Let’s call it the “Biden way”: when our president can’t get his policy through Congress, he tries to force it through other means. Just look at her student loan forgiveness plan, which faced a tough Supreme Court challenge this week, and its imposition of tougher “Buy American” provisions on the infrastructure spending bill. Now he wants to reshape corporate America by tying the big chain of “high-quality” childcare to semiconductor subsidies.
This strategy, while popular with other presidents, has only one redeeming aspect: it beautifully illustrates how politics hijacks industrial policy and similar attempts to divert the economy from their stated goals. You see, politicians say they want to subsidize this and that to improve manufacturing or enhance national security, but invariably sabotage themselves by burdening the policies with rules and requirements that have nothing to do with the plans.
This is certainly true with last year’s “bipartisan” CHIPS law, which provides $52 billion to revive American microchip manufacturing. Now, President Joe Biden’s Commerce Department has announced that companies receiving the grants will have to do (and not do) a bunch of other things if they want the money.
Specifically, subsidized companies must provide “high quality childcare services for factory workers.” They may even divert some of the grants to build child care centers and hire providers, activities that do little to increase the supply of microchips. Companies will also be required to file all sorts of financial statements and share some of the windfall profits with the government. Preference for financing will be given to companies that agree not to buy back shares. The New York Times cleverly named this approach “Chips and Strings”.
These chains will significantly compromise chip manufacturing by increasing production costs. For example, when the administration talks about high quality child care, it actually means more expensive child care due to the requirement that caregivers must have a college and other education. . Construction of these child care centers and chip factories will be subject to Buy American and environmental requirements, Davis-Bacon wage requirements, and material supply requirements for minorities and women, as well as pressure to be more open to trade union requests.
I don’t want you to think that these industrial policies would succeed if they didn’t come with strings attached — I don’t think so. The best way to outperform China is do not imitate China’s heavy economic interventions. On the one hand, the already profitable US chip industry does not need such funding. Second, even if Biden’s plan worked and all the hoped-for factories were built, we’d still be a long way from making most chips at home. That’s a good thing, as I explain below, which makes it a lousy strategy to start with.
Indeed, even without these requirements, it would take years to build new chip factories. These are also unlikely to offer the most advanced manufacturing technology in the industry. By then, freer, more nimble companies could build completely different chips. That’s what happened in the 1980s when the United States had this same fight over semiconductors, but with Japan. The US government only used subsidies to produce a product that was immediately supplanted by more lucrative segments of the industry. Additional requirements will only multiply the cost of each project and the time it takes for companies to deliver.
More importantly, the best way to compete is to renew our hugely successful engagement free markets and entrepreneurial innovation. This requires ending subsidies and letting the market direct capital to its highest and best uses.
Moreover, competition with China demands that we maintain the diversity of our supply chains rather than being more self-sufficient. Diversification avoids single points of failure. Better supply chains require, among other things, removing regulatory barriers that “currently block or discourage the construction of chip fabs and the broader ecosystem of facilities and businesses including a national semiconductor industry.” -drivers needs to be successful in the long term”. said Adam White in THE the wall street journal.
Finally, liberalizing immigration would make more workers available for chip manufacturing and child care. In fact, it would do more to lower the price of child care than all of the president’s attempts to reshape corporate America combined.
There is so much to do to make this country more competitive when it comes to doing business, building and innovating. But industrial policy, especially when laden with politically fashionable demands, pushes us in the opposite direction.
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