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Caterpillar Cronyism

Posted By Don Boudreaux On December 19, 2013 @ 2:19 pm In Crony Capitalism,Other People's Money,Seen and Unseen,Subsidies,Trade | Comments Disabled

Uncle Sam – that allegedly prudent, responsible, and science-driven protector of the well-being of ordinary Americans – has just decided to transfer more taxpayer treasure to large corporations (namely, Caterpillar, GE, and Atlas Copco).  The transfer comes in the form of a loan of $694.4 million from the U.S. Export-Import Bank to an Australian mining company that will use the loan proceeds to buy products from these American corporations.  Despicable.

In the passage below (from this news report [1]) is a crowing statement from Ex-Im’s chief honcho, Fred Hochberg:

According to Bank estimates derived from Departments of Commerce and Labor data and methodology, the credit will support 3,400 U.S. jobs across America. Furthermore, an estimated 20 percent of the job support will benefit small-business jobs.

“After a comprehensive review, the Bank determined that this transaction represents a significant opportunity for American exporters to create and sustain American jobs,” said Ex-Im Bank Chairman and President Fred P. Hochberg. “Our financing positions American companies on a level playing field so they can close the sales and expand their homegrown workforces. Projects this size can be difficult to finance–that’s where Ex-Im comes in. And I am proud that today’s action will support 3,400 jobs across the country, many of them at small businesses.”

So very much is wrong with the above passages.  But let’s focus here just on some of the howlers – for example, Hochberg’s assertion that “Projects of this size can be difficult to finance.”  Well, yes, they can be difficult to finance.  But the difficulty has little to do with the dollar size of the financing needs and almost everything to do with the likelihood that the funds will be used unprofitably.  A one-billion-dollar venture will have no real difficulty getting financing if that venture has a sufficient likelihood of turning a profit, while a one-hundred-dollar venture will have plenty of difficulty getting financing if that venture has an insufficient likelihood of turning a profit.

If in fact the Australian company did have difficulty getting financing for this project, then the likelihood is very high that the project is an unprofitable loser.  Therefore, the only way for it to be financed is for some government, which doesn’t give a damn about profitability, to forcibly transfer taxpayer funds to that project.  The government, in short, preys upon innocent people to get the resources it desires to enrich its cronies by ‘funding’ these cronies’ unprofitable business ventures.

To portray their predation as productive, Hochberg and his Congressional overlords rely in part upon the public’s naiveté about capital markets – a naiveté that mistakenly gives too many people the impression that merely a large size of financing requirements is itself a significant obstacle to securing that financing.

A second howler: from where does the money loaned to the Australian company come?  Hochberg speaks as if that money is free; he speaks as if there is no opportunity cost of lending to a private corporation.

And now a question: what ‘unlevel’ playing field is Hochberg referring to when he boasts that forcing American taxpayers to extend a loan to a private company “positions American companies on a level playing field”?  Are other governments subsidizing non-American heavy-equipment producers?  (Never mind that, if they are doing so, such subsidies in no way justify Uncle Sam following suit.)  Or has the “level playing field” phrase become so common and canned that mercantilist ministers such as Hochberg spout this phrase even when it has no colorable relevance?

Now, of course, it’s no surprise that Caterpillar executives are pleased by this latest installment of cronyism.  Quoting again from the news report:

“Caterpillar applauds Ex-Im Bank for approving the long-term financing request for the Roy Hill’s Australian iron-ore project,” said Steve Wunning, group president with responsibility for the Resource Industries Group, Caterpillar Inc….  We appreciate the support of Chairman Hochberg and all the Ex-Im Bank officials who worked so hard to get us to this point.”

Let’s rewrite the above to better reveal the truth:

“Caterpillar applauds Ex-Im Bank for approving the long-term financing request forced transfer of funds from American taxpayers to us through its economically unjustified loan to the Roy Hill’s Australian iron-ore project,” said Steve Wunning, group president with responsibility for the Resource Industries Group, Caterpillar Inc….  We appreciate the support of Chairman Hochberg and all the Ex-Im Bank officials who worked so hard to get us to this point force private citizens to fund for our personal benefit a project that these citizens, when choosing what to do with their own money, refused to fund.

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[1] this news report: http://www.marketwatch.com/story/ex-im-bank-approves-694-million-to-finance-export-of-us-mining-and-rail-equipment-to-australia-2013-12-19?reflink=MW_news_stmp

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