Chips ahoy! Enabling poor public policy

Chips ahoy! Enabling poor public policy

National security” is being invoked by some in Washington to spend billions of taxpayer dollars on bolstering domestic semiconductor chip production. And more than a few pols, educrats and chamber of commerce types in Pennsylvania are arguing that such “support” could lead to an economic renaissance here in the Keystone State.But never have the supposed best of intentions been more rationalized by misguided notions.

The story is oft told: The United States is said to be “overly reliant” on foreign countries for production of computer chips that are the beating heart of our computerized society. In order to reverse this “deficit,” the government must invest billions of dollars to repatriate production and bolster new chip innovations.

And that, what with Pennsylvania’s (and, particularly, Pittsburgh’s) high-tech, university-based prowess, would be a vrooming economic engine to boot.

At least that was the argument from federal officials this month as they lobbied for passage for “competitiveness legislation” that would, as the Post-Gazette reported, earmark about $52 billion in new subsidies and/or tax incentives for domestic semiconductor production.

The domestic industry already is heavily subsidized at the state level. Consider the state of Ohio, which is ponying up a cool $2 billion to help Intel build a new chip manufacturing facility in New Albany. Then there’s Arizona, which last year gave Intel $7 million in tax exemptions, $25 million-plus in tax credits and a 15-year, $50 million property tax abatement.

U.S. Sen. Pat Toomey, R-Pa., argues that the proposed new federal subsidies sound like the latest excuse by the government to attempt to command and control the economy through industrial policy.

Toomey voted against one iteration of what he told the P-G was a “flawed bill” because it is “based on the premise that American economic competitiveness depends on government-directed spending on research and industrial policy.”

“It spends over $200 billion on the already mature semiconductor industry and on research grants that will often be allocated based on political and parochial considerations, rather than intellectual merit.”

That is, for all the wrong reasons.

But this is no purely philosophical argument; there are a number of bases in fact against such government “investment” that, more often than not, is only more corporate wealthfare.

First, the argument for this spending is based on the fact most semiconductor chip production occurs in two countries, Taiwan and South Korea. And given the state of world unrest these days, the U.S. must protect its chip flank, so to speak, and its national security and — Chips ahoy! — ramp up production at home.

But that’s akin to Congress regularly invoking the phrase “for the common and public good” to justify massive spending bill after massive spending bill. Invocation of “national security” by rote does not make it so. The simple fact of the matter is that, given the geopolitical realities, it’s highly unlikely that Taiwan or South Korea ever will be commandeered by China and North Korea, respectively.

The second point goes to the faux wisdom of “national industrial policy.” As Samuel Gregg, research director at the Acton Institute, reaffirmed in a 2020 white paper, “There are good reasons to believe that industrial policy significantly undermines rather than bolsters the common good.”

“Industrial policies” are “targeted government interventions designed to foster, upgrade, reorient or protect particular industries,” reminds Gregg. Republican and Democrats “have argued that ‘industrial policy’ is necessary for America; without it, they say, the country will neither maintain its technological edge nor reverse the declines in employment that particular regions and specific industries have experienced since the mid-1970s,” he recounts.

Simply stated, Gregg says it is government failure, not those of the marketplace, that lead to an environment in which government says it must intervene.

“I don’t just mean the obstacles and perverse incentives that these and other government interventions create: I also have in mind the fact that policymakers cannot know either the optimal allocation of capital and labor in any given economy or the respective comparative advantages of millions of individuals and companies at any moment in time,” he says.

“Put another way, not only do industrial policy advocates tend to ignore just how much preexisting government interventions already distort markets, but the additional interventions they propose require that the government possess a knowledge of the economy that no one can attain.”

And then there’s the opportunity cost of such government intervention.

“If the state chooses to subsidize a particular company, it gives up the opportunity to invest those resources elsewhere,” Gregg says. “Unfortunately, no government department—let alone a single technocrat—can know if the forgone alternatives might have been more profitable, or might have produced even more growth, innovation, or spillover effects for a greater number of businesses.

“This means that no legislator or expert can claim with any meaningful degree of certainty that a particular industrial policy will produce more such benefits than would have resulted if the state had not implemented the policy in the first place. For they simply do not know what might have otherwise occurred or come into existence,” Gregg notes.

Now, would it be smart for U.S. tech companies to diversify their semiconductor chip production? Likely, yes, but only if it is cost-effective, the very reason such production long has been offshored.

But it’s nigh impossible that that would be the case, especially given the high cost of the regulatory strings attached to such government “beneficence.”

Backers of this handout argue that Pittsburgh, touted as a high-tech “mecca,” would benefit by leaps and bounds. But how quickly they forget the Pennsylvania-led industrial policy forays into, to name but two, automobile and television production in Westmoreland County.

Industrial policy pushers “overestimate what can be achieved by selective interventions into the economy, downplay the dysfunction that such measures create and ignore considerable evidence that industrial policies fail to achieve their stated goals,” Gregg concluded in his white paper. “Neither these attitudes nor the policies that they inspire help build up the common good. On the contrary, they all too frequently achieve the opposite.”

Pittsburgh and Pennsylvania have seen more than their share of such deleterious public policies. It ought not countenance any more.

Colin McNickle is communications and marketing director at the Allegheny Institute for Public Policy (cmcnickle@alleghenyinsitute.org).