The Senate has begun the debate on the so-called Chips bill, which will provide $52 billion in grants and $24 billion in tax credits to supposedly strengthen the production of semiconductors in the US. , soybeans, ethanol, steel, credit unions, and Amtrak as industries deemed too important to warrant taxpayer subsidies—in perpetuity.
As President Ronald Reagan once observed, “The closest thing to immortality is a government program.” So, policymakers should think ahead 50 years from now and wonder if those in Congress will ask, “What were they thinking?”
This is especially true in an industry that changes as fast as Moore’s Law, which states that the speed and capacity of computer chips tend to double every two years. When wool and mohair were key to making World War II flight jackets, electronics were powered by vacuum tubes. Imagine if Congress had decided long ago that having a strong vacuum tube industry in the US was key to national security and, thus, worthy of taxpayer subsidies. Could industry have invented transistors, which eventually led to the invention of semiconductors?
Probably not. Even as synthetic materials replaced oil and mohair in flight jackets the subsidies to farmers continued for decades. In other words, we will probably still have a vacuum tube industry that is subsidized by the taxpayer despite making computer chips.
In his book The Logic of Collective Actionthe famous economist Mancur Olson taught us that the reason such programs metastasize to the federal budget is because the special interests that benefit from these subsidies are stronger and more organized than the citizens whose dollars in taxes go to fund them.
For example, there are about 150 million taxpayers. So, the chips bill of $76 billion in total subsidies for the semiconductor industry amounts to roughly $500 per taxpayer. Which interest group is ready to organize and fight hard for their stake in the chips bill?
Olson’s theory of interest groups has kept each of these industries in the taxpayer’s gravy train for decades, often with unintended consequences. Ethanol subsidies pit our cornflakes against our cars. Large credit unions do not pay income taxes but compete directly with tax-paying banks. The US steel industry has been protected by various tariffs and trade restrictions for six decades, but it continues to decline every year. Amtrak was created in 1971 by merging 20 mostly bankrupt passenger railroads and still relies on taxpayer subsidies. It took decades for the federal government to sell off the nation’s helium reserves, which began while zeppelins ruled the skies.
The federal budget is made up of sedimentary layers of programs, often well-intentioned, created to address a national crisis or emergency. Unfortunately for taxpayers, special interests have organized to protect these programs and subsidies long after the crisis has passed. Policymakers should accept these lessons of history and not deposit subsidies for semiconductors on top of these alluvial layers of budgetary largess.
A better path, as outlined in a recent Tax Foundation study “Taxes, Tariffs, and Industrial Policy: How the US Tax Code Fails Manufacturing”: “The fix to bias against capital investment is better than pursuing industrial policy through the tax code, such as subsidies. tend to be ineffective and tariffs often undermine protected domestic industries and harm downstream industries.
The solution, the study concludes, is to shift the entire cost for all capital investments, including equipment, structures, and research and development. These measures allow all industries to flourish, not just those connected to politics.