Free Market Fundamentalist Opinion Top Story

Democrats Taxed and Regulated, Now Subsidize, Chips and Energy

It would have been cheaper to deregulate both industries.

Joe Biden Nancy Pelosi
American president Joe Biden and Democratic House speaker Nancy Pelosi in the Capitol in Washington DC, October 28, 2021 (White House/Adam Schultz)

Ronald Reagan summarized government’s view of the economy: “If it moves, tax it. If it keeps moving, regulate it. If it stops moving, subsidize it.”

Economists now call this cost-disease socialism: first restrict supply, then subsidize the costs. The United States does this with everything from health care (examples here) to housing (although Joe Biden’s reforms go in the right direction).

Democrats are making the same mistake with their technology and climate laws.

There is plenty to like about the CHIPS and Science Act and the (albeit misleadingly-named) Inflation Reduction Act. The first doubles government funding of research into 6G communications, advanced manufacturing, artificial intelligence and other breakthrough technologies; the latter creates a 15-percent minimum tax on the largest corporations, lowers annual out-of-pocket drug payments for Medicare patients from $7,050 to $2,000 beginning in 2025 and will allow Medicare to negotiate some drug prices starting in 2026.

But both laws also spend billions of dollars in subsidies and tax credits to prop up technologies and industries that could have been deregulated instead.

Semiconductors are not in decline

Start with the CHIPS (“Creating Helpful Incentives to Produce Semiconductors”) and Science Act. It spends $50 billion over five years to support America’s semiconductor industry, and it creates a 25-percent tax credit for companies that invest in semiconductor manufacturing.

Democrats argue the industry needs help to compete with China.

America’s share of global chip production has fallen from 37 percent in 1990 to around 10 percent, but that is because China, Taiwan and other countries in Asia are producing so much more. American production is still rising in absolute terms, just slower.

American companies still outspend their rivals in research and development. As a share of sales — 16 percent — American chipmakers invest more in R&D than most other industries (pharmaceuticals are an exception) and more than their competitors in other countries..

Chipmakers don’t need subsidies

All the major chip companies are profitable. They might claim that subsidies are a factor in deciding where to open new plants (who says no to free money?), yet Intel, Samsung and TSMC didn’t wait for the CHIPS and Science Act before breaking ground on new factories in Arizona and Texas.

Why would they, when the United States buys 47 percent of the world’s chips? It makes little sense to move production to China, where the government is increasingly hostile to foreign companies, workers are lower skilled, and when the cost of shipping containers across the Pacific Ocean has more than doubled.

The law, then, spends $50 billion of taxpayers’ money on an industry that doesn’t need it for reasons that scarcely exist.

A cheaper way to support chip manufacturing in the United States would have been to repeal the tariffs Donald Trump raised on chip-related machines and parts, which, according to the industry, cost $500 million per year and add 25 percent to the cost of semiconductors.

First regulate, then subsidize

The Inflation Reduction Act isn’t really about reducing inflation. It’s a scaled-back version of the climate and health-care policies Democrats previously tried to pass in the name of “Build Back Better”.

The hope is that its $369 billion in climate- and energy-related subsidies and tax credits, including for electric cars, nuclear plants and wind farms, will cut American greenhouse gas emissions by 31 to 44 percent in 2030 compared to 2005.

Some of those subsidies and tax credits, however, wouldn’t have been necessary if the government hadn’t overregulated sectors like nuclear and shipping in the first place.

Regulators have made nuclear almost impossible

Nuclear plants generate a fifth of America’s electricity. The Inflation Reduction Act contains subsidies to extend the lifespan of existing plants. It doesn’t make it easier to build new plants.

America didn’t build any reactors between 1978 and 2013. Two new reactors in Georgia are still under construction after almost a decade.

The reason is that federal and state regulators have made it almost impossible to build nuclear plants since the Three Mile Island accident in 1979. The Nuclear Regulatory Commission has approved only seven reactor designs since it was founded in 1975. One, for a small modular reactor, was approved this year.

Manufacturers are denied the economies of scale that would make nuclear affordable. The resulting high costs of building plants is then used by anti-nuclear activists as an argument against it.

Other countries, like France and Korea, have managed to keep costs down. They didn’t do it by lowering environmental or safety standards. They did it by streamlining regulations and providing economies of scale, in the case of France under a government monopoly.

Tax credit for protected industry

The Inflation Reduction Act also creates a manufacturing production credit for offshore wind shipbuilding, allowing yards to deduct up to 10 percent of the sale price of their vessels from their taxes.

A cheaper and quicker way to speed up the construction of offshore wind farms would have been to repeal or waive the Merchant Marine Act of 1920, better known as the Jones Act, which bars foreign ships from carrying goods between American ports.

Requirements are too strict for electric cars

Tax credits for green energy must meet “Buy American” requirements. Iron and steel used to build, for example, wind turbines must be produced entirely in the United States.

The materials sourcing requirements for electric cars are so strict that not a single vehicle currently on the market would qualify.

The expectation is that the administration will issue waivers until such cars are made, but that is a process that benefits large companies that can afford lawyers and lobbyists, thus making the sector less, not more, competitive.

Environmental laws block green energy

Neither law reforms environmental protections that were introduced for good reasons in the 1960s and 70s, but which now hinder America’s transition to green energy.

In Nevada, conservationists are blocking the construction of a geothermal plant and what would be the largest solar farm in the United States under the National Environmental Policy Act.

Along the coasts, the Jones Act and Endangered Species Act have slowed offshore wind deployment.

Nationwide, the need to conduct environmental impact studies in multiple states is delaying the construction of new power lines. The last major project was a decade ago. In order to cut greenhouse gas emissions to net zero by 2050, the United States would need to triple its transmission infrastructure — to carry power from renewable production sites, like solar farms in Nevada, to cities, like San Francisco.

Instead of subsidizing companies to offset costs created by regulation, Democrats should take a critical look at regulations Democrats created in the past.