Does the chip industry need a big-government intervention? Highlights from a conversation with Karl Wennberg

By Shane Tews and Claude Barfield of AEI. 

"Karl Wennberg, an innovation policy researcher and professor at the Stockholm School of Economics."

"Shane Tews: Karl, tell us about the underlying premise of your upcoming book, and what inspired you to write it.

Karl Wennberg: The book is kind of an antithesis. What inspired me and the other co-authors to write it is essentially that this big trend of big government trying to be innovative and entrepreneurial is an oxymoron. It goes against what I’ve been doing research on for 20 years, and it’s also against my kind of personal view of things, being a former small business owner. Government should not be cutting ribbon to break ground on new projects, but should be cutting red tape. So we set out to study this phenomenon of the entrepreneurial state"

"there is this third trend, which is really about the government stepping in and directing sectors and technologies, and choosing the types of actors and companies that are supposed to be investing in new technologies. That is really an odd thing for an economist."

"Claude Barfield: I’m wondering if we can get your reaction to the US Innovation and Competition Act (USICA), which is winding its way through Congress. It’s going to be a huge infusion of funds into a number of technological areas. But part of what spurred the bill was this interest in semiconductors as a key avenue for competing with China. It seems like there could be key lessons here about the state’s ability to be entrepreneurial. 

I’m altogether not surprised that this bill is gaining traction. It’s similar to how after the financial recession, the US and other industrial nations spent money on everything and heavily subsidized startups in key sectors — many of which do not exist today, by the way.

There really has been a trend of government experimenting with these things. And if something like a pandemic or financial meltdown creates a need to infuse the economy with funds, it’s very easy for a policymaker to put on a little extra pork, so to speak, and perhaps invest in something that he or she feels strongly about, his or her constituents feel strongly about, or something on the general political agenda.

With semiconductors specifically, I’m somewhat surprised by the magnitude of this discussion. A number of unprecedented events like the storms in Texas, fires in Taiwan, and the pandemic made consumers like us buy all of these technologies — not to mention the automobile industry’s rapid turn towards a digital economy. So all of those things broke up demand, and there was a shortage. And to make matters worse, it isn’t easy to be these gigafactories. So this was definitely not a foreseeable problem, or one that had many explanations.

The interesting part, though, is that now, everyone suddenly sees the need to materialize these massive investments to subsidize the industry. This always works well for political reasons, but the actual track record of these investments paying off is less clear.

Shane Tews: Another interesting factor with USICA is that the unforeseen crises you named have largely subsided, making the bill’s passage far less urgent than when it was introduced. So at this point, do we need to put financial support toward this industry, or would the industry just naturally migrate there? I get the argument that our national security is on the line, but is such a huge infusion of government funds still necessary at this point?

As someone who has studied entrepreneurs for decades and started a few businesses, I get very cautious when I hear private enterprises asking for handouts from the government and not by customers. If there is one thing we have an excess of now in the world, it is money. It is highly risk-willing investments. There have been more dollars printed in the last couple of years than ever before, and the European Central Bank has been following with quantitative easing for over a decade.

We are drowning in money. Investors are everywhere. It’s not a supply problem. Anyone can start a business, make huge investments, and get investors if they have a credible business plan. So the real question is: Do these companies have a real business plan, and will there be customers to purchase all of these chips?

Claude Barfield: Returning to Shane’s point about security, the fact that Taiwan houses the world’s most advanced and versatile chipmaker is something we cannot ignore given the island’s imminent security threats from China. And I think what is happening in Russia could also spill over into Asia with the Chinese. You do have, in a very vulnerable place, a key set of technologies, and this national-security argument seems different from the pro- or anti-industrial-policy arguments. What’s your reaction to that?

I think it’s a very valid point. There are sectors that any country would want to have, to some extent, within their borders or closely accessible via free-trade arrangements with closely related countries (the European Union, for example). My question, though, is about the demand issue. Is there a genuine spike in demand for chips or is it just due to the pandemic and other unforeseeable disasters I mentioned? Does every country need these gigafactories, or do we perhaps need better trade agreements with each other?

Right now, Europe has quite a few of these big plans as well. And I don’t really see the demand for them all, but I do understand that you don’t want to have all of your eggs in one basket, very close to a potential hostile power. I just think we can’t get in over our heads in the name of national security. Whatever you do still has to be pragmatic and based on sound economics as to not hurt yourself even further."