The CHIPS Act and industrial policy, explained

Is America giving up on the free market?

The United States is going to start making more of its own electronics, and taxpayers are going to pick up a good chunk of the tab.

Congress has passed the CHIPS Act, a bill that devotes billions of dollars to the research and manufacture of semiconductor chips used in "the nation's smartphones, cars, computers, medical equipment, and weapons systems," Barbara Sprunt reports for NPR. The bill had support from both Democrats and Republicans, who say it "will lower U.S. reliance on China for chip manufacturing, which they say poses a national security risk."

In the CHIPS Act — and in the new climate bill backed by Sen. Joe Manchin (D-W.Va.) — some observers see the United States drifting from free-market philosophies in favor of "industrial policy," giving the federal government a firmer hand in shaping the American economy. Even a few conservatives are on board. "What we are doing is industrial policy unlike people of my free-market background have done before," Sen. John Cornyn (R-Texas) said after the CHIPS Act passed. Is the United States really returning to an era of industrial policy? Why? And how will that shape the nation's future economy? Here's everything you need to know:

What is industrial policy?

Industrial policy uses a combination of carrots and sticks — subsidies, taxes, and regulation — to steer sectors of the economy "that the government has identified as critical for national security or economic competitiveness," Anshu Siripurapu writes for the Council on Foreign Relations. If you've grown up hearing paeans to America's history of laissez-faire economics, that might sound alarming. Aren't we supposed to let the market decide

But industrial policy has deep roots in American history. Treasury Secretary Alexander Hamilton — you may have heard of him — was one of the first proponents. He urged Congress to jump-start America's fledging industrial sector with tariffs on foreign goods, bans on the exports of some raw materials, and subsidies for the manufacturing of goods like textiles, sailcloth, and glass. "Arguing against those who insisted that the government should 'leave industry to itself,' he insisted that deliberate government encouragement was needed to ensure that American manufacturers continued to thrive," Bruce Katz and Jessica Lee wrote for the Brookings Institution in 2011

Hamilton's ideas have echoed down through history. The modern internet — which now enables and includes billion-dollar companies like Amazon and Facebook — is one example: The federal government built the bones of today's web when it created Arpanet in the 1960s, after all. That's been true of a lot of tech. "During the 19th and early 20th century, public policy pushed the expansion of communications technologies — the postal system, the telegraph, the telephone — throughout the country," Ganesh Sitaraman writes for the Yale Journal on Regulation. Siripurapu points out, though, that industrial policy has often been a tool of last resort for American officials: "Washington has typically embraced it only in response to a perceived external threat."

Why a return to industrial policy now?

If that's the case — and if Washington is indeed turning once again to industrial policy — there must be threats facing the country, right? Some observers think so. "Devastating climate change, a deadly pandemic, and the rise of China as a technological powerhouse require an active government pushing the private sector to achieve public purposes," Robert Reich, the former U.S. Secretary of Labor, writes on his blog. 

Let's take those items one by one. Climate change requires the world to shift from carbon-based energy to renewables like solar and wind. Government backing can make that transition speedier. The pandemic sparked an ongoing supply chain crisis that in turn has pushed up the cost of just about everything, taking a toll on American consumers and companies: The new CHIPS Act will eventually shorten at least one of those supply lines. And the growing tensions with China — as well as its threat to Taiwan, a major center for chip manufacturing — have convinced some officials that America needs to make more of its own stuff

"The national security implications are plain," Stewart Baker writes at Lawfare. "If commercial products from China are cheap enough to sweep the market, even security-minded agencies will be forced to buy them, as it turns out the FBI and Department of Homeland Security have both been doing with Chinese drones."

What are the criticisms?

Industrial policy mostly fell out of favor during the presidency of Ronald Reagan. "To conservative hardliners, it had the whiff of Soviet economics," Bob Davis writes for Politico, while "many more opponents dismissed it as the government picking winners and losers."  Some of those criticisms still stand, although elements of industrial policy started to make a comeback during Donald Trump's presidency when he imposed tariffs on China and other foreign rivals. 

The practice can get most controversial when the government ends up picking the losers. During Barack Obama's presidency, the federal government spent millions to subsidize Solyndra, a solar panel manufacturer. The company failed, and scandal ensued. And the winners can often be the same companies that were winning even without the government's help. For those (often conservative or libertarian) critics, industrial policy is "just another term for corporate welfare — a lovely name for the unlovely practice of a government granting subsidies, protective tariffs, and other privileges to politically influential industries or companies," Reason's Veronique De Rugy writes about the CHIPS Act.

The left tends to be more amenable to industrial policy, but there are limits. The CHIPS Act, for example, doesn't contain enough worker protections for progressive critics. "Intel can build fabs in America, receive investment tax credits and direct public-subsidy grants to do so, and still undercut workers on wages and fight unionization in those facilities," Lee Harris writes at The American Prospect. That's why Sen. Bernie Sanders (I-Vt.) — a proponent of industrial policy proposals like the Green New Deal — opposed the new law. Industrial policy, he said, "does not mean the government providing massive amounts of corporate welfare to profitable corporations without getting anything in return." Even if America decides to fully revive the era of industrial policy, we'll probably still fight about getting those policies right.


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