This Is How We'll Know If the CHIPS Act Is Working

27:51But there is still a lot of money coming, you know, high multiplier money, it seems like, building all these factories, batteries, chips, et cetera. Do you see, are you like, to what extent, looking from a macro lens, do you see some of this investment allowing the U.S. to maintain robust job growth, strong economic activity, strong wages, etc., even as a, you know, sort of like helping us avoid going right back to the old slump? Yeah, I mean, I think ongoing capital investment's great. It's nice to see that the interest rates haven't fully shut that down. And I think that that's sort of the risk that we're playing with right now.

28:29I think all eyes should be on growing GDP. How do we increase GDP? How do we do more? Because the reality is we've had tight labor markets over the last two years. But a substantial part of that has been reduced labor supply. And also just the speed at which things moved. So I think that looking forward the next 5 to 10 years, I think when we think about how many people are working, we can do better. The labor market can do better. And so we shouldn't look at the amount of people working now and say, oh, we hit the lid. That's the capacity. It's over. It's really a lot of things happening. Short-term NARU is a lot realer than it ever has been.

29:09And so I think we should think about capital investment growth and higher employment all as, you know, that's the next five to 10 years. That's what we should be aiming for. So just on this note, though, is there a risk that we're front loading CapEx or pulling forward too much investment at a time when the economy is arguably running hot and at the risk of not having. Oh, God, I'm about to veer into MMT territory. But at the risk of. The water's warm. The water's warm. When the economy is slowing, maybe we won't have that fiscal policy or investment lever to pull. I think the economy is confusing right now.

29:52And the resilience of spending, the resilience of durable goods spending. And I wouldn't be surprised if there are a lot of factory owners and a lot of manufacturers across the country who don't know yet what the permanent trajectory looks like. And so given that there's uncertainty, I think it would be surprising if there weren't people building factories, and it's going to turn out that they don't need. You just hope that the economy has enough strength to sort of reabsorb that stuff as companies do realize some of that malinvestment, to put my Austrian hat on. Dan, going back to actually some of the national security questions, is there a level at which the U.S.

30:32can feel comfortable? And so in terms of like, OK, we have hit enough. Is there any way even knowing or being able to quantify, excuse me, okay, the factories are up and running. Yes, probably the majority of manufacturing is going to be in Taiwan or China or elsewhere in Asia. But it's like, we're good here. We actually did this. Do you have any sort of analytical way of figuring out what that number is? I think that is pretty difficult to say. If I had to come up with my own test, it is that, you know, that the United States regularly runs into problems of oversupply of a lot of these things rather than undersupply and having, you know, basically these spiraling cost curves chasing after fewer and fewer goods.

31:20That, you know, at least, you know, again, it is hard to say what the U.S. national government declares to be national security. But, you know, what I would say is, you know, that, you know, if from I think hopefully that the folks at Econ Twitter can agree on is, you know, something like, you know, to bring down the cost curve for infrastructure. That, you know, it is still kind of mind blowing that these subway extension lines in New York City cost about 10 times more than in, you know, European countries. That it becomes, you know, super difficult to build these solar farms, to build these sorts of transmission grids.

31:54I never knew what an obscene four-letter word NEPA was until the folks at IFP told me so, that NEPA, CEQA, its close cousin, just really block all sorts of development in the U.S. And that, you know, if we don't have, you know, some sort of a robust system to save automakers from their mistakes, although these automakers make, you know, probably too many mistakes to really try to save them from. But unless you are able to have this sort of robustness, bring down these cost curves, have regular problems of oversupply rather than persistent undersupply, where prices just keep rising to chase after these goods, where it's not at all clear where$100 million in the New York public school system goes, it's not very clear where tens of billions, hundreds of billions of dollars of infrastructure investment goes, then I think we can be a little bit more at ease in thinking about having a robust economic system.

32:50And just on this point, I mean, there is a perception out there that when it comes to China, it's a command economy. And, you know, Xi Jinping can wake up one day and say, we're going to make semiconductors a strategically important industry. But actually, the way that happens, it usually isn't a bunch of money thrown at that problem. It's sort of a wink and a nod to the banks and the credit providers like, hey, you should lend these guys some more money at cheap rates. I guess my question is, what kind of policy response would we expect to see from China on this front? And would they start to tweak their own way, their own version of industrial policy in response to what the West is doing?

33:32Yeah, I tend to think that, you know, China is mostly pretty focused on building all of these capacity without thinking too much about these other competitive forces. You know, that creates a lot of these problems. You know, it creates these usual issues of oversupply. But I think the Chinese is, you know, mostly thinking about its own internal system rather than, you know, trying to figure out how to make the rest of the world more happy. So when the Chinese decide that, you know, semiconductors are a critical technology or that solar is a critical technology, as you say, the central government would do something like name solar a strategic emerging industry, as the state council did in 2010.

34:14And it would trigger a vast cascade of subsidies, which leads to business creation. It encourages the local governments to give free land to favorite industries, have the banks lend at very cheap rates, sometimes these direct grants. But in general, what the Chinese tend to do is to have oversupply. They don't. They have no ability to stop themselves from building. And I think, you know, if I had to choose, I would rather choose that set of economic problems. That was the trigger that has made it so that China builds basically as much renewable infrastructure every year as the rest of the world combined.

34:56That these Chinese local governments cannot stop themselves from building more, you know, favored industries in something like solar or wind farms. What they really try to do is to, you know, they can't stop themselves from building. They build even when there is no interconnection, when these farms aren't really connected to the grid. They build hydroelectric dams that displace millions of people. They build even when the central government tells them to stop building because it just wants this sort of capacity and employment out there. And that's what the U.S. is kind of up against. And I wonder how these two systems can be more adaptive.

35:33Well, that feeds into, so it really does feel like we have the opposite problem where people are always writing Substack posts about how terrible we are at building things. And then you have Dan talking about, no, they literally can't stop the building even when they say stop the building. Is it really as simple as like, oh, there's some laws from the Carter era that we have to get rid of, but then suddenly we could like build subway and rail as fast as they do in Europe and Asia? Like what do you like just sitting aside like this idea, like, oh, what do we get to do to get the U.S. building again?

36:06How do you like rank the priorities or get good at that? Yeah, I mean, I think there are important laws to change. But I think what we have to understand is that a lot of the blockers, like, why are those laws there? Right. Like we can't just like erase them and say they should be gone. They're gone. A lot of the blockers to lower cost are there because someone wants them to be there. And because we don't have enough, you know, bipartisan cross ideological agreement that these things should go. You know what I mean? All we have to do is get enough people to agree that by America is a problem and then we can get rid of by American provisions.

36:44But like, is the law the problem? Yes, to an extent. But the problem is, for whatever reason, we can't overcome the forces that push for it. No, but there's also like, I mean, Buy America, I presume, is not why it took forever with the Second Avenue subway, which I don't know if that even exists or maybe it has a few stops. And why there are like large swaths of the country where they can't put electrical wires and stuff like that. Like there seems to be like, it seems like there's more. Sure. There's a lot of there's a lot of problems. And behind most of those problems, there's some party pushing for them.

37:17And I would argue that what we need is more ideological alignment among the people who wish to push back against those things. You know, like NEPA is a huge issue, right? But like it exists for a reason. It's defended for a reason. There are people who sue using NEPA because, you know, that's that they want those outcomes. And so we need to have more agreement here in the set of problems and sort of work in a bipartisan way to push behind them. and you have to be realistic about people are on the other side of the table of the everything bagel problem. And that's who we're up against if we're going to get rid of it.

38:12This is LeVar Arrington from Two Pros and a Cup of Joe. Toyota is moving forward a more sustainable future by giving you the freedom to choose from an incredible lineup of trucks. Now available in both gas and hybrid models, including the legendary Tacoma and powerful Tundra. Both available with the iForce Max hybrid powertrain and backed by Toyota's legendary reputation for reliability. More choices, less compromise. Visit BuyAToyota.com for a great deal on an efficient Toyota today. Toyota, let's go places. Hey, Ryan Reynolds here for Mint Mobile. You know, one of the perks about having four kids that you know about is actually getting a direct line to the big man up north.

39:01And this year, he wants you to know the best gift that you can give someone is the gift of Mint Mobile's unlimited wireless for$15 a month. Now, you don't even need to wrap it. Give it a try at mintmobile.com slash switch. Upfront payment of$45 for a three-month plan equivalent to$15 per month required. New customer offer for first three months only. Speed slow after 35 gigabytes if network's busy. Taxes and fees extra. Just going back to the beginning of this conversation when we were talking about the goals of the CHIPS Act and the IRA as well, it does feel like there is a tension between a recognition that these are strategically important things for the U.S., whether they're semiconductors or clean energy tech, and then the ability to actually scale these and sell them in a way that is appealing to American people and corporations.

39:51Is that tension insurmountable? I'd like to hear from both of you on this point. I think it is probably going to be a pretty serious tension. And I think that the U.S. government has to work through, you know, all these sorts of tensions. Some of these things will be resolved through the executive process. So I think about something like, you know, the Treasury Department will give guidance on which electric vehicles are actually subject to the full$7 ,500 in subsidies from the IRA. And so it has to thread these needles. If it is, you know, a little bit too tight, then, you know, the electric vehicle industry uptake will be pretty slow because most of these batteries are used with minerals processed in China.

40:41On the other hand, if it is, you know, if it is too strict, then no one will buy electric vehicles. If it is not strict enough, then none of these automakers feel that they have to, you know, get rid of their China dependence on all of these batteries. And so these are basically a lot of these tensions that I think are going to be pretty difficult to try to solve. Adam? I think there's a couple of important facts that matter here. One is that we have a huge cost gap, especially when it comes to advanced semiconductor production. TSMC says it's 40 to 50 percent. So it's too expensive to start. We used to make it here and we don't anymore.

41:19And that's for a reason. And the reason is because of costs and, you know, it made more sense to make it in other countries. So you have to be laser focused on those costs because of the third reason, which is this is a globally competitive industry. It's ruthless. And you have to be focused on costs and you have to be focused on prices. And policy should reflect that. And if policy doesn't reflect that, I think that's a problem. If I can amplify that point a little bit, that, you know, I think that, you know, what is really strange when it comes to something like clean tech in the United States is that I think the U.S.

41:54is in a very strange position where it is trying to engage in technological catch up with a lower wage competitor, which is China. That China makes, you know, solar photovoltaic panels that are both cheaper as well as more efficient than the U.S. And, you know, often the same goes for batteries. And so, you know, usually one of these things is not true, that, you know, you are either technologically ahead or you are cheaper. But the U.S. really has a hard time here, which is why I want to echo Adam's point that you really have to focus on bringing down this cost curve. The other, you know, slightly novel thing is that, you know, China developed technologically by embracing a lot of foreign investment into China.

42:36These involved, you know, Apple through Foxconn building enormous electronics factories in China. Tesla has a wholly owned factory in Shanghai that, you know, Intel, Dell, whatever. All of these American technology giants invested a lot in China. And then Beijing was extremely welcoming into in their investment and has not, you know, retaliated against them throughout the many years of President Trump's trade war. By contrast, the U.S. has become pretty hostile towards attracting investment from what is the technology leader in a lot of these spaces, China, when it comes to solar and batteries especially.

43:13And so it is pretty hostile towards Chinese battery makers from setting up in Virginia, sometimes including in Michigan. And so I think, you know, the U.S. is making this bet that it is going to be able to be OK in something like batteries by, you know, mostly working with allies in Japan as well as South Korea. And perhaps that is all very fine. But I would also encourage it not to be, you know, boxing with one hand tied behind its back to be a little bit more like China and then trying to get as much investment as possible, solve and mitigate these national security problems where they exist, but don't really, you know, reject foreign investment from the technology leader.

43:50So going back to chips specifically mentioned at the top, Tracy and I recently interviewed two of the top people running the Chips Act of the U.S. And it was totally a fluke timing because like a week before that, our colleagues on the Bloomberg opinion side who were like, you know, separate wall between us, like they totally savaged the state of the Chips Act. than like, you know, a lot of these accusations like, oh, this is becoming like this like progressive Christmas tree of like environmental concerns and child care, etc. Like outside of like what you see, you know, is this sort of like the tensions, goals of like create jobs versus create advanced semiconductors.

44:31How concerned are you about some of these other elements or like how overblown or where do you stand on some of the other priorities that some are saying are seeping into the chipset. Yeah, I mean, I think 100 % that there are other priorities that are just direct. They're just going to raise costs. Like, that's what they do. Like, there's no world in which forcing project labor agreements under the construction of these fabs doesn't raise costs. And you have to acknowledge that that's the problem. You got to be realistic about that. So I think that they are absolutely in tension. I want to be a two handed economist here, that there's a lot of stuff that they that they are doing and saying that I think is good.

45:07There's a recognition from the administration that we are going to need to nest semiconductor production within globalization. And there's a realism there and a desire to work with allies on this that I think is missing from a lot of the other discussion around this. So we're not going to make it all. And globalization is not the enemy here. Globalization is a key factor in why Moore's law has continued over time. If we didn't have globalization, Moore's law would have been dead a long time ago. And so you cannot run away from globalization when it comes to semiconductor production. So I do want to say that I do think the administration has been good on that.

45:46It's the other things. It's the Christmas tree stuff that I think is a problem. On the other hand, everything bagels are delicious. I don't order plain bagels myself. And Christmas trees are beautiful. I agree with Adam that, you know, it is really difficult to try to make everything here at home. But, you know, I wonder to what extent that these child care provisions, that these other labor provisions are really, you know, going to be mostly inconveniences that these companies are going to be able to write off that, you know, or whether they actually are critical, you know, if they actually are crippling.

46:23It may be a little bit too early to tell, but I agree with Adam. Certainly it is pretty difficult, which is why I go back to the test I laid out at the beginning. What we are seeing is already huge amounts of investments in the U.S. But, you know, is it going to be invested in most of the right things? And, you know, is there going to be some way to, you know, have the—is the U.S. going to be able to say that these economics are going to be pretty self-sustaining over the longer run? So I just have one last question, sort of a classic interview question, which is in 10 years time, or I don't even know if 10 years is long enough because we're talking about technologies with very, very long lead times.

47:02But OK, so I guess I have two questions. One, what time frame do you think is reasonable to judge the success? To clear verdict. Yeah. And then two, what are you looking out for? Is there something specific where you would wake up in 20 or 30 or 50 years time? Hopefully we're all still around and say this has either been a massive success or a desperate failure. I look forward to getting back into this bowling alley in 10 years, one decade from now. Decades. Perfect. Decades, yes. Or perhaps many decades. and thinking about where we are. Ten years is not very long of a time, as you say, Tracy.

47:47Technologically, politically, that also tends to be not too long of a time. For the Chinese, that is only two turns of the five-year plan. And so I think they judge things on a slightly longer timescale. Let's give it at least three five-year plan cycles. What I slightly worry about is that, you know, there is quite a lot of investment in things like solar and batteries and also in semiconductors in the U.S. today. What I worry about is that, you know, somehow the TSMC facility in Arizona turns a little bit more like a showcase factory that doesn't end up, you know, producing too much. And I think the example here is something like Apple's Mac Pro factory in Texas, which doesn't have very high volume.

48:32And, you know, if after all this investment, a lot of firms will fail. I think that is certainly going to be the case. If in two, three years from now, you know, we take a look back, you know, if, you know, one of the parties points out a lot of these failures and says, you know, this is why industrial policy cannot work. We're getting a lot more cylindras. They're still talking about these, the cylindra failure of about, you know, 15 years ago now that, you know, politically the appetite disappears to continue investing in these sort of things. that is something I am a little bit worried about.

49:03And so therefore I would say that, you know, we have to think about these things on the longer timeframe. Adam? I would say it depends what we're talking about specifically. So if we're talking about advanced semiconductor production, it'd be nice to have a little bit more, you know, less geographic concentration there, both onshore and, you know, in friend shore. When it comes to, you know, mature node ships, I'd love to see more direct accounting for here's why we need it here is how we've improved resiliency. When it comes to solar, what I'd love to see is the cost curve come down. I think that's everything.

49:37That's everything. I don't care about making it here. I don't care where we make it. I care that the price comes down and I care that people install it. And I think that we should think about the technological frontier as being something really important here. And Chips, to be fair, is spending billions of dollars on R &D too. So I'd love to see that some of that money helped move the technological frontier forward. I think Alec Stapp is here somewhere. He's always posting the solar chart, and it always looks very encouraging that that line is going down. So that does seem to be happening. One last thing, and then I want to open up, and then I think we can go to Q &A.

50:12But Dan, I'm really struck by the point that you make about it's kind of rare to be trying to catch up to a country that both is cheaper and more technologically advanced. Usually maybe there's one the other and you exploit the other. Like, should we be doing things like, you know, export discipline and subsidizing the companies that can produce here and sell well in the global market? Should we be thinking about that type of thing for the US? Or should we be thinking about, you know, more buyer of last resort things? Like, seems to be a part of the sort of, when we have had successful, like sort of like military driven semiconductor policies like back in the Cold War and stuff like that.

50:53Yeah, well, I would love for U.S. firms to have export discipline, which is, you know, a lot of the strategy for firms in Asia to, you know, sell to the rich American market and then, you know, get the quality of their products, you know, to raise the quality of their products. The challenge for the U.S. is that there is no bigger and more sophisticated markets. So it's hard to, you know, figure out, you know, who is able to discipline the American firm. And I think to add to the point of how the U.S. is in a bit of a tougher position, again, I would think slightly politically the challenges here.

51:28To go back to the example of CHIPS, whether the CHIPS Act is working, I think about something like TSMC in Taiwan. And so TSMC is, by miles and miles, Taiwan's everyone's favorite employer in Taiwan that people, engineers in Taiwan would say, I would sell my liver to go work for TSMC. You know, it's much more difficult to think that people would say that of any chip firm over here. You know, Taiwan is periodically in a drought. It is a, you know, an island where they give the fresh water to TSMC and make the citizens drink the treated water in a drought. They park a lot of these fire trucks outside of the facilities of TSMC in order to make sure that TSMC has, you know, fresh water to produce the chips powering our iPhones.

52:15And so, you know, this is, you know, that is just a different sort of thing where politically also, can I, is it really easy to imagine that TSMC's facilities in Arizona, a fairly dry state, is able to park a lot of fire trucks outside of TSMC's facilities in a drought? I wonder. We're going to be doing an episode soon with an Arizona alfalfa farmer. So he will be making the case that we should not, you know, they got to get their, they got to get theirs too. Yeah, but thank you, Dan, for leaving us with that wonderful vision of late-stage capitalism. And thank you to Adam Ozemeck for joining us for this conversation.

52:52We welcomed questions from the audience, and if you'd like to hear those, we invite you to be on the lookout for live recordings where you can be part of our audience in the future.

53:22Joe, I found that conversation fascinating. I loved it. It was so great. I'm so glad. I appreciate both perspectives. I do find, like, I don't know. I really appreciate both perspectives. I like Dan's case for we should do big, heavy stuff here. I guess that's something to do with people. But no, that was great. I really enjoyed it. One thing that I think is pretty special about the discussion is It has to be a first for a semiconductor policy discussion in a bowling alley. No, and the listeners who are not here, like, we're on this stage. We're looking out at a bowling alley. We're looking at this beautiful light fixture in this old building.

53:59I had the exact same thought. No one is having this conversation about, like, the history of industrial policy in this context before. So if nothing else, quite an accomplishment. No, it's bowling pins. Which is really bullish on America, actually. You know, there's, like, this is what we... I'm good at it. We can draw the line between bowling pins and pin diodes. How about that? All right. Well, this has been another episode of the Oddbots podcast. I'm Tracy Alloway. I'm Joe Washington. And big thanks to our guests, Dan Wong and Adam Ozimek. And, of course, Adam for this incredible location where we recorded.

54:32A massive thank you to the Economic Innovation Group and the Institute for Progress for allowing us to be here and do this world first of talking semiconductors in bowling alley territory. You can follow me on Twitter at Tracy Alloway. And I'm Joe Weisenthal. And you can follow me on Twitter at The Stalwart. Follow our guests on Twitter, Adam Ozemeck. He's at Modeled Behavior. And Dan Wong, he's at Dan W. Wong. Follow our producers, Carmen Rodriguez at Carmen Armin and Dashiell Bennett at Dashbot. And check out all of the Bloomberg podcasts under the handle at Podcasts. and for more OddLots content, go to bloomberg.com slash OddLots, where Tracy and I have a blog.

55:15We post transcripts and we have a newsletter that comes out every Friday. And for more OddLots content, check out our Discord. It's really fun. People are chatting in there 24-7 about all of the things we talk about on the show. Check it out at discord.gg slash OddLots. Thanks for listening.

56:06Hey, this is LeVar Arrington from two pros and a cup of joe. Toyota is moving toward a more sustainable future by giving you the freedom to choose from an incredible lineup of trucks now available in both gas and hybrid models, including the legendary Tacoma and the powerful Tundra, both available with the i-Force Max hybrid powertrain and backed by Toyota's legendary reputation for reliability and value. In fact, for 2025, Toyota is the best resale value brand for the fifth year in a row. According to the Kelly Blue Book, KBB.com, with Tacoma ranked number one, holding the highest projected retained value of any vehicle.

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