against the potential benefits to your family, so must Congress balance the costs and benefits of the Export-Import Bank. It might still be worthwhile, but it’s not a win-win-win.

Time to Fix the Budget Process

Congressional negotiators are trying to craft a budget deal by mid-December. Fareed Zakaria’s Global Public Square asked twelve experts what they hoped that deal would include. My suggestion: it’s time to fix the budget process:

Odds are slim that the budget conference will deliver anything big on substance. No grand bargain, no sweeping tax reform, no big stimulus paired with long-term budget restraint. At best, conferees might replace the next round of sequester cuts with more selective spending reductions spread over the next decade.

Those dim substantive prospects create a perfect opportunity for conferees to pivot to process. In principle, Congress ought to make prudent, considered decisions about taxes and spending programs. In reality, we’ve lurched from the fiscal cliff to a government shutdown to threats of default. We make policy in the shadow of self-imposed crises without addressing our long-run budget imbalances or near-term economic challenges. Short-term spending bills keep the government open – usually –  but make it difficult for agencies to pursue multiyear goals and do little to distinguish among more and less worthy programs. And every few years, we openly discuss default as part of the political theater surrounding the debt limit.

The budget conferees should thus publicly affirm what everyone already knows: America’s budget process is broken. They should identify the myriad flaws and commit themselves to fixing them. Everything should be on the table, including repealing or replacing the debt limit, redesigning the structure of congressional committees, and rethinking the ban on earmarks.

Conferees won’t be able to resolve those issues by their December 13 deadline. But the first step to recovery is admitting you have a problem. The budget conferees should use their moment in the spotlight to do so.

P.S. Other suggestions include investing in basic research, reforming the tax system, and slashing farm programs. For all twelve, see here.

The Costs of Debt Limit Brinksmanship

Today I had the chance to testify before the Joint Economic Committee about a perennial challenge, the looming debt limit. Here are my opening remarks. You can find my full testimony here.

I’d like to make six points about the debt limit today.

First, Congress must increase the debt limit.

Failure to do so will result in severe economic harm. Treasury would have to delay billions, then tens of billions, then hundreds of billions of dollars of payments. Through no fault of their own, federal employees, contractors, program beneficiaries, and state and local governments would find themselves suddenly short of expected cash, creating a ripple effect through the economy. A prolonged delay would be a powerful “anti-stimulus” that could easily push our economy back into recession.

In addition, there’s a risk that we might default on the federal debt. I expect that Treasury will do everything it can to make debt-service payments on time, but there is a risk that it won’t succeed. Indeed, we have precedent for this. In 1979, Treasury accidentally defaulted on a small sliver of debt in the wake of a debt limit showdown. That default was narrow in scope, but financial markets reacted badly, and interest rates spiked. If a debt limit impasse forced Treasury to default today, the results would be more severe. Interest rates would spike, credit would tighten, financial institutions would scramble for cash, and savers might desert money market funds. Anyone who remembers the financial crisis should shudder at the prospect of reliving such disruptions.

Second, Treasury doesn’t have any “super-extraordinary” measures if the debt limit isn’t raised in time.

Pundits have suggested that Treasury might sidestep the debt limit by invoking the 14th Amendment, minting extremely large platinum coins, or selling gold and other federal assets. But Administration officials have said that none of those strategies would actually work.

Third, debt limit brinksmanship is costly, even if Congress raises the limit at the last minute.

As we saw in 2011, brinksmanship increases interest rates and federal borrowing costs. The Bipartisan Policy Center—building on work by the Government Accountability Office—estimates that crisis will cost taxpayers almost $19 billion in extra interest costs.

Brinksmanship also increases uncertainty, reduces confidence, and thus undermines the economy. In 2011, for example, consumer confidence and the stock market both plummeted, while measures of financial risk skyrocketed.

Finally, brinksmanship weakens America’s global image. The United States is the only major nation whose leaders talk openly about self-inflicted default. At the risk of sounding like Vladimir Putin, such exceptionalism is not healthy.

Fourth, as this Committee knows well, our economy remains fragile.

Now is not the time to hit it with unnecessary shocks.

Fifth, as the CBO confirmed yesterday, the long-run budget outlook remains challenging.

Deficits have fallen sharply in the past few years. But current budget policies would still create an unsustainable trajectory of debt in coming decades. Congress should address that problem. But the near-term fiscal priorities are funding the government and increasing the debt limit.

Finally, Congress should rethink the debt limit and the entire budget process.

Borrowing decisions cannot be made in a vacuum, separate from other fiscal choices. America borrows today because this and previous Congresses chose to spend more than we take in, sometimes with good reason, sometimes not. If Congress is concerned about debt, it needs to act when it makes those spending and revenue decisions, not months or years later when financial obligations are already in place. When the dust settles on our immediate challenges, Congress should re-examine the entire budget process, seeking ways to make it more effective and less susceptible to dangerous, after-the-fact brinksmanship.

The 47% is Now 43% and Falling

Remember the 47%? Well, my colleagues at the Tax Policy Center just updated the numbers. For 2013, they estimate that the fraction of Americans not paying any federal income tax is down to 43%. Why? Because the economy is recovering and tax cut stimulus has ebbed. A decade from now, they predict, it will be 34%.

Bob Williams, the Sol Price Fellow at the Urban Institute, explains the number in this video. Key point: the 43% may not pay any federal income tax, but that doesn’t mean they don’t pay taxes:

Ike and the 1953 Debt Limit Showdown

It’s debt limit season again. Treasury will soon exhaust all the “extraordinary” (if familiar) measures it’s using to stay within the limit. By mid-October, Treasury will have just $50 billion on hand. Once that’s gone–maybe at Halloween, maybe a bit later–Uncle Sam won’t be able to pay all his bills or will be forced into doing something desperate like breaching the debt limit or minting platinum coins (kidding, mostly).

We seen this movie before. Sometimes it ends with major policy changes, such as the 2011 deal that spawned the sequester. Other times it leads to minor tweaks, such as the January 2013 deal that linked congressional pay to passing separate budgets through the House and Senate.

These showdowns feel like a modern phenomenon. But over at Tax Analysts, tax historian Joe Thorndike reminds us that a similar showdown happened in 1953 under President Eisenhower:

Soon after President Dwight Eisenhower took office, his administration began signaling the need for additional borrowing authority. But conservatives were not convinced. “For the Administration, this would be the easy way out of hard decisions,” warned the Wall Street Journal. “[T]o lift the debt ceiling for this ‘emergency’ need will make the whole idea of a debt ceiling meaningless. To impose a limit on the government’s debt and then to change it the moment it begins to squeeze makes of the whole thing a trick for fooling people.”

In fact, the Journal suggested that a debt ceiling crisis might be useful. “The government would not be able to carry out all of its spending plans,” the editors predicted. “Some things would have to be cut back a little further. Up against the hard ceiling, government officials would be compelled to make hard decisions, to choose between this dollar and that one.” Staying under the existing cap would be difficult, but that was the point. “Under such a compulsion,” the paper suggested, “many needed economies would be made that would otherwise be thought impossible.”

Eisenhower didn’t believe that spending cuts would be sufficient to keep federal debt under the cap. “Despite our joint vigorous efforts to reduce expenditures,” he told Congress, “it is inevitable that the public debt will undergo some further increase.” On July 30, Eisenhower asked Congress for an increase in the debt ceiling from $275 billion to $290 billion.

Treasury Secretary George M. Humphrey stressed the urgency of the situation. “We will just run out of money and we can’t pay our bills,” he told lawmakers. “It’s just that simple.” Failing to raise the borrowing limit, he warned ominously, might produce “a near panic.”

The House of Representatives swallowed hard and approved Eisenhower’s request. But the Senate had other ideas.

History, as they say, sometimes repeats. Swap the House and Senate and boost the dollar amounts and you’ve got rhetoric that could almost be plucked from today.

Read Joe’s piece to find out how it all turned out. One tidbit (which I don’t think we should repeat): Treasury was forced to sell gold bullion to cover $500 million in debt.

Uncle Sam Is Smaller (Relatively) Than We Thought

At 8:30 this morning, Uncle Sam suddenly shrunk.

Federal spending fell from 21.5 percent of gross domestic product to 20.8 percent, while taxes declined from 17.5 percent to 16.9 percent.

To be clear, the government is spending and collecting just as much as it did yesterday. But we now know that the U.S. economy is bigger than we thought. GDP totaled $16.2 trillion in 2012, for example, about $560 billion larger than the Bureau of Economic Analysis previously estimated. That 3.6 percent boost reflects the Bureau’s new accounting system, which now treats research and development and artistic creation as investments rather than immediate expenses.

In the days and months ahead, analysts will sort through these and other revisions (which stretch back to 1929) to see how they change our understanding of America’s economic history. But one effect is already clear: the federal budget is smaller, relative to the economy, than previously thought.


The public debt, for example, was on track to hit 75 percent of GDP at year’s end; that figure is now 72.5 percent. Taxes had averaged about 18 percent of GDP over the past four decades; now that figure is about 17.5 percent. Average spending similarly got marked down from 21 percent of GDP to about 20.5 percent.

These changes have no direct practical effect—federal programs and tax collections are percolating along just as before. But they will change how we talk about the federal budget.

Measured against an economy that is bigger than we thought, Uncle Sam now appears slightly smaller. Wonks need to update their budget talking points accordingly.

Smart Tax Reform Could Shrink the Government

Max Baucus and Dave Camp, leaders of the Senate and House tax-writing committees, are on the road promoting tax simplification. One goal: cleaning out the mess of deductions, exclusions, credits, and other tax breaks that complicate the code.

Done well, such house cleaning could make for a simpler, fairer, more pro-growth tax code. It could also shrink government’s role in the economy. Eric Toder and I explore that theme in a recently released paper, Tax Policy and the Size of Government. Here’s our intro:

How big a role the government should play in the economy is always a central issue in political debates. But measuring the size of government is not simple. People often use shorthand measures, such as the ratio of spending to gross domestic product (GDP) or of tax revenues to GDP. But those measures leave out important aspects of government action. For example, they do not capture the ways governments use deductions, credits, and other tax preferences to make transfers and influence resource use.

We argue that many tax preferences are effec¬tively spending through the tax system. As a result, traditional measures of government size understate both spending and revenues. We then present data on trends in U.S. federal spending and revenues, using both traditional budget measures and measures that reclassify “spending-like tax preferences” as spending rather than reduced revenue. We find that the Tax Reform Act of 1986 reduced the government’s size significantly, but only temporarily. Spending-like tax prefer¬ences subsequently expanded and are now larger, relative to the economy, than they were before tax reform.

We conclude by examining how various tax and spending changes would affect different measures of government size. Reductions in spending-like tax preferences are tax increases in traditional budget accounting but are spending reductions in our expanded measure. Increasing marginal tax rates, in contrast, raises both taxes and spending in our expanded measure. Some tax increases thus reduce the size of government, while others increase it.

Eric and I first presented this line of reasoning in How Big is the Federal Government? in March 2012. Our latest paper, recently published in the conference proceedings of the National Tax Association, is a pithier presentation of those ideas.

Uncle Sam’s Trillion-Dollar Portfolio Partly Offsets the Public Debt

When policy folks talk about America’s federal borrowing, their go-to measures are the public debt, currently $12 trillion, and its ratio to gross domestic product, which is approaching 75 percent. Those figures represent the debt that Treasury has sold into public capital markets, pays interest on, and will one day roll over or repay.

These debt measures are important, but they paint an incomplete picture of America’s fiscal health. They don’t account for the current level of interest rates, for example, or for the trajectory of future revenues and spending. A third limitation, the focus of this post, is that the public debt doesn’t give Treasury any credit for the many financial assets it owns.

As we noted last week, Uncle Sam has been borrowing not only to finance deficits but also to make student loans, build up cash, and buy other financial assets. That portfolio now stands at $1.1 trillion, equivalent to almost one-tenth of the public debt.

Those assets have real value. They pay interest and dividends and could be sold if Treasury ever cared to. In fact, Treasury has sold many financial assets in recent years, including mortgage-backed securities and equity stakes in TARP-backed companies, even as it expanded its portfolio of student loans.

Debt Measures

One way to take account of these holdings is to subtract their value from the outstanding debt. The rationale is straightforward. If Ann and Bob each owe $30,000 in student loans and have no other debts, they both have the same gross debt. But that doesn’t mean their financial situations are the same. If Ann has $10,000 in the bank and Bob has only $5,000, then Ann is in a stronger position. Her net debt is $20,000, while Bob’s is $25,000.

The same logic applies to the federal government: $12 trillion in debt is easier to bear if the government has some offsetting financial assets than if it has none. That’s why both the Office of Management and Budget and the Congressional Budget Office regularly report the public debt net of financial assets. The net debt isn’t a perfect measure; many assets are harder to value than Ann and Bob’s bank accounts, and official valuations may not fully reflect their risk. Nonetheless, as CBO has said, the net public debt provides “a more comprehensive picture of the government’s financial condition and its overall impact on credit markets” than does the gross public debt.

The net debt is now a bit less than $11 trillion or about 68 percent of GDP. That’s more than $1 trillion less than the usual, gross measure of public debt, or about 7 percent of GDP. That difference was only 3 percent of GDP as recently as 2006. Under President Obama’s budget, it would expand to almost 10 percent by 2023, with financial assets growing twice as fast as the public debt.

Financial assets are thus playing a bigger role in America’s debt story. Accumulating deficits remain the prime driver of the debt. But the expansion of Uncle Sam’s investment portfolio means the growing public debt overstates America’s debt burden.

This post was coauthored by Hillel Kipnis, who in interning at the Urban Institute this summer.

Uncle Sam’s Growing Investment Portfolio

The federal government has been borrowing rapidly to finance recent budget deficits. But that’s not the only reason it’s gone deeper into debt. Uncle Sam also borrows to issue loans, build up cash, and make other financial investments.

Those financial activities have accounted for an important part of government borrowing in recent years. Since October 2007, the public debt has increased by $6.9 trillion. Most went to finance deficits, but about $650 billion went to expand the government’s investment portfolio, including a big jump in student loans. Before the financial crisis, Uncle Sam held less than $500 billion in cash, bonds, mortgages, and other financial instruments. Today, that portfolio has more than doubled, exceeding $1.1 trillion:

Uncle Sam Investment Portfolio

Financial crisis firefighting drove much of the increase from 2008 through mid-2010. Treasury raised extra cash to deposit at the Federal Reserve; this Supplemental Financing Program (SFP) helped the Fed finance its lending efforts in the days before quantitative easing. Treasury placed Fannie Mae and Freddie Mac, the two mortgage giants, into conservatorship, receiving preferred stock in return; shortly thereafter, Treasury began to purchase debt and mortgage-backed securities (MBS) issued by Fannie, Freddie, and other government-sponsored enterprises (GSEs). And through the Troubled Asset Relief Program (TARP), Treasury made investments in banks, insurance companies, and automakers and helped support various lending programs.

Together with a few smaller programs, these financial crisis responses peaked at more than $600 billion. Since then, they have declined as Treasury sold off all its agency debt and MBS and most of its TARP investments and as quantitative easing, in which the Fed simply creates new bank reserves, eliminated the need for cash raised through the SFP.

Those declines have been more than offset by the government’s growing student loan portfolio. The federal government used to subsidize student borrowing not only by providing loans directly to students, but also by guaranteeing many private loans. In 2009, however, Congress eliminated private guarantees and dramatically expanded direct federal lending. The government’s portfolio of student loans has since increased from about $90 billion at the start of fiscal 2008 to more than $560 billion today.

As a result, the government’s financial investments now total about $1.1 trillion, essentially all of which was financed by borrowing. The debt supporting Uncle Sam’s investment portfolio thus accounts for almost 10 percent of the $11.9 trillion in public debt.

Source: The Federal Reserve Financial Accounts (formerly known as the Flow of Funds), Daily Treasury Statement, and the President’s Budgets. The figures here compare balances as of March 31, 2013 (most recent available) with balances as of September 30, 2007 (the end of fiscal 2007). We define financial investments to be all the federal government’s financial assets except for official reserve assets, trade receivables, and tax receivables; this definition approximates those used by the Office of Management and Budget and the Congressional Budget Office in certain debt calculations.

This post was coauthored by Hillel Kipnis, who in interning at the Urban Institute this summer.