Amidst mounting pressure from the Biden administration and led by Senate Majority Leader Chuck Schumer, the Senate last night began a final push to fast‐track $76 billion in new taxpayer subsidies for domestic semiconductor manufacturers. (The initial subsidy proposal was a mere $16 billion, but—unlike in the real world—inflation has always been a problem in Washington.) House Democratic leadership has also signaled their desire to quickly approve the subsidies, should the Senate send them a final package.
Politically, Democrats’ intense motivation to deliver these funds now makes perfect sense. According to various reports, the subsidies would not only provide a financial windfall for semiconductor companies in Schumer’s home state of New York (something he openly admits), but also reportedly constitute one of the few “political wins” that the Democrats can deliver to President Biden and candidates in key battleground states like Arizona and Ohio ahead of the midterm elections in November—“huge leverage” that chipmakers and other subsidy supporters are perfectly willing to exploit today. Meanwhile, several of the congressional Republicans who support the subsidies—smaller in number than Democratic supporters but essential to the subsidies’ legislative success—also host semiconductor companies or large semiconductor consumers in their states or districts.
As a policy matter, however, the already‐weak economic case for the subsidies that we detailed last December has become even weaker. For starters, there has been even more chipmaking investment dedicated to the U.S. market, even as federal subsidies have languished. Construction is now underway at four major U.S. facilities and will continue with or without subsidies—something even Intel reluctantly acknowledged when it delayed the groundbreaking ceremony on its much‐ballyhooed Ohio facility to protest congressional inaction. This is because, as numerous experts have explained over the last year, there are real economic and geopolitical reasons to invest in additional U.S. semiconductor production—no federal subsidies needed.
Meanwhile, multiple reports suggest that—just as we cautioned last year—the global semiconductor shortage is coming to an end and might even be replaced by a semiconductor glut, even before any new federal subsidies might further goose global chipmaking capacity. In particular, Taiwan’s TSMC, South Korea’s SK Hynix, and the United States’ Micron Technology have each reported that they are reconsidering capital expenditure plans for next year because of unexpectedly‐softening demand and apparent hoarding by major semiconductor consumers (who are expected to work through their stockpiles before placing new orders).
In other words, just as Congress is gearing up to throw $70-plus billion at cash‐rich semiconductor manufacturers, there are increasing signs of excess supply and lagging demand in the notoriously cyclical (boom‐and‐bust) global semiconductor market—a situation that those subsidies could exacerbate. (As discussed last year, a subsidy‐induced semiconductor glut would not only cause financial pain for chipmakers and their investors, but also increase the potential for costly trade conflicts similar to those that erupted in the 1980s and 1990s following a similarly‐misguided U.S. embrace of industrial subsidies and “strategic” planning.)
These two developments put subsidy advocates in quite the pickle: taxpayer dollars either will pay giant corporations to do what they already planned on (and are) doing or will finance additional and undisciplined domestic capacity expansions that could cause a painful global glut. Either way, American taxpayers lose.
Regardless, the current situation is already a classic example of one of U.S. industrial policies’ chief problems: because politics, not market fundamentals, drive industrial policy proposals, they are often implemented or continued long after their economic justifications have disappeared. (A problem dubbed the “Technology Pork Barrel” back in the 1990s.) In this case, Congress appears intent on subsidizing an industry making record profits, already building facilities here, and even facing a potential glut—not because doing so makes good economic sense but because the Democratic leadership and the White House need a “political win” and are under serious pressure from powerful domestic interest groups to deliver the cash. Indeed, even as the subsidies’ economic justifications dwindled, the subsidy amounts increased.
Only in Washington.
As previously explained, there are more productive, market‐oriented ways for Congress to encourage semiconductor manufacturers to invest and expand production in the United States, while avoiding subsidies’ inevitable costs, distortions, and conflicts. But those policies don’t deliver the same political benefits—there are no ribbon‐cutting ceremonies when Congress changes how capital expenditures are expensed, expands high‐skilled immigration, or eliminates trade barriers—and in fact raise potential political costs. So we get billions in subsidies instead, papering over our real policy problems and likely causing new ones along the way.
Like we said: classic.
