US CHIPS and Science Act: Creating New Problems to Solve an Old One?

The CHIPS and Science Act of 2022 is designed to incentivize the domestic production of semiconductors and support applied scientific research in the US. The bill, which garnered significant bipartisan support, is largely in response to three main concerns:

1. The US need to remain economically competitive and a leader of technological innovation given the rapid growth and sophistication of the Chinese economy as an outgrowth of a substantial Chinese industrial policy;
2. Concerns about disrupted supply chains for critical components for the modern economy due to the global pandemic and geopolitical tensions, particularly with regard to Taiwan, the world’s leader in semiconductor manufacturing; and
3. Maintaining the integrity of the chips value chains for national defense given the reliance of all major US defense systems and platforms on semiconductors.

Semiconductors are an essential foundation of a modern economy and, consequently, for US defense capabilities. In recent decades, semiconductors have become part of the supply chain for a huge variety of consumer goods, from microwaves to automobiles to phones. They are also critical to virtually all defense functions, including military vehicles and communications equipment.

While semiconductors can be cheap when manufactured in bulk, the supply of semiconductors is highly inelastic in the short run; that is, consumer demand cannot immediately spur higher production, even if consumers pay much higher prices. Semiconductor “fabs” (manufacturing plants) require a substantial upfront investment, often taking several years to construct. Therefore, in an adverse event that creates a semiconductor shortage—such as the COVID-19 pandemic—semiconductors become unavailable or extremely expensive, reflecting a high consumer willingness to pay and inelastic supply.

The CHIPS and Science Act aims to address the inflationary impact of shortages of computer chips, which are found in many household goods and in business equipment. However, the ACT introduces more government funding that will increase the US federal budget deficit and accumulated debt. Moreover, this bill incentivizes onshoring, which is expensive and potentially inflationary as firms likely will pass the transition costs onto customers. Moreover, the bill lays out a US industrial policy for this important sector.

To learn more about this bill and its intent see, Policy Brief: The CHIPS and Science Act of 2022.