Jubilation broke out in Washington this summer when industrial politics returned to fashion. Congress passed Biden-backed legislation known as the CHIPS Act to spend $52 billion to subsidize semiconductor production. But the new law is a reminder that politicians thrive in Washington by “learning nothing and forgetting nothing,” especially not forgetting how to buy votes and defraud campaign contributions.
The passage of the CHIPS Act sparked euphoria at the dawn of sweeping new government interventions. Washington Post Columnist E.J. Dionne stated, “The chip bill means the era of laissez-faire government is over.” Dion invoked a cherished progressive illusion, though the Federalists had not intervened since Grover Cleveland was president. Senator Charles Schumer (D-NY), the Senate majority leader, said, “The old laissez-faire theory is: Leave the companies alone, and they’ll do a great job.” Inside the Beltway, anything less than complete federal control of the economy is derided as a “laissez faire.” Jared Bernstein, a member of the White House Council of Economic Advisers, declared, “When it comes to bequeathing a lasting legacy in terms of existentialally necessary economic transformation, history may put President Biden in the same sentence as Franklin D. Roosevelt and Leon Johnson.” Exaltation occurred because “many politicians believe that economic Beijing The layout is superior to the free market system in the United States. Wall Street Journal I noticed the editorial.
The CHIPS Act made Biden the nation’s semiconductor czar, promising he would have to “personally sign the largest grants” to the companies. What could go wrong?
If a picture is worth a thousand words, is a political photo opportunity worth $50 billion? Biden was quick to exploit the new law at a campaign event before the midterm congressional elections. Last month, Biden and New York Gov. Cathy Hochul summoned the media to Syracuse, New York, to celebrate support for a semiconductor plant at Micron. That plant isn’t set to start until 2024, but Hochul is in a tough fight for re-election, and Biden needed every victory lap his handlers could arrange. Hochul successfully swayed the New York legislature to enact a subsidy of up to $10 billion for semiconductor producers. Micron is expected to receive more than $5 billion — the largest corporate grant in the state’s history. Federal subsidies will be added next year when the CHIP Act starts to take away the good stuff. Total support per promised job exceeds $600,000 and could go much higher.
Biden boasted that Micron’s investment in New York is “the largest American investment of its kind… ever, ever, ever in history.” Because the plant will only run on renewable energy, its production costs could be sharply higher than unsubsidized plants elsewhere in the world. Biden also bragged that the plant would only be built by union members who pay high wages dictated by the US Department of Labor. Federal and state mandates effectively ensure that the new plant will not be competitive even before the first spade is turned over. No wonder Bloomberg News criticized the CHIPS Act as a “handicap that “could result in bloated, wasteful, government-dependent chipmakers demanding more grants a decade later.”
Biden boasted, “With only Micron’s $100 billion investment, we will increase America’s share of global memory chips and production by 500 percent.” But the Syracuse plant’s prospects may depend more on global markets than government grants. New York times It reported that Micron recently “reported a 20 percent decline in fourth-quarter revenue” and “cut planned plant and equipment spending by about 50 percent in the current fiscal year.” The Philadelphia Semiconductor Index fell 35 percent from its high by the time the law was passed.
There is also a risk that federal subsidies will help build up a chip cartel in America. Massive subsidies to a few favored producers could give them dominance, perhaps for many years. And if federal subsidies create or exacerbate a chip surplus, it could be devastating for unsubsidized competitors. The same pattern has been repeated since the 1930s of federal agricultural subsidies that favored the largest farmers and helped drive small farmers out of business.
Politicians’ boasting about the job benefits of corporate subsidies is not covered by the SEC’s rules on fraudulent statements. Hochul claimed that its aid to Micron will create more than 50,000 jobs in New York. But the governor’s office refused to disclose the private study from which that estimate was made. A study by Reinvent Albany, a nonprofit organization, noted that “New York State spends nearly $5 billion a year subsidizing large businesses… There is overwhelming evidence that government support for businesses is a very poor way to create good jobs and local economic growth.” The study noted that “state oversight of the Excelsior jobs program – under which Micron receives tax breaks – is notoriously weak”.
Micron and other government-backed chipmakers may find themselves junior partners for political appointees and unions, who at present wield more influence in Washington than private firms. Perhaps in the future, environmental lawmakers will require recipients of semiconductor subsidies to rely solely on windmills to make chips. Commerce Secretary Gina Raimondo bragged that “there are a lot of threads attached” in the CHIPS Act.
But business bureaucrats have repeatedly disrupted high-tech industries by implementing versions of protectionist laws (such as anti-dumping laws) passed by Congress. In 1986, Commerce fabricated unfair trade tariffs against Japanese semiconductor exports. The accusations were used to persuade Japan to sign an agreement seeking to restrict semiconductor trade around the world, a shady deal that was extended in 1991. The agreement politically damaged one of America’s most competitive industries. The Ministry of Commerce issued a decree that the prices of imported semiconductors must rise by 200 percent, at a time when local semiconductor producers cannot meet the local demand. That deal destroyed more than 10,000 jobs at companies that use the chips, according to the Center for American Business Study. In 1991, Trade Rubber Stamps imposed punitive import taxes on flat-panel computer monitors that devastated American computer makers. But as long as trade restrictions kept some local businesses happy, politicians reaped a windfall from campaign contributions.
After the passage of the CHIPS Act, Brian Deese, director of the Biden National Economic Council, declared, “The question should move from ‘Why should we pursue an industrial strategy? to “How do we successfully pursue it?”
Since the Nixon era, the US government has stifled steel imports, relying on rotating quotas, special tariffs, artificial anti-dumping sanctions, and other bargains. A 1984 Federal Trade Commission study estimated that steel quotas cost the US economy $25 for every additional dollar of profit of US steel producers. Professor Hans Müller estimated that quotas resulted in thirteen job losses in the steel industry using industries for every job created for each steelworker. The US International Trade Commission concluded in 1989 that steel import quotas had in fact widened the US trade deficit, causing a large increase in manufactured goods containing steel and a decline in US exports of steel products.
Steel producers continued hitting their tin cups in Washington and President Trump committed them in 2018 to imposing a new 25 percent tariff on steel imports. Federal policymakers deliberately put at risk six million jobs in industries that depend on steel to house the jobs of 135,000 workers in the steel industry. President Biden pretended to end Trump’s tariffs late last year. In effect, he replaced them with complex tariff quotas that could quickly become widespread import restrictions.
In fact, federal trade policy provisions can amount to “reverse industrial policy,” Ron Cass, vice chairman of the US International Trade Commission (ITC), told me in 1990. The weaker US industry, the more likely the ITC will blame companies. Foreigners get their problems and agree to tariffs. Since falling profits are a sign of injury, the ITC method tends to sacrifice America’s strongest and most profitable industries in favor of the weakest. American trade law pretends that the Feds can boost the economy by exempting every industrial hardliner from the need to compete.
Corporate subsidies are essentially corporate bribes that routinely spur corruption scandals. A decade ago, President Barack Obama visited New York and declared, “Right now, some of the most advanced manufacturing in America is being done right here in upstate New York. Cutting-edge companies from all over the world decide to build here and hire here.” Governor Andrew Cuomo appointed Alan Caloeiros to “construct a semiconductor corridor across the state,” Politico pointed out. The promised boom did not happen. The program collapsed after Caloeiros and three other officials were found guilty of bid-rigging in 2018 and sent to federal prison. But that scandal disappeared into the memory hole, paving the way for a repeat of the redemption offer in 2022. Could history be repeated with the latest wave of subsidies?
Politicians do not learn from mistakes made with other people’s money. Allowing politicians to pick the winners is the surest recipe for wooing consumers and all unsubsidized business. Unfortunately, there will always be enough critics that Econ 101 failed to antagonize every boneless intervention.