Robert Reich
The Coffee Klatch with Robert Reich
How to end corporate welfare

How to end corporate welfare

Putting our chips on the table


As Congress prepares for summer recess, average working Americans are facing increasingly hard economic times — including a likely recession (see here). Yet Congress has so far failed to provide most Americans with what they need to weather the storm — subsidies for childcare and eldercare, paid sick leave, an increase in the federal minimum wage, lower pharmaceutical costs, additional help with the next strain of COVID, and so on.

At the very same time, American corporations are lining up with their hands outstretched, seeking all sorts of special benefits. And there’s bipartisan support for giving them what they want.

Today I want to explain why corporations so often get what they want while average Americans don’t. It’s not simply that corporations bribe legislators with campaign donations, although that’s a big part of it. There’s another phenomenon at work that you need to know about.

Consider semiconductor chips. They’re the brains of modern electronics — embedded in everything from smartphones, radios, TVs, computers, video games, and advanced medical diagnostic equipment, to automobiles. As the world supply of almost everything tries to catch up with roaring post-lockdown demand, chips inevitably are in short supply.

This week, Congress is putting final touches on the CHIPS Act, which will provide more than $52 billion to companies that design and make semiconductor chips. The subsidy is demanded by the biggest chip makers as a condition for making more chips here.

It’s pure extortion.

You see, the world’s biggest chip maker (in terms of sales) is already an American corporation — Intel, based in Santa Clara, California. Intel hardly needs the money. Its revenue rose to $79 billion last year. Its CEO, Pat Gelsinger, got a total compensation package of $179 million (which was 1,711-times larger than the average Intel employee).

From the perspective of the United States, the problem is that Intel is not dealing with the current American shortage of chips by giving preference to producers in the United States, and it’s not keeping America on the cutting edge of new chip technologies. In addition to its facilities in the United States, Intel designs, assembles, and tests its chips in China, Israel, Ireland, Malaysia, Costa Rica, and Vietnam. And it sells them just about everywhere. (To add another layer of complication, many of Intel’s “American” customers don’t actually make their products in the United States. They’re headquartered in the United States but, like Intel, they design and make stuff all over the world.)

Obviously, Intel would like some of the $52 billion Congress is about to throw at the semiconductor chip industry — but why exactly should Intel get the money?

Among the other likely beneficiaries of the CHIPS Act will be GlobalFoundries. GlobalFoundries currently makes chips in New York and Vermont, but in many other places around the world as well. GlobalFoundries isn’t even an American corporation. It’s a wholly owned subsidiary of Mubadala Investment Co. — the sovereign wealth fund of the United Arab Emirates.

The point is, the nation where a chipmaker (or any other global corporation) is headquartered has less and less to do with where it designs and makes things or where its customers are located.

Every industry that can possibly be considered “critical” is now lobbying the U.S. government for subsidies, tax cuts, and regulatory exemptions, in return for designing and making stuff in America. But they’re lobbying in other nations, too.

It’s a giant global shakedown. India, Japan and South Korea have all recently passed tax credits, subsidies and other incentives amounting to tens of billions of dollars for the semiconductor industry, and the European Union is finalizing its own chips act with $30 billion to $50 billion in subsidies. Even China has extended tax and tariff exemptions and other measures aimed at upgrading chip design and production there. “Other countries around the globe … are making major investment in innovation and chip production,” says Senate Majority Leader Chuck Schumer. “If we don’t act quickly, we could lose tens of thousands of good-paying jobs to Europe [emphasis added].”

Who is “we,” Senator?


John Neuffer, the chief executive of the Semiconductor Industry Association (the Washington D.C. lobbying arm of the semiconductor industry) says the industry has been under “withering pressure” to build new manufacturing facilities to respond to the explosion of demand for chips, but he warns that chipmaking facilities are often 25 to 50 percent cheaper to build in foreign countries than in the United States. Why are they so much cheaper to build abroad? As he admits, it’s largely because of the incentives foreign countries have offered.

As capital becomes ever more global and footloose, it can play nation against nation to get the best deals in return for where it agrees to do what. Most people, by contrast, are rooted within particular nations, which gives them far less bargaining power.

This asymmetry helps explain why Congress is ready to hand over $52 billion to a highly-profitable global industry but can’t come up with even the $22.5 billion that the Biden administration says is necessary to cope with upcoming variants of COVID in the United States — for testing, therapeutics, vaccines, and essential treatments for the next generation of vaccines.

The reality is that global corporations have no loyalty to any nation. As the then-CEO of U.S.-based ExxonMobil unabashedly stated, “I’m not a U.S. company and I don’t make decisions based on what’s good for the U.S.”

If they are publicly owned, corporations have to be loyal to their shareholders by maximizing the value of their shares. But not even this guarantees that they’ll act in the best interest of the United States. Over 40 percent of the shareholder value of American-based companies is owned by non-Americans. There’s no reason to suppose a company’s American owners will be happy to sacrifice investment returns for the good of the nation, either.

Global corporations also have to obey the laws of the countries where they make or sell their stuff — which can cause problems when those laws or policies conflict with those of other nations. Last December, Intel was slammed by China for writing a letter to its suppliers, published on its website, stating that the corporation had been "required to ensure that its supply chain does not use any labor or source goods or services from the Xinjiang region” — as required by the United States (which has accused China of widespread human rights abuses in Xinjiang, home to the country's predominantly Muslim Uyghurs). Intel then deleted the reference to Xinjiang and apologized for the "trouble" it had caused, explaining that its commitment to avoid supply chains from Xinjiang was an expression of compliance with U.S. law rather than a statement of its position on the issue. (The apology caused Senator Marco Rubio to threaten to make Intel ineligible for CHIP Act subsidies. “Intel’s cowardice is yet another predictable consequence of economic reliance on China,” Rubio said. “Instead of humiliating apologies and self-censorship, companies should move their supply chains to countries that do not use slave labor or commit genocide.”)

This is not to dismiss the critical importance of semiconductor chips to the United States, but only to suggest that paying $52 billion in subsidies to global chipmakers to make them here is a peculiarly inefficient way of responding to that importance. The real question is what conditions the United States (or any other nation that subsidizes chip makers) should place on receipt of such subsidies.

It can’t be enough that a company merely agrees to make or design chips in America, because chip makers are already doing that. It can’t be that they’ll create more American jobs in chip making, because jobs in low-end fabrication that require little skill won’t build the technological capabilities of the U.S. workforce. And it can’t just be that the chipmakers agree to produce more chips in the United States, because additional production in the United States is no guarantee against future shortages in the United States. Remember, these corporations are global. They sell their chips around the world to the highest bidders, wherever the chips are produced.

If we want to tie the public subsidy to the public interest, we should demand that any chips produced in America, over and above those already produced here, focus on the highest value-added parts of chip making — design, design engineering, and high precision manufacturing — so Americans gain that technological expertise. And we should demand that in the event of chip shortages, the subsidized chipmakers give highest priority to their American-based customers — customers using the chips in products made in the United States, by American workers.

But what happens if every nation subsidizing chipmakers demands the same? Obviously, the chipmakers can’t grant most-favored-nation status to every nation. They’ll have to choose.

Also: How do we ensure that a big chunk of the $52 billion isn’t frittered away on shareholders and executive pay — as has been the case every time the U.S. government has subsidized Wall Street banks? Perhaps make chip makers agree not to buy back their shares of stock or pay their executives more than 50 times the pay of their median workers, and also give the government partial ownership in the form of equity interest. As Senator Bernie Sanders (who is pushing these conditions in an amendment to the CHIP Act) has said, there’s no reason to socialize the chipmaker’s risks and privatize their profits. If American taxpayers are going to give the semiconductor industry $52 billion, we should get a return on our investment.

What do you think?

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