I became intrigued by the recent coverage of a computer chip and semiconductor shortage. The scarcity of these essential parts is believed to be responsible for the widespread interruptions in auto production across the country, to such an extent that it could potentially inhibit the progress of our economic recovery. Partly in response to these conditions, President Biden included investing in chipmaking as part of his vision for infrastructure spending.
In my effort to understand why this condition developed, my first step was to discover that chips and semiconductors are the same thing. These are miniaturized circuits that are used everywhere nowadays in virtually all electronic devices. In the automotive industry, they play a key role in a wide range of sensors and control functions. So why are they rare?
The impression I got from the popular press was that we were too dependent on foreign sources for these chips; but, based on who makes the semiconductors, and where, this representation seems inappropriate. Although the US market share has declined, it appears to be a competitive industry with more than a few companies contributing to the manufacturing pipeline. Here are the top 10 manufacturers – six of which are US companies:
Certainly, global shutdowns due to the Covid-19 pandemic have contributed to the current problem; but collectively, the management of the various producing companies may also have failed to adequately meet or anticipate market demand for their products. At this point, the problem appears to be that the current production capacity is insufficient to meet current demand; and, unfortunately, building the infrastructure needed to speed up production is not something that can be done quickly.
The signals of this imbalance are not really new. HR 7178 (116th), the CHIPS for America Act was introduced to Congress in June 2020. This bill provided a tax credit for investments in semiconductor equipment or manufacturing facilities until 2026. While the provisions of this domestic bill have not progressed into law, either as part of this effort or under the authority of the employment law under consideration, the Biden administration is seeking to secure $ 50 billion to support this sector.
I say, not so fast – or at least not as currently planned. Although I fully support the improvement and modernization of our infrastructure, I am in favor of making a distinction between public and private beneficiaries. Giving tax credits like this to private companies is why we find ourselves in the situation we find ourselves in now, where profitable companies end up paying no corporate taxes.
The history of government support to private industry is replete with examples of extending tax credits and funding initiatives with government-backed (ie, subsidized) loans. Among the most notorious examples in the lending category is the case of Solyndra, who, after receiving a federally guaranteed loan of $ 535 million, ended up going bankrupt. I’m struggling to get a reliable figure for the true cost of this subsidy to U.S. taxpayers, but the case is often cited – perhaps wrongly – as an example of wastefulness and emblematic of the folly of the U.S. government trying to pick winners.
Associate this example, however, with Tesla support. In 2015, Tesla obtained a low-interest loan of $ 465 million from the Department of Energy. Regardless of whether his companies were racking up losses by that time, a major shareholder, Elon Musk, was a billionaire! In this case, the government has certainly backed a winner, but something remains in the crawl when the consequence of the success of government policy falls so focused on the owner of the business. It is one thing if their risk taking is rewarded by the market; but it is quite another thing when the rewards come from federal support.
Rather than directly benefiting the shareholders of the company – which is the effect of granting tax credits and granting subsidized finance – the money should be directed to government agencies and public institutions. like universities and research organizations. These expenditures can be targeted to support the semiconductor industry or any other industry deemed to serve the national interest. We don’t have to do this by lining the pockets of private shareholders, which usually happens when policy uses financial incentives to cover corporate costs. This is a form or welfare of business that we should be careful to encourage.