“The Biden administration’s rush to engage in more centrally planned industrial policy, particularly when it comes to the production of semiconductor chips and other high-tech manufacturing, has always been framed as an attempt to counter China.”
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“To defeat China, the argument goes, the U.S. must adopt the tactics of the Chinese Communist Party, at least when it comes to high-end manufacturing.
How’s that going on the far side of the Pacific? Not so great, actually.
“China is pausing massive investments aimed at building a chip industry to compete with the U.S.,” Bloomberg reported last week. “Top officials are discussing ways to move away from costly subsidies that have so far borne little fruit and encouraged both graft and American sanctions, people familiar with the matter said.””
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“China might be relatively new to this game, but industrial policy has a long, mostly ugly history in other parts of the world—including right here in the U.S.—and there’s little reason to think that this time will be different.
China’s shift away from industrial policy seems to be driven, according to Bloomberg, by the strain that COVID-19 has put on the country’s economy and fiscal policies rather than by any sudden rediscovery of the benefits of free markets. Even so, there’s a certain irony to the Chinese government changing course just months after U.S. policy makers decided that we had to copy China in order to compete with it.”
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“The Bloomberg report says Xi is becoming frustrated about how tens of billions of dollars dumped into the semiconductor industry in recent years haven’t produced major breakthroughs that allow the country’s domestic chipmakers, like the Semiconductor Manufacturing International Corporation, to compete with the world’s top producers.
America’s foray into high-tech industrial policy seems to be on the same trajectory. The New York Times, for example, reported last week that “new chip factories would take years to build and might not be able to offer the industry’s most advanced manufacturing technology when they begin operations.” Meanwhile, everything from federal permitting requirements to America’s broken immigration system is creating huge hurdles for the semiconductor manufacturers that are planning to expand their capacity in the United States.”
“When it was passed, the law provided subsidies for the construction of a domestic shipping industry, while imposing various employment rules and other shipping regulations. It has been amended in the century since, but it continues to prohibit foreign-flagged ships from traveling between U.S. ports, and many of its wage and labor regulations are still in effect, making it beloved, almost obsessively, by unions.
In at least one way, the Jones Act has served at least part of its intended purpose: It has benefited the domestic shipping industry by shielding it from foreign competition. But it has done so at considerable expense to everyone else.
By restricting and regulating shipping at America’s ports, the Jones Act considerably raises the costs of transporting goods, which in turn raises prices on everything from food to electronics to textiles. In good economic times, the Jones Act is a cost borne by the majority to bolster the fortunes of a few. In periods of global economic instability and high inflation, the Jones Act makes supply chain problems worse and drives prices even higher. On a daily basis, it is a force for impoverishment. ”
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“Just about any time one finds a politician taking credit for specific business decisions by specific companies, one ought to be skeptical, worried, or both. In this case, the proximate cause of much of Biden’s factory-jobs campaigning is the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act, a $52 billion package of industry subsidies Biden signed into law in August. Manufacturers who stand to benefit from these subsidies have played along, with Micron’s leadership saying that its facility is “the first of Micron’s multiple planned U.S. investments following the passage of the CHIPS and Science Act.” Micron, however, was publicly teasing the possibility of new manufacturing facilities as early as October 2021, long before the CHIPS Act became law.”
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“Just as the Jones Act ends up distorting the shipping industry, shaping it in ways that make it less flexible and less responsive to genuine consumer demand, we should expect the CHIPS Act to push the semiconductor industry into labor and production decisions intended to satisfy politically determined subsidy requirements rather than genuine market needs. Subsidies are more likely to incentivize inefficiency and dysfunction than genuinely useful production, inflating prices in the process. When subsidies are driving decisions, that means subsidy programs, not end users, are the true customer. “
“It really looks that we had as much technological change and progress between 1870 and today as we had between 6000 BC and 1870 AD. We packed what had previously been nearly eight millennia of changes in the underlying technological hardware of society, which required changes in the running sociological code on top of that hardware. To try to pack what had been eight millennia worth of changes before in 150 years is going to produce an awful lot of history.
Before 1870, most of history is how elites run their force-and-fraud, domination-and-extraction mechanism against a poor peasantry so that they, at least, can have enough, and so that their children are only two inches shorter than we are, rather than five or six as the peasants are. It’s about how the elites elbow each other out of the way as they eat from the trough. And it’s about the use they make of their wealth for purposes good and ill, of civilization and destruction.
But if you’re enough of a Marxist, like me, to say that the real motor of history is the forces of production, their changes, and how society reacts for good or ill to changing forces of production, then yes, [1870 to 2010] has to be as consequential because there’s as much technological change-driven history as there is in entire millennia before.”
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“you look worldwide and you take my index of technological progress, and it [grows by] less than half a percent per year from 1770 to 1870. That’s based on exploitation of really cheap coal and also on the productivity benefits of falling transport costs that gather all of the manufacturing in the world into the place [the United Kingdom] where it’s most productive and most efficient, because it’s the place where coal is cheapest.
I was struck by a line I came across from the 1871 version of John Stuart Mill’s Principles of Political Economy: “Hitherto it is questionable if all the mechanical inventions yet made have lightened the day’s toll of any human being.”
Say you have some slowdown in global technological progress after 1870 because the cheapest coal has already been mined and the deeper coal is hard to find, and say that you have some other slowdown because you don’t get the boost from gathering manufacturing in places where it’s productive. We might well have wound up right with a steampunk world after 1870: a world with about the population of today, but the living standards of 1870 on average.
That’s what the pace of progress was, except that we got the industrial research lab, the modern corporation, and then full globalization around 1870. The industrial research lab rationalized and routinized the discovery and development of technologies; the corporation rationalized and routinized the development and deployment of technologies; and globalization diffused them everywhere.”
“To armchair economists, industrial policy seems like a solution for the country’s economic woes: “Infuse money into Industry A, add trade protections for Industry B, protect workers in Industry C from automation, and the economy will soar! New technology will arrive sooner, domestic firms will outcompete foreigners, and steady employment will ensure a chicken in every pot.” That indeed was the thinking behind Depression-era policies which extended that crisis by seven years.
Economies are not deterministic like physics or chemistry. You can’t pull a lever to achieve a particular effect. A better analog is biological or ecological systems, where there are second- and third-order effects to any given stimulus.
Think about the reintroduction of wolves to Yellowstone National Park: Increased predatory pressure keeps elk herds on the move, leaving more young willow trees for beavers. Growing beaver populations dam more waterways, altering the habitat and spurring additional difficult-to-predict effects. That’s economic policy: You must plan for unexpected downstream effects (pun intended).
That thinking has been missing in Congress this past month. I don’t know what microchip subsidies or a mistitled inflation-fighting bill will ultimately do, but neither do our elected officials.
Compounding the problem is that people, not some agnostic supercomputer, determine which industries and companies are considered worthy of a boost. Humans are subject to influence and pressure, turning industrial policy into a contest of who can secure the most government favoritism—a political game of Hungry Hungry Hippos.
Policies protecting companies from competitive pressure, like subsidies or tariffs, allow them to take their eye off the ball. This “X-inefficiency” means they’re less efficient and pay less attention to customers’ desires.”
“The current legislation has swelled to a total cost of more than $400 billion. The core of the bill is $76 billion in direct funding for domestic semiconductor manufacturing through a variety of grants and tax credits. The rest of the money, beyond doubling the budget of the notoriously silly spenders at the National Science Foundation, is predictably a billion here and a billion there for vaguely named programs with even more ambiguous purposes. For example, as the Wall Street Journal editorial board pointed out, “The Commerce Department gets $11 billion, most of which it intends to plow into creating 20 new ‘regional technology hubs,’ which will somehow expand ‘U.S. innovation capacity.'””
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“Proponents of the legislation would have you believe that the U.S. is overly reliant on foreign, unreliable suppliers of semiconductors, particularly those under threat from China. Semiconductors are unbelievably important components in practically countless goods relied on every day, but that’s no excuse to ignore the fact that the domestic semiconductor industry is, per a 2020 report by the Semiconductor Industry Association, “on solid footing.” U.S.-based semiconductor firms hold nearly half of the global market share, and 44 percent of that production already occurs in the U.S. Moreover, these figures don’t even capture firms based in allied countries such as South Korea and Taiwan that are currently spending billions of dollars to open semiconductor manufacturing facilities in the U.S.—without the need for funding.”
“The argument for bailing out restaurants is thus morphing from a need to save the industry during the pandemic to a desire to relieve it from persistent challenges that have less and less to do with COVID-19.
That’s hard to justify when the industry itself is on a steady track toward recovery, and federal spending is driving inflation to record levels.”
“The US national security establishment sees China as the most urgent threat of the moment, while the entrenched interests of the arms industry endure.
Put another way, although the US is no longer in Afghanistan, taxpayers continue to pay for the American military’s massive global presence. Absent a fundamental rethinking of how the US sees national security and the role the military plays in foreign policy, big cuts are unlikely.”
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“Congress didn’t think that Biden had committed enough to combatting China in his original defense budget request, so lawmakers added some $25 billion in all.”
“Scientists originally suspected the problem was illegal logging in local forests, which are protected as part of the Monarch Butterfly Biosphere Reserve. But as they later discovered, the decline has a lot more to do with what’s happening thousands of miles away in the US. Over the last few decades, industrial farms have decimated grasslands rich in milkweed, the only plants that monarch caterpillars can eat. Less food in the US means fewer butterflies thousands of miles away in Mexico.”
“The vaccines that millions of Americans receive every day are the result of a global system of research, development, manufacturing, and trade. Forcing those networks to be concentrated within the United States wouldn’t make those supply chains more robust, but would leave Americans vulnerable to the accountability problems that seem endemic to federal government contracting.”
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” It’s true, of course, that the federal government paid billions of dollars to Pfizer and other vaccine manufacturers in the form of advance-purchase agreements last year. But that’s a different situation—one that effectively promised prize money but still put the onus on private companies to deliver vaccines that worked. While certainly not an ideal arrangement from a libertarian point of view, it’s far better than an industrial policy that directs public funds to companies that hire the best lobbyists.”
“When you think of the U.S. manufacturing sector, you likely think of General Motors and U.S. Steel, faceless megaliths with armies of disciplined workers. But it’s more like Yellowstone National Park, an intricate ecosystem of small and specialized players, their fates closely intertwined. “If you look at anyone who is a node in a supply chain—a manufacturer, or sub-manufacturer, or raw materials extractor—each of those entities may be partnering with many different customers, as well as many different sub-suppliers beneath them,” says Karen Donohue, an expert on supply chains at the University of Minnesota’s Carlson School of Management. “Their solvency is potentially dependent on the weakest link in both of those networks. And that’s what makes prediction difficult.” A 2018 survey by the consultancy Deloitte found that 65 percent of more than 500 procurement leaders from 39 countries had a hazy view, at best, of their supply chains beyond their most important suppliers.”
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“Professional Instruments’ primary customer is a small company in New Hampshire whose ultraprecision machine tools are crucial for manufacturing in the medical device, defense, consumer electronics, and automotive fields. “It’s almost impossible for someone to anticipate the knock-on effects of some businesses being closed down because they’re deemed nonessential, because they’re suppliers for companies that are deemed essential,” says the company’s recently retired former CEO, who requested anonymity to discuss sensitive business matters. “You build a quarter-million-dollar machine, but if you can’t get one $150 component off the shelf, you can’t put it into production.””
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“Zoom out further, and the pandemic’s global nature becomes palpable. The future of the New Hampshire company is also uncertain, thanks in part to closures abroad. It has representatives in several countries (including South Korea, Japan, and Taiwan, all of which have implemented lockdown measures) and customers in many more. “Representatives might need to come from the U.S. to help install the machines,” says the former CEO. “But with global travel being affected, how are you going to get that equipment installed? You still need those people to travel. These machines don’t install themselves.” In March the company opened a training center in China, but “whether that center will be utilized for some time remains to be seen.””