Here Come The Crony Capitalists
There is a new threat to the US economy emerging in the wake of the COVID-19 outbreak. It is every bit as virulent as COVID and possibly even more economically damaging than the shutdowns it engendered. Yes, industrial policy, in all its xenophobic, anti-free trade, anti-capitalist glory is making a comeback. A big comeback. A few decades ago I would have said it is surprising that it is being led by Republicans but that was a different Republican party, one that actually believed in free markets and capitalism. Or at least I think it was. Maybe that was just my youthful innocence and Republicans have always been fair-weathered friends of free markets. Politicians, after all, have generally preferred to stand on soap boxes rather than principles. Like Marx - Groucho not Karl - politicians have principles and if you don't like them, they'll get new ones. And Republicans apparently have.
This headline ran all weekend on the WSJ website:
Trump and Chip Makers Including Intel Seek Semiconductor Self-Sufficiency
The Trump administration and semiconductor companies are looking to jump-start development of new chip factories in the U.S. as concern grows about reliance on Asia as a source of critical technology.
A new crop of cutting-edge chip factories in the U.S. would reshape the industry and mark a U-turn after decades of expansion into Asia by many American companies eager to reap investment incentives and take part in a robust regional supply chain. (emphasis added)
That "take part in a robust regional supply chain" really cracked me up. That very badly worded sentence could have just ended at "incentives" which is shorthand for cash for companies who know how to lobby Congress. Further down in the article is this gem:
“The administration is committed to ensuring continued U.S. technological leadership,” a senior official said in a statement. “The U.S. government continues to coordinate with state, local and private-sector partners as well as our allies and partners abroad, to collaborate on research and development, manufacturing, supply-chain management, and workforce development opportunities.”
I can't think of anything more inimical to the goal of "ensuring continued US technological leadership" than getting all levels of government involved. Has it not dawned on these idiots that the reason we have technological leadership is exactly because we didn't let government dictate Silicon Valley's investments? Don't they get that other countries have already tried this and failed miserably? Does anyone in the current administration remember Japan's Ministry of International Trade and Industry? That experiment in industrial policy, aka central planning, failed so badly they had to change the name. If the Japapanese screwed this up, what makes the US and Intel think it will work any better here?
We are going to hear a lot about why America needs to "secure" its supply chains in coming months as we approach the election. We started hearing that we needed to move the pharmaceutical supply chain back to the US almost immediately after the virus hit. Did you know that 90% of antibiotics are made in China? I have no idea if that is true but it's what I've seen repeatedly in the press. This apparently represents such a large risk that we need to move all pharma manufacturing back to the safe shores of America. To which I am forced to ask: exactly which antibiotics are in short supply right now? Any? Bueller?
America's trade warriors are going all out on the "national security" angle of protectionism. I understand that there can be legitimate security concerns about trade but we need to be careful not to let those concerns override common sense. Once you start down this path of "critical industries" it is hard to turn back. If drug manufacturing is critical to national security doesn't that mean their suppliers are as well? What about the companies that provide chemicals to the pharma industry? What about the energy needed to run the manufacturing facilities? Should we cut off LNG exports? It is a very slippery slope indeed.
The emerging post-COVID economic narrative goes something like this: "We must get our supply chains out of China and bring them back home. We've got a lot of unemployed people right here in the US who need jobs. We can put them back to work building the factories and then manning them after they're built. The government can provide tax or other incentives to companies that bring manufacturing back to the US. We'll need to upgrade our infrastructure as well and the federal government can and should plan and fund it. We can be self sufficient again. We can create an economic boom the likes of which we've never seen. US companies need to step up, be patriotic and make things in America again. And Americans need to Buy American to support their fellow Americans!"
This is not an economic argument. It is a political campaign disguised as an economic program wrapped in a national security wrapper. And, by the way, I don't think party affiliation will matter much. Joe Biden will make this argument every bit as forcefully as President Trump.
If Intel believes that building a semiconductor fab in the US is a good idea, then they should build it. But if doing it profitably - which is the only reason they should do it - requires federal government subsidies, that is a big clue that it might not be a good idea. Which companies will the US government support? Which ones will it leave to the vagaries of the market? I'd suggest that companies think long and hard about taking on the federal government as a business partner. With federal money comes conditions and you won't always know what those are before hand. Lots of companies are today returning PPP loans because the administration changed the rules after the loans were funded. If you don't use the money the way the government tells you, they'll prosecute your for....well, for taking the Trump administration at its word.
Increased government involvement in the economy is a recipe for corruption and stagnation. It rewards campaign contributors and punishes political enemies regardless of the economic outcome. It funds the past at the expense of the future. What innovation won't be funded because we wasted capital building an unprofitable semiconductor fab? What bad company will get propped up because it is "critical" to national security and has the administration's ear? All this talk of self-sufficiency may be good politics - although I have my doubts about that too - but it sure isn't good economics. The new bull market is in crony capitalism and it is driven by actual bull.