Of all the problems in the world right now, the chip shortage probably isn’t the chief concern for most people, but that doesn’t mean it’s not a serious issue. The auto and tech sectors have faced unprecedented delays and rising prices in recent months. Some used cars are even selling for more than their new counterparts because of the delays, a sure sign that production has slowed dramatically.
To address this, Congress is contemplating bipartisan legislation known as the Chips Act, which would provide $52 billion in grants and $24 billion in tax credits to the US semiconductor industry. Thanks to a last-minute bipartisan amendment, the bill will also put tens of billions of dollars toward various federal agencies, bringing the total price tag to $250 billion.
Because why not…
The Senate voted to advance the bill on Tuesday, which means it will likely hold a vote on final passage in the coming days. If passed, the bill will then go to the House for passage, and assuming that is successful it would then go to President Biden for signature into law.
The main arguments for the bill were summarized earlier this week in a Wall Street Journal Op-Ed penned by Jim Farley and Pat Gelsinger, the CEOs of Ford and Intel, respectively.
“The pandemic supply-chain shock exposed a problem that had been mounting for years,” they write. “The U.S. share of global chip manufacturing has declined to 12% from 37% in 1990. South Korea and Taiwan, notably, have spent years actively investing in [read: subsidizing] their own chip manufacturing, creating an uneven playing field for U.S. chip makers that harms our economy and global competitiveness.”
They go on to list the disruptions that have occurred in the auto, consumer-electronics, and healthcare industries because of the shortage, and they warn that national defense is also at stake.
“Fortunately, a solution is within reach,” they continue, referring to the Chips Act. “In addition to boosting production of leading-edge and legacy chips, the act would help level the playing field with global competitors…This legislation is vital to many American industries, including ours, that have dealt with significant disruptions.”
“By funding the Chips Act,” they conclude, “Congress will help consumers, protect patients and strengthen the American economy and national security.”
The Problem with Corporate Subsidies
At first glance, that Op-Ed might seem innocuous, even well-intentioned. But it doesn’t take much to realize what’s really going on here. The companies run by these CEOs stand to gain billions of taxpayer dollars—not just tax credits, but government grants—if this legislation passes. Do you really think they wrote that because they care about the American economy and national defense? Give me a break. They wrote it because they want the money, and they will make whatever arguments they think people will buy in order to get it.
So, what’s wrong with their arguments?
For starters, there’s the classic problem of opportunity cost. Fifty-two billion taxpayer dollars being poured into these industries is 52 billion taxpayers dollars that can’t be poured into other industries. The government is not creating resources, it is simply reallocating them, and it’s by no means obvious that this is the best use of these funds. Notably, the free market tends to allocate resources much better than the government because, unlike Congress, it is guided by actual consumer demand.
Additionally, the CEOs conflate strengthening their businesses with strengthening the American economy. In reality, these are two very different things. If it’s cheaper to buy semiconductors from companies in foriegn countries, it would be economically inefficient to produce these products in America. It would be better to let the domestic producers take losses and ultimately fail so their capital could be reallocated to better uses.
Here, of course, the lobbyists have a rejoinder. “The only reason it’s cheaper to buy semiconductors from foreign countries,” they say, “is because foreign governments subsidize their semiconductor producers. We need a level playing field.”
People who are otherwise proponents of free markets are often sympathetic to this line of reasoning. After all, it’s not really the case that American producers are inefficient, right? If only there was a level playing field, they could compete just fine.
Rothbard tackles this thinking head-on in his book Making Economic Sense.
“Whenever someone starts talking about ‘fair competition’ or indeed, about ‘fairness’ in general,” he writes, “it is time to keep a sharp eye on your wallet, for it is about to be picked.”
Sure enough, that’s exactly what’s happening here.
After addressing some other arguments, Rothbard turns to the issue of foreign government subsidies that allow foreign companies to engage in “dumping,” that is, selling products to American consumers “below cost.”
“Another charge claims that Japanese or other foreign firms can afford to engage in dumping because their governments are willing to subsidize their losses,” he writes. “But again, we should still welcome such an absurd policy. If the Japanese government is really willing to waste scarce resources subsidizing American purchases of Sony’s, so much the better! Their policy would be just as self-defeating as if the losses were private.”
Swap out Japanese Sony’s for Taiwanese semiconductors and Rothbard might as well be writing in 2022. The point is, economic well-being is ultimately about consumers, not producers. If foreign governments are willing to subsidize semiconductors, making them cheaper for Americans, then we might as well take the gift. True, it’s not a free market, but it doesn’t help to adopt bad public policy simply because other nations are also doing it.
What Politics Is Actually About
What’s curious about corporate subsidies like this is that large swaths of both the left and the right are opposed to them. Right-wingers oppose corporate subsidies because they are funded with taxpayer dollars and have the government picking winners and losers in the market. Left-wingers oppose corporate subsidies because they help big corporations at the expense of the little guy.
So if both sides of the political spectrum have good reasons for opposing this measure, it’s worth asking ourselves, who exactly is promoting this?
The answer is: the establishment.
It’s important to understand that the real world of politics is somewhat different from the ideological debates we see online and in the news. Sure, politicians know how to say the right things, but when it comes down to it, most of their job is about appeasing special-interest groups, from semiconductor companies to the military industrial complex to farmers to unions…the list is long.
Ambrose Bierce has a great quote that really captures this idea. Giving a satirical definition of politics in The Devil’s Dictionary, he writes, “POLITICS, n. A strife of interests masquerading as a contest of principles. The conduct of public affairs for private advantage.”
We’re told that politics is about competing philosophies of government. In theory, each party has its own vision of what good government looks like, and they are trying to live out those principles as best they can.
But most of the time, that’s not what happens. In practice, it is a strife of special interests. For most politicians, the principles they espouse are merely a pretense, a facade. The real work of politics is about placating donors and lobbyists and voting blocs. This is why we see things like corporate subsidies. They aren’t part of some grand governing philosophy. They are simply the inevitable result of a system that is run by the special interests and for the special interests.
Is that cynical? Sure. But it’s a very justified cynicism, and it gets reinforced every time a story like this comes out.
The good news is that we can do something about it. Once we see the corrupting incentives inherent in politics, we can begin to work towards change. But the key is to not be wooed by the politicians, pundits, and executives when they tell us their schemes are designed for our benefit.
This article was adapted from an issue of the FEE Daily email newsletter. Click here to sign up and get free-market news and analysis like this in your inbox every weekday.
Patrick Carroll has a degree in Chemical Engineering from the University of Waterloo and is an Editorial Fellow at the Foundation for Economic Education.
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