In spite of having won the US president’s election in November 2020 by an ultra-slim margin, President Biden has launched a major multidimensional agenda leading America into a “post neo-liberal” age, representing a radically different direction from the last decades. Since Reagan became President in 1981, the governing political and economic philosophy of the both Republican and Democratic Administrations has been neo-liberal, the view that the less the government was involved in the economy, the better, free markets know best, the government’s role should be to stay out of economic guidance to let markets operate freely. This approach also favored international trade, globalization and limiting the growth of US federal debt.
Biden has radically changed this governing philosophy, for example by passing four major legislative Acts, each representing one element in the construction of this new philosophy. This Post presents the impact of the $280 billion Chips and Science Act (“CSA”), the second major piece of legislation that Biden passed in August 2022 with some bipartisan support, essential to overcome the filibuster in the US Senate: 17 out of 50 Republican Senators voted for the SCA, along with 24 Republican House members. In a sense, it is the most radical legislative act passed by the Biden Administration to date, as it pushes the US government into active and direct dirigiste industrial planning and policy, a surprising echo of the methods used by centralized planners in the 20th Century, be they in France during the era of President de Gaulle or China in recent decades.
The reason that Biden was able to get support for the CSA from some Republicans in Congress is that CSA was very much couched as an answer to the challenge posed by the rise of China. Only 12% of semiconductors used in the US are manufactured in the US and the country is heavily dependent on Taiwan for the most advanced chips – 90% are produced by Taiwan Semiconductor Manufacturing Company. It is the concern shared by Democrats and Republicans that the US is very vulnerable to the risk that China might invade Taiwan and control the advanced semiconductor market essential. The problems represented by this external supply chain dependency were underlined during the global semiconductor shortage in 2021 and 2022, when production of many products, including cars, had to be reduced because of the dearth of semiconductor chips.
About $106 billion of the $280 billion CSA value is allocated to research and production projects in semiconductors and telecommunications, including $39 billion in direct subsidize for companies to build new semiconductor production plants in the US, aiming to reduce US dependence on foreign suppliers, especially in Asia. The response of the private sector to the CSA has been quite positive, since its preparation, companies have committed to build or expand US manufacturing plants to the tune of over $300 billion. We may note that Europe has also awakened to the same risk, the European Union has unveiled a €43 billion project to produce 20% of the world’s semiconductors. Semiconductors have become a major element of geopolitical rivalry, probably leading to subsidy races between the US, Europe and Asia.
A second major objective of the CSA is to promote growth in productivity by instituting the largest 5-year federal funded scientific R & D program ever, to dramatically increase US basic research by allocating $174 billion to areas other than semiconductors and telecommunications. Estimates have been made that 85% of productivity growth comes from technological advances, the result of investments in research and the utilization of government fundamental and applied research in partnerships between the federal government and the private sector. Although the US spends more than any other country in research, U.S. federal government R&D spending as a percentage of GDP is near its lowest point in 60 years. The CSA was structured to reverse the trend of reduced R & D investment (the downward trend was accelerated during the Trump Administration), significantly increasing federal funding of basic scientific and applied research and diversifying the investment into many new high-tech areas. It will also create 20 new technology hubs around the country, favoring underrepresented populations and locations. Through tax benefits and other incentives, the mammoth research bill covers an incredible array of subjects.
One of the consequences of the creation of multiple new research centers will be an accelerated effort by the US to attract outstanding scientists from around the world, offering them remuneration that will be difficult for others to compete against. This US initiative will probably attract many top European minds, draining Europe’s capabilities to maintain leadership in many areas of fundamental research. Just as with the other major acts passed by the Biden Administration, CSA has a protectionist flavor, strongly favoring domestic sourcing. In seeking to counter the potential and real threat of rivalry with China, the US is likely to exacerbate what is likely to be an increasingly strained relationship between with its European allies.
With the CSA and the other major legislative Acts, the Biden Administration has instituted an unprecedented combination of active involvement of the federal government in research, in industrial policy and in infrastructure investment, It is almost as if the US, once the defender of minimal government, is copying the approach of China and other centralized economies, although it is clear that the US approach includes a major partnership role for the private sector. Will the US government have the capability to work effectively with industry to execute the projects and plans outlined in enormous, broad legislative Acts like the CSA? We will need years to find out.