Should we be worried that China controls too much of the world’s microchip manufacturing? Yes. China is not our friend and might decide to cut off our supply of chips at any time.
Would it be nice to have more semiconductor manufacturing in the U.S.? Absolutely. We learned during the pandemic that our supply chains for microchips and other crucial components are too vulnerable.
So we should applaud the Biden administration’s CHIPS and Science Act, which allocates nearly $40 billion to help companies build new microchip factories in the U.S., right? Hold it right there, cowboy.
Biden’s plan to boost domestic chip manufacturing is a disaster in the making, for several reasons. For starters, it won’t work. Efforts to prop up economic sectors through top-down industrial-policy programs almost never do. Even the most bloated bureau of government experts can’t understand the intricacies of a particular supply chain as well as the tens of thousands of entrepreneurs, investors, and customers who live and breathe that industry every day. (Economist F.A. Hayek called this “the knowledge problem.”) That lack of detailed market knowledge is one reason the government is so terrible at investing capital.
Worse, such programs inevitably turn into insider rackets. Politicians steer money to their friends (remember Solyndra?). And businesses lobby to turn their temporary subsidies into permanent profit centers.
Biden’s microchip master plan also reveals two ideological biases that pervade his administration and that will keep damaging the country long after Biden himself is gone. First, he and his team have a profoundly undemocratic idea of how the government is supposed to work. They believe that once Congress allocates money for a program, the White House should be free to spend that money however it chooses—even on priorities Congress specifically chose not to fund. Second, Biden’s bureaucrats have a pinched, Old Left notion of how the economy works. In their view, private enterprise is morally suspect, but wise officials will tolerate some businesses as long as those can be enticed—or forced—into enacting progressive policies. Making sure private businesses serve public ends is a big job, of course. So the progressive project requires battalions of regulators to enforce an ever-changing rulebook.
As it began explaining how the U.S. Commerce Department will hand out CHIP Act checks, the Biden team started issuing demands. First of all, it announced that any manufacturer seeking subsides under the program will be required to provide “affordable, high-quality child care” for plant workers and construction crews. The companies can use their federal grants to hire local caregivers or build on-site day-care centers, as long as they follow Commerce Department “guidelines.” This focus on child care isn’t new. Biden’s failed Build Back Better bill included a whopping $400 billion for child care and preschool. But, as the New York Times notes, the White House “was unable to corral support from even a majority of Senate Democrats” for that measure. Congress (including some hoodwinked Republicans) did authorize gobs of money to boost domestic manufacturing. So now, with the money safely in hand, Commerce wants to redirect some of those subsidies to the social priorities Congress had declined to fund.
The child-care push is part of a broader White House mission to transform the American workplace. In a recent speech, Commerce Secretary Gina Raimondo instructed the business world “to work with us toward the national goal of hiring and training another million women in construction over the next decade to meet the demand not just in chips, but other industries and infrastructure projects as well.” In the administration’s view, the lack of childcare is a key obstacle keeping women out of these male-dominated fields. After Congress declined to pass Biden’s child-care programs, Raimondo says, she gathered her top aides around a conference table and told them that “if Congress wasn’t going to do what they should have done, we’re going to do it in [the] implementation” of the bills that did pass. In other words, Raimondo said the quiet part out loud—that the administration disdains Congress’s instructions—and then bragged about it to the New York Times.
Adam Ozimek, chief economist at the Economic Innovation Group, noted on Twitter that mandated child care is just one of the burdens the CHIPS program imposes on manufacturers. Participants will also need to comply with union-boosting “prevailing-wage” requirements, provide other special favors to unions, refrain from “arbitrary” discipline or dismissal of workers, and so on. Each of these demands will boost labor costs and, no doubt, provide employment for the army of “compliance officers” needed to fend off the corresponding army of federal regulators with clipboards. Even without these requirements, the U.S. is a difficult place to build a chip factory. The Taiwan Semiconductor Manufacturing Company, the world’s biggest maker of advanced chips, is struggling to complete a new plant in Arizona. The company recently told investors that construction in the U.S. “could be at least four times the cost in Taiwan, driven by labor expenses, permits, regulatory compliance and inflation.”
On top of all those costs, the Biden plan imposes a “Buy America” requirement on program participants. It would take a book to explain just how fanciful this demand is. Semiconductor fabrication is the most complex, precise, and demanding manufacturing process ever devised. Modern computer chips can contain billions of transistors, etched on layers of silicon just a few atoms thick. According to the U.S. chipmaking pioneer Intel, a single fabrication module can cost between $10 billion and $15 billion. Each module requires thousands of advanced components, many of which are not even made in the United States. To remain on the cutting edge, a semiconductor manufacturer must constantly acquire breakthrough technology from around the world. Telling chipmakers that they can use only domestically sourced hardware and materials is like telling a chef to make a Michelin-star meal using only convenience-store ingredients and a hot plate.
But once participants in the CHIPS program have jumped through all the hoops, filled out all the forms, and risked billions of their own shareholders’ dollars, at least they’ll have a shot at making a tidy profit, right? Well…no. Commissar Raimondo recently warned that participating companies will have to open their books to Commerce Department overseers, and they should expect to share any “excess profits” with the federal government. How much profit is too much? The companies—and their investors, if any remain—will just have to wait and see.
Even the Times noted the audacity of the White House demands: “Biden’s Semiconductor Plan Flexes the Power of the Federal Government,” read one headline. And don’t expect Biden’s progressive overreach to stop with microchip makers. As the Times wrote, the CHIPS demands join “a growing list of administration efforts to expand the reach of Mr. Biden’s economic policies beyond their primary intent.” The Biden administration has managed to push through trillions in new spending on infrastructure, environmental measures, energy, and other initiatives. Much of that money must filter through private industry: construction contractors, energy companies, agribusinesses, and more. That gives the administration unprecedented power to impose progressive policies on those private companies, including policies the White House could never push through Congress.
The $1.2 trillion Bipartisan Infrastructure Law, for example, is stuffed with what Politico called “below-the-radar provisions that would make it easier for workers to organize” and give unions the upper hand in labor disputes. “Labor is not only all over supporting it,” American Federation of Teachers President Randi Weingarten told the publication, “it has helped craft it.” The bill also includes a provision called the “Build America, Buy America Act” which is far stricter than previous Buy America requirements. It demands that the materials and components used in infrastructure projects be produced in the United States. The requirement flies in the face of engineering reality. Almost all infrastructure today—wind turbines, power lines, bridges—requires high-tech components that are produced in Germany, Japan, South Korea, or other countries. Simplistic Buy America rules will boost costs and, worse, cause months and years of delays as contractors seek waivers to these absurd restrictions.
One of Biden’s first acts as president was signing an executive order launching a government-wide “Justice-40” initiative. In the name of environmental justice, the ruling demands that 40 percent of all federal spending “relating to climate change, clean energy, and other areas” must flow to disadvantaged or marginalized communities. After two years, the administration is still working out the details. But the advisory committee recruited by the White House recommends against “pipeline creation, expansion, or maintenance,” “road improvements,” “nuclear power,” and a host of other progressive bugaboos. Some of the initiatives the group recommends include free broadband, community gardens, and, of course, financial grants to local activist groups.
At a minimum, the Justice40 initiative implies that the Biden administration intends to override Congress’s instructions on how to spend the huge sums it allocated for infrastructure, climate mitigation, and other goals. Instead of seeking the most cost-effective means to bring down greenhouse-gas emissions, for example, agencies will be required to divert 40 percent of their spending to less effective, less efficient projects in poor communities.
When progressives implement policy, this kind of bait-and-switch is routine. Congress might have thought it was allocating money to making more computer chips, improving highways, or reducing emissions. But along the way, a good deal of that money—not to mention time and energy—will get diverted to other goals. Inevitably, these goals reflect the progressive movement’s true priorities, including racial equity, reducing income inequality, restoring the dominance of unions, and creating a national child-care program. Biden and his allies failed to get their full progressive wish list through the legislative process. Now they are determined to smuggle big chunks of it through the backdoor of executive actions.
What’s especially galling here is the cynicism that underlies the White House’s policies. If Biden were serious about helping the U.S. semiconductor industry, there are plenty of steps he could take. The industry’s biggest challenge isn’t lack of capital, Adam White pointed out in the Wall Street Journal—it’s too much red tape. The billions of dollars Congress has allocated “will be squandered if lawmakers don’t do something about the host of regulations that currently block or deter the construction of chip fabrication plants and the broader ecosystem of facilities and companies a domestic semiconductor industry requires,” White writes. By the same token, both microchips and green-energy technology require a range of mineral resources. These are currently almost impossible to mine in the U.S. because of outdated regulations. “To compete with China, Congress must unlock them,” he concludes.
The same goes for child care. The progressive model for child care combines massive subsidies with elaborate regulations that drive potential caregivers out of the field. But economist Veronique de Rugy points out that we could solve the child-care shortage tomorrow simply by “lifting the many idiotic rules (some federal and many state and local) that constrain supply and jack up the price.” (We could solve the housing crisis, the health-care crisis, and most other self-inflicted crises through similar means, but those are topics for other columns.)
Such simple solutions don’t occur to progressives because they just don’t fit the progressive worldview. If you think private enterprise is greedy and corrupt, you certainly don’t want to give businesses more freedom to make their own investment decisions. Somebody might get rich! In the progressive model, government experts should make critical investment choices: Yes to more chips; yes to green energy; no to fossil fuels. Private companies can be allowed to implement those plans, but only if vigilant regulators keep them on a short leash. No windfall profits allowed.
This is the economy Biden and his allies want to build, one that’s more centralized, more dependent on taxpayer subsidies, and more heavily regulated. Under this model, the government has both more power and more money to spend on big, bold initiatives. And a lot of that money and power can be used to slip through progressive priorities on the down-low. We might never get the computer chips—or clean energy, or power lines, or highways—we were promised. But at least we’ll have plenty of child care.
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