Plain English with Derek Thompson - "Industrial Policy" Is the Hottest Idea in Economics. What Could Go Wrong?

Episode Date: March 10, 2023

Under President Biden, the U.S. is pivoting toward what some people call “industrial policy”—that is, using the government to support key industries, like green energy manufacturing and the manufacture of advanced computer chips. There is a strong case against industrial policy in economics: It’s the idea that governments do not know better than markets when it comes to picking winners, and industrial policy just wastes money and distorts the economy. But there’s another view, which is that industrial policy is utterly necessary to help the U.S. build an abundance of computer chips and green energy infrastructure. Greg Ip, the chief economics commentator at the Wall Street Journal, helps us separate fear from fact as we talk about industrial policy. Host: Derek Thompson Guest: Greg Ip Producer: Devon Manze Learn more about your ad choices. Visit podcastchoices.com/adchoices

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Today's episode is about a bold, new experiment by the Biden administration to remake the U.S. economy and the world. Under President Biden, the U.S. is pivoting toward what some people call industrial policy that is using the government to support key industries like green energy manufacturing or advanced computer chips. Now, there is a very strong case against industrial policy in economics. It's the idea that governments are stupid. Governments do not know what markets to pick. They don't know what companies to pick. They're terrible at distinguishing winners from losers. And when they try to pick winners, they end up just wasting money and distorting the economy.

But there is another view, which is that industrial policy is actually the oldest idea in American economics. In fact, laissez-faire, hands-off, pure, unbridges. right old capitalism is not the dominant throughline of the American story. As Robert Atkinson, the founder of the Information Technology and Innovation Foundation, has written, industrial policy is the story of U.S. economics. Alexander Hamilton was the OG industrial policy guru, our first successful manufacturing firm, the Society of Useful Manufacturers. I love that. Useful manufacturers was funded by the state of New Jersey, industrial policy.

In the 19th century, Henry Clay and other Whigs devised what they called the American system, and included tariffs to protect industry and federal subsidies for roads and canals, industrial policy. The government subsidized the railroads, the Navy helped create the radio. The military contributed funding to Bell Labs, which invented the transistor and the solar cell. DARPA, the Defense, Advanced Research Projects Agency in the Defense Department, had their hand in pretty much everything you associate with the iPhone, the touchscreen, GPS, the internet. Eisenhower limited liability for nuclear plants, which gave rise to the first nuclear plants.

He also signed the Highway Act, which gave rise to, obviously, the highways. JFK birthed the Apollo Project, which, by the way, didn't just get us to the moon. It accelerated demand for microchips. Richard Nixon expanded non-military research funding, which birthed the modern biotech industry in the 1970s. You go on and on. But in the last few decades, industrial policy and government partnerships, with the private sector have absolutely fallen out of favor. But today, I think that's changing.

Three laws signed by Joe Biden, the Infrastructure, Investment in Jobs Act, the Chips and Science Act, and the Green Energy provisions in the Inflation Reduction Act, altogether herald a new dawn in direct government support of the economy. And that is some people very excited and others very scared.

So to separate fear, from fact when we talk about industrial policy as it relates specifically to chip manufacturing, today's guest is Greg Ip, the chief economics commentator at the Wall Street Journal. I'm Derek Thompson. This is plain English. Greg Ip, welcome to the podcast.

Thanks for having me, Derek. So industrial policy has a bad reputation. Why? I think people intrinsically, when they hear that the government is going to be picking winners, they think, well, the government can't do that better than the private market, can it? And the mistakes that we've made with industrial policy tend to be remembered, you know,

Cylindra or the supersonic transport or fast-breed reactors or syncrude. These were all boondoggles where the government spent a lot of money and didn't have much to show for it. I think the other reason is that the countries that were best known for pursuing industrial policy, like Japan and Western Europe, they did very well up until around the 90s, and their economy started to slow down. And the American economy, where we took a lighter touch, took off, and everybody envied Silicon Valley. And that history, I think, led the world in general to believe

that maybe there was something to be said for the government just getting out of the way and letting the private sector do its thing. It's something interesting about the idea that the success of Silicon Valley proves that the government should just get out of the way, because, as I'm sure, some people thought when you mentioned those things side by side,

it was government investments. and the Defense Department that helped to give birth to Silicon Valley. It was government investments that helped to lead to the takeoff of Tesla, which has created the richest man in the world. So would you agree that industrial policy, while it has a bad reputation, I think it's true that it has in many different pockets a bad reputation, has also somewhat sneakily been a part of the American story for a lot longer than some people realize.

I definitely agree with that, is that there is actually probably no advanced country that hasn't done industrial policy in some way, shape, or form. In the United States is no exception. As you probably know, Alexander Hamilton, our first Treasury Secretary, was a big fan of industrial policy. He thought we should protect American manufacturers from British competition, either with tariffs or subsidies, until they were strong enough and competitive enough that they could survive on their own. So we were a high-tariff country for the first century of our existence. And as you know, the Pentagon and the space program have been big spenders on technology, whether it was semiconductor chips or lasers or spacecraft

or jet engines, all of which eventually had extensive civilian applications. So there's no pure free market economy here. There's industrial policy everywhere, if it look hard enough. It still seems to be the case that industrial policy, at least as we think of it, fell out of fashion for a while, say sometime between the 1970s and 1980s. Why do you think it seems to be having a resurgence in the Biden administration? I think that the interest in industrial policy is part and parcel of a broader rethink of the sort of the free market globalization model

that more or less held sway in the 1990s in the 2000s. While it's true that the United States did much better than, say, Japan or Western Europe for a lot of those decades, starting with the financial crisis of 2008, I think there's been a lot of, you know, introspection about whether the world sort of like steered too hard

towards the total free market model. And then at the same time, you just can't ignore the fact that we've seen China, this economy, rise to such a prominent place of position and power. And there's an economy where the government is involved at virtually every single level. The People's Republic of China lives and brings industrial policy always has never really bought into the so-called neoliberal model of free trade. The fact that so many Chinese industries compete at the top level with Western industries reflects to some extent very like interventionist behavior on the part of their government,

whether it was subsidies and tariff protection or helping their industries steal the top technology secrets of their Western competitors. When we're thinking about why this moment is happening now, you mentioned a couple really important culprits, the financial crisis, a revolution to neoliberalism, the rise of China. I want to add a couple other possible causes. One is inflation and inflation plus shortages. we have had in the news lots of stories about, oh, there aren't enough computer chips, there isn't enough baby formula.

Prices are rising as we're seeing shortages, either because of the pandemic or because of problems with international shipping. And that, I think, has diverted a lot of attention in economics, especially among liberal economists and liberal economic thinkers from the demand side of the equation. How do we give people enough cash to buy stuff to the supply side of the equation? How do we create enough stuff so that if people have money to demand it, they actually can. The other, I think, is that Democrats have for a while been interested in passing some kind of green infrastructure bill, whether it was the Green New Deal or other versions of

climate policy. And once they had something like universal control over the levers of legislative government, they saw an opportunity to enact those policies as well. Any other things to throw into the causal jumbalaya here? Yeah, I think you've mentioned two things. I think the supply chain breakdowns that accompany the pandemic and the green energy transition. And I'm going to mention a third, which is COVID. And I think what all these three things that have in common is there are large systemic problems that are what we call in economic externalities. There's no private actor that sees that as their responsibility of something to take care of. There's no profit to be made, essentially replacing fossil fuels with something else unless, you know, the appropriate

incentives are put in place. The supply chain problems. that we had coming out of the pandemic, if you think about it, they were a result of every company privately doing what was in its own best interest, which was to achieve the leanest, meanest supply chain possible with just a handful of suppliers in the lowest possible inventory. And it was a system that when everything worked well, it was incredibly fast and efficient and cheap and, you know, enable us to get amazing breadth of products with the click of a button very quickly,

but it was extremely fragile and bent under stress under all the distortion. that the pandemic created. So I think if you take those three big events, the supply chain problems, COVID, and the green transition, they each present a plausible case for why the private sector cannot by itself solve the problem.

And it creates at least a plausible opportunity, if not the actual correct response, but it creates at least a plausible case for why the government needs to get involved and not simply leave the solution to the private market. You and I could have an entire conversation about industrial policy and the new green economy. I do think that is an incredibly important, maybe one of the most important possible conversations we could have about policy, but it is another podcast.

What I want to talk about with you mostly is industrial policy as it affects computer chips. You write that not only in the past few years, but maybe even going to, back further, the U.S. has only just started to grasp that semiconductors are as central to modern economies as oil. The U.S. invented the computer chip. How did we lose the technological frontier? Well, I think it wasn't just computer chips, but a lot of electronics manufacturing that the United States was one's dominant, eventually migrated to East Asia, and did it for a couple of reasons. First of all, a lot of that manufacturing is labor intensive and labor was cheaper over there. Those were countries that pursued policies, including industrial policies, including things like

subsidies and tariffs, that made an attractive place to build stuff. And then eventually they achieved what we call sort of ecosystems where the suppliers were all close together. And this almost created, if you will, a large sunk cost that was difficult for the United States to get back. And it's not like the United States had nothing else in its return. It turned to the people that used to like make things in the United States found jobs doing other things that were extremely remunerative. So it's true that we lost a lot of the capacity to manufacture semiconductor chips, but it turns out we still design a lot of semiconductor ships. And indeed, if you look at the actual value created in the chip ecosystem, a ton of that value is still

creating in the United States. Companies like Nvidia, like Apple, that design chips, And then those designs are then taken to fabrication plants in other countries and made. And if there were no other considerations, one might say, well, you know, that's actually pretty logical. It's comparative advantage, isn't it? We have a comparative advantage in design. We also, by the way, make a lot of the very sophisticated tools that are necessary to make chips. And those countries that over in Asia, they have chief land and cheap labor, so maybe that's their competitive advantage. What I think Derek changed with chips was this realization, both Two things, first of all, the pandemic you were just touching on.

We discovered that things as varied as, you know, F-150 pickup trucks and CPAP machines for sleep apnea didn't operate if they didn't have vital but cheap semiconductor chips. And people woke up and said, wow, there's just a lot of industries here that can't operate without a secure supply of chips. So that was number one. And number two, I think, was this growing competition and this very adversarial relationship that's emerged between the United States and China.

And a view that, holy cow, even if there was an economic logic to letting China make most of our chips, that would be really bad for U.S. national security if one day they can withhold from us the chips that are vital to our economy, much the same as we used to worry about hostile countries withholding the supply of oil.

And so I think that created, and actually a bipartisan consensus that whatever you thought in general about the government getting involved in industrial policy, you could make an exception for semiconductor chips and say, yes, there is a case here for the government to step in. I'm really, really glad you brought China into this because I cannot imagine a world in which relations between the U.S. and China were close to what they were in, say, 2014, where you would have this kind of energy on Capitol Hill for the Chips and Science Act.

Nonetheless, just to put it a couple numbers to the story that you were telling, U.S. share of global chip manufacturing declined from 37% in 1990 to 12% in 2020. So it declined by about two thirds. Meanwhile, mainland China grew from zero to 15%. Taiwan and South Korea each account for a little over 20% each. I'm not sure, and correct me if you think this is wrong, I'm not sure it would matter that much to politicians if we were still buddy-buddy with China, that the manufacturing frontier had moved to East Asia.

It is because of the shift in Chinese politics and the fear that China could establish dominion over Taiwan that would really, really threaten the U.S. economy and national security. It's that fear to me that has really been critical in shifting thinking in Washington. Do you agree with that? I mean, would we even be having this conversation in a world where China had not had the last, say, nine years of authoritarian lien that it had?

Well, I agree 100%, Derek. I mean, for example, let's go back in history a little bit. Like, this is in some sense a rerun of what we went through in the 1980s. When the memory chip industry, by the way, which the United States pioneered, moved to Japan, and companies like Fuji and so forth ended up becoming the dominant suppliers and the U.S. really withered away. And that wasn't for want to trying. I mean, under President Ronald Reagan and ostensibly first,

market fan. Japan, you know, we had Japan imposed voluntary restraints on exports and semiconductorships, and we created a public-private consortium called Semitech in order to try and jumpstart innovation here in the United States. And neither of them really saved the U.S. memory chip industry. It all moved, virtually all moved to Japan from whence it then moved to South Korea. But nobody, at least, almost nobody in the 80s, saw this as a really existential national security threat. To be sure, people did. think it was a bad idea that we would never make chips again. But there wasn't anybody really thinking

that Japan or South Korea was one day going to withhold this vital technology from us. That's why the competition with China is qualitatively different from the competition with Japan. Now, Derek, I do think actually it's the case that even in the absence of this competition with China, there would probably still be a lot of people pushing their industrial policy. I'll take one example. That's the Inflation Reduction Act, because there's a lot of industrial policy in that law too. We're basically offering electric vehicles subsidies and battery subsidies to vehicles if they're only assembled in North America and if the batteries are only made in the United States or its allies. That's industrial policy, really. The Biden administration is trying

to get, you know, an indigenous electrical vehicle industry, but no Republicans voted for that bill. And a lot of Republicans did vote for the chips bill. And I think that tells you something. It tells you that while the case for industrial policy in the case of electric vehicles is, you know, kind of like two-sided, it's not, you know, widely accepted. When it comes to semiconductors, there is no partisan divide. Both sides of the aisle can agree on that, and it is precisely because of the China factor in that one. Very well said. I could reiterate it, but I would just like listeners to underline, go back 30 seconds, re-listen. I think that China is such an important story. in such important part of this story. You have a great quote from Mike Schmidt, who heads the Department of Commerce Office

that oversees the implementation of the Chips and Science Act. And he had a really, really interesting line. He said, quote, there is zero leading-edge production of chips in the U.S. We are talking about making the U.S. a global leader in leading-edge production and creating self-sustaining dynamics going forward. There's no doubt.

It's a very ambitious set of objectives, end quote. So I want to talk about what is, in the Chips Act specifically, before we get to some of the controversies that have arisen around the Chips Act? What is the Chips Act? What does it do? The Chips Act appropriates $53 billion in two chunks. One chunk, which is around $13 billion, is really to support like basic level research and development to sort of maintain the U.S. edge in the design of semiconductors and all the associated stuff. The other $39 billion is direct subsidies for the, for building semiconductor fabrication plans, what we call fabs, the buildings and the sophisticated equipment that goes inside them.

And that's where the chips act is a little bit special, because even though this country has a long history of subsidizing research and development, actually subsidizing the manufacture of the products that result from that R&D, that's relatively new. Now, we've done it for a long time at the state level, practically every state has a program to offer incentives to establish a factory in their state and another state. And we sort of understand that's basically, you know, business as usual, right? I mean, no governor is going to say to their, wants to go to their boat and say, I did nothing to try and attract that like Volkswagen factory or that whatever factory, right? And in some sense, the Chips Act is doing exactly the same thing at an international level.

It's saying that these fabs could go anywhere. They could go to South Korea. They could go to Taiwan, they could go to China, they could go to Malaysia. We want them to come to the United States. They won't come to the United States with us throwing a little bit of money into the pot to put our thumb on the scale. Let's get into this game, just like everybody is, and make sure that the United States is at least at the table as a preferred option when these companies decide where to put their fabs. Now, here's where things get interesting. As you just said, the Biden administration really, really wants these companies to make a decision to move their fabs to the U.S. So you look at the rules. What does it take to open a fad right here in the United States? The Biden administration

seems to be using industrial policy and computer chips to pursue some broader goals. So, for example, to receive funding for one of these fabs, recipients must provide, quote, affordable, accessible, reliable, and high-quality child care for both facility and construction workers. They also have to pay union-scale wages for construction and preferably use unionized labor. Greg, tell me why this has been controversial among some economists. I think it's controversial because what the Biden administration is trying to do here is use one program to accomplish two very different goals. One goal is establish more chip manufacturing in the U.S. instead of China. And the other goal is further various important progressive

priorities like universal child care, more unions, more union pay, and stop companies from using cash to buy back shares. We could have a separate podcast about the relative merits of all those policies. I think in the current context, what we worry about is that by establishing the second set of social goals, you actually make it harder to achieve

the first set of economic goals. Why might that be? Well, remember, these companies, you know, I heard somebody, another economist, make the following point. When you demand that highways in the United States be built with like union labor in American products. The highways are going to be more expensive, but at least the highways will get

built. It's not like we're going to lose that highway to South Korea. The highway has to be built here, right? But that's not the case with these fabs. There is a global contest for these fabs, and the companies that make them are extremely profitable and extremely competitive, and they have choices. They don't have to put that fab in the United States. And when they make that decision, they're going to look at all the costs and benefits of putting it here versus somewhere else. And on the cost side, you're already starting with the fact that American labor is more expensive than Asian labor. American land is more expensive than Asian land. And now you're adding all these other costs.

You have to bring us child care. You have to pay union scale wages. You cannot buy back your stock. If you have unusual props, you must share them with the government. Every time you add another condition, you make the proposition a little less attractive and you make it a little bit less likely that a company is not actually going to apply for this money. That is not a good outcome. We want companies to apply for this money.

And not just any companies, we want the best most successful companies, the Samsung's, the Intel, the Taiwan Semiconductor manufacturing companies of the world who apply for this money because they're the ones who are going to be around for a long time. They're the ones with the leading technology. Those are the ones we want building factories here. And every time we add another condition that makes it a little bit less attracted to build it here,

they may think twice, number one, about whether they'll apply for the money and build it here or how much they'll build here. And that's not something we want. And if I might, we know this is a factor because we've got a history of attaching these conditions, and it does affect companies' behavior. In 2008, we bailed out a bunch of banks who's something called the Troubled Asset Relief Program, and because people didn't like banks very much and thought they were greedy, we attached a lot of conditions.

You can't pay your CEOs bonuses and so forth. That turned TARP money into the scarlet letter, and every bank that received it worked really hard to pay it back as quickly as possible. And one result was that instead of using that money to expand lending, it was no longer there. because of this stigma. Look at the CARES Act that we passed in 2020 to help industries make it past the pandemic. There was money in there for the defense aeronautics industry. That was more or less crafted for Boeing, which was really suffering because a lot of aircraft orders for being canceled. But the money was only going to go to Boeing if Boeing also agreed to give up equity to the government, plus abide by a lot of other conditions like no share buybacks. Boeing looked at this and they finally said,

no thank you. In other words, we created money, it was a form of industrial policy in which the conditions were so stringent that the company was aimed for, decided it didn't want the money. And I would say that we do not want to end up in that situation with this semiconductor program. You do not want the money to become so burdened with these other entirely separate objectives that the only companies you end up attracting are the weakest companies. Let's say that I love industrial policy. I love industrial policy. I love policy for semiconductors specifically. I also separately love the idea of an abundance of affordable, accessible, reliable, and high-quality child care for all Americans. If putting my second goal

into my first goal is the bad way to conduct policy, what's the good way to conduct policy? How might an economist that you speak to who's critical of industrial policy, but not critical of the concept that we could really use better child care, how would they go about getting both goals? Well, they would probably pass two different laws. One law would be the Chips Act, which is to attract the particular industries that we want for national security policy. The other law would be one that expanded childcare, paid more subsidies either to the families or to the providers of childcare. So that affordable childcare was in the places where it was needed. And indeed, you know, the president did have a plan. It was called to build business.

back better plan that intended to do just that, but for various reasons, was not able to get that passed. So I suppose, you know, the simple answer is use the right instrument for the right goal. And if you actually try to squash too many, achieve too many goals with one instrument, you end up not achieving any of those goals, or at least not doing a very good job, any of them. Look, the argument's been made, and I have some sympathy for it, that having affordable quality childcare is actually economic policy. It is a factor to having a high quality labor force. I get that. The fact of the matter is that these companies, if they perceive that they are having trouble attracting the right people because they lack the childcare, they will have the incentive

to offer that child care themselves without having been frauded to do that by the government. And indeed, a lot of the companies, I am told, that we are aiming this chip subsidy money at already do offer child care. So in fact, it's a little bit redundant. But if in fact they're not offering childcare, or if it in fact is a burden, that you've essentially asked this very vital industry to shoulder a tax in order to provide a benefit that we want the entire country to have. And I would suggest that's not the optimal way to go about it. I would say there's one other risk to larding industrial policy with a bunch of mission creep. And it's that if you lose out on a bunch of Samsung factories, you don't just lose the value

inherent in those Samsung factories. If the policy fails, it might poison the well of industrial policy and domestic semiconductor manufacturing for many years or decades, the same way that, you know, Cilindra was held over the heads of green economic types for years and years, despite the fact that, unfortunately, no one would point to Tesla and say, actually, the policy of subsidizing some green economy companies seem to work. So if you see what I'm saying, it seems like there's an externality. to industrial policy failing in a catastrophic way,

which is that if you are a fan of industrial policy in certain narrow segments, which I am, I want it to succeed, and therefore I'm worried that its short-term failure may lead to its long-term abandonment. Does that make sense? I think that makes a lot of sense.

And in fact, I'm really glad you brought that off. I think that, you know, there's a... I quote Larry Summers in one of my pieces. He says, I like my industrial policy advisors the way I like by generals. The best generals, they hate war, but when you ask them, when they know that war is necessary, they fight. And the best industrial policy advisors are the ones who are reluctant to do industrial policy, but want to get it right when they do it.

I worry about people who do industrial policy just because they love doing industrial policy. So I think what we know from history, if you look at things like Operation Warp Speed, which gave us these COVID vaccines, or if you look at the space program and the missile program that gave us semiconductors and rockets. Industrial policy works when the goals are really focused. When the government says, here's a bunch of money, put a man on the moon, give me a COVID vaccine, go out and do it. It's least successful than the goals are really diffuse.

I'm not even sure that slender is the best example because that same program also help companies like pre and electric lighting and I think Tesla. So I'm not even sure that's a clean example. But I'll give you another perfectly good example, and that's shipping. You know, the Jones Act was passed in 1921, but the theory that we needed a domestic shipbuilding industry so that our Navy would always be ready to build ships. And here we are 100 years later, we still got that thing.

And one result of it, this law requires us to use American build ships to move between American ports. It makes shipping very expensive, products very expensive. It's one of the reasons why Puerto Rico is poor because they have to get so many of their products through this expensive shipping. And it has done nothing to save the American shipbuilding industry. And failures like that, I think,

sort of like give industrial policy a bad name. Look at Donald Trump's, you know, famous effort to build an LCD plant in Wisconsin. Remember that one? As far as I know, it still hasn't been built. And it was just subject to like endless ridicule because let's face it, nobody who actually knew anything about the needs

of the electronic industry or the LCD industry thought that that was a good place to build one. It was, they chose that place because Wisconsin was a swing state. And I think that it just creates a bad taste in the mouths of everybody when the government says, we're going to do-allad money for these companies to go this place or the other.

So I guess what I'm saying in a long way is, Derek, I agree 100% with you. I think it's incumbent on the folks who are doing industrial policy now to really do their best to get it right and to be not distracted by these extraneous objectives. I want to ask you about the Buy America provisions in some of this industrial policy

that's coming down the pike from the Biden administration, especially in the Infrastructure Act and in the IRA, which handles more of the green economy industrial policy stuff, there are some lines and some policies that essentially say you have to buy all or a certain share of the products in this category from an American producer. And Buy America has to poll very well. I mean, it sounds absolutely fantastic.

Tell me a little bit about the Buy America provisions in these bills and what some of the risks of Buy America are. Yeah, so Buy America, as President Biden loves to point out, it's been around for a very long time, decades, I think. And what he's trying to do in the Infrastructure Act, and I think of the other programs is really toughen them up and make sure that they're really observed. And yeah, you're right, they pull really well. I mean, if we're going to build a bridge, why don't we use American cement and American steel and so forth? But the fact of the matter is that the American suppliers are more expensive. If they were cheaper, we wouldn't need a law to tell our contractors to use them. And so what are we getting in return for that? Well, I guess it's obviously good if you're in the industry of supply. these materials or building stuff, it's not great for the taxpayer. And we know for a fact, because studies have shown this, that Buy America raises the cost from governments and taxpayers to build basic things like their infrastructure and so forth. And it means that for a given amount of money to spend on infrastructure, we get less for it. It's also the case of some of the things that are subject to Buy America are simply very difficult to source in America.

Certain types of steel aren't available or they're not available in the right quantities or the right specifications. So specifying by America, I think, means that some stuff simply can't be done and you need to find a way around those rules. And I'm not even sure that the fundamental rationale makes sense. I mean, it supposedly creates jobs. Well, we have a 3.4% unemployment rate. The jobs that we create with Buy America are essentially jobs that are not created in some other part of the economy that desperately needs them. And those jobs might be as good, if not better, for us. It's not bad to go back to our basic economics and ask, why people like Adam Smith and David Ricardo

without three trade and comparative advantage for great things. We can't make everything in the United States alone, and we shouldn't want to. It's not efficient for us to make absolutely everything at home. Joe Biden wants us to all American infrastructure to be made with American lumber and American drywall. Why? What is special about American lumber, American drywall?

What is wrong with buying the lumber and the drywall from Mexicans or the Canadians if it's just as good? The people who would otherwise be making that lumber and drywall here in the United States can make something else, like semiconductor chips. You know what I mean? There is a reason why economists think that the division of labor and comparative advantage

is a good thing. Everybody ends up richer for it. Buy America is generally speaking not a great idea. Yeah, I prefer the concept of some people call it friend-shoring. I think of it as an abundance agenda needs an abundance of help. I think that building a relatively and globally resilient network of key materials

is probably the right approach here. I've been very persuaded, for example, by America's experience with baby formula last year. The U.S. government essentially has something very much like a Buy America policy for baby formula. As a result, there are very few approved baby formula manufacturers in the U.S. that can actually sell to American consumers. It's extremely concentrated, which means that if one node is knocked out,

we're in a lot of trouble. And guess what happened last year? A node got knocked out. There was a bacteria infestation at a plant in Michigan. And as a result, thousands of parents seemed to struggle to find baby formula for their kids. And people freaked out. Well, this is exactly what you should expect if you reject fend shoring. If you try to make everything that is essential within the U.S. borders, you're creating an unresilient network for a critical supply or for a critical material.

And that's where I want to move to sort of the supply chain of stuff that is necessary to build computer chips. So, you know, I've talked about an abundance agenda. I want government policy to focus on an abundance of that which we decide is most important for American life. But I'm become more interested in what I think of as vertical abundance. How do we create an abundance of things that are necessary in order to build, say, houses? You know, you want an abundance of electric vehicles. Well, that means you need an abundance of lithium ion batteries. You need a bunch of lithium.

How do we create an adequate supply of lithium? It's the same story with chips. We want a bunch of leading-edge chips. We would prefer that many of them be manufactured in the U.S., but that means we need to think about the whole supply chain that sums up to an advanced computer chip, all the way down to something like the lasers that imprint tiny circuit blueprints on silicon wafers

using purified neon gas. This is a story that you've reported on, Tell me about the lasers, Greg. Why does the U.S. have a shortage of purified neon gas, and why is it so important that we solve problems like this? Yes, well, so it turns out that like semiconductors aren't just really sophisticated products. They're one of the most complex also with like multiple steps. I mean, there are so many parts and so many vital ingredients.

And it turns out that one of the things you need to make semiconductors is a very purified form of neon gas. and the raw neon gas is actually a byproduct of steel production. Well, in terms of out the U.S. doesn't make that much steel any longer here in the United States that produces the raw neon gas, and so we have to get it from other countries. In fact, up until recently, the two big producers of it were Russia and Ukraine. Well, as you can imagine, there are issues with getting those supplies from Russia and Ukraine. Now, so what's the correct response to this situation?

It's not good that a vital industry like semiconductors is dependent on only a handful of suppliers in very risky parts of the world. I don't think the answer is autarchy. I don't think the answer is all that neon gas must be produced here in the United States. Because as I mentioned with the example of lumber and drywall, we can't make everything in the United States. We don't have enough people. If we ask them to make everything,

the United States, there would be something less that they'll be making of and that we will pay a higher price for. And I think that's what the appeal of the idea of friend shoring is. I mean, if the issue is that free trade left its own devices would leave us dependent on countries that may be hostile to us, Let's make a very minor intervention and carve out the countries that we're worried about, call them Russian China, and then have free trade among the rest of us. And that really is kind of the essence of friend shoring.

And it has a lot of appeal. A lot of these products, like semiconductors, require extremely high economies of scale. You can really only achieve their low cost if you're making them for a market, which encompasses most of the world. You want to not, it's not just economies of scale, but there's competition involved, is that when you have a lot of companies competing in this space, the products get better. They make each other better.

You don't have the complacency that comes with having a monopoly at home. Good as friend shoring sounds, I think it is actually right on that perimeter of where we get to the debate about when does industrial policy go too far. And a good example is, again, the Inflation Reduction Act,

where there's a debate right now about whether we wrote that law so narrowly that we're being a little unfair and insisting that only batteries and cars made in the United States who are in the allies of the United States who qualify. I don't think you can make the same case that EVs are as vital, or the electric vehicle batteries are as vital to national security as semiconductor chips are. And I think it's also the case that we know for a fact

that a lot of the electric vehicles, a lot of great electric vehicles and batteries are made in countries that are our allies and our friends, like Germany, like South Korea, like Japan, like Canada, and Mexico. So it's difficult for me to see the rationale that we use for industrial policy in the Chipsack translating to the Inflation Reduction Act. I think that with respect to the Inflation Reduction Act, you want to actually draw the perimeter fairly wide and say, rather than say this is an industry that is so vital, some of it has to be in the United States, sort of say, our only priority here is that we not

depend excessively on China. Everybody else is okay. And that has a number of benefits. It does just have the economic benefits of allowing more competition and economies of scale. It has geopolitical benefits, right? We've been going to the Dutch and the Japanese and the Korean saying, we want you to join our controls on the export of sensitive semiconductor equipment to China. We don't want you doing it. And they're saying, well, fine, but you're telling us you don't want us to sell to China, but in the inflation reduction act, you're selling us you don't want to sell to the United States either. That doesn't seem fair. I think that if we expect our allies to be there when it comes to not doing business with China, they need us to be there when it comes doing business with each other

in the field of electric vehicles. I'm thinking about putting these two concepts side by side. On the one hand, that industrial policy, as we're conceiving of it, is about narrowly and with clear prioritization, ensuring that America has the capacity to make really important stuff right here in the U.S. That's why we're subsidizing things like advanced computer chips and solar panels, maybe wind turbines as well. But at the same time, it seems like it's a little bit in tension with the concept of friend-shoring, which says that actually it doesn't so much matter what country certain

key materials are being manufactured in, so long as they're being manufactured within a network of friends who can trade freely with each other. And maybe if there was some kind of, you know, emperor of America and its allies, overseeing all the industrial policies happening among all these countries, Japan and America, Germany, and the UK, whether that emperor would actually say, Germany, you're taking wind turbines, and you are going to have an industrial policy for wind turbines. go. Japan, you're going to take semiconductors. You're going to have an industrial policy for chips. UK, you're going to take solar panels and you're going to figure out how to have the most

extraordinary policy for subsidizing the exquisite manufacturer of photovoltaics, etc., etc. Is there a weird, I'm just thinking of all this out loud, is there a weird argument for, like, coordinated industrial policy so that we're all not throwing a lot of government funds at the exact same thing and trying to steal a scarce, you know, marginal Samsung fab from Germany to UK to Canada to the U.S.? I mean, it's not just, it's not weird at all. In fact, it's actually explicit policy. Gina Ramando, the Commerce Secretary, talks about this all the time that she realizes that the United States can't and shouldn't want to do this alone. It needs to talk to its allies. Mark and Fasdaher, the Competition Commissioner for the European Commission,

It's the same thing. Europe can't afford to do it all its own on industries like these things where there are large economies of scale. There has to be cooperation between like-minded partners. And there do exist a few forums to help this along. There's something called the Trade and Technology Council, which is essentially a body made up of like the top policymakers of the United States and the European Commission that meets a couple of times a year to discuss these things. It's good in theory. Like, hey, you make the three meter node chips. We'll make the five. have nanometer, no chips. You make the chips for home appliances, we'll make the chips for cars,

and we'll have free trade among each other. It sounds like really smart, doesn't it? I think actually actualizing that, putting that into practice, so it's really hard. And I've actually put the question to folks at commerce and elsewhere, and haven't yet got a good reason about how, in practical terms, they plan to do this. I mean, you can imagine one way they might do this is simply by talking to the companies, right? You know, commerce sits down with Intel, or they sit down with Samsung or they sit down with S.K. Heinex and they say,

if we subsidize this plan for this type of chip here, where will you put your other plan? They'll say, oh, in that case, we'll talk to the Germans about that plan. And maybe it'll just happen, right? You know, there's a finite number of companies you have to talk to. There's a finite number of markets that are involved. It shouldn't be that big of a coordination problem. I do worry, though, that, you know, we're in a world where, in spite of the theoretical benefits of cooperation. We are sliding into a world of, in some sense, national competition that is really what industrial policy is about. And the political incentives do not line up in favor of people doing that. You know, the Europeans were so upset with the subsidies in the Inflation

Reduction Act. They came to the American to us and they said, look, we're your friends. You know, German automobile makers love doing business in the United States. We welcome American automobile companies to do business in Europe, we should be trading with each other, not sort of like putting up these walls. You shouldn't like have subsidies that discriminate against our European companies. And Catherine Tai, the U.S. Trade Representative

for responses basically, well, if you don't like our subsidies, you should offer your own. You know, it wasn't, they did not suggest cooperation. They suggested just do what we're doing, which doesn't sound like cooperation, right? I mean, it sounds like

it has a bit of a race to the bottom feel to it. I'm not sure that's the ideal outcome. I'm thinking about all the various ways that this era of industrial policy could fail. And I want to just enumerate what I think we've come up with and then ask you if there's something else that you're afraid of. Number one, we talked about mission creep, this idea that if you take the incentives for building fabs in the U.S. and you lard them up with all sorts of social policies that that next marginal fad just doesn't arrive in the U.S. And so industrial policy simply fails in the crib. That's mission creep.

Number two is my fear that buy America provisions raise prices at a time that we actually would reduce the price at which a lot of these things are bought or a lot of these things are made, and it reduces resiliency for key materials, the same way that our infant formula was unresilient to the bacterial infection of one Michigan plant. And then number three is this fear of it scrambling our relationships with allies, scrambling the friend-shoring network building that we're trying to do and might just result in a bit of wasted money. Because if we spend $200 billion trying to subsidize X and then Germany spends $100 billion trying to subsidize it in the UK, this isn't the worst thing in the

world, but it just means that maybe some money is going to be wasted in this kind of race to the bottom. Is there something else that you're most concerned about when it comes to the implementation of industrial policy in the next few years? Yeah, I'd say that I'm most worried about the possibility that we're backing the wrong horse, that we have incorrectly diagnosed the criticality of semiconductors in general or specific types of semiconductors. I don't think anybody anticipated that integrated circuit would be as important as it was back in the 50s. in the 60s, and the fact that it did reflect it in some sense of serendipitous discoveries and the decisions of a bunch of disconnected entrepreneurs. I don't think anybody anticipated that

logic chips would displace memory chips in the 90s as the source of the most important semiconductor advanced knowledge. I don't think that folks anticipated that the Foundry Model, which TSM pioneered, would become so successful. and make possible all these standalone design firms, like ARM and Qualcomm and so forth, if we had thought that all of our money should go into chip manufacturing, we may not have those fantastic design firms today because those are firms that essentially only thrive

because they did not have to sink a lot of capital to manufacturing facilities. I don't think anybody realized beforehand that graphical processing chips that were mostly used for things like video games would become so important for artificial intelligence, which is why Nvidia is the most valid. valuable semiconductor company in the United States today.

It's these kind of technological developments, which often reflects serendipity in things that no government can guess, and like the smartest people on Wall Street do not guess them, that our inability to predict those things, mean, we will put money into the wrong place. Intel right now, as you may know, is struggling, and it's struggling because it guessed wrong on what the next generation of processed technology would be, TSM guest right. they bought the right machinery from ESML, which is a Dutch company, Intel guessed wrong. They're five years late. They're several years now behind TSMC, and they're struggling to keep up with. And if we lose Intel, I mean, we have lost the last, essentially American-based logic chip manufacturer.

The chip industry right now is going through one of its periodic down cycles. They're all like cutting back. They're all losing money. They're all having second thoughts. And at exactly this moment, every government in the world is subsidizing even more capacity at a time when we actually don't need more capacity. So if you ask me to worry about it, it is a possibility that in spite of the best of our intentions, we will end up subsidizing too much of the wrong industry. Greg Gipp, the Wall Street Journal. Thank you very much.

All right, Derek. Thanks for having me. Thank you for listening. Plain English is produced by Devin Manzi. If you like the show, please go to Apple Podcasts, or Spotify. give us a five-star rating, leave a review, and don't forget to check out our TikTok at plain English underscore. That's at plain English underscore on TikTok.