A key problem of industrial policy is, famously, that central planners cannot think of everything. Here is an excellent reminder of that inescapable reality. Before getting to the heart of the story, take a moment to savor this paragraph from the FT:
Until now, the dominant belief has been that increasing chip manufacturing capacity was simply a matter of money. The global chip shortage that started in early 2020 was addressed by governments throwing billions at chipmakers to increase capacity, preferably in their backyard. TSMC has been expanding its semiconductor factories in the US, Germany and Japan.
This, this has been the dominant belief?
If so we are in even more trouble than I thought.
According to the FT, the U.S. has been one of the most aggressive governments to go down this route, with investments expected to reach $250 billion over a five-year period, but there’s a catch:
Chip plants require highly skilled employees, with master’s and doctoral degrees in science and engineering, to run them. Even the construction of a chip fabrication plant itself requires specialist workers.
The large investment and subsequent build out of the US chip sector means more than 160,000 new job openings in engineering and technician support alongside additional openings in related construction craft jobs, according to McKinsey analysis. Yet just around 1,500 engineers join the chip industry each year. For chip technicians, that figure is even lower with just about 1,000 new technicians joining each year. In the next five years, the demand for these workers is forecast to reach 75,000.
Oh.
As it happens, given an increasingly bellicose China, there may well be a case (on strategic, not straightforward economic grounds) for ensuring that the U.S. (and U.S. companies) can secure a supply of chips that would be difficult to obtain if China were to blockade Taiwan, but doing so may need rather more thought than appears to have been the case here.
This story raises three broader questions (independent of the discussion over chips) about the investment surge generated by the administration’s industrial policy. The first concerns the disruption it produces. The implication of the FT’s story is that there will be a surge in wages for those already working in this sector or related fields. That might (net, net) be benign, but it’s unlikely to be good news for other companies that employ such workers and which are not in receipt of government funds. Related to that, at least some of the private investment that follows the government cash is private investment that will not go elsewhere. Will that be the best use of those funds? There is cost, and there is also opportunity cost. A third question is triggered by seeing charts such as this one from the Peterson Institute showing a jump in investment in factory buildings.
The Peterson Institute:
Real business investment in manufacturing structures in the United States has risen sharply since the end of 2022. The amount of investment in this category in the first quarter of 2024 was about 80 percent higher than the amount at the end of 2022. “Industrial policy” legislation enacted in recent years likely helped fuel this sharp increase. For example, the Inflation Reduction Act and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act, both enacted in 2022, provided large subsidies for the renewable energy and semiconductor industries.
Fine, fine, but if many/most of those investments are going into structures to manufacture goods for which the demand depends on subsidies, or to put it more bluntly, to manufacture goods for which the real stand-alone demand may prove rather weaker than anticipated, there could be trouble ahead. See electric vehicles for details.
In due course we may see a scattering of ghost factories across the land, legacies of an investment boom that was, in reality, an investment bubble funded, at least in part, by the taxpayer.
Or will we see demands for bailouts for the owners of subsidized factories for the manufacture of subsidized goods?
Some questions answer themselves.