Bidenomics is a significant departure from the US economic status quo. One of its key features is the administration’s willingness to engage in industrial policy by subsidizing efforts to reduce dependence on fossil fuels and bring back the manufacturing of computer chips to the United States.
Economists are generally skeptical about government planners arranging for companies and workers to meet production targets. Market measures of demand are considered more efficient signals for investment. However, there are certain jobs for which markets don’t have all the necessary information. For example, there is no price on the damage caused by climate change. Additionally, in the case of computer chips, investors may not consider the potential disruptions in silicon supply chains due to factors like trade wars or conflicts.
The US government recognizes these challenges and has decided to prioritize silicon supremacy to protect its global position in the future. This led to the enactment of the CHIPS Act, a $280 billion spending package aimed at incentivizing more chipmaking within the US.
Why Janet Yellen is suddenly a fan of US industrial policy
While American companies like Nvidia, Intel, and Apple design advanced chips, the majority of chip production takes place in Taiwan and South Korea. The US only accounts for about 12% of global chip manufacturing.
Critics argue that Washington is wasting money on an effort that could make the US industry reliant on the government and less competitive. However, US Treasury Secretary Janet Yellen has a data-backed response to these concerns.
In a recent roundtable organized by Fortune Magazine, Yellen stated, “Throughout my career, I’ve not been a strong believer in industrial policy generally. But I think if you look at the semiconductor industry, and the way in which it’s evolved globally, over decades, what you see are enormous government interventions in virtually every country that plays a significant role.”
The US semiconductor industry has roots in TVs and the space program
Silicon chips were first developed in the United States in the 1950s, initially used to replace vacuum tubes in radios and televisions. However, it was the space race that truly propelled the semiconductor industry forward.
The US space program was responsible for over 70% of the global demand for transistors in the mid-1960s. While the ultimate impact of the Apollo program is still debated, it provided significant funding and support for the growth of the semiconductor industry in its early years.
In the case of Taiwan, the world’s largest producer of silicon chips, the semiconductor industry was the result of direct government intervention. Taiwanese policymakers made a conscious decision to fund research and development and provided start-up capital to the first three Taiwanese chip-makers, including TSMC.
Similarly, South Korea’s chip industry emerged with government support, albeit to a lesser extent than Taiwan. In Japan, which surpassed US chipmakers in the 1980s, the government also played a significant role by helping private companies gain an edge through tracking US patent filings and subsidizing chip sales at low prices abroad.
Now, all of these countries, including China, are focused on maintaining or increasing their share of the global chip market. This race has raised concerns about a potential race to the bottom. However, Yellen believes that abandoning semiconductor manufacturing would not be a smart move for the United States.
