Microchips are incorporated in nearly every good and service these days, as well as the processes by which they are made. A short list includes major appliances; heating and air conditioning systems; electric, internal combustion, and hybrid vehicles; waste disposal; and of course cell phones and computers. A shortage of chips during the pandemic led to a shortage of all of those products, as well as slowing the effort to renovate the electricity grid, an essential step in addressing climate change. The shortages also led to higher prices for those products and processes, contributing to the supply-side part of the inflation now disrupting the United States.
With bipartisan support, the "Chips and Science" bill is working its way to President Biden's desk after the Senate passed the bill on July 27 by a margin of 64 to 33. Officially known as Creating Helpful Incentives to Produce Semiconductors or CHIPS, this bill will allocate $52 billion to chip manufacturing within the United States, and $200 billion to research in the ongoing improvement of chips plus education and training programs to increase the number of chip-manufacturing employees.
The CHIPS bill is designed to foster discoveries made in the USA that contribute to the ongoing improvement in speed, accuracy, durability, and capacity of chips. To stay on the "cutting edge," microchip manufacturing requires ongoing research by firms in the private sector, by university technicians and professors as well as scientists at national and private labs. The aim is to assure that conceptual breakthroughs and their applications take place in the United States, including in the advanced manufacturing sector of the State of Wisconsin with its 187,000 employees.
Wisconsin Senator Johnson voted against CHIPS. He labeled CHIPS "corporate welfare," and "socialism." He also declared that the bill would be "inflationary." These charges reveal economic misunderstanding that is harmful to the nation and to Wisconsin.
The core concept behind CHIPS is that these improvements in the US semiconductor industry are a public responsibility. The alternative is unregulated market activity, or "free markets." As previous essays in this Econ4Voters series have argued, that free-market default is superior only when the pre-conditions for market efficiency, including competition, are present; microchips are a textbook example of the opposite. In the worldwide market, the manufacturing of chips gravitated toward countries like China, where their highly precise labor input can be hired for very low wages. This natural result of market activity left the US vulnerable to cut-offs, whether due to the pandemic or to military threats.
Similarly, the notion that the CHIPS bill would be inflationary has it backwards. An increased supply of microchips reduces the cost of producing the modern goods and services that require microchips and the production processes that supply them. Both economic principles and empirical evidence show that productivity and cost are inversely related; increasing the supply and quality of microchips will fight inflation, not cause it. Moreover, making the US economy more competitive globally will strengthen the dollar as an international currency which in turn would also fight inflation by making foreign goods cheaper.
Johnson’s "socialism" charge reveals a particularly worrisome misunderstanding of economics. A capitalist system requires an efficient public sector to support the market system, providing those things that the market system needs but will not produce for itself. Market activity requires streets, roads, sewer, water services, the legal system, police and fire protection, national defense, and a host of other public services. It is also a public responsibility to support specialized research that produces very uncertain investor return, as in the case of advanced semiconductors. To conflate capitalism's public sector with socialism is a demonstration of incapacity to evaluate public policy. It is not conservatism. It is confusion.
William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.
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