Greg Ip on Industrial Policy

Greg Ip on Industrial Policy

[00:00:00.330] – Scott Wallsten

Hello and welcome back to Two Think Minimum, the podcast at the Technology Policy Institute. Today is Wednesday, March 8th. I’m Scott Wallsten, president of TPI, and I’m here with my co-host, Tom Lenard, TPI president Emeritus and Senior Fellow. Today we’re talking with journalist Greg Ip, the chief economics commentator for the Wall Street Journal. Greg, thanks for joining us today.

[00:00:20.360] – Greg Ip

Thanks a lot for having me, Scott.

[00:00:21.990] – Scott Wallsten

So let’s start by talking about industrial policy. You had an article in the Journal a few days ago about the history of industrial policy, especially with respect to high tech industries. It really struck me because it seems like we’re very studiously avoiding learning from what we’ve done before. Your article talked a little bit about this. Tell us about what you found, what we should be learning.

[00:00:43.260] – Greg Ip

Well, let’s define industrial policy first. What we mean, or what economists mean when they use the phrase industrial policy is when the government uses its resources or its authority to favor particular industries because they believe that doing so is in the national interest. Industrial policy can take many forms. I like to say that you should measure industrial policy both in terms of its goals and its methods. So in terms of goals, they can be extremely broad or extremely narrow. Now, if you go back to the founding of the Republic, Alexander Hamilton, our first Treasury Secretary, was quite adamant that the US could pursue an industrial policy aimed at supporting American manufacturers so that they could become bigger and more competitive against their British counterparts, and this could be done either through a high tariff or subsidies. In the end, the United States went with the high tariffs, and this was a high tariff country for the first century of its existence, roughly. That did indeed succeed in helping nurture a large manufacturing base, although scholars do differ on exactly whether or not the tariffs are necessary to do that. Now, for the last 50 or 75 years, at least in the post-World War II period, I would say that industrial policy has generally been thought of as favoring particular industries, the government actually taking stakes in national champions or the commanding heights of the economy.

[00:01:52.280] – Greg Ip

This was especially in vogue in Western Europe and in Japan, where the government had a very hands on role deciding what its largest companies should do. Not so much in the United States, it was really a route that we did not pursue here, but we did nonetheless pursue industrial policy in some narrower ways. So, for example, defense has always been an area where we recognize the need for government to be involved. We wanted private businesses to develop the weapons systems that were necessary to fight wars, and nobody thought it was unusual that we would preference American companies since, of course we didn’t want to rely on potential adversaries for national security. A good example of this was the space program and the early development of intercontinental ballistic missiles, both of which created the initial demand for semiconductors and led to the booming chip industry led by the likes of Texas Instruments, Fairchild Semiconductor and later on Intel. Nowadays, you might often describe industrial policy in broader terms, for example, the research and development tax credit or the NIH spending money on medical research. These are thought of as industrial policy as well, even though they don’t focus specifically on a particular company or industry because there’s a view that producing basic research is good for society as a whole and that if we relied solely on people doing it for the private profit, we wouldn’t get enough of it.

[00:03:13.170] – Scott Wallsten


[00:03:13.550] – Scott Wallsten

So the classic externalities start a positive externalities. But it also seems to me that there is something fundamentally different between the government doing something that only the government will do, like going to space in the 60’s, of course it’s different today and developing intercontinental ballistic missiles and trying to support things that are developed commercially for commercial, at least for partly commercial uses. There’s a lot of the latter going on. Now, the CHIPS Act, for example, does that, although there’s certainly national security element to that. Is that right?

[00:03:46.740] – Greg Ip

Yeah, I think you’re raising exactly the key question here, Scott, which is what is the appropriate perimeter up to which the government ought to be involved and after that should just stay out of the way and let the private sector do its thing. Now, the example that we just discussed of how the space program and the missile program led to the demand for semiconductors, which then had commercial applications, is an example of what we call induced demand. The government says we really need product X. We’re going to give money to the private sector to develop X. We won’t tell them how to do it. We won’t specify. We just want them to come up with the best one possible. And that’s how we got semiconductors in this country. Another good example would be Operation Warp Speed, which was the name the Trump administration gave to their effort to develop a COVID-19 vaccine. Again, they didn’t specify it must be a vaccine produced by this company or of this type. They said, here’s a lot of money, we will invest in your company and in your vaccine technology. We will guarantee a certain amount of sales.

[00:04:38.800] – Greg Ip

We just want an effective vaccine as quickly as possible. And we got a bunch of very effective vaccines using new technologies such as messenger RNA and viral vectors, some of which have turned out to have other spin off applications towards cancer and so forth. These are good examples because the private sector had on its own no great incentive to develop a COVID vaccine, and it didn’t have any great incentive to develop nuclear missiles, at least I hope they didn’t, or to put a man on the moon. So this was an appropriate, as you say, nobody really doubted that this was well within the perimeter of what government should do.

[00:05:11.000] – Scott Wallsten

And also the government could define a specific outcome as well.

[00:05:14.700] – Tom Lenard

When I listen to this discussion and your initial definition of industrial policy, it strikes me that it also could be rephrased as government supporting things that just are not competitive enough to make it on their own. And that could encompass a lot of things. That could encompass farm policy, it could encompass you even referred to this in your article saving the Textile Industry in North Carolina when it has outgrown its competitiveness and things like that. So how do you distinguish, I know what you’re trying to talk about, but how do you distinguish those examples from trying to, and we haven’t even talked about the Solyndras of the world.

[00:05:56.450] – Greg Ip

This is exactly why the perimeter starts to become a little more fuzzy, as it were, as the government expands the scope of what is in the national interest. Because a lot of what the government thinks is good industrial policy in the national interest looks to probably you and me as old fashioned protectionism. Right? So one of my favorite examples is ship building. Since 1921, I think we’ve had a law on the  books called the Jones Act which basically says, ships that transport goods between American ports must be built in the United States. The ongoing rationale for this law is that we need a domestic shipbuilding industry so that we can build ships for the Navy, which is necessary for national security. Well, it’s actually just protectionism. And the fact of the matter is that the US shipbuilding industry has steadily shrunk over the last 50 or 60 years despite this law. Essentially what it means is that it is very expensive to transport stuff between American ports and we really don’t have a strong shipbuilding industry. So I would say that that’s a place where industrial policy gets over its skis and essentially just becomes a prop for industries where the United States no longer has any competitive advantage.

[00:07:04.690] – Greg Ip

Now, let’s take another look at it slightly different industry, which is renewable energy. And indeed, I will tell you right off the bat that energy is a black hole for industrial policy in this country. I mean, does anybody remember the Clinch River Breeder Reactor? I don’t remember how many billions of dollars were sunk into that thing. Synthetic crude, Syncrude, FutureGen, carbon capture and storage. Right. Tom just mentioned Solyndra. So there’s something about trying to create new energy technology that politicians just find irresistible, and they often commit the primary sin of actually specifying the technology. They don’t say we want renewable energy. They say not only do we want renewable energy, it must be of this particular type. And that often ends up guessing wrong because it turns out that it was an inferior technology that they supported, one that never had a chance of becoming commercially viable, at least in this country. On the other hand, there have been a series of incentives put out renewable energy such as state and federal feed-in tariffs and renewable portfolio standards and production tax credits, which were a little bit more sort of well, we’re not going to tell you what type of renewable energy to use or whether you’re going to use, like a particular type of solar technology, but we will reward you for producing what we think is the national interest, which is energy that does not add to the climate change problem.

[00:08:19.220] – Greg Ip

And I would argue that been successful in the following sense. It has led to a lot of R&D going into renewable energy technologies, some of which didn’t work out so well like Solyndra. But on the other hand some of it went towards Tesla and that looks to have been relatively successful and it also definitely sped up the adoption by utilities of renewable energy. So in fact we’ve had more solar power and wind power than a lot of people expected and through learning by doing and economies of scale, the cost of that power has also fallen a lot. What it did not do though is to create a sustainable, competitive solar power industry in the United States. Most of those panels are still made in China and I would say that that’s kind of a mixed example of successful industrial policy.

[00:09:04.910] – Scott Wallsten

Let’s actually talk about China for a second. So there’s the CHIPS Act which seems to encompass all of the different aspects, good and bad that you’re talking about. We know there is a need for semiconductors and microchips for national defense reasons but it also does have protectionist elements, right? There are lots of companies that are thrilled to get more money for whatever it is that they want to do. Building fabs, making more chips. How do we think about something like the CHIPS Act? In fact we’ve done this before, it was Sematech. It has real aspects that we should really be concerned about and it’s got protectionism aspects. How do we think about that from a policy sense? How do we balance those?

[00:09:43.480] – Greg Ip

Well, a good way to start this conversation Scott is actually to go back to the 1980s. You mentioned Sematech which was a private public consortium intended to revitalize the US semiconductor industry. But we also had voluntary export restraints when Japanese agreed to limit how much of their chips they would sell to the United States. At the time the primary type of chip we were interested in was memory chips and those initiatives utterly failed to save the US industry. More and more the industry ended up going to Japan and then by the way it eventually went from Japan to South Korea. So you might say that was an example of failed industrial policy. And by the way the arrival of cheap memory chips actually brought on the ability to create lots of new devices and applications that may not have been possible if we’d insisted that everybody buy expensive American made chips. But there was something different about that period, and that is that Japan and South Korea were allies of the United States. Nobody really worried that one day the Japanese or the South Koreans would refuse to sell us chips because we were at war.

[00:10:41.600] – Greg Ip

It just wasn’t kind of something that people factored into, except maybe at the extremes. And that, I think, is not an assumption people are willing to make with China. So what I think makes the semiconductor situation special today is that a growing share of, not the design of semiconductors, which is still dominated by the United States and close allies, but the manufacturing of chips themselves takes place in three places Taiwan, South Korea and China. China, for a variety of reasons, people are worried about relying on. Taiwan we think of as an ally. But China has made it clear they intend some day to pull Taiwan back into the fold. South Korea is an ally, but at risk of going to war with North Korea. I think that even people whose inclination is to be very hands off recognizes that there is a role for government to tip the scales a little bit and have more of this manufacturing occur in the United States, and in other so-called allies or safe countries, or like minded partners, so that we are not excessively dependent on these three risky areas. And semiconductors themselves are not just any technology.

[00:11:49.090] – Greg Ip

They are, in some sense foundational to a lot of civilian and military applications. We saw that during the pandemic when a shortage of chips led to production shortfalls in countless products, all the way from CPAP machines for sleep apnea to pickup trucks. So I think that this is one area that ought to rightly be within the perimeter of where the government can put its finger on the scale through industrial policy to encourage more production in the United States.

[00:12:18.410] – Tom Lenard

Given what you’re talking about, and those are clearly real risks, it’s hard to measure them. But given what you’re talking about, do you think the CHIPS Act is enough? Given the financial requirements of establishing a chips industry in the United States, it may not be enough.

[00:12:33.390] – Greg Ip

So if we accept that this is rightly within the perimeter where the government should intervene, the next questions I think we need to ask are is it focused enough, and is it designed in such a way that we actually get what we want without actually a lot of negative feedback? Rent-seeking and protectionism and so on? I would say that from what I’ve seen, it seems to be relatively focused that the Commerce Department is not saying only certain companies may apply and only certain technologies will qualify. They have specified that they do want, at the end of this process, for the US to have some meaningful share of the most advanced chip nodes possible. And I would say that that is already likely to happen because we’ve already seen companies like Taiwan Semiconductor, and Intel, and Samsung commit to making those nodes in the United States. They’ve also said that some of the less advanced nodes, those that are nonetheless important for things like automobile manufacturing, it’s not that they all have to be made in the United States but we need more than one source of supply within friendly countries. Those strike me as very logical goals and relatively focused goals.

[00:13:42.410] – Greg Ip

And the fact that they’re basically opening up the money to almost any company from a friendly country whether it’s Taiwan or South Korea or Germany or the United States is also appropriate. I think that immediately cuts down on the rent-seeking. I’m sure that Intel or Global Foundries or Micron would have loved if the money was restricted only to companies based in the United States but that’s not in the interest of the United States writ large. If I were to worry about something it would be that when I see the rules written for this program I see the Biden administration trying to accomplish more than just that narrow focus of shoring up vital semiconductor supply. For example, they insist that the companies and their contractors have good affordable child care. They pay union wages, and if possible use unionized labor. They say that recipients may not use this money to buy back stock or pay big dividends. They may not invest in China. They must share extraordinary profits with commerce. I kind of get why these are attractive conditions. This is a Democratic  government. They want to rein in corporate greed. They want childcare for everybody.

[00:14:49.230] – Greg Ip

But I don’t think that these things actually help them achieve the primary goal which is to build up the US semiconductor supply chain. In fact, I worry that they do just the opposite and that the more conditions you add to the money that recipients are applying for, the less attractive that money becomes. And you do not want a situation where the most financially strong and successful semiconductor chip companies say you know, frankly we don’t need the money that badly, we’re going to go invest somewhere else. That would not be a successful program. You don’t want the only people applying for the money to be the companies that can’t get money any other way.

[00:15:25.110] – Scott Wallsten

This seems to be an issue throughout the IIJA. There are lots of conditions attached to the money and lots of programs. We talk about broadband a lot. It’s there. People don’t seem to calculate in the costs of adding those extra conditions. You can maximize one thing and every condition you attach to it makes it less likely or even impossible to get to that goal. It just raises costs. And as good as some of those things will be, and they might be fantastic, it makes achieving the goal harder.

[00:15:51.610] – Greg Ip

And by the way, this isn’t hypothetical. We’ve got a lot of experience in this area. I mean, they’re not all specifically related to industrial policy, but when we did the Troubled Asset Relief Program during the financial crisis over a decade ago, we attached all sorts of conditions about lending. You couldn’t pay your CEO certain amounts of money for compensation and so forth. And so this money also became like a scarlet letter. Any company that took the money then worked really hard to try and pay the money back so that they would not have to actually adhere to these conditions any longer. And that actually worked against the purpose of the program, which was to ensure that banks had all the capital they needed to keep lending. If you go to the CARES Act of the year 2020, this was the big COVID relief bill. There was actually a provision carved out of that bill specifically to help Boeing, which was, as you know, facing a lot of difficulty because airlines were on the ropes and they were canceling their orders and so forth. And I don’t think anybody wanted Boeing to go under. Well when it came in time to actually write the rules for that loan, the rules said, well, we want equity interest in Boeing if they’re going to take this money.

[00:16:48.440] – Greg Ip

And Boeing looked at this and they said, we don’t like that. I don’t think we’ll take the money. That was a specific example of the conditions actually being enough of a turn off that the money was not taken. And maybe that’s fine, if Boeing managed to get the money from private sources, that’s good, that’s the end goal. Maybe that’s a lesson in how those things were appropriate. But what I’m trying to say here is that we already know from real examples how attaching conditions actually makes companies more reluctant to take the money., there’s probably some level of conditions that’s okay, like the child care thing. I’m not sure anybody’s really that fussed about it. These companies are pretty actually sophisticated advanced companies, and most of them offer childcare already. I’m actually kind of doubtful that the childcare requirement will, in the end, be that material to any of them. But like saying you can’t buy back stock, thinking you can’t invest in China, thinking that you have to share profits with the Commerce Department.

[00:17:44.210] – Greg Ip

The deterrent effect of those conditions, I think, will depend a lot on precisely how Commerce interprets them and imposes them in writing the rules. And hopefully, they’re being very conscious in weighing the effect, balancing the desired policy goals on the social policy front of these conditions with a possible deterrent effect of getting the take up of this program that they really do want.

[00:18:08.120] – Scott Wallsten

In addition to that, I’m also concerned that each program, they look at each program separately, but there are also a host of programs that all have similar goals and are all actually competing against each other for resources. Money isn’t a resource, it’s what you get with the money. If it drives up, everything’s driving up the cost, that will be a problem. I’m sorry, Tom interrupted you.

[00:18:27.030] – Tom Lenard

No, I was going to agree. I think the devil will be in the details. You can say, well, you can’t use the money for buybacks, but of course money is fungible, so if this money comes with strings, you can use the other money. But given how unpopular, it’s amazing to me how buybacks poll so badly. It just seems to be something you can demagogue against and it’s just kind of an all purpose thing. So if a company takes money, and even if they use other money to do buybacks, I’m sure there’ll be some pushback on it.

[00:19:00.570] – Greg Ip

Yeah, like a first year student of finance can tell you that buybacks are just an alternative to dividends, they are a way of returning cash to shareholders and companies will find a different way to do it.  

[00:19:17.250] – Tom Lenard

It could be that or it could be that company just going to face a lot of bad PR if they use any of their money for buybacks. And the windfall, however windfall profits are defined, I’ve only read the newspaper accounts that somehow there’s going to be some sort of I guess that’s what you’re talking about, by sharing the profits with the Department of Commerce.

[00:19:36.640] – Greg Ip

Yeah, I want to give Commerce a little bit of credit here because first of all, I think Gina Raimondo, the Commerce Secretary, is very cognizant of all these trade-offs, more so than, I think, perhaps a lot of government officials. So I think if there’s any kind of secretary who’s going to get the balance right, I think that she’s probably got a better chance than many. And even the profit sharing provision, I mean, as it was explained to me, they didn’t want to be in a situation where companies were deliberately lowballing the profitability of their projects in order to get more subsidies. So in some sense, the possibility that if they actually make more money than they say they’ll have to share, that in some sense it helps keep them honest, there’s a certain intuitive appeal to that. As you said, Tom, the devil will be in the details.

[00:20:19.170] – Tom Lenard

From what I’ve read, the ultimate objective, or one of the ultimate objectives is for these subsidies to end at some point. It’s not clear to me from what I read how long the time horizon is, but ultimately that these companies are supposed to be able to stand on their own two feet, you may understand the details better than I do. How do you understand that, I don’t think there are that many examples of companies that have received a subsidy over a long period of time, and then it stops because the political imperatives are generally in the other direction.

[00:20:50.680] – Greg Ip

It’s actually written into the legislation. It was written into the funding requirements that the projects must be commercially viable at that point when the money is no longer available. And that’s another thing that I find encouraging, is not just on commercial viability, but certain conditions into the funding or qualifications that are intended to enhance that. So, for example, one thing that would really not help would be if every congressman and senator insists that somebody build a fab in their district, right, because then you’ll end up with a bunch of tiny fabs that are not commercially viable and that are nowhere near their necessary suppliers, which also takes away from commercial viability. So written into the conditions is that Commerce wants to create at least two so called clusters. We know that the semiconductor industry tends to sort of like coalesce into clusters, where a lot of the many suppliers of the different technologies and inputs are close by. And so in some sense, by actually requiring the formation of clusters as part of this money, I think it militates against that risk of distributing a little bit of money in every congressman’s district.

[00:21:50.870] – Greg Ip

So I think that that’s a positive thing. But as you say, $39 billion sounds like a lot, but compared to the $3 trillion that this industry is likely to invest over the next decade, it’s not a lot of money. So you got to be careful that you don’t try and spread it around too thin, that you use it in places where it will really will make a difference. So Commerce is saying they want to see, for example, states and local governments pony up money as well. They’re trying to leverage that funding. I think that part of the theory, is that they’re trying to avoid that tipping point where once an industry leaves, it’s impossible to bring back because so much of the supporting workforce and infrastructure and ecosystem leaves with it. We’re not there yet with semiconductors, we still have pretty big clusters, like in places around Phoenix, Arizona, around Austin, Texas, around Portland, Oregon, and in upstate New York. But maybe in ten years, they will have disappeared. So it may be possible that we’re intervening at an early enough stage that we start to grow those clusters again. And therefore, a modest amount of public money is enough to basically create lasting commercial viability.

[00:22:54.130] – Greg Ip

And I will add that this Cold War, whatever you want to call it, with China is probably not going to end in the next few years. So even if the money isn’t there, the government is going to continue to find ways to make it hard for chip companies to invest in China and nudge them through the bully pulpit if necessary to invest more in the United States. I will say that the United States is not the only country in this game. South Korea, Taiwan, Japan and China are all rolling out their own incentive programs. That’s another thing Commerce has to keep in mind, is that they’re not the only choice available to these companies. And you want to make the proposition of investing in the United States as attractive as possible.

[00:23:35.010] – Scott Wallsten

How do we know if it’s successful? Is it number of new fabs here? What is it that we’ll be looking for?

[00:23:43.190] – Greg Ip

Well, one simple way is that I think the US now has a 12% share of global semiconductor fabrication. I think we’d want to see that ratio go up. I don’t know that it needs to go to like 40%, but you definitely want to go above 12% to 13 or 14% in a decade or two. You would want to see at least one or two fabs making the most advanced nodes of semiconductors here. And not in like little bespoke amounts as a demonstration project, but in large quantities for like the big purchases of these chips where it comes in like Nvidia and Apple and Samsung and other users of chips.

[00:24:19.370] – Scott Wallsten

Going back just a minute to what you said about the law requiring that they be profitable when subsidies end. How does that work? I mean, what if they’re not profitable? Either you can have an end date for the subsidies or it can stretch on for forever because profits you can make profits look well, they’re fungible, or flexible.

[00:24:37.680] – Greg Ip

I think the reality is you cannot guarantee that the project you’re funding will be profitable. You can ask that the company showed you that it’s going to be profitable. And then hopefully we’ve got smart, well intentioned people running this program who will take a good, hard arms length look at these projects and say, this one looks like it’ll work, this one probably will not. And they choose the one that will work.

[00:25:01.550] – Scott Wallsten

Is the implication then that the subsidies could continue?

[00:25:03.840] – Greg Ip

No, I don’t think so. I mean, Congress only appropriated $39 billion for this. And so unless you’re planning to go back to Congress and ask for more money, there is a limit to how much money there will be. You might say this is an advantage, for example, I’m not sure if this is a good or a bad example. One of the reasons we still make pickup trucks in this country is because in the 1960s, Lyndon Johnson imposed a 25% tariff on imported pickup trucks. It became known as the Chicken Tax, I think because it was in retaliation for tariffs on our chicken products that the Europeans imposed. Anyway, here we are 40 or 50 years later and we still have that tariff because it turns out that the light truck industry in the United States probably would not be able to survive without it. So that is in some sense a permanent form of industrial policy support right out of the pockets of consumers into the pockets of the producers of these vehicles, which is never going away. It might be an advantage that this is a subsidy which, if you want to continue it, you do have to keep going back to Congress for more.

[00:26:00.360] – Scott Wallsten

The point about the pickup truck tariffs, it seems like some of these programs, particularly ones targeted at commercially viable projects, seem to come in waves. We had in the 70s, there were those kinds of rules targeted at auto, and then we saw again in the 80s, including with semiconductors, 80s and 90s, and now it’s back. Do these actually sort of come in these waves? Is it just a coincidence? Is there sort of a political factor underneath it.

[00:26:27.930] – Greg Ip

I think you’re right, Scott. I think it does come in waves, and I think that the interest in industrial policy today is in some sense occurring against the backdrop of a broader rethink of, you hear the phrase neoliberalism thrown around. What does that really mean, it’s trusting in the market to make a lot of decisions and so forth. And that sort of like free market ideal, I would say, peaked in the 90s and 2000s, this was a period when Japan and Germany and other Western European economies that we used to worship as models of enlightened government intervention seemed to be struggling. Their economies were stagnating, Japanese bubble economy had deflated, and the United States was like storming back. We were like the hyperpower. Remember the Cold War? It was over and the United States had won. Japan’s foray into semiconductors had basically stalled, and now the United States was leading with not just with semiconductors, but with software. Silicon Valley was everybody’s envy. It kind of looked like our hands-off model was the best model. The World Trade Organization came to existence. Everybody was striking free trade deals with everybody. So there was a period, I would say in the 90s and the 2000s, when that sort of like globalized free market model was essentially the one that everybody was trying to pursue.

[00:27:38.460] – Greg Ip

And that’s not the case any longer. We could have a much longer conversation about why it is that that model has fallen on hard times. But I’d say probably the single biggest factor is the rise of China. Here is a country that has explicitly chosen to follow its own route. It is not a free trader. It has always been protectionist, has always been a proud user of industrial policy, where the Communist Party takes a very strong hand in the decisions of even nominally private companies, where a lot of the economy is state controlled. I think there’s a view in other countries, certainly United States, that we got China wrong, that this country did not become more like a liberal free market model as we had perhaps expected and hoped, and that if the US was to continue on its old path, then it would essentially allow China, with its subsidy driven, protectionist driven, industrial policy driven model, to capture more and more of the most important areas of technology in the future and that nobody wants to take a chance on that happening. So in some sense, I think the rise of China changes everything.

[00:28:38.360] – Greg Ip

And there’s a little bit of if you can’t beat them, join them. If we can’t persuade the Chinese to give up protection as an industrial policy, then to a certain extent, we may have to become a little bit like China just to sort of compete with them.

[00:28:50.620] – Tom Lenard

Is there some national security or including economic security criterion that one could use? I mean, just along the lines you’re talking about, if we’re worried about let’s say we’re worried about a cut off of supply from China for something like chips, can we develop objective criteria as to how much is enough and how much is too much?

[00:29:11.970] – Scott Wallsten

Well, and maybe also how much more we’re willing to pay for things to do this?

[00:29:16.610] – Greg Ip

Those are two great points. I think that’s above my pay grade. I can’t figure out exactly what those criteria should be, but I think that let’s stipulate that the semiconductor fits the definition, and I think the bar should be higher for virtually everything else. Let me give you an example. Electric vehicle batteries. Everybody seems to think electric vehicle batteries ought to be the next step, that they’re an appropriate target of industrial policy, that we need to make sure electric vehicle batteries are all made in the United States. I’m not convinced of that. Why must all the EV batteries be made in the United States? What’s wrong with Mexico? What’s wrong with Japan? What’s wrong with Western Europe? Do we really think that we won’t be able to buy those EV batteries from those countries? If we insist they’ll be made in the United States do we end up making electric vehicles so expensive that most Americans will not be able to afford them? That will get in the way of the adoption of electric vehicles and all the things that the good things that we want to happen with respect to that. And then there’s just, like, good old rent seeking, right?

[00:30:07.320] – Greg Ip

I mean, industries and politicians are highly motivated to basically seek any possible justification for special treatment for them and their constituents, right? So a few weeks ago, I got a press release from a group of senators demanding that copper be declared a critical mineral deserving of national security treatment. Not coincidentally, the senators behind this have large copper mines in their states.

[00:30:31.530] – Scott Wallsten

What a coincidence.

[00:30:32.880] – Greg Ip

Yeah, what a coincidence, right? I mean, I had to smile during his State of the Union address, President Biden said, we want all this infrastructure to be made with materials, that it’s American steel, American drywall. I guess that’s the first time I heard of American drywall having important national security implications. But there you go.

[00:30:54.400] – Tom Lenard

And now they can’t find it. The more I’ve been reading, they can’t find enough stuff that’s made in America to do what the infrastructure plan is supposed to do.

[00:31:02.470] – Greg Ip

and it’ll take longer and cost more money to build the infrastructure if you insist on those conditions.

[00:31:07.400] – Scott Wallsten

Do you think that policies like the CHIPS Act where there’s lots of good justification opens a spillway to things where there aren’t? Or is the press release you got sort of an aberration and nobody will really go for that?

[00:31:22.090] – Greg Ip

I don’t know that CHIPS per se opens the floodgates. I would say that CHIPS is part of essentially this growing national zeitgeist the government needs to be involved and that zeitgeist, as opposed to CHIPS per se will encourage more and more industries and their political sponsors to step forward demanding protection when in fact the argument in its favor is relatively weak. As I said, it took, I think, over two years and a lot of political orchestrating to get that act passed. And as a practical matter, it just doesn’t exist, the consensus or the political capital to do that over and over again with a lot of things. Interestingly enough, the so-called Inflation Reduction Act that it contained these provisions for electric vehicle and other green technology subsidies. But as a condition of them, the cars have to be assembled in North America and the batteries have to be made in friendly countries. So that was a form of industrial policy, I guess you could say. But we’re already witnessing a backlash from our trading partners and to its credit, the Biden administration appears to be finding ways to interpret the criteria loosely enough that more US allies can participate.

[00:32:25.760] – Scott Wallsten

Well, I think that takes us to the end of our time. Greg, thanks so much for speaking with us. That was really interesting, I thought.

[00:32:33.250] – Greg Ip

Thanks for having me.

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