Unpacking the chips act: A critical analysis

The Chips Act promises jobs, a more secure supply chain with respect to the availability of microchips, and a fortified national security.  All seem to be beneficial contributions to the health of our country; and Biden is sure to claim credit, as the legislation passed on a bi-partisan basis under his watch. In general, I endorse the objectives of the bill; but at the same time, I have some reservations about the way the legislation was designed.

First some background from the White House’s fact sheet on the program:  Passed in 2022, the bill authorizes a $52.7 billion expenditure for research, development, and manufacturing relating to microchips. Additionally, it gives a tax credit for 25 percent of qualifying capital expenditures – i.e., expenditures that advance the manufacture of microchips. The bill specifically proscribes using these funds or tax credits in connection with building plants and equipment in China, but it appears that it allows for some use of the funds, elsewhere, other than domestically.

Spending under the Chips Act is popularly characterized by government officials as an “investment,” but that’s really a misuse of the term. It’s not an investment; it’s a subsidy. It’s a subsidy directed to the shareholders of the companies that receive these benefits; and it should be understood to be exactly that.

It doesn’t hurt to have some basic understanding of accounting and economics when trying to assess a fiscal policy such as the Chips Act. With that in mind. . . When people start businesses, they put in their own money to get started. Business owners are entitled to the profits of the company, if and when they’re generated. If the owners’ own capital isn’t sufficient, they can try to issue more stock (i.e., find additional prospective owners).  Alternatively, they can get that money by borrowing or issuing debt.  Whoever lends that money to the company expects to have that principal repaid, plus interest, over some specified time frame. 

The balance sheet of any business is their statement of assets and liabilities – i.e., what they own, and what they owe. The difference – assets minus liabilities – reflects the net worth of the business.  You might have one company with assets valued at $200 and $190 of liabilities and a second company with $400 of assets and $390 of liabilities. Both of these companies have the same net worth, equal to $10 ( = $200 - $190 and = $400 - $390). Critically, the act of borrowing, where you raise cash and simultaneously incur a debt adds equal amounts to both assets and liabilities, thereby leaving net worth unchanged.

With this foundation, let’s consider what happens with an immediate infusion of cash into a company, which comes with no corresponding liability.  This new cash necessarily means that the company’s net worth would increase by exactly that amount.  Such a cash effect, then, directly benefits the company’s owners (i.e., shareholders).

That’s just the beginning.  Besides those initial grants, the legislation provides for tax credits to cover 25 percent of qualifying capital expenditures, presumably to be applied over some time. It’s beyond my pay grade to figure out exactly (or even inexactly) how much this feature of the program will cost the government; but these tax credits, too, directly benefit the shareholders. 

These credits allow the receiving companies to produce microchips more cheaply than they otherwise could, but that cheaper production capability doesn’t necessarily translate to cheaper prices for the ultimate consumers. The policy may actually set up the situation where the Chips Act tilts the playing field in favor of these advantaged companies to the detriment of any prospective competitor.  In so doing, the Act may very well create barriers to entry for new companies that might have wanted to compete in these markets and foster downward price pressure. 

I started to rethink about these issues in reaction to recent news that Intel had just collected an $8.5 billion grant under this legislation. Beyond that initial payment, it appears that Intel will realize an additional $25 billion of tax credits in connection with a commitment to spend $100 billion to construct new manufacturing facilities over the next five years. And finally, besides the initial grant and the subsequent tax credits, the government is also expecting to lend Intel an another $11 billion on “generous” terms – meaning below market. Put it all together, and it looks like Intel – or I should say, Intel’s stockholders – are poised to collect a gift from the government of something in the range of $35 billion, more or less.

I’m in no position to evaluate the fears about national security that have been made with respect to our reliance on foreign-sourced microchips, but I’m willing to accept this motivation as a legitimate concern.  Independent from this consideration, I supported the effort to incentivize job creation as this bill was (and is) expected to do.  Still, I can’t help but feel that this program could have been designed differently. 

More to my liking would have been a program where the government contractually committed to buying microchips in quantities and prices that incentivized manufacturing companies to make the needed capital commitments on their own. And to the extent that additional capital is needed, I don’t mind the government providing it; but not for free. In exchange for cash or tax credits, the government should be getting stock or some other claim on a share of company profits, at least over some period. Outright grants are nothing more than corporate welfare, where we rely on trickledown economics for benefits to extend beyond the shareholder class.  Haven’t we learned that lesson yet?

Finally, I find it to be a bit disingenuous for our leaders – both in Congress and in the administration -- to be beating their chests about how China unfairly competes by subsidizing their industries, thus allowing them to achieve unfair price advantages.  As far as I can tell, we’re doing essentially the same thing -- perhaps on a more selective basis, but still. . .  Ours is a capitalistic system – for good reason. Our fiscal policies should be more sensitive to that ethic than is the case with the Chips Act. As meritorious as the goals of the Chips Act may be, we could have done in designing its features, and we should do so in the future.