Economy 28-03-2024 11:01 9 Views

Red Alert: Biden’s Biggest Chips Act Expense Yet

Recently, the Biden administration handed  $1.5 billion to the nation’s largest domestic semiconductor manufacturer, GlobalFoundries, the biggest payout from the CHIPS and Science Act of 2022 so far.

The argument for this corporate welfare is America is too dependent on chips from China and Taiwan so more should be made domestically. Instead of seeing how America should reduce the cost of doing business for all semiconductor businesses here, some businesses will be picked as winners and others as losers. The cost of this form of socialism gives capitalism a bad rap and should be rejected.

This move echoes a broader trend of governments worldwide intervening in their economies through industrial policy. A cocktail of targeted subsidies, tax breaks, and regulatory tinkering, industrial policy aims to sculpt economic outcomes by favoring specific industries or firms, all for the supposed benefit of the national economy. Industrial policy puts business “investment” decisions in the hands of government bureaucrats. What could go wrong? 

While its champions tout its potential to boost competitiveness and spur innovation, the reality often tells a different story, especially in light of massive deficit spending. In practice, industrial policy tends to fan the flames of higher prices and sow the seeds of economic destruction. 

Politicians too often meddle with voluntary market dynamics by artificially bolstering favored sectors through subsidies and tax perks, resulting in the misallocation of resources and distorted prices. Moreover, the infusion of government funds to bankroll these initiatives with borrowed money can contribute to the Federal Reserve helping finance the debt, increasing the money supply, and stoking inflation.

The nexus between deficit spending and prices looms large over industrial policy. 

When politicians resort to deficit spending to bankroll industrial ventures, they put upward pressure on interest rates by issuing more debt and competing with scarce private funds. Elevated interest rates disturb private investment, ushering in a likely economic slowdown. 

Suppose deficit financing leans heavily on monetary expansion, whereby the central bank snaps up government debt. In that case, it fuels inflation by flooding the market with money that chases fewer goods and services.

The national debt is above $34 trillion, and the Federal Reserve has already monetized much of the increase in recent years. Racking up even more deficits is insane: repeating the same mistakes and expecting a different result. Excessive spending and money printing have landed us with above-target inflation for over three years running. 

The repercussions of industrial policy ripple beyond inflation to encompass the broader economic landscape. 

Excessive government meddling in specific industries crowds out private investment and entrepreneurship. When particular firms enjoy subsidies and preferential treatment, it distorts the competitive landscape and deters innovation. This stifles economic vibrancy and impedes the rise of new industries or technologies crucial for sustained growth.

For a cautionary tale of how Biden’s recent move could play out, look no further than Europe. 

Nations like Sweden, heralded by the West as a utopian example of big government yielding big benefits, spent the last year grappling with economic strife driven by dwindling private consumption and housing construction. Europe’s penchant for industrial policy, marked by subsidies, high taxes, and regulatory hoops, has contributed to its economic stagnation

To sidestep the dilemma of industrial policy missteps, policymakers should stop propping up their favorite sector or industry and instead unleash people to flourish by getting the government out of the way.

Politicians should foster an environment conducive to entrepreneurship, innovation, and competition. This entails cutting government spending, reducing taxes, trimming red tape, and championing trade by removing barriers to private sector flourishing.

By allowing market forces to determine resource allocation and rewarding entrepreneurship and risk-taking, people here and elsewhere can unleash their full potential and adapt to changing circumstances more effectively than under industrial policy frameworks.

Biden’s billion-dollar amount to one company may seem like a lot, but that’s just a drop in the bucket of what’s to come from the CHIPS Act. Instead, these funds should be eliminated, preventing Congress from taking us further down the road to serfdom.

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