Wed. Jun 29th, 2022

Competition with China will define the coming decades, and Congress wants to get into the game. Alas it’s off to a bad start with the Senate’s nearly 1,500-page Innovation and Competition Act that won’t help innovation or competitiveness.

The bill has some useful provisions that deserve to be considered separately—such as economic sanctions against Chinese entities linked to cyber and IP theft and officials involved in human-rights abuses, and a repeal of the Global Magnitsky Act’s 2022 sunset.

But the bill’s bipartisan support has less to do with China than with its typical Congressional spending blowout and parochial politics. “Everyone knows this thing is going to pass, so every lobbyist wants to add everything they can,” said

Rep. Ro Khanna,

the bill’s lead House sponsor, with refreshing candor. This is how industrial policy always works in practice.

***

Start with the $54 billion for the not-so-needy U.S. semiconductor industry. Manufacturing computer chips—as opposed to design—has been commoditized due to economies of scale, with

Samsung,

Taiwan Semiconductor Manufacturing (TSMC)

and

Intel

dominating fabrication.

While the U.S. accounts for 12% of chip manufacturing, American companies dominate in design (52%) and chip-making equipment (50%). This is where the U.S. has a comparative advantage and China trails by leaps and bounds. Credit American semiconductor research and development spending by private companies.

A legitimate worry is that Beijing will try to take control of Taiwan, which accounts for about 20% of global capacity. The Trump Administration already worked with TSMC to build a new plant in Arizona. Defending Taiwan requires more arms to the island democracy and a better U.S. naval deterrent. Yet the

Biden

budget includes a cut in real U.S. defense spending.

The bigger problem is the political strings that always attach to industrial policy. Companies left to their own devices will allocate capital to its most productive use, but government subsidies will steer investment where politics directs. Majority Leader

Chuck Schumer

has already promised that the bill will bring chip manufacturing to upstate New York. Commerce Secretary

Gina Raimondo,

those are your orders.

The bill also includes some $120 billion for research in advanced technologies and would roughly double the annual budget of the National Science Foundation (NSF). More spending on basic research, especially in defense technologies, could be useful as adversaries militarize robotics and artificial intelligence. But much of the Senate bill’s money would be directed to applied research that is typically financed by private industry.

Grants to institutions would also be allocated based on identity and geographic politics. The bill would create a new Directorate of Technology and Innovation and separate Chief Diversity Office at the NSF to ensure funds are equitably distributed and create domestic jobs. But effective research is about ideas, not jobs.

Some grants would specifically go to expand research on sexual harassment of “vulnerable groups” in science, technology, engineering and math (STEM) and “alternatives to the power dynamics and hierarchical and dependent relationships in academia.” China must be quaking at that one.

One of the bill’s better ideas is to award scholarships to undergraduate and graduate students studying artificial intelligence in exchange for future public service. But institutions would only qualify if they attract “a diverse and non-traditional student population.” Could too many Asian students disqualify a school?

Many Republicans support the bill because they believe the U.S. needs to mimic Beijing’s directed capital to defeat Beijing. But the U.S. strength has always been its capitalist system, which encourages private investment and innovation through market competition, strong intellectual property rights, and, yes, profits. That’s how the U.S. transcended Japan’s challenge in the 1980s and 1990s.

American businesses have nearly doubled R&D spending over the last decade (see the nearby chart) and lead most areas of advanced technology. China’s strategy has long been to subsidize inefficient state-owned enterprises and national champions like Huawei, which has hamstrung smaller potential competitors.

***

America’s biggest competitive disadvantage is its failing K-12 schools, which are controlled by teachers unions and progressives who want to dumb down math education, as

Williamson Evers

described in these pages last week. Higher education has been a U.S. strength, but meritocracy is eroding there too. Meantime, Democrats want to weaken pharmaceutical IP and raise capital-gains and corporate taxes, both of which would reduce investment.

The China challenge requires a better response than the U.S. has mustered to date. But the industrial policy of this bill will waste taxpayer money and divert private capital to less efficient purposes. America can’t out-compete China by imitating it.

Wonder Land: In an era of social media’s emotions, progressive politics is about saving us from constant apocalypse. Images: AFP via Getty Images Composite: Mark Kelly

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By rahul