When staunch conservatives and socialist Democrats ally against an important policy measure, something unusual is going on. That’s a signal to pay attention to the so-called CHIPS Act, which Congress is likely to pass this week after years of deliberation.
The CHIPS Act (Creating Helpful Incentives to Produce Semiconductors … sorry, don’t blame the messenger) would provide $52 billion in subsidies and research funding for semiconductors manufactured in the United States. The U.S. share of the global chip market has shrunk from nearly 40% in 1990 to just 12%, and it’s on track to fall even lower. At the same time, chips have become crucial components in just about everything that’s electric, including cars, appliances, medical equipment and industrial machinery. They’re also crucial to weapons systems such as satellites, fighter jets and missiles. The chip shortage caused by the 2020 COVID pandemic revealed an American vulnerability to microchips mostly manufactured overseas.
So a critical mass of Democrats and Republicans now agree that incentivizing more semiconductor production in the United States is an economic and national security priority. The Senate will likely pass the CHIPS Act the week of July 25, with the House likely to follow. President Joe Biden has lobbied for the bill and will sign it promptly. Giant chipmaker Intel (INTC) says the passage of the bill will clinch its plan to build a huge chip-making facility in Ohio.
Should one sector get government giveaways?
So what’s the problem? Well, if you ask Sen. Bernie Sanders of Vermont, the self-described Democratic socialist, he’ll tell you the money is “corporate welfare” targeted at companies that earned $70 billion in profits last year. Sanders argues that American chip companies have shut hundreds of U.S. plants during the last 20 years and outsourced thousands of jobs, and are now demanding the government pay a “bribe” to keep some jobs here in America.
Sanders is a sour fussbudget who’s often an outlier on policy issues. So he’s probably the only one who feels this way, right? Wait, no. Republican Sen. Pat Toomey of Pennsylvania also calls it “corporate welfare” and frets that it will lead the United States toward socialist-style central planning. Toomey argues for broader policies, such as tax relief and deregulation, that benefit all industries more or less the same, instead of singling out one sector for government giveaways.
The CHIPS Act needs 60 votes to pass in the Senate, which means more than 10 Republicans will have to join most of the 50 Democrats in voting for the bill. That’s likely to happen, but there will be defections in both parties. Same in the House. Many “bipartisan” bills pass with just enough support from the opposition party to cross the finish line, since legislators can have myriad reasons to vote against a bill, even one their own party supports.
The CHIPS Act is different, in that it represents acknowledgement by both parties that the U.S. government can no longer operate as a laissez-faire economic observer at a time when other countries are aggressively seeking dominance in key economic and technological fields. Both parties have steadfastly resisted “industrial policy” for decades, in the belief that capitalist incentives usually produce a better outcome than political decision-making. Exceptions, such as the ugly federal bailouts of General Motors and Chrysler in 2009, usually end up demonstrating everything that’s bad about government acting as a shareholder or board member.
‘A win for China’
But there’s now a convincing case in favor of more aggressive government action to stoke strategic economic sectors. The main reason is that many other countries—most notably China—are doing it, and it’s working. China isn’t yet the world’s leading source of semiconductors, but it’s rising fast, and the pattern is familiar. China has identified 10 key sectors, including information technology, that are national strategic priorities, as part of its China 2025 plan. It subsidizes those industries and treats many of the companies in those sectors as vital government agencies at the front of the line for funding and other resources. Commerce Secretary Gina Raimondo said on Yahoo Finance recently that passing the CHIPS Act would be “a win for America. And if we don’t, it’s a win for China.”
South Korea, Taiwan, France, Germany and many other countries are also offering a government hand to chip companies that operate inside their boundaries, or move there. Forty years of outsourcing now make it clear that when costs are lower in other countries, American companies will move their operations there.
“We need to protect ourselves first as a country, and make sure we’re in the chip manufacturing business,” Gary Cohn, vice chairman of IBM and former Trump economic adviser, said during a July 25 call with reporters. “We have to create an incentive for chip manufacturers to redomicile back to the United States.”
If the CHIPS Act is necessary, it’s also somewhat odious. Bernie Sanders is right about tech firms that have outsourced thousands of jobs to India, China and other lower-cost countries. In some cases, U.S. tech firms have required American workers losing their jobs to train their foreign replacements. Severance deals typically include nondisclosure clauses preventing the laid-off workers from saying anything about the nature of their departure. Economists have now linked widespread outsourcing—sometimes characterized as the China shock—to declining living standards in the United States and worsening income and wealth inequality. Intel, IBM and other big tech firms that have aggressively outsourced will be the prime beneficiaries of the CHIPS Act.
In five or 10 years, economists and journalists may analyze the consequences of the CHIPS Act, and find that American workers didn’t benefit very much. The cost of every job saved or created may be absurdly high, as it often is when states compete against each other by offering lucrative tax breaks to lure businesses. This is an unfortunate feature of the U.S. economy, at the moment: Government aid for companies tends to benefit shareholders first, executives next and workers barely at all. That’s a complex problem with no easy solution, and the CHIPS Act may do little to help. The alternative, however, may be worse, if the do-nothing approach would cede even more turf in the chip industry to China and other competitors.