If Semiconductor Chip Demand Is High, Why Do We Need More Subsidies?

Commerce Secretary Gina Raimondo says more chip subsidies are needed, even before the Biden administration has distributed $52 billion or measured how effective that spending was.

The Biden administration has yet to announce how it plans to spend the $52 billion in semiconductor manufacturing subsidies that Congress approved more than 18 months ago.

But the administration is already laying the groundwork for another round of taxpayer-funded subsidies for advanced computer chips—with an argument that reveals how economically illiterate the whole effort has been all along.

"I suspect there will have to be—whether you call it Chips Two or something else—continued investment if we want to lead the world," Commerce Secretary Gina Raimondo said this week while speaking at an Intel corporate event, Bloomberg reported. "Chips Two" is a reference to the CHIPS and Science Act, that 2022 bill that authorized $52 billion in subsidies, a sizable chuck of which is expected to find its way into Intel's pockets when the White House announces its funding plans in the coming weeks.

Perhaps nothing better illustrates the way the government approaches issues than throwing an arbitrary amount of money at a perceived problem, and then declaring that more money will be needed to solve that problem even before the first pile of money has been distributed or the usefulness of the spending measured.

But the real kicker here is Raimondo's explanation for why more subsidies might be necessary.

"She pointed to the computing demands of artificial intelligence, adding that she has spoken with OpenAI Chief Executive Officer Sam Altman, who's working to secure US government approval for a massive venture to boost global manufacturing of AI chips," Bloomberg explained. "'When I talk to him or other customers in the industry, the volume of chips that they project they need is mind-boggling,' she said."

What? The argument for more federal subsidies for semiconductors is that there is suddenly a surge in demand for them? Is this a joke?

If it's not immediately clear why that argument is nonsense, think about it in any context other than semiconductors. Imagine that there was a new technology that ran on potatoes, and suddenly there was skyrocketing demand for potatoes. Would that require a massive government subsidy program to produce more potatoes, or would farmers suddenly have a huge incentive (independent of any government scheme) to grow more potatoes?

In fairness, one of the main arguments for getting the government involved in subsidizing semiconductor manufacturing is that advanced computer chips are not exactly potatoes. Building a fabrication facility for high-end chips is a major investment, the future is always somewhat uncertain, and companies like Intel might be more willing to take that risk if they weren't shouldering the whole cost. (Of course, they'll still be more than happy to collect the whole reward when the risk pays off.)

What Raimondo said this week undermines that case for government intervention too. If some of the most successful tech companies in America are telling Raimondo that they expect to need to buy a lot more semiconductors in the coming years, that should be a signal to Intel and other advanced chipmakers they can safely invest in building out capacity for chip production (in the U.S. or wherever it makes the most economic and strategic sense to do that) and rest assured that their investments will pay off because their future products will have buyers.

A more sensible industrial policy would look at the huge advances being made in AI and chip manufacturing and conclude that there's no need for the government to start picking winners and losers in what is clearly a robust, healthy marketplace.

Besides, governments can juice demand by throwing money around, but they're not very good at influencing the supply side of the equation—and that's where most of the bottlenecks in chip manufacturing continue to exist. There are only a few companies in the world, for example, with the technical skills to make the machines used to make advanced semiconductors.

Think about potatoes again. Now imagine that there were only a few places on the planet with the soil necessary to grow potatoes. Subsidizing potato production would not solve that problem.

But once the government gets involved in subsidizing an industry, that industry has a strong incentive to keep those subsidies flowing. We're already seeing that, even before the CHIPS Act funds have been distributed. Earlier this month, a spokesman for Intel told The Wall Street Journal that the company is slowing construction on a new plant in Ohio while waiting to be showered with taxpayer money.

It's foolish for the Biden administration to play along, but it appears eager to do so. Demand for advanced semiconductors remains high, but unfortunately so too does demand for taxpayer-funded handouts.