Semiconductors and Investment in Infrastructure

4/24/21

I’ve become intrigued by recent coverage of a shortage of computer chips and semiconductors. Scarcity of these critical parts is reportedly responsible for widespread interruptions in automobile production across the country, so much so that it could potentially inhibit the progress of our economic recovery. Partly in response to these conditions, President Biden has included investing in chipmaking as a component of his vision for infrastructure spending.

In my effort to understand why this condition has developed, my first step was finding out that chips and semiconductors are the same thing. They’re miniaturized circuitry that is used ubiquitously these days in virtually all electronics. In the automotive industry, they play a key role broadly in a host of sensors and control functions. So why are they in short supply?

The impression I’ve gotten from the popular press is that we’ve been overly dependent on foreign sources for these chips; but, on the basis of who makes semiconductors, and where, that representation seem inappropriate. Although the US share of the market has been in decline, it appears to be a competitive industry with more than a few companies contributing to the manufacturing pipeline. Here are the top 10 manufacturers — six of which are US companies:

Certainly, the global shutdowns due to the Covid-19 pandemic contributed to the current problem; but collectively, managements of the various producing companies may also have failed to respond to or appropriately anticipate market demand for their products. At this point, the problem appears to be that the current production capacity is insufficient to meet the current demand; and, unfortunately, building the necessary infrastructure to ramp up production isn’t something that can be done quickly.

Signals of this imbalance aren’t exactly new. H.R. 7178 (116th), the CHIPS for America Act was introduced in Congress in June 2020. That bill called for a tax credit for investments in semiconductor equipment or manufacturing facilities through 2026. While provisions of this house bill haven’t progressed to become law, whether in connection with this effort or under the authority of the Jobs Act under consideration, the Biden administration is seeking to secure $50 billion to support this sector.

I say, not so fast — or at least, not as currently envisioned. While I’m fully in support of improving and modernizing our infrastructure, I favor making a distinction between public and private beneficiaries. Granting tax credits of this type to private companies is why we find ourselves in the situation we are now in, where profitable companies end up paying no corporate taxes.

The history of government support for private industry is replete with examples of extending tax credits as well as funding initiatives with government backed (i.e., subsidized) loans. Among the more notorious examples in the loans category was the case of Solyndra, which, after receiving a $535 million federally guaranteed loan ended up going bankrupt. I’m hard pressed to get a reliable figure for how much this subsidy actually cost US taxpayers, but the case is frequently cited — perhaps erroneously — as an example of waste and emblematic of the folly of the US government attempting to pick winners.

Pair that example, however, with the support for Tesla. Back in 2015, Tesla got a $465 million low interest loan from the Department of Energy. Irrespective of the fact that his companies had been racking up losses at that time, a major stockholder, Elon Musk, was a billionaire! In this case, the government certainly backed a winner, but something sticks in the craw when the consequence of the success of the government policy falls in such a concentrated manner on business owners. It’s one thing if their risk taking is rewarded by the market place; but it’s quite another thing when rewards are derived from federal support.

Rather than directly benefiting company shareholders — which is the effect of bestowing tax credits and providing subsidized financing — money should be directed to government agencies and public institutions like universities and research organizations. Such spending can be targeted in a way that supports the semiconductor industry or any other industry that’s deemed to be serving the national interest. We don’t have to do it by lining the pockets of private shareholders, which is what typically happens when the policy uses financial incentives to defray business costs. This is a form of corporate welfare that we should be circumspect about encouraging.