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

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Today’s episode is about a bold, new experiment by the B Administration, to remake, the US 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 and economics.


It’s the idea that governments are stupid.

It governments do not know what markets to pick.

They don’t know what companies to pick their 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 an industrial policy is actually the oldest idea in American economics.

In fact, laissez-faire.

Hands off pure unbridled capitalism is not the dominant through line of the American story.


As Robert Atkinson.

The founder of the information technology and Innovation Foundation has written industrial policy is the story of us economics.

Alexander Hamilton was the OG industrial policy Guru.

Our first successful manufacturing firm, the Society of useful manufacturers, I love that.


Use manufacturers, was funded by the state of New Jersey industrial policy in the 19th century, Henry, Clay, and other wigs devised with they called the American system and included tariffs to protect industry and federal subsidies for roads and canals industrial policy.


The government subsidize the railroads that Navy helped create the radio, the military contributed ending 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 and 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 birth.

The Apollo project which by the way didn’t just get us to the Moon.

It accelerated demand.


Could ships.

Richard Nixon expanded non-military research funding, which bird 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 and 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 has some people very excited and others very scared.

So, two separate fear from fact, when we talk about industrial policy at as it relates, specifically to chip, Factoring today’s guest is Greg IP, the chief economics commentator at the Wall Street Journal.


I’m Derek Thompson.

This is plain English.


Greg, it’s a welcome to the podcast, thanks for having me Derek’s.

So industrial policy has a bad reputation.


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, solyndra or the supersonic transport or fast.

Breeder reactors are 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 is something to be said for the government just getting out of the way and letting the private sector do its thing.

It’s me Just think 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 mention those things side by side, it was government Investments.


And the defense department that help to give birth to Silicon Valley.

It was government Investments that help to lead to the takeoff of Tesla, which is created the richest man in the world.

So it would you agree that industrial policy while it has a bad reputation.


I think that, I think it’s true that it has in many different Pockets.

A bad reputation as 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 know Advanced country that hasn’t done industrial policy in some way, shape, or form.


And yet, knighted 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.

Nothing competitive enough that they could survive on their own.


So we were a high tariff country.

The first for the first century of our existence and as you note the Pentagon and the Space Program have been Big Spenders on technology whether a 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 you look hard enough, it still seems to be the case that industrial policy at least as we think of it.

If 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 body ministration?

I think that the Tristan 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 and 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 introspection about whether the world sort of like a steer to 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 gods of People’s Republic of China lives and breathes.

Industrial policy.

Always has never really bought into the so-called Old neoliberal model of free trade.

The fact that so many Chinese Industries compete at the top level with westerners trees, reflects, to some extent, very like interventionist behavior on the part of their government.


Whether it was subsidies and tear 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 or revulsion to neoliberalism the rise of China.

I want to add a couple Other possible causes one is inflation and inflation plus shortages that we have had in the news.


Lots of stories about, oh, there aren’t enough computer chips, there.

Isn’t enough baby formula.

It 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 get If 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 then interested in passing, some kind of green infrastructure Bill, whether it was the green New Deal or other versions of climate policy.


And when 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 any other Things to throw into the causal jambalaya here.

Yeah, I think you’ve mentioned two things.


I think the supply chain breakdowns that company 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 their large systemic problems that are what we call an economics 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.

Else unless, you know, the pretenders are put in place the supply chain problems that we had coming out of the pandemic.


If you think about it they were result of every company privately doing what was it in its own best interest, which was to achieve the leanest, meanest, supply, chain possible, with just a handful of suppliers and the lowest possible inventory.

And it was a system that when everything worked well, was incredibly fast efficient and cheap and, you know, nabal us to get amazing breadth of product.


With the click of a button very quickly, but was extremely fragile and been under stress and are all the distortions 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 the plausible opportunity if not the actual correct response.

But It creates at least a plausible case for why the government needs to get involved in 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 incredibly important, maybe the 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 back.

Further the u.s. is only just started to grasp.

But 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 once dominant eventually migrated 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 it an attractive place to build stuff.

And then eventually, they achieve what we call sort of ecosystems where the suppliers were all close together.

And this, almost, Created, you know, if you will a large Sun cause it was difficult for the United States to get back and it’s not like the United States had nothing else in his return and turn it.


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 chips and indeed, if you look at the actual value created in the chip, System like a ton of that value is still creating 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 its comparative advantage is that if 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 are Were in Asia, they have cheap land and cheap labor.


So, maybe that’s their competitive Advantage.

What I think, Derek changed with chips, was this realization, well, two things.

First of all depend on here, 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 see semiconductor chips and people woke up and said, wow, there’s just a lot of Industries.

Sure that can operate without a security Apply of chips.

That was number one.

And number two, I think, was this growing competition and the 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 there isn’t, it’s, that would be really bad for us National Security.

If one day, they can withhold from us chips that are, is vital, that are vital to our economy, much the same as used to worry.


Worry about like hostile countries with holding his plight of oil.

So I think that created and actually a bipartisan consensus that whatever you thought in general about the government getting involved 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 US and China were close to what they were and say, 2014.

Were you would have this kind of energy on Capitol Hill for the chips and science Act and the last just to put a couple numbers to the story.


You were telling you as share of global chip.

Manufacturing, decline from 37% 1992, 12 percent in 2020.

All right, so it declined by about two-thirds.

Meanwhile, mainland China grew from 0, to 15 percent Taiwan and South Korea.


Each account for a little over 20 percent 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 this that the manufacturing Frontier had moved to East Asia.


It is because of the shift in Chinese politics, and the fear that Shina could establish dominion over Taiwan, that would really, really threaten the US 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, Even be having this conversation a world where China had not had the last say, nine years of authoritarian lean 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 re-run of what we went through 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 and it up becoming the dominant suppliers in the u.s. really withered away.


And that wasn’t for watching trying.

I mean, Under President, Ronald Reagan and hospitably free markets and Japan him.

We had Japan impose voluntary restraints on exports and semiconductor chips and we created a public.

Private Consortium called sematech in order to try and jump.


Start Innovation here in the United States and neither of them really saved you with memory chip industry at all.

Moved on virtually all move 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 Threats 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 and Derek.

I do think actually it’s the case that even in the absence of this competition with China, they would probably still be a lot of people pushing for industrial policy not to give one example.


That’s the inflation reduction act because there’s a lot of industrial Policy in that law.

To 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 actually create, 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, that tells you that while the case for industrial policy, in the case, Of electric vehicles is, you know, kind of like a 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 the China is such an important story and 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 in 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 US and 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 and 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 chip stack appropriates, 52 53, million dollars into chunks one.


Chunk mitts around thirteen billion dollars 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 thirty, nine billion dollars is direct subsidies for the for building semiconductor fabrication plans.


When we call stabs the the buildings and the sophisticated equipment that goes inside them and that’s where the chips act a little bit special because even though this country has a long history of subsidizing, research and development actually subsidizing the the manufacturer of the products that result from that Rd that’s relatively new.


Now we’ve done it for a long time at the state level.

I 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 it was to go to the boat and say I did nothing to try and attract that like Volkswagen factory or that whatever Factory.



And in some sense, the chips Act is doing exactly the same thing at an international level.

It’s saying that these Fabs can go anywhere.

They could go to South Korea, they could go to Taiwan, they could go to China, to 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 Subset.

Let’s get into this game, just like everybody is to 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 that by the administration really, really wants these companies to make a decision to move their Fabs to the us.


So, you look at the rules, what does it take to open a fad right here in the United States?

The B Administration seems to be using industrial policy and computer chips.

Soooo 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, childcare for both facility and construction workers.


They also have to pay union scale wages for construction and preferably use unionized labor.


Tell me why this has been controversial among some economist I think it’s controversial because what did by demonstration is trying to do.


Here is use one program to accomplish two very different goals. 1 goal is established 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 unionpay and stop companies from using cash to buy back shares.


We could have a separate podcast but 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 calmest.

Make the following point when you demand that highways in the United States be built with like union labor and American Products, the highways are going to be more expensive but at least the highways will get built.


You know it’s not We’re going to lose.

That high would said Korea, I would have to be built here, right?

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 it’s really 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 and 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 this child care.

You have to be 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 to Samsung’s the Intel’s, the Taiwan semiconductor, manufacturing company.


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.

We, 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 medicines and something called the troubled asset relief program.

And because people didn’t like, thanks 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 did work 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.


All because of this stigma, look at the cares.

Act that we passed in 2020 to help industries.

Make it past the pandemic, there’s 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 boat.


Go to Boeing Boeing.

Also, agreed to give up Equity to the government A+ abide, by a lot of other conditions, like no sure, Matt BuyBacks, Boeing.

Look at this and they finally said, no, thank you.

In other words, we created money.

It was got fourth industrial policy.


In which the conditions are so stringent.

That the company was aiming for decided it didn’t want the money and I would say that we do not want to end up in that situation with its the 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 for Semiconductor specifically.

I also separately, love the idea 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 continue 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?


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 from national security policy.

The other law would be one that you know 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’s called the build back better planned intended to do just that but for you know 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 achieved many goals with one instrument, you end up not doing achieving any of those goals or at least not doing a very good job.


Any of them.

Like, the argument has been made, and I have some sympathy for it.

That having affordable quality Child Care is actually economic policy and it’s a factor to having a high quality labor force.

I get that.

In fact, that matter, is that in these companies, if they perceive that they’re having trouble attracting the right people because they lack the Care.


They will have the incentive to offer that childcare themselves that having been spotted to do that by the government.

And indeed a lot of the companies I am told that we are aiming this chip subsidy money.

I’d already do offer childcare 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 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, solyndra 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 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 wanted to succeed and therefore I’m worried that it’s short-term.


Failure may lead to its long-term abandonment.

Does that make sense?

I think that makes a lot of sense.

You know, I ran.

In fact, I’m really glad you brought that up.

I think that, you know, there’s a quote Larry Summers and one of my pieces.

He says I like my industrial policy advisers away.


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, advisers 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 Nothing 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 a missile program, they 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 covert vaccine, go out and do it.

It’s least successful in the goals are really diffused, you know, I’m not even sure that’s linder’s 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 that shipping you know the Jones Act was passed in 1921 with the theory that we needed a domestic shipbuilding industry so that our Navy would always be ready to build ships and here we are a hundred years later.

We still got that thing and one result of it, this Law requires us to use American build ships, moved between American Imports and call.


It makes shipping very expensive products are expensive.

It’s one of the reasons why Puerto Rico is Poor because they have to get so many their products through this expensive shipping.

And it has done nothing to save the American ship building 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 a 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 was a good place to be.

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 like Dole out money for these companies to go this place or the other.


So I guess what I’m saying?

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 do really do their best to get it, right?

And to be not distracted by the extraneous.

Objectives, I want to ask you about the Buy America, Erica Provisions.


In some of this industrial policy that’s coming down the pike from the B Administration especially in the infrastructure act and in the II ra, 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 by America has to pull their e.


Well, I mean, it sounds absolutely fantastic.

Tell me a little bit about By America Provisions in these bills.

And what some of the risks of by America are yes in by America as President Biden loves to play that has 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 you of the program’s 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 lot of 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 supplying, these materials are building stuff.

It’s not great for the taxpayer and we know for a fact, because Studies have shown this that died America races across 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, in 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 types where 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’s supposedly creates jobs.

Well we have a three point four percent unemployment rate.


The jobs that we create with by 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.


It’s not free 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.

You know, Joe Biden wants us to O’Mara constructed.

Be made with American Lumber and American drywall.


Why what is special about American Lumber American drywall?

What is wrong with buying a lumber, the drywall from Mexicans where the Canadians of it’s Is good that 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 by America is generally speaking, not a great idea.


Yeah, I prefer the concept of some people call it friend Shoring I think of it is you know in abundance, agenda and needs and abundance of help.

I think that building a relatively We 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 US 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?

Anode got knocked out, there was a bacteria-infested, a Shinto plant in Michigan.

And as a result, thousands of parents seem to struggle to find baby formula for their kids and people freaked out.


Well, this is exactly what you should expect.

If you reject friend Shoring, if you try to make everything that is essential within the US borders, you’re creating a, a nun, resilient 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 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 is 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 US, 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.


Why does the u.s. have a shortage of purified, Neon gas?

And why is it so important that we solve problems like this?


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 rod Neon gas is actually a byproduct of steel production.

Well, it turns out the you Doesn’t make that much steel, any longer here in the United States.


That produces the Ronnie on gas.

And so we have to get it from other countries.

In fact up until recently, the two biggest producers of it were Russia and Ukraine.

Well you can imagine, there are issues with getting those supplies from Russia and Ukraine now.

So what’s the correct response to the situation?


It’s not good that a vital industry like semiconductors is dependent on only handful of suppliers in very risky.

Parts of the world.

I don’t think the answer is autarky.

I don’t think the answer is All That Neon gas must be produced here in the United.

United States.

Because as I mentioned, the example of lumber and drywall, we can’t make everything in the United States.


We don’t have enough people, where, if we ask them to make everything the United States really, something less will be making other, and everybody will pay a higher price for us.

And I think that’s what the appeal of the idea of French or inning 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 it very, very minor intervention and carve out the countries that were worried about Russia and 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 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 us the Monopoly at home.

Good at French Learning 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 the again the inflation reduction act where there’s a debate right now about whether we wrote that a lot.

So narrowly that were being a little unfair and insisting that only batteries and cars made in the United States when the allies of the United States would qualify.


I don’t think you can make the same case that even He’s are as vital gaurav, 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 allowed lies and our friends like Germany like South Korea, like Japan, like Canada and Mexico.


So it’s difficult for me to see the are the rationale that we use for industrial policy in the chip stack 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, are only a priority here is that we not depend excessively on China.

Everybody else is okay.

And that has a number of benefits does just that you cannot make benefits of allowing more competition and economies of scale it has geopolitical benefits, right?


We’ve been going to the Dutch in the Japanese and the Koreans saying, we want you to join our controls on the export of sensitive semiconductor Equipment.

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 actor selling its, 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 to business 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 is where 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 US.

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 a 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 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 Voltaics etcetera, Etc.


Is there a weird?

I’m just thinking of all this out loud.

Is there a weird argument for like coordinated industrial policies?

So that were all not throwing a lot of government funds at the exact same thing and trying trying to steal a scarce, you know, marginal Samsung Fab from Germany to UK to Canada to the US I mean it’s not just it’s not weird at all.


In fact it’s actually explicit policy generator Mondo.

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.

More confess to her the competition from Anton competition.

Commissioner for the European commission, says the same thing.


We can’t Europe.

Can’t afford to do it all this phone, but 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 policy makers of the United States and the European commission that meets.


Once a couple times a year to discuss these things.

It’s good in theory like hey you make the 3 meter 3, nanometer node, ships will make 25 NM.

Don’t you make the chips for applying home?

Appliances will 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 in the actualized in that, Putting that into practice.

So is 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 be the simply by talking to the company’s right.


You know, Commerce sits down with Intel or they sit down with Samsung or they sit down with SK hynix.

And they say, if we subsidize this plan for this type of Chip here, where will you put your other plan?

They say, oh, in that case, we’ll talk to the Germans about at that plant and maybe it’ll just happen, right?


You know, there’s, there’s a finite number of companies 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 some sense.


National competition.

That is really what it does for policies.

About 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.

You know, they came to the American to us and they said, look, we’re your friends, you know, America, 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 Power European companies and Catherine, Todd, us trade representative responses basically.


Well, if you don’t like Are some things you should offer your own, you don’t, you know?

It wasn’t she didn’t, they did not suggest cooperation they suggested just do what we’re doing, which doesn’t sound like cloth.


I mean it sounds like has a bit of a race to the bottom, feel to it and 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 are afraid of now, One we talked about Mission creep.

This idea that if you take the incentives for building Fabs in the US, and you large them up with all sorts of social policies that that next marginal Fab just doesn’t arrive in the US.


And so, industrial policy is simply simply fails in the crib.

That’s Mission creep.

Number two, is my fear that by America, Provisions, raise prices.

At a time that we actually reduce the price at which a lot of these things are bought, a lot of these things are made and it reduces resiliency for four key materials.


The same way that our infant formula was unreasonably Aunt to the bacterial infection of one, Michigan plant.

And then number three is this fear of its 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 two hundred billion dollars, trying to subsidize X and then Jeremy spends 100 billion dollars trying to subsidize at UK.


This isn’t the worst thing.

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’s 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 were 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 ended rated circuit would be as important as it was back in the 50s and the 60s.


And the fact that it did reflected in some sense of serendipitous, discoveries in the decisions of a bunch of disconnected.


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 tsmc pioneered would become so successful and make possible all these Standalone design firms, you know, like arm Qualcomm and so forth.


If we had thought that all of our money should go into chip manufacturer and we may not have those fantastic design firms today because those are firms that essentially only Thrive because they did not have to think, a lot of capital to manufacturing facilities.

I don’t think anybody realized beforehand, that graphical processing chips.


Were mostly used for things like video games would become so important for artificial intelligence, which is why Nvidia is the most valuable Semiconductor Company in the United States.

Today, it’s these kind of technological developments, which often reflect Serendipity and Things That No government can guess, and I guess the smartest people in Wall Street, do not guess them that our inability to predict those things being.


We will put money into the wrong place until right now as you may know, to struggling and it’s struggling because it guessed wrong on what the Next Generation.

Of process.

Technology would be tsmc guessed, right?

They bought the right Machinery from.

Yes, the Bell, which is a Dutch company until guessed wrong there.


Five years later, there’s several years.

Now, behind his seems the in there struggling to keep up with, and if we lose until, I mean, we have lost the last essentially American 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.

Back or 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 is a possibility that in spite of the best of her intentions, we will end up subsidizing too much of the wrong industry, Greg Abbott Wall Street Journal.


Thank you very much.

All right, Derek, thanks for having me.

Thank you for listening.

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