The author is an assistant professor of economics
Even during high inflation, Congress chooses to waste money by giving it to large corporations who don’t need it.
Last week, semiconductor firms convinced Congress to provide free money and tax credits for expanding their U.S. manufacturing business — expansion they already started in 2020 and 2021. The logic for these subsidies is not rooted in economics. Subsidies only make economic sense for infant industries and for industries critical to national security. In this case, neither condition applies.
On Tuesday, the U.S. Senate voted for the CHIPS Act (Creating Helpful Incentives to Produce Semiconductors for America Act) to incentivize producers in chip manufacturing to compete with China. As part of the bill there will be $52 billion in subsidies provided to chip makers as well as an investment tax credit for U.S. manufacturing. The House approved the measure Thursday, and the bill went to President Joe Biden for his signature.
Both Intel and the Semiconductor Industry Association are major lobbiers for the bill – and that’s no surprise. After all, they have the most to gain from this legislation.
Sensing a handout, they have declared that they need subsidies in order to compete with China. It’s a prime example of the “infant industry argument” commonly used in trade policy to justify government subsidies. Some companies need protection from international firms until they are mature enough to compete, or so the argument goes.
However, there’s no conceivable way Intel and its competitors could be considered an infant industry in need of help from the U.S. government.
Intel is the world’s biggest chipmaker with a market capitalization of $164 billion and a net income of about $20 billion per year since 2018 – greater than the GDP of the entire country of Jamaica. Their market share is 64% bigger than Semiconductor Manufacturing International Corp, China’s biggest semiconductor firm.
As U.S. Senator Bernie Sanders, I-Vermont, asked about Intel, Micron Technology and others: “Does it sound like these companies really need corporate welfare?” If the U.S. government truly wanted more competition and lower prices, they would actually support true “infant” firms in the semiconductor space to compete with Intel, Texas Instruments, and others. These already gigantic companies don’t need a handout. They need competition. Concentrating semiconductor production in only the largest firms will only lead to higher prices for chips.
Some advocate providing these subsidies in the interest of national security. After all, what if China stops selling chips to the U.S.? Electronic goods production would stall, causing huge market disruptions, right? Wrong. U.S. firms already produce chips domestically, and Intel already has an incentive to manufacture in the U.S. due to increasing demand for U.S. made chips.
In fact, they already started building a plant in Ohio and only shut it down as a political move to squeeze out money from Congress.
Rather than subsidize large, existing semiconductor firms in the U.S., we ought to be inspiring domestic investment by private companies. There already exists incentives for firms that commonly use chips – like car companies – to enter into the semiconductor field or invest in these firms. Decreasing regulation to allow for more vertical integration can help create more chip producers.
We can’t ignore the cost of these subsidies. For example, $52 billion is enough to give each state and D.C. $1 billion for schools – a 10% increase in New Jersey’s budget for K-12 education and a 5% increase for Texas.
Another better use for the $52 billion could be immigration enforcement, which would be over a 15% increase for the Department of Homeland Security, or for state and local road repair, an increase of 28% in funding for most states. The government shouldn’t invest this money in companies that don’t need help – it ought to use it to help our public education system, overburdened immigration system, or neglected highways, among other viable options.
Sen. Sanders is right to call out the CHIPS Act as crony capitalism.
Danielle Zanzalari is an assistant professor of economics at Seton Hall University in South Orange, N.J., and a policy contributor for the Garden State Initiative. She is a personal finance expert whose lesson plans are used in teaching financial literacy in high schools around the country.