What to Expect from Washington’s Latest Industrial Policy

Industrial policy is making a comeback. For those of you under the age of 50, this is just another term for corporate welfare — a lovely name for the unlovely practice of a government granting subsidies, protective tariffs and other privileges to politically influential industries or companies.

The latest form of industrial policy is Congress’s CHIPS Act of 2022, a bill meant to subsidize the semiconductor industry by channeling taxpayer money to build up domestic production capacity and combat feared Chinese computer-chip supremacy.

This chapter began with the disruption caused by lockdowns to global supply chains. Unsurprisingly, that led to a series of semiconductor shortages aggravated by a surge in demand for automobiles.

Now, Congress is responding to this temporary chip shortage with $52 billion in subsidies and $24 billion in tax credits mostly directed at semiconductor industry beggars.

Never mind that chip firms have already expanded production without subsidies.

What about the argument that China is subsidizing its chip producers and thus threatening our technological leadership? Yes, China subsidizes its chip industry, but this doesn’t guarantee their subsidies will work. If U.S. politicians could for a moment stop treating every Chinese action as a threat, they would see that the Chinese semiconductor industry is both quantitatively and qualitatively weak. In fact, many of the companies subsidized would go under without the government’s help. That’s hardly the sign of a vibrant industry. These subsidies are more like life support than super-vitamins.

By contrast, the U.S. chip industry is extremely profitable. These firms invest massive amounts of money in R&D — 18 times the dollar amount of their Chinese-subsidized competitors. The result, as Stevens Institute of Technology professor George Calhoun writes, is that if the semiconductor industry “is de-constructed into its key segments, the picture is clear. There is no significant capacity or capability problem for the U.S., which is dominant in every segment of the industry” except one.

… believing that these subsidies will promote our national security by helping companies relocate production to the United States is rooted in faith rather than facts.

Any resulting new operations would still face deep-rooted issues hindering American manufacturing. Large-scale environmental assessments will be required, but over the years, the costs and delays have become excessive. Recent trends promoting or requiring unionized workers for federal contracts, combined with the current labor shortage, will hinder chipmakers’ ability to find talent and could exacerbate the cost of domestic production.”

In other words, if you believe that moving most of our chip production onshore is important for national security reasons, you should labor for regulatory reforms rather than subsidies.

… in the real world, what these policies do is add to our deficit, fuel more inflation, waste resources, breed unfairness and hinder growth.

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