Addressing the Shortage of Microchips

6/10/22

Microchips have been in short supply since shortly after the start of the pandemic; and while both houses of Congress have passed versions of the CHIPS Act, which will likely pump $52 billion into the hands of Microchip producers, the bill remains in conference and has yet to be sent to Biden for his signature. Separate and apart from this legislation, at least one additional measure to support domestic production of microchips appears to be under consideration.

According to the NY Times Dealbook, two of our nation’s wealthiest billionaires, Eric Schmidt and Peter Thiel, have become involved with a nonprofit venture capital fund called America’s Frontier Fund. This fund has a stated objective of “investing in the frontier technologies of the future” with an eye toward fostering greater independence of the US’s supply chain and improved overall US competitiveness; and it seems that Schmidt and Thiel want this fund to be used to address the microchip shortages.

What could be wrong with that? The idea of a fund responding to market forces sounds good to me, but what’s with the nonprofit designation? A nonprofit venture capital firm seems to me to be an oxymoron. Venture capitalists allocate capital to risky investments that may have few or no other funding alternatives. Generally, these funds invest in a portfolio of companies where only a minority of those companies make it and pay off handsomely. The expectation is that the gains on the winners will more than offset the losses on the losers; but it’s a high risk / high reward proposition appropriate only for those with deep pockets.

As a rule, nonprofits don’t have private owners, nor do they issue stock or pay dividends. The nonprofit structure thus requires the bulk of the company’s activities to be funded by grants and donations; and with this constraint in mind, America’s Frontier Fund has been lobbying Congress for funding, to the tune of $1 billion. Unlike other nonprofits, however, the America’s Frontier Fund purports to work with limited partners. How that’s supposed to work isn’t at all clear. Do these limited partners participate with the intent of not realizing a return on their investments, where instead, gains from investments will simply be re-invested into other ventures? In effect, then, would limited partners simply be a separately categorized class of donors? Answering affirmatively to these questions would seem to be in the spirit of how nonprofits work but contrary to the workings of venture capital funds.

As an economist, I’ve come to appreciate how market forces serve to allocate capital efficiently; and with that bent, I’m skeptical about overriding market signals by introducing extraneous incentives, which, presumably the America’s Frontier Fund would be affecting by its nonprofit structure. If we in the US have a problem with our supply chain or with our international competitiveness — i.e., the concerns that motivated the America’s Frontier Fund to begin with — those problems should be addressed directly by our governmental institutions. They shouldn’t be off-loaded to some random nonprofit, regardless of the experience of its Board of Directors. In this instance, the America’s Frontier Fund’s Partners and Directors have impressive backgrounds — reminiscent to me of the depth and caliber of talent that Elisabeth Holmes had assembled for her failed company, Theranos.

Many have criticized the US for earlier decisions to support particular private businesses, with the example of a loan to Solyndra serving as a poster child. Solyndra was a solar panel company that had receive a government loan guarantee back in 2009. The company ended up filing for bankruptcy two years after the loan, fostering widespread criticism faulting the government for playing the role of “picking winners.” Both the CHIPS Act and the seeding of the America’s Frontier Fund would seem to be following in this tradition.

I don’t happen to be one who necessarily would proscribe using federal funds to support a company or an industry. I just think that when it happens, the government should at least have the prospect of receiving a return. If recipients of government aid end up reaping subsequent earnings that derive from that support, the government deserves a piece. At this point, it’s unclear to me that any return to the US government is expected from either of these initiatives.

It’s understandable that companies will lobby their representatives to gain financial assistance from the government, but such preferential treatment is antithetical to the idea of fair trade and a level playing field; and for the most part, such subsidies should be resisted — whether in the form of direct government expenditures or tax breaks. Critically, I’m not advocating a “do nothing” approach. Rather, my point is that when taxpayers’ money is used to support private enterprise, that assistance should be structured so taxpayers can reasonably expect to realize a return.