From subsidies to seizures

Another day, another norm trashed.

I’m talking about the latest “deal” in which Trump managed to extort an equity stake of 10 percent in Intel, with the teaser that more similar “deals” are in the pipeline. According to the Wall Street Journal:

“Under the terms of the agreement, $8.9 billion in grants that had been awarded to Intel from the 2022 CHIPS Act, but not yet paid, will be converted to equity, the two sides said Friday. The government could get more stock depending on what happens to Intel’s chip manufacturing business.”

As an economist, I’ve come to appreciate the value of the invisible hand of the market, which typically results in the most efficient allocation of goods and services. Sometimes, however, the market needs some help. Issues of national security are often cited as legitimate reasons for the government to put its thumb on the scales to override what the market would otherwise deliver.

The CHIPS Act, signed by President Biden in 2022, was an example of one such effort. According to the White House Fact Sheet, “The CHIPS and Science Act aimed to change that by investing nearly $53 billion in U.S. semiconductor manufacturing, research and development, and workforce.” A good portion of those “investments” were outright grants to private companies, given largely to encourage their subsequent investment in US-based manufacturing facilities. Intel had been the largest grant recipient under that program, at least initially slated to receive a grant of $8.5 billion (with a B!).

At the time, I wasn’t too keen on the design of this legislation. Grants such as these directly benefit the stockholders of the receiving companies, and while other stakeholders likely benefit, as well, their benefit derives as a trickle-down effect, subject to the discretion of the companies’ management. I find it somewhat unsavory granting billions of dollars to companies that compensate their managers with annual compensation packages in the scores of millions. Moreover, because these subsidies are limited to a select few recipients, they tilt the playing field, creating a comparative advantage relative to their prospective competitors.

In the case with microchips, specifically, I also saw the intention to bring more manufacturing back to the US as a signal of a waning commitment to Taiwan’s independence from China – Taiwan being the most important source of these products, worldwide. China’s recognition of our diminished reliance on Taiwanese microchips would undoubtedly influence their decisions regarding their aspirations to control Taiwan.

In any case, the deal with respect to Intel effectively converts the grant into a stock deal. Given my aversion to dispensing free money to private companies, I find the idea of converting this grant into a stock purchase as having some appeal; and if the size of the grant reasonably represents 10 percent of the company’s valuation, the terms of the deal may be economically reasonable. My fear, however, is that this arrangement can more fairly be characterized as yet another example of a company bending the knee, hoping to avoid a worse outcome from this administration. In any case, while the terms of the deal might be acceptable had the funding come from a private source, I’m not at all comfortable with the idea of nationalizing private companies, which is exactly what’s going on here. In America, private companies should stay private.

My aversion to subsidies to private companies and nationalization of industries leaves me with the question: how should the government intercede in the market when an issue of national security justifies a measure of intervention? I see the answer in research and education, even as the Trump administration is imposing the diametrically opposite policy. In contrast with what’s happening now in our major research institutions, we should be increasing funding to nurture a growing population of scientists and engineers who have the talent and skill necessary to protect our national interests. This growing pool of talent, coupled with the incentives inherent in our capitalistic marketplace, should be sufficient to satisfy our national security needs in all but the most dire situations.