Semiconductor Subsidy Doom Loop
There's an ugly state-federal feedback loop happening.
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In literally the final hours before their scheduled 2022 legislative session closed last week, New York lawmakers approved a $10 billion bill to subsidize semiconductor manufacturers. It passed late at night, with no public debate or transparency, after having been introduced just days before, at the behest of Gov. Kathy Hochul — who has been negotiating with a semiconductor corporation, supposedly, though she won’t disclose which one.
It was a shameful performance. And it reflects a wider feedback loop between lawmakers at the state and national level that is leading to inflated subsidies for big semiconductor corporations, which make the chips used in loads of products, such as cars and computers.
That doom loop is happening because Congress is dangling large federal semiconductor subsidies out there, but hasn’t approved them yet, and states want those funds to land within their borders, so are spending a lot all by themselves in the hopes that it will lead to an even bigger payoff.
The latest turn in “The Chip Wars,” as I’ve dubbed them is proving the point that interstate subsidy competitions result in a race to the bottom — especially if they’re being encouraged by the federal government.
Not only was New York’s handout banged through the legislature at the last moment without any public input, but it is also dressed up in sham “green” language, even though the only environmentally-related provision in the bill is that projects funded by the program include “sustainability measures to mitigate the project’s greenhouse gas emissions impact over its lifetime.”
That requirement is so vague as to be almost nonexistent. I’d be willing to bet every corporation that applies will qualify under it. But it reflects the rush to make this massive corporate subsidy look politically palatable.
Meanwhile, over in Ohio, Intel’s $2 billion subsidy package is chugging along, even as critics point out that protections for local taxpayers and workers in the authorizing legislation are inadequate. For example, Policy Matters Ohio has noted that the deal has no requirements that Intel’s workers come from Ohio, even though a much smaller deal Intel made in New Mexico included such requirements.
In addition, as Policy Matters Ohio’s Zach Schiller wrote, hundreds of millions of dollars in the deal are not covered by clawback provisions, meaning Ohio taxpayers are simply out of luck if Intel reneges on its end of the bargain. (And it seems like the deal violates federal rules against using pandemic relief funds on corporate subsidies, but I’ll revisit that later.)
These haywire deals are happening, along with another multi-billion dollar deal for Samsung in Texas, right now, and in such a shoddy and rushed fashion, because at the federal level, Congress is working on a massive trade and spending bill that, among its many provisions, includes about $50 billion to encourage domestic semiconductor manufacturing. Federal lawmakers are attempting to respond to a semiconductor shortage that has been plaguing several major industries, including the auto industry, and the CHIPS Act, as it’s called, is what they’ve come up with.
Competing versions of that bill have passed both houses of Congress, but still need to be reconciled, which everyone in D.C. seems to think will inevitably happen at some point. So the federal government looking likely to do something, but not having done it yet, is setting off a state-level race to get ready for when it happens — but if it doesn’t, states will be left hanging, since the funds they’re approving aren’t contingent on federal funding coming through too.
One of the very few legislators who voted against the New York chips bill, State Sen. Liz Krueger, rightfully noted that the existence of the federal chips bill is encouraging a “range war between the states,” a critique which she says she elevated up to New York Sen. Chuck Schumer, one of the foremost proponents of the federal effort.
And the same problems plaguing the state subsidies are happening at the federal level, too. In fact, one of the holdups on the federal bill is that critics are pointing out — correctly — that it doesn’t adequately protect the public’s investment.
Vermont Sen. Bernie Sanders is pushing for the U.S. government, and therefore taxpayers, to receive an equity stake in any semiconductor manufacturer that receives subsidies under the bill, which would allow the public to literally share in the upside, rather than just theoretically through all the knock-on economic effects the corporations claim they will create.
“Providing $53 billion in corporate welfare to an industry that has outsourced tens of thousands of jobs to low-wage countries and spent hundreds of billions on stock buybacks with no strings attached may make sense to some, but it does not make sense to me,” Sanders said.
As I’ve said before, I think there’s some justification in trying to rebuild a domestic semiconductor manufacturing industry, since having this vital product made mostly in volatile parts of the world is a problem, on both economic and national security grounds.
But that doesn’t mean lawmakers have to pile headfirst into subsidizing massive corporations with few strings attached. In fact, doing so may just make the industry’s problems worse, as part of the reason our domestic manufacturers are such a mess is that a few big players consolidated, and then focused on outsourcing and buybacks as a means to drive stock prices up, rather than innovating and staying ahead of foreign competitors.
Plowing tens of billions of dollars into that same system, with no safeguards for taxpayers or metrics for success that go beyond rough investment numbers, and without changing the dynamics in the industry, will likely end in similar heartbreak, with everyone back in the same place a few years from now. Worse is that the federal government’s half-baked plan is goading states into a destructive subsidy competition of their own, which will result in even more money thrown into a system that already failed.
Bad stuff all around.
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— Pat Garofalo