Odd Lots - This Is How We'll Know If the CHIPS Act Is Working

Episode Date: May 29, 2023

The US government is spending billions of dollars to build out state-of-the-art domestic semiconductor manufacturing capacity. But spending money is no guarantee of success. In fact, there are already worries that the CHIPS Act passed by the Biden administration isn't succeeding, due to various roadblocks, speedbumps and unforced errors. So what are the odds that it will pay off? And what should we be watching for as evidence of its efficacy? On this episode of the podcast, we spoke with Dan Wang, technology analyst at Gavekal Dragonomics and Adam Ozimek, chief economist at the Economic Innovation Group. This episode was recorded live at Decades, Adam's bowling alley in Lancaster, Pennsylvania, during the #EconTwitterIRL event in April.See omnystudio.com/listener for privacy information.

Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, lists and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio. That's vanguard.com slash audio. All investing is subject to risk, Vanguard Marketing Corporation distributor. Thanks for listening to Odd Lots. Follow the show on Amazon Music

for more future episodes or just ask Alexa play the Odd Lots podcast on Amazon Music. Hello there, Oddlots listeners. You are about to hear a live episode recording of the All Thoughts podcast. Yep, this episode was recorded in front of a live audience at the Decades Bowling Alley in Lancaster, Pennsylvania. We hope you enjoy the show. Hello, and welcome to another episode of the Oddlots podcast. I'm Tracy Allaway. And I'm Joe Watson.

So, Joe, we can't seem to get away from semiconductors. No, we can't. And, you know, we recently talked. to two of the people basically running the Chips Act in a recent episode. But I think if we're going to ask the question like how the Chips Act is going, we can't just talk to the people running.

No. It may be biased. You think? No, we need some outside perspective. And I'm very happy to say that in this very special episode of Odd Lots, which we are recording live at the decades bowling alley, we are going to be speaking to two of the perfect guests. We are going to be speaking to Dan Wong visiting

scholar at Yale Law School's Tsai China Center and tech analyst over at Gavacal Dragonomics. Perhaps the only man who's ever read a full copy of the Chinese Communist Party's internal policy journal from cover to cover. What's it called again? Cushing truth. Seeking truth, yeah. And special guest, a last-minute edition just to keep our producers and our tech audio people on their toes.

We're also going to have Adam Ozemeck. He is, of course, chief economist at Economic and, Innovation Group and also our host for this wonderful event. So thank you both so much for coming on all thoughts. Without further ado, Dan, you recently moved back to the US and now you're in Lancaster at a bowling alley. Isn't it great that we're all here? No one is more surprised than me, Tracy,

that we've all gotten over here. If I could heighten the surrealness of the moment just a little bit, I want to point out that my parents are also here in the back who slow over from their home in suburban Philadelphia. They are shy. I hope we can't involve them in the bowling. Adam, are you surprised to be an economist who owns a bowling alley and to issue your own tokens?

I'm a little used to it at this point, but I enjoy being an economist who issues my own tickets. Okay, that's fair enough. So maybe just to set the scene, I mean, Joe and I started talking about semiconductors years ago now, because of supply chain shortages, which we've since gone on to explore in various ways. But in the years that have passed since, semiconductors have become like a huge policy point. Why is this of interest, in particular to someone like Adam?

Why does this interest you? Well, it's part of a broader discussion around industrial policy. And I think that, you know, if we're going to be trying to pick specific industries, that we want to grow. I sort of put myself in the camp of I think this is possible, but we have to do it very smartly. It's not easy. And so my interest in the discussion

is trying to make sure we're doing this the right way to maximize the odds of success. A lot of times, you know, you sort of find two camps. There's the critics of industrial policy who just say it can't work, it's impossible. There's public choice problems. It's doomed. And then you sort of have another side

that's just like, As long as we're spending the money, we're already mission accomplished. They might not say that, but that's kind of out of act sometimes. Sorry, guys. But I think we need to be critics who think it can succeed and trying to make it succeed by being critical and ensuring that it's done smartly. So, you know, one of the things, the first time we ever did a COVID-related episode,

it was actually with Dan. And I think it was before we knew, like, quite how much it was going to change the world. And it was like a very specific, like, well, what's COVID going to do to, like, essentially electronics manufacturing in China? And that was, like, the extent to which we were thinking. I think it was like February 2020. Obviously, then we, you know, the world change. We don't need to go over all of those things. But let's just start with, like, this simple point.

When it comes to, from your perspective, can it succeed? Not like the specifics of the Chipsack Theater or whatever, but do you accept the premise that, that the attempt to turn around domestic manufacturing of high-end semiconductors in the U.S. is conceivably possible. I think it is possible. I think it is conceivably possible. And I think that we are off to a good start with an emphasis on start. Now, the Financial Times recently tabulated that there's something like $200 billion of new investment

in Clean Tech as well as in semiconductors after the passage of the IRA, as well as. the chipsack. Now, $200 billion is quite a lot. We're seeing these flurries of investments in semiconductors from the likes of Samsung and TSM, as well as Intel. And we're seeing also a lot of battery makers. We're seeing a lot of solar photovoltaic makers announcing these very large facilities in the US.

So we are off to see a start. And I think what I really wonder about is, what exactly are the criteria for success? Is spending money really, really, just efficient, or as you've had the Chips Act administrators come on, tell you, you know, there has to be a little bit more. And the test that I would propose for, you know, everyone to think about are, I would say, you know, probably to focus on these two things. The first is, you know, what exactly is the economic criterion for success? If we are going to have, you know, a thriving

chip industry, if we're going to have a thriving clean tech industry, then, you know, the economics have to work out in some big way. And I think the challenge for a lot of this is that, you know, spend a lot of time looking at the clean tech supply chain in China, it is going to be pretty difficult, I think, for the United States to become a lower cost producer than China on a lot of these important manufactured products. But is there some criteria on here that could be met in a bit of a lower way? Are we going to see some self-sustaining dynamics that is not being primarily driven by foreign investment? Are we going to be able to see, you know, the cost curve, perhaps with some help from tariffs, you know, be able to get us to some competitive products?

And then the second test I would propose that we really think about is some threshold of a national security test. Now, you know, this is really up for the national security folks in DC to debate what this should really mean. But what I would look at is the structure of these investments. Because a lot of what we see right now in terms of, you know, the actual investments in chips, the actual investments in Clean Tech, that's overwhelmingly going to the downstream industries in both of these sectors. We're seeing a lot of investments in the battery cells. We're seeing a lot of the investments in solar modules, but really these are only the assemblies of all of the components that you need.

There hasn't been quite so much investment in the critical minerals for batteries in the U.S. There hasn't been quite so much investment in the solar cells, the solar polysilicon. This is much more difficult stuff. So if the U.S. is spending a lot of this money, you know, $200 billion, potentially far more than that, mostly to import products mostly made in Asia, China and then assembling a lot of these things here, well, it doesn't look to me like they are really going to be, you know, pushing past that threshold. So, you know, for ultimate measures of success, I would look at the economics and I would look at the structure of these investments.

Adam, I kind of want to ask you the same question, which is how are we judging the success of this program? Because it does seem, as Dan just laid out, there are all these different targets. So on the one hand, the Chips Act is sort of the poster child for revived, more activist, industrial policy. I know that's a negative term in some economic circles. I've heard people call it industrial strategy instead. Maybe I'll use that. People trying to fix supply chain shortages, create new jobs, geostrategic interests, as Dan just mentioned. The list of potential goals here is quite long. So how should we be judging the success of this type of program? Well, I think we need to focus. I think that's really important. And we need to focus on the goals that

actually makes sense versus the goals that not only do they not make sense, but they're going to be a distraction for achieving our primary goals. So if you think about, you know, national security interest, I think we have a genuine economic interest in making sure that specific mature node chips that we rely on for our military, we have a safe and steady supply with them. It doesn't necessarily mean they need to be here. It means they need to be some of them here and some of them on allies that we can trust. That to me seems like a completely reasonable national security concern that I don't see why even, you know,

I'm libertarian, neoclassical-style economists would object to. I think having the most advanced production here, there's an argument for that too, at least having some of it, for the purpose of making it more less geographically concentrated. You know, a lot of the production, what is it, 90% of advanced chips is made in Taiwan, That's a hugely risky situation.

So I think we think of that as like insurance. So we don't want all the advanced production concentrated in one place. We want it to be insured. Again, this is an area where we should be relying on allies, and we shouldn't see it just as a goal of producing it here, but a goal of making the supply of that more resilient, less risky. I see those as reasonable policy goals. I see the idea that this is going to be something that creates good jobs, skilled or

low scale as being a distraction. I think that the idea that we're going to have more resiliency in a huge variety of chips is not really realistic. I mean, there's so many chips made so many countries and you're not going to know which ones we need to insure against. If you look at the auto industry, the reason they had a chip shortage wasn't because we couldn't make enough chips for them. It's because they canceled all their chip orders early in the pandemic.

by the time they realized they made a mistake and they went to the chip makers that actually we do want those chips classic bullwhip effect right and so like how are we going to solve that and i don't really hear any clear answers about that and even when i do hear an answer it's sort of not fully thought out in my mind so we're going to create mature node production here um what's going to happen next time something like this happens right are the automakers going to cancel their orders again if not then we don't have a problem. And if so, then what are we going to do? Use the Defense Production Act to seize it because it's here.

It just, it seems like a solution that's a little disconnected from the problem. Well, this actually gets to another thing. Like, Dan, I mean, let's say we all, everyone, were to sort of accept the national security case for domestic advanced semiconductor manufacturing. Is there another problem that we need, that actually needs to be solved beyond that? I mean, like, can we just sort of like, yeah, have maybe more diversified globally or something like that? Like, it seems like, okay, yes, it's pretty crucial the military part. What about just going back to the status quo outside of that?

Would that be fine? Well, the wonderful thing, Joe, about national security in the U.S. is that no one can ever define it. You know, it is, you know, the president is very reluctant to define it. the federal judges are always very differential about, you know, how the U.S. President defines what national security is. Maybe we should just come up with our own definition. You know, I think that I take an expansive view of, you know, U.S. national security. I think there should be quite a lot more manufacturing jobs.

And, you know, we're speaking in Pennsylvania. This is, you know, a site of quite a lot of manufacturing. I value manufacturing for its own sake. I think that I love heavy industry, you know, the heavier, the better. And so, you know, it is, you know, really great that we should be thinking about these sort of things. So, you know, if I were able to, you know, think about, you know, what is a good vision of all of these things, I would ideally like to see, you know, that even if automakers make some big mistakes in the beginning of the pandemic, cancel other orders, that was no doubt a mistake, that somehow the, you know, U.S. manufacturing system is able to be somewhat robust

to be able to be self-correcting enough to rescue, you know, a lot of these manufacturers. from their mistakes. Because what I was quite surprised by in the early days of the pandemic was that, you know, in the earlier days of March 2020, when the U.S. had a pretty big deficiency then of masks and swabs, which were simple products by any measure, there were a lot of manufacturers that were not able to quickly retool and make these pretty simple products that manufacturing employment, even up until, I think, something like the last three months, did not, you know, surpass the peak in March 2020, that it is pretty surprising that both the manufacturers and the

workforce were not really able to respond in a pretty robust way and be supple enough to, you know, make a lot of these types of products. And so I would start there by thinking about, you know, from a workplace issue, less from an optimization, less from an efficiency issue, are we able to build some sort of, you know, workforce, economic system that responds robustly to emergencies. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients.

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and very flexible goal. But I did see a headline float by this week, basically saying that Germany is in talks to limit the export of certain chemicals that are important to chip production. I guess my question is, like, what is the ultimate goal here? Is it just to cut off chip production within China?

Or is it to limit chip production in other countries that might be interested in developing it? Is the future goal that we just have just have, you know, a strategic industry of semiconductors that is concentrated in a few select Western countries. I'm being very careful not to use the word Western block, but that kind of feels like we're heading. Yeah, it's a pretty important question, Tracy. And so, you know, what I wonder about with something like the IRA, with something like the Clean Tech bill is,

what exactly is the ultimate objective of the United States government? Is it to, you know, decarbonize as quickly as possible, or is it to build out a clean tech supply chain in the US as quickly as possible? Because to some extent, these two are somewhat in tension. China does have all the solar as well as quite a lot of the battery technologies. It would be much simpler to decarbonize if you just imported all of that, but that is totally not acceptable in the present day. Now, with respect to chips, that is a little bit of a different story. But again, The targets here are not terribly clear. You have the National Security Advisor Jake Sullivan

say that it can't be enough for the United States to be just two generations ahead of China on semiconductors. They really should be seeking some sort of an absolute advantage. This is someone else on the National Security Council. Tarun Chabra said, we no longer want a comparative advantage against China's technology capabilities. The US really needs to have an absolute advantage. Now, if you're removing comparative, you know, if you're in the realm of the absolute,

then it becomes, you know, quite a lot more difficult to figure out exactly the degree to which the U.S. really needs to be ahead. But, you know, I think in general, what it seems like here is that the U.S. really wants, you know, quite a lot of the most advanced stuff, a lot of the everything else as well. It would be ideal if China did not get that much further out of here. So I want to go back to something where I sense there is some disagreement and get some debate going. and that is essentially about employment as a good thing per se. And I could see sort of your argument is like, look, if the goal is we want to have advanced chips here,

then the goal should be we want to have advanced chips here. And the fact that it creates jobs, you know, jobs are good, but that is a secondary goal, and you wouldn't want the job creation aspect to be a distraction from the advanced chips. To your point, however, there is this sort of like seems like a slightly different take, which is that,

we want to have an economy in which a lot of people are capable of working in complex, heavy industry. And you don't get there. If you don't start with employing more people in complex, heavy industry in the training, and thinking about a recent conversation we had with Henry Williams and David Ox, like, economic complexity is a really good thing and is part of what drives wealth. But maybe we could, like, explore this a little bit, maybe start, like, what are your concerns about the degree to which some of these secondary goals may undermine the main goal? and maybe like, sir, to hear both of your perspective on whether jobs per se is a good part of the ambition. Yeah, I mean, I think Dan acknowledges that we already are seeing the tradeoff between domestic employment

and the main goal when it comes to clean energy, right? I mean, we could be importing more clean energy. We could be getting, you know, cleaner, greener faster, and we're not to preserve jobs. And the reality is the wage premium that a low-skilled person earns in manufacturing has, declined massively over time. It's just not there anymore. These aren't great jobs anymore. It's just not the case. We don't have a economic interest in taking someone from services to manufacturing anymore. I think a lot of what we're seeing is a relic of 10 to 20 years of a bad economy, right? Like, I think we had a long, long, great recession. And before that, we had the

China shock. So it's been a long time since we've seen a legitimately good labor market. And I think people lost faith in that. They lost faith in basic macroeconomic policy's ability to generate decent wage growth for people with less than a college degree. And I think that's just misplaced. I think the fundamental mistake there is macro policy. I don't think it's industrial policy. I don't think the solution to a 10-year recession is getting more people in manufacturing. I think if we do that, we don't need to do that. Dan, do you want to defend the idea of job creation as part of industrial policy? Sure.

Well, you know, I think it's impossible to disagree with Adam that, you know, the wage premium here is not good in terms of a lot of manufacturing. And I think it is going to be pretty difficult to entice these workers who are working in semiconductors to, you know, get out of, you know, Silicon Valley beanbags and then, you know, go into these fab rooms where, you know, if you ever go in. into one of them. They have a very strange light. It is yellowish, purplish light. You're sitting there, you know, looking at, you know, these transesters for eight hours a day. It is pretty strange work, you know, to try to do something like this where yes, if you can, you know, get into those beanbags, or, you know, if you are able to just work as a, let's say, as a home health care worker, where your wages can be, you know, just as high as working in these grueling factory jobs, you know, I think that is pretty difficult to entice a lot of people to take a look at the situation and say,

well, let's do a lot more manufacturing. You know, I'm sitting at a law school now. I'm hardly turning wrenches all day. And so I want to be the first put up my hands and say, you know, this is, you know, quite challenging for me to envision, you know, myself as doing something like that as well. But I think, you know, in general, what I would love to do is to, you know, imbue manufacturing with a special sense of dignity. Let's imbue complexity with a special sense of economic dignity. And that, you know, that we should say that culturally in general, that we should, you know, exalt manufacturing,

that we should exalt economic complexity, that we should consult the types of technology that involve a lot more of this creation because I think that is good for both the economy as well as for national security. So we managed to mention a bullwip effect and beanbags. So we just need to mention mint the coin and then we'll hit like all the traditional,

you started on minting coin. Right, we've already talked about his token operation. Yeah, that's true. Okay, so just on this point, Dan, maybe you can explain. So one thing I've always wondered is, you know, we talk about U.S.-China rivalry when it comes to semiconductors, but China is far behind a lot of other countries when it comes to semiconductor technology, but it's doing pretty well, as you already mentioned, with clean tech. What are the differences between those two industries,

as they relate to China's economy and social fabric. Because I think that will also give us some insight into whether or not this type of traditional, quote unquote, industrial policy will actually work in the US. Sure. So maybe we can think a little bit about where China is on most technology.

And so if I can give a very quick snapshot of where China is on most of its technology endeavors, roping up clean tech as well as semiconductors, what I would say is that, that at this point, I think China is pretty competitive with the US in manufactured products outside of two big areas. The first is semiconductors, where China is, has built pretty much the basics of competition

in all of the semiconductor production, but it is leading in absolutely nothing, that it is at best 10 years behind the market leaders here. China is also really weak in something like aviation. So, you know, in terms of China's answer to Airbus and Boeing, it is really, really far behind. But outside of these two big areas, again, in manufactured technologies only, I would say that China has broadly caught up to, you know, the West writ large on most manufactured products. It is leading the U.S. and Europe in most of clean tech, by which I mean solar, wind, batteries, as well as hydrogen electrolyzers. And it is, you know, leading in all sorts of these boring industrial products, you know,

some things like hydraulic pumps, which would never grace the headlines of, you know, fine papers like Bloomberg. The hydraulic pumps act isn't coming anytime soon. No, but we definitely need something like that. But China is, you know, leading in all of these broad manufactured products. Where I think, you know, it is weak relative to the U.S. is that I think that any scientific area, any technology sector that involves the complex integration of different, you know, scientific disciplines, China tends to be pretty weak. So in semiconductors, that involves the integration of

chemistry, electrical engineering, computer science, aviation involves the integration of material science, aerodynamics, many other things. This is something where the U.S. is still really, really strong at, you know, building these advanced manufacturing products. Where the U.S. tends to be weak is, where the science is pretty mature, but all of the execution risk lies with manufacturing. So, you know, and anything that the manufacturing operation is pretty complex. If I'm thinking about something like putting together

a battery cell involves about a dozen different steps, everything from cell filling to final ceiling, all of these demand, you know, perfect handoff between each one of these steps. And this is where the Chinese are really, really strong, that they learn from building iPhones, building complex electronics. They're just really good at building

building products of high intricacy at high volume. And so this is where I would love to see the U.S. become a little bit better at this more volume production. Adam, I want to go back to something you said, which I think is really a key, which is that, you know, perhaps some of the U.S., the diagnoses of the U.S., we forget that we had really many years of slack labor markets, poor demand, maybe 10 plus years and weak economic growth. going back to like well before the economic crisis, the 2008, 2009 crisis. One thing that strikes me now that I've been trying to think about is, okay, we're in this tightening cycle with the Fed, et cetera, but there's still a lot of money coming, you know,

high multiplier money, it seems like building all these factories, batteries, chips, et cetera. Do you see, are you like, to what extent looking from a macro lens, do you see some of this investment allowing the U.S. to maintain robust job growth, strong? economic activity, strong wages, et cetera, even as a, you know, it's sort of like helping us avoid going right back into the old slum. Yeah, I mean, I think ongoing capital investment's great. It's nice to see that the interest rates haven't fully shut that down. And I think that that's, you know, sort of the risks that we're playing with right now.

I think all eyes should be on growing GDP. How do we increase GDP? How do we do more? Because the reality is we have had tight labor markets over the last two years. But a substantial part of that has been reduced labor supply. And also just the speed at which things moved, right? So I think that looking forward, the next five, 10 years, I think when we think about how many people are working, we can do better.

The labor market can do better. And so we shouldn't look at the amount of people working now and say, oh, we hit the lid. That's the capacity. It's over. It's really a lot of things happening that, you know, short-term Nehru was a lot realer than it ever has been. And so I think we should think about capital investment, growth, and higher employment, all is, you know, that's the next five to ten years. That's what

we should be aiming for. So just on this note, though, is there a risk that we're front-loading CAP-X or pulling forward too much investment at a time when the economy is arguably running hot and at the risk of not having, oh God, I'm about to veer into MMT territory, but at the The water's warm. The water's warm. When the economy is slowing, maybe we won't have that fiscal policy or investment lever to pull. I think the economy is confusing right now and the resilience of spending, the resilience of durable good spending.

And I wouldn't be surprised if there are a lot of factory owners and a lot of manufacturers across the country who don't know yet what the permanent trajectory looks like. It looks like. And so given that there's uncertainty, I think, you know, it would be surprising if there weren't people building factories that it's going to turn out that they don't need. You just hope that the economy has enough strength to sort of reabsorve that stuff as companies do realize some of that malinvestment to put my Austrian hat on. Dan, going back to actually some of the national security questions, like, is there a level at

which the U.S. can feel comfortable? And so it's in terms of like, okay, we have hit enough. Is there anyone even like knowing or like being able to quantify, excuse me, like, okay, the factories are up and running? Yes, probably the majority of manufacturing is going to be in Taiwan or China or elsewhere in Asia. But it's like, we're good here. Like we actually did this. Like, do you have any sort of analytical way of like figuring out what that number is?

I think that is pretty difficult to say. If I had to come up with my own test, it is that, you know, that the United States, United States regularly runs into problems of oversupply of a lot of these things rather than under supply and having, you know, basically these spiraling cost curves chasing after fewer and fewer goods that, you know, at least, you know, again, it is hard to say what the U.S. national government declares to be national security. But, you know, what I would say is, you know, that, you know, if from, I think hopefully that the folks that Econ Twitter can agree on is, you know, something like, you know, to bring down the cost curve for infrastructure, that, you know, it is still

kind of mind-blowing that these subway extension lines in New York City costs about 10 times more than, you know, European countries, that it becomes, you know, super difficult to build these solar farms, to build these sorts of transmission grids. I never knew what an obscene four-letter word NEPA was until the folks at IFP told me so, that NEPA, that NEPA, Coppa, CEQA, its close cousin, just really block all sorts of development in the US. And that if we don't have some sort of a robust system to save automakers from their mistakes,

although these automakers make probably too many mistakes to really try to save them from, but unless you are able to have this sort of robustness, bring down these cost curves, have regular problems of oversupply rather than persistent undersupply, where prices just keep rising, to chase after these goods where it's not at all clear where a hundred million dollars and the New York public school system goes.

It's not very clear where, you know, tens of billions, hundreds of billions of dollars of infrastructure investment goes. Then I think we can be a little bit more at ease in thinking about having a robust economic system. And just on this point, I mean, there is a perception out there that when it comes to China, it's a command economy and, you know, Xi Jinping can wake up one day and say, we're going to make semiconductors a strategically important industry. but actually the way that happens,

it usually isn't a bunch of money thrown at that problem. It's sort of a wink and a nod to the banks and the credit providers, like, hey, you should lend these guys some more money at cheap rates. I guess my question is, what kind of policy response would we expect to see from China on this front? And would they start to tweak their own way, their own version of industrial policy in response to what the West is doing? Yeah, I tend to think.

that, you know, China is mostly pretty focused on building all of these capacity without thinking too much about these other competitive forces. You know, that creates a lot of these problems. You know, it creates these usual issues of oversupply. But I think the Chinese is, you know, mostly thinking about its own internal system rather than, you know, trying to figure out how to, you know, make the rest of the world more happy. So when the Chinese decide that, you know, semiconductors are a critical technology, where that solar is a critical technology. As you say, the central government would do something

like name solar, a strategic emerging industry, as the state council did in 2010. It would trigger a vast cascade of subsidies, which leads to business creation. It encourages the local governments to give free land, to favorite industries, have the banks lend at very cheap rates. Sometimes these direct grants, but in general,

what the Chinese tend to do is to have oversupply. They don't, they have no ability to stop themselves from building. And I think, you know, if I had to choose, I would rather choose that set of economic problems. That was the trigger that has made it so that China builds basically as much renewable infrastructure every year as the rest of the world combined,

that these Chinese local governments cannot stop themselves from building more, you know, favorite industries in something like solar or wind farms. But what they really try to do is to, you know, they can't stop themselves from building. They build even when there is no interconnection when these farms aren't really connected to the grid. They build, you know, hydroelectric dams

that displace millions of people. They build even when the central government tells them to stop building because, you know, it just wants this sort of capacity and employment out there. And that is just, you know, that's what the, the US is kind of up against. And I wonder how these two systems can be more adaptive.

Well, that's what I want to feed into, so it really does feel like we have the opposite problem, where people are always writing substack posts about how terrible we are at building things. And then, yeah, Dan, talk about, no, they literally can't stop the building even when they say stop the building. Is it really as simple as like, oh, there's some laws from the Carter era that we have to get rid of, but then suddenly we could like build subway and rail as fast as they do in Europe and Asia? Like, what to you, like, just sitting aside like, how do we get to do to get the U.S. building again? How do you, like, rank the priorities or get good at that?

Yeah, I mean, I think there are important laws to change. But I think what we have to understand is that a lot of the blockers, like, why are those laws there? Right. Like, we can't just, like, erase them and say they should be going to be gone. A lot of the blockers to lower cost are there because someone wants them to be there. And because we don't have enough, you know, bipartisan cross-ideological agreement that these things should go. You know what I mean? All we have to do is get enough people to agree that Buy America is a problem.

And then we can get rid of Buy American provisions. But like, is the law the problem? Yes, to an extent. But the problem is, for whatever reason, we can't overcome the forces that push for it. You know, but there's also, like, I mean, Buy America, I presume is not why it took forever. the Second Avenue subway, which I don't know if they even exists, or maybe it has a few stops, and why there are, like, large swathes of the country where they can't put electrical wires and stuff like. There seems to be, like, it seems like there's more than that. Sure, there's a lot of,

there's a lot of problems, and behind most of those problems, there's some party pushing for them. And I would argue that what we need is more ideological alignment among the people who wish to push back against those things, you know, like NEPA is a huge issue, right? But like, it exists, for reason. It's defended for a reason. There are people who sue using NEPA because, you know, that's that they want those outcomes. And so we need to have more agreement here in the set of problems and sort of work in a bipartisan way to push behind them. And you have to be realistic about people are on the other side of the table of the everything bagel problem. And they, that's who we're up against if we're going to get rid of it.

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Not someday, but right now. Register at democrat homes.com and get everything you want right now. Just going back to the beginning of this conversation when we were talking about the goals of the Chips Act and the IRA as well, it does feel like there is a tension between a recognition that these are strategic. strategically important things for the U.S., whether they're semiconductors or clean energy tech, and then the ability to actually scale these and sell them in a way that is appealing to American people and corporations. Is that tension insurmountable? I'd like to hear from both of you on this point. I think it is probably going to be a pretty serious tension, and I think that the U.S. government

has to work through, you know, all these sorts of tensions. Some of these things will be resolved through the executive process. So I think about something like, you know, the Treasury Department will give guidance on which electric vehicles are actually subject to the full $7,500 in subsidies from the IRA. And so it has to thread these needles if it is, you know, a little bit too tight. Then, you know, the electric vehicle industry uptake will be pretty slow because most of these batteries are used with minerals process in China. On the other hand, if it is, you know, if it is too strict, then no one will buy electric vehicles. If it is not strict enough, then none of

these automakers feel that they have to, you know, get rid of their China dependence on all of these batteries. And so these are basically a lot of these tensions that I think are, you know, going to be pretty difficult to try to solve. Adam? I think there's a couple of important facts that matter here. One is that we have a huge cost gap, especially when it comes to advanced semiconductor production. TSM says it's 40 to 50%. So it's too expensive to start. We used to make it here and we don't anymore. And that's for a reason. And the reason is because of costs and it made more sense to make it in other countries. So you have to be laser focused on those costs because of the third reason, which is this is a globally competitive industry. It's ruthless.

you have to be focused on costs and you have to be focused on prices, and policy should reflect that. And if policy doesn't reflect that, I think that's a problem. If I can amplify that point a little bit, that, you know, I think that, you know, what is really strange when it comes to something like clean tech in the United States is that I think the U.S. is in a very strange position where it is trying to engage in technological catch-up with a lower-wage competitor, which is China, that China makes, you know, solar photovoltaic panels that are both cheaper,

as well as more efficient than the US. And often the same goes for batteries. And so usually one of these things is not true, that you are either technologically ahead or you are cheaper, but the US really has a hard time here, which is why I want to echo Adams' point that you really have to focus on bringing down this cost curve. The other slightly novel thing is that China developed

technologically by embracing a lot of full foreign investment into China. These involved Apple through Foxcon building enormous electronics factories in China. Tesla has a wholly owned factory in Shanghai, that Intel, Dell, whatever. All of these American technology giants invested a lot in China, and then Beijing

was extremely welcoming in their investment and has not retaliated against them throughout the many years of President Trump's trade war. By contrast, the US has become pretty hostile towards attracting investment from, you know, what is the technology leader in a lot of these spaces, China, when it comes to solar and batteries especially. And so it is pretty hostile towards Chinese battery makers

from setting up in Virginia, sometimes, you know, including in Michigan. And so I think, you know, the U.S. is making this bet that it is going to be able to be okay in something like batteries by, you know, mostly working with allies in Japan as well as South Korea. And perhaps that is all very full. fine, but I would also encourage it not to be, you know, boxing with one hand, tied as behind its back, to be a little bit more like China and then trying to get as much investment as possible, solve and mitigate these national security problems where they exist, but don't

really, you know, reject foreign investment from the technology leader. So going back to CHIP specifically mentioned at the top, Tracy and I recently interviewed two of the top people at running the CHPS Act of the US. And it was totally a fluke time in because like a week before that, our colleagues on the Bloomberg opinion side who were like, you know, separate wall between us, like they totally savaged the state of the Chipsack. And like, you know, a lot of these accusations like, oh, this would be coming like this like progressive Christmas tree of like environmental concerns and child, child care, etc. Like outside of like what you see, you know, is this sort of like detention goals of like create jobs versus creative and separate conductors. How concerned are you about some of these other elements or like how overblown or where do you stand on some of the other priorities that some are saying are seeping into the chipsack? Yeah, I mean, I think 100% that there are other priorities that are just direct.

They're just going to raise costs. Like, this is what they do. Like, there's no world in which forcing project labor agreements. One of the construction of these fabs doesn't raise costs. And you have to acknowledge that that's the problem. You've got to be realistic about that. So I think that they are absolutely intention. I want to be a two-handed economist here,

and that there's a lot of stuff that they are doing and saying that I think is good. There's a recognition from the administration that we are going to need to nest semiconductor production within globalization. And there's realism there and a desire to work with allies on this that I think is missing from a lot of the other discussion around this. So we're not going to make it all.

And globalization is not the enemy here. Globalization is a key factor in why Moore's law has continued over time. If we didn't have globalization, Moore's law would have been dead a long time ago. And so you cannot run away from globalization when it comes to semiconductor production. So I do want to say that I do think the administration has been good on that. It's the other things. It's the Christmas tree stuff that I think is a problem. On the other hand, everything bagels are delicious.

I don't order plain bagels myself. And Christmas trees are beautiful. I agree with Adam that, you know, it is really. difficult to try to make everything here at home but you know I wonder to what extent that these child care provisions that these other labor provisions are really you know going to be mostly inconveniences that these companies are going to be able to write off that you know or whether they actually are critical you know if they actually are crippling I may be a little bit too early to tell but I agree with Adam certainly it is pretty

difficult which is why I go back to the test I laid out at the beginning what we are seeing as already huge amounts of investments in the U.S., but, you know, is it going to be invested in most of the right things? And, you know, is there going to be some way to, you know, have the, is the U.S. going to be able to say that these economics are going to be pretty self-sustaining over the longer run? So I just have one last question, sort of a classic interview question, which is in 10 years' time, or I don't even know if 10 years is long enough, because we're talking about technologies with very, very long lead times.

But, okay, so I guess I have two questions. One, what time frame do you think is reasonable to judge the success? To clear a verdict. Yeah. And then two, what are you looking out for? Is there something specific where you would wake up in 20 or 30 or 50 years time? Hopefully we're all still around. And say this has either been a massive success or a desperate failure.

I look forward to getting back into this bowling alley in 10 years, one decade from now. Decades, perfect. Yes, or perhaps many decades. And, you know, thinking about where we are, that, you know, 10 years is not very long of a time, as you say, Tracy, technologically. Politically, that also tends to be not too long of a time for the Chinese. that is only two turns of the five-year plan. And so I think they judge things on a slightly longer time scale. Let's give it at least three five-year plan cycles.

What I slightly worry about is that, you know, there is quite a lot of investment in things like solar and batteries and also in semiconductors in the U.S. today. What I worry about is that, you know, somehow the TSM facility in Arizona turns a little bit more like a showcase factory that doesn't end up you know, producing too much. And I think the example here is something like Apple's Mac Pro factory in Texas, which doesn't have very high volume. And, you know, if after all this investment,

a lot of firms will fail. I think that is certainly going to be the case. Even two, three years from now, you know, we take a look back, you know, if, you know, one of the parties points out a lot of these failures and says, you know, this is why industrial policy cannot work. We're getting a lot more cylindras. They're still talking about the cylindra failure of about, you know, 15 years ago now that, you know, politically the appetite disappears, that continue investing in these sort of things. That is something I am a little bit worried about. And so therefore, I would say that, you know, we have to think about these things on the longer timeframe. Adam? I would say it depends what we're talking about specifically. So if we're talking about

advanced semiconductor production, it'd be nice to have a little bit more, you know, less geographic concentration there both onshore and you know in friend shored when it comes to you know mature node chips i'd love to see more direct accounting for here's why we need it and here is how we've improved resiliency when it comes to solar what i'd love to see is the cost curve come down i think that's everything that's everything i don't care about making it here i don't care where we make and i care that the price comes down and i care that people install it and i think that we should to think about the technological frontier as being something really important here. And Chips, to be fair, is spending billions of dollars on R&D, too.

So I'd love to see that some of that money helped move the technological frontier forward. I think Alec Staff is here somewhere. He's always posting the solar chart, and it always looks very encouraging that line is going down. So that does seem to be happening. One nice thing, and then I want to open up, and then I think we can go to Q&A. But, Dan, you know, like, I really struck by the point. that you make about, it's kind of rare to be trying to catch up to a country that both is cheaper and more technologically advanced. Like, usually maybe there's one or the other and you exploit the

other. Like, should we be doing things like, you know, export discipline and subsidizing the companies that can produce here and sell well in the global market? Should we be thinking about that type of thing for the U.S.? Or should we be thinking about, you know, more buyer of last resort things, like seems to be a part of the sort of when we have had successful, like, sort of like military-driven semiconductor policies, like back in the Cold War and stuff like that? Yeah, well, I would love for U.S. firms to have export discipline, which is, you know, a lot of the strategy for firms in Asia to, you know, sell to the rich American market and then, you know, gets the quality of their products, you know, to raise the quality of their products.

The challenge for the U.S. is that there is no bigger and more sophisticated markets, so it's hard to, you know, figure out, you know, who is able to discipline the American firm. And I think to add to the point of, you know, how, you know, the U.S. is in a bit of a tougher position, again, I would think, you know, slightly politically, the challenge is here. To go back to the example of chips, you know, whether the Chips Act is working. I think about something like TSM in Taiwan. And so TSM is, you know, by miles and miles, Taiwan's, everyone's favorite employer in Taiwan, that people, engineers in Taiwan would say, I would sell my liver to go work for TSM. You know, it's much more difficult to think that people would say that of any chip firm over here. You know, Taiwan is periodically in a drought. It is a, you know, an island where they give the fresh water to TSMC and make the citizens drink the treated water in a drought.

in a drought, they park a lot of these fire trucks outside of the facilities of TSM in order to make sure that TSM has, you know, fresh water to produce the chips powering our iPhones. And so, you know, this is, you know, that is just a different sort of thing where politically also, can I, is it really easy to imagine that TSM's facilities in Arizona, a fairly dry state, is able to park a lot of fire trucks outside of TSM's facilities in a train. out, I wonder. We're going to be doing an episode soon with an Arizona alfalfa farmer. So he will be making the case that we should not, you know, they got to get their out.

They got to get theirs too. Yeah, but thank you, Dan, for leaving with us with that wonderful vision of late stage capitalism. And thank you to Adam Ozemeck for joining us for this conversation. We welcomed questions from the audience. And if you'd like to hear those, we invite you to be on the lookout for live recordings where you can be part of our audience in the future. Joe, I found that conversation fascinating. I loved it. It was so great. I'm so glad I appreciate both perspectives.

I do find like, I don't know, I really appreciate both perspectives. I like Dan's case for we should do big, heavy stuff here. I guess I had some sympathy for it. But no, that was great. I really enjoyed it. One thing that I think is pretty special about the discussion is it has to be a first for a semiconductor policy discussion in a bowling alley. No, and the listeners who are not here, like, we're on this stage, we're looking out in bowling alley, we're looking at this beautiful light fixture in this old building. I had the exact same thought. No one is having this conversation about like the history of the ghostro policy in this context before.

So, no, it's a building. Pins. Which is really bullish on America, actually. You know, there's like this and what we're good. We can draw the line between bowling pins and pin diodes. How about that? All right. Well, this has been another.

episode of the Audlots podcast. I'm Tracy Alloway. I'm Joe Washingtonthal, and big thanks to our guest, Dan Wong and Adam Ozumack and, of course, Adam, for this incredible location where we're recorded. A massive thank you to the Economic Innovation Group and the Institute for Progress for allowing us to be here and do this world first of talking semiconductors in Bowling Alley Territory. You can follow me on Twitter at Tracy Allo. And I'm Joe Wisenthall, and you can and follow me on Twitter at the stalwart. Follow our guests on Twitter. Adam Ozemeck, he's at modeled behavior.

And Dan Wong, he's at Dan W. Wong. Follow our producers, Carmen Rodriguez at Carmen Armin, and Dashel Bennett at Dashbot. And check out all of the Bloomberg podcasts under the handle at Podcasts. And for more Oddlots content, go to Bloomberg.com slash Oddlots, where Tracy and I have a blog. We post transcripts,

and we have a newsletter that comes out every Friday. And for more Odd Lots content, check out our Discord. It's really fun people chatting in there 24-7 about all of the things we talk about on the show. Check it out at Discord.g.g. slash oddlots. Thanks for listening. The news doesn't stop on the weekends. Context changes constantly.

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