How to Allocate $52 Billion in CHIPS Funding
"industrial policy in a way the United States has not done for a long time"
Last week, we spoke to Gerry Petrella, Chuck Schumer’s policy director, about how the CHIPS and Science Act finally became law. But we were left with questions. Once CHIPS was signed, what happened next? How does the money get allocated to the semiconductor industry? Who manages that process? How are recipients chosen? Are these investments reasonable?
So we sat down with Ronnie Chatterji. Chatterji served as the White House CHIPS coordinator, directing traffic for the Biden administration.
What You’ll Learn
What does a war room of economists do?
When do bills get White House coordinators?
Industrial policy: what’s the hype?
How do you avoid international bidding wars?
What happens when the money runs out?
A former White House economic adviser, Chatterji led the implementation of the CHIPS Act from the White House’s National Economic Council (NEC) as Acting Deputy Director. Previously, he served as the Chief Economist of the U.S. Department of Commerce, where he was the principal economic adviser to the Secretary of Commerce.
In an interview, your former Department of Commerce boss, Gina Raimondo, talks about the Commerce war room on the CHIPS and Science Act. When she says "war room," what is she talking about?
I think she's talking about my office, maybe, where we definitely had a war room mentality around supply chains. I had been in government before, during the Obama administration, and if you had asked me in 2010 and 2011, “Who's the supply chain person, who does that kind of work?” I really wouldn't have known who did it, or what the policy context was. Even coming from a business school, where I had colleagues who did work on supply chain management, I hadn’t thought about it as a public policy issue in a comprehensive way. Depending on when you serve in an administration, particularly if you work on the economic policy side, the thematic events of that period are going to shape what your job is. In the Obama administration, because of the global financial crisis and the aftermath of that, a lot of my work focused on small business’ access to credit.
When I came back in the Biden administration years later, the big issue of the day was around supply chains. Luckily, I'm a microeconomist and I look at and talk to businesses a lot in my research. When I came in, Secretary Raimondo asked, “Why is the price of lumber so high? Where's all the steel? Where's all the aluminum?” These things were important from a macroeconomic perspective because they were, to some extent, driving inflation. When we saw lumber prices spiking, we started to think, “Oh this is a really big deal. It's not just lumber, it's about the broader price levels in the United States.” With computer chips, the fact we couldn't get them and they were short led to price increases and a scarcity in automobiles, which drove the consumer price index. Connecting the micro to the macro made supply chain issues the biggest challenge that I faced in the Commerce Department.
That war room was basically my office with a bunch of colleagues, trying to figure out where these supply chains were, geographically and across industries, and how goods were being shipped from point A to point B and every point in between. The question for us was how to improve supply chains, increase their speed, lower prices for consumers, and have a positive impact on the macroeconomic environment.
That was the war room mentality. I always knew a little bit about supply chains, but I didn't really become an expert until I joined the Commerce Department and went deep.
Go a level deeper. When you're in the room with a group of fellow economists at Commerce all day, what are you doing?
Sure. In the chief economist’s office, you'll work with other economists. The first thing you're going to look at is, “Okay, what's the price trend? What's going on in a particular market?” say, lumber. You first have to figure out which index you'll use to track prices, which is an adventure in and of itself.
The great thing about Commerce is that you have people who are really familiar with all sorts of data across the economy. You have your colleagues at the Bureau of Economic Analysis, and they’re best known for producing GDP and other key statistics. Then you have your colleagues at the Census Bureau. In addition to the decennial census, they’re also doing fantastic research in a lot of other areas, including industrial areas. You're leveraging all those folks to figure out, “How do I measure this? What's happening here?” Once you understand which price index to look at and whether it's going up or down, you start to investigate what could explain those price levels. As an economist, the best thing to do is collect a bunch of data and use empirical analysis to figure out what's going on, but you often don't have time to do that or a lot of data to work with. And so what you’re doing is calling a lot of folks in the industry and trying to figure out, okay, “What do you know about the market for lumber?”
And you realize, oh, gosh, there's a whole value chain starting off with the production of, let's say, resins. Resins are the glue-like substance that goes into oriented strand board, which is really important in home building. When the home builders talk about their materials being expensive, some of it is because the cost of oriented strand board is high, and some of that is because resin is scarce, and some of that is because the petrochemical plants that produce the inputs to resin have gone down because the pipes froze for an unseasonable winter storm.
What you're doing with your fellow economists is trying to piece together the story, put data together around it, talk to each part of the chain, talk to industry, talk to economists. There are also folks at the Federal Reserve who you can consult with. You’ll then come to the Secretary of Commerce with an understanding of what is going on and what the government could do to make a difference. That's really what we're doing in a situation like that.
It's small group work with quick turnarounds. You're often contributing a chart to a slide deck that will be presented to somebody making a decision. And in some sense, as the chief economist, you're making external presentations to audiences who want to know what is going on out there.
In an August interview, you spoke about how the new skill set on supply chains will take time to percolate through government, and you just mentioned developing your own supply chain instincts and capabilities in your second stint in government.
Practically, what is that skill set? What’s the specific knowledge or skill gap about supply chains you were missing?
That's a great question. Okay. One is being familiar with the data sources. If you ask people what's going on in the economy, most people, economists or otherwise, understand where to get data on employment, where to get data on wages. You can perform variably sophisticated analyses, but there is a baseline understanding of what the data is, what it says, and what the data-generating process is. With supply chains, few folks had that expertise at the beginning of the administration.
First of all, supply chains are connections, often between businesses, and they're often businesses that are located in different parts of the world. Some are public, some are private. A firm might have multiple suppliers for a particular good, and that firm may then send on their product to multiple customers. Some products are inputs into a larger integrated product, so it might be difficult to trace the impact of a particular, let's say, chip into an electric vehicle. Understanding all of the pieces of the chain and having the right data to answer the questions is table stakes, so we have to decide as a group what data we're going to use inside government.
A lot of supply chain vendors have really exciting supply chain data analytics, and so you have to figure out, “Do they have what I need?” Some of those data vendors are optimized for CEOs or the chief of supply chain for a big company, not for the government decision maker who needs to think about the big picture instead of just a single organization. So you also need to figure out if there can be new products and tools developed, either in the private sector or inside government, to help you get more leverage.
So one part of the skillset is being familiar with the data, and a big part of that is knowing who the players are who have the data. Often it's fragmented, so you need to be able to create unified datasets. The global scale is a challenge, too, because many supply chains, take chips, for example, run through Europe, Asia, and back to the United States.
Once you solve the issues with supply chain data, you have to decide, “What do I do with the data?” Do I want to tell stories and have case studies about different kinds of supply chains? Do I want to do some sort of empirical analysis? What does that analysis look like? What am I actually thinking is the dependent variable and the independent variable? What questions do I try to answer? That's part of the skill set.
And the last piece is understanding which tools government policymakers have at their disposal to actually make a difference on supply. Readers of IFP’s work will know: we have many tools to stimulate demand. For example, we know that when we send stimulus checks to people, they might spend that money and goose consumption, which is a big part of GDP. What about supply? Are there short term things we can do to increase the supply of a good that's scarce, or can we only invest in the long term capacity of the economy to grow the supply of these goods in the future? That's going to create a very different tool kit for policymakers as they think about what they can do inside government. So from data to the right kind of analysis to what the policy implication is — that's what I mean by that new skill set. I think you're going to be seeing a lot of folks training up to do that inside our government and governments across the world.
At both Commerce and the National Economic Council, you had an internal team of economists doing a lot of this work. What was your relationship to outside researchers in academia? Are you ever saying on a long-term timescale, “We can't get this done, we'd love for outside folks to research it?”
You're always monitoring, or at least I am, academic papers, policy briefs from important think tanks, even Econ Twitter, to see what people are saying, and you may get an insight or a tidbit. Someone on Twitter might mention some really interesting data about a particular port in the United States and how many ships are waiting to dock or what those ships are carrying. That's stuff you might not be seeing in the day-to-day data that you're getting in the Commerce Department, and those insights can help you message up to decision makers, “Hey, here's what's going on. Here's an example.” It makes it real.
There are also, of course, academic papers, which are published at an interval that's not really suitable for real-time policymaking, but are very important. I think where academics can play a strong role is framing the way policymakers think about issues: What are the key tradeoffs? What should we be looking for? And I would say in terms of asks for outsider researchers, how the government thinks about supply chains is a fantastic area of research. It’s an area of economic policy that has been so important in the Biden administration, and one where the research base wasn't that strong, partly because supply chain management scholars have traditionally focused on a different set of problems, based on what I can understand.
Now, of course, they're turning their attention to this in different ways and using new analytical tools that are fit for a different purpose. There are a few economists who've done this work in the past, but they weren't really focusing on the questions that we tried to answer in the Biden administration.
Based on the experience we've had and my own work in the academy, my request here is to drive more research on the economics of supply chains. What is the policy toolkit for supply chains? That's really the big question that I'd like to see more academic research on. You do keep in touch with scholars while you're working at Commerce or the NEC, and a lot of the answers will come in the next couple of years through the research people are doing at universities and think tanks.
You’ve described a shift in how we study supply chains. What were the areas of focus in the past?
A lot of folks would focus on a single large firm, let's say an Amazon or an Uber, and how they're managing their own supply chain or logistics. Some of the work tends to be theoretical, so we're thinking about how multiple suppliers might affect the reliability of a supply chain, really fundamental questions.
A harder question is, “What are the best ways for a country to secure the supply of a particular input now?” They could probably generalize some of the models they have, but to my knowledge, that hasn't been the central question in supply chain management. Supply chain management is studied in business school because it often focuses on businesses, rather than in a public policy school where it might focus on a national government. I think that’s one of the big differences.
Let's go to CHIPS. You spent some time at Commerce and ended up on the National Economic Council as acting deputy director, where you oversaw a lot of the administration's work on the CHIPS and Science Act. What was your involvement with that legislation before it was passed?
When you're working on supply chains, Exhibit A is computer chips, semiconductors. Of course, Secretary Raimondo said, “Hey, you’ve got to work on lumber. You’ve got to work on steel. You’ve got to work on aluminum. What about those transformers?” All these different areas, right? But in the end, chips were a big driver of the supply chain work because they were seen as contributing to the shortage of automobiles that could be sold, which drove an increase in the price of used and new cars, and that was driving core inflation. So a lot of my supply chain work was devoted to chips.
We convened a bunch of CEOs to talk about supply chain issues, and in the background was this idea that, wow, in the short term, we have limited tools to increase the supply of computer chips, but in the long term, we could actually increase the capacity of the United States and not be in this situation again.
That's how I saw the CHIPS and Science Act: less of a short-term fix to the problems that we were dealing with then, and more of a long-term answer that would make America more economically resilient, and, from a national security standpoint, more safe. And so we were doing these things the ambidextrous way, trying to solve a short-term problem, plug supply chains, fix them where we can, but also trying to think about what to do in the long term to make sure that this doesn't ever happen again. Bringing that together with a broader group of people across Commerce was how I got into CHIPS. I wasn't only working on semiconductors, but I was one of a small group of people who were thinking about them a lot.
When the bill passed with a bipartisan majority, which was amazing, they needed someone to go to the White House to be the coordinator. All of the other major bills that President Biden passed had one. My understanding is that came from President Biden's own experience — when the $787 billion Stimulus Act was passed in President Obama's first term, Biden was the point person on that. He realized that having someone accountable is really important, someone to say, “This is how government should be working on these issues.” He had Gene Sperling on the American Rescue Plan, Mitch Landrieu on the Bipartisan Infrastructure Law, John Podesta on the Inflation Reduction Act, and myself on the CHIPS and Science Act.
Given my work at Commerce and my prior experience on the White House Economic Team, I think the pieces came together. And it was, obviously, an honor of a lifetime to have the opportunity.
So you ended up on the National Economic Council after CHIPS was passed.
That's right. It passed and then we went right over and started on implementation. As it was getting passed, I had the sense that it was going to happen and made the transition to the NEC so that we could get started on day one.
In a talk you gave at Duke recently, you mentioned that a big part of your job at the NEC was explaining why American chip production is so important for national security. Who are you explaining to? Who do you have to convince?
One group that you have to convince is state and local leaders, because a lot of states are also providing incentives for local semiconductor manufacturing. Why are we making these huge investments in an industry with manufacturing located in other parts of the world? Why should we bring it here, and why is it going to be cost efficient? Why does it make sense for America? Although CHIPS passed with a bipartisan majority on Capitol Hill, we still need to explain to a lot of other people around the country, political and civic leaders, why it matters.
We also want to explain to the general public, “This is industrial policy in a way the United States has not done for a long time, on a scale that we haven't considered for a long time.” We allocated $52 billion to a single industry, the computer chips and technology industry, which most people already consider to be a profitable segment. How do we explain why we need to do this?
There's also a whole ‘nother set of people on the academic side who say, “Gosh, these efforts to subsidize industry are always a failure. It never works.” I think explaining the effects on national security to the state and local leaders, to the general public through the media, and also to academics who have been thoughtful about industrial policy, helps people unify around an objective that might otherwise seem controversial.
Sure. I spent an early part of my career at AEI, which I very much respect, which has that more traditional view on industrial policy generally.
Yeah. There are a lot of great points from people who are critiquing industrial policy. You have to be humble when you're implementing this and listen to their critiques. There are many people who are going to give you good advice, and some people who are going to criticize it for political reasons. But you have to listen to the folks who have good advice and are trying to help you do better because this is really high stakes, really difficult, and it hasn't always succeeded in the United States or around the world.
Give me a rough breakdown of your time as the implementation coordinator. Where are you spending your time in a given week?
50% of the time is spent talking to the agencies that have the money that was appropriated from the CHIPS and Science Act. That means the Department of Commerce with their $50 billion, the Department of Defense, the State Department, the National Science Foundation, and the Department of Treasury, which was responsible for putting together the investment tax credit. All of these agencies have an important role to play in CHIPS. They all have money. We have to make sure we're rowing in the same direction and that one side knows what the other side is doing. I would convene calls with them very regularly, multiple times a week, sometimes bilaterally, sometimes as a group, to understand, “Okay, here's what's going on with the money, here's the program you're setting up, here are the staffing decisions you've made.”
That led to the other 25%, which is communication inside the NEC. When you're the belly button of a program like CHIPS, one of your big roles is to make sure other folks know what’s going on at the White House. My job was to tell Lael Brainard, who took over from Brian Deese as the director of the NEC, “Here's what's going on with the program. Here's how it fits into the other things I'm seeing in the other agencies.” We had a daily meeting where they would give me the overlay of how it affects the Inflation Reduction Act and what the president was doing on supply chains and I would feed in the updates on the CHIPS program. We'd also have staff meetings at the National Economic Council. I'd also connect to the press team if there was going to be an event, or to our office of intergovernmental affairs to think about the connection to state and local governments.
My job was managing all of those different angles, messaging and informing people at the White House, and taking that information back to the NEC. My colleagues at the National Security Council were also a big piece of that, given the relationship between chips and security. I was also the connective tissue between the agencies that were implementing CHIPS and the White House. If someone had a question about what was going on around science and technology policy, then I could say, “I'll talk to Arti Prabhakar,” who runs that office. That's an important skill for this kind of job, knowing how the White House works.
The other 25% of my time was spent on media and speaking to groups about what the CHIPS Act is and why it is important.
Was it a big shift for you to go from a pretty academic role at Commerce to a purely managerial role?
Very much so, yes. That’s a very smart insight. Yes, it was something I welcomed and embraced, but it was a pivot for me and it took a long time. There are probably many academics who feel this way, that if you haven't been dean of your school or run a big program, you may have latent management implementation capabilities that you never really get to flex.
Most people think, “You’ve got a PhD, you're a domain expert. The best thing for you to do is write a memo on a particular topic and inform the principal, and she will make the decision based on your memo.” I played that role many times, I think it's incredibly valuable and I take it very seriously, but as you get more senior, you start to see more and you say, “Oh, maybe I could be the blocking and tackling person. I could make sure that things are happening. I could have the vision down the field to see that these things are working.”
When I was running the CHIPS implementation, my job was very implementation and management-oriented, and it was something I really wanted to do in my career. I feel blessed that I was given the chance to do that because a lot of folks are not given that opportunity. It's something that I want to build on in the future parts of my career in government.
There's been debate over whether requiring semiconductor manufacturers to provide childcare for workers will delay the movement of money through CHIPS. You push back on that in some interviews.
Looking ahead over the next 6 to 12 months, how can we evaluate that debate? What would be a sign that those requirements are a drag on CHIPS?
It's a great question. Yes, I have pushed back on this in the past. There was an op-ed about the everything bagel, which argued that the policy scope was too broad, and yet you have over, I think, 500 statements of interest and 130 applications for CHIPS incentives. In my work, it didn't seem like the requirements were really big sticking points in terms of companies applying. In many cases, like in childcare, companies are already satisfying those requirements somehow and it's not something that's impossible to figure out.
I don't actually think those are big stumbling blocks. However, I think it's important to think about when you design these programs. If you enforce a lot of different requirements, some might be unexpectedly difficult to comply with or slow down implementation. If you're seeing that the money is allocated, but companies are having trouble deploying the capital and the projects are being slowed because they're trying to comply with government requirements, then I think you can say, “Oh, okay, this requirement here seems to be a real sticking point.” Then you have to go and think about the policy rationale. Was this a must-have? If it is, maybe you're willing to tolerate some of the issues. If it was inadvertent or it turns out that the benefits are not worth the cost, then you can reevaluate. But in general, I think, look at the projects once the money has come out.
I think the applications suggest that a lot of companies are interested in this money, regardless of what is required of them, and that they're willing to build that into the model. Let's look at how the projects progress. I'm sure there'll be some lessons along the way, and I'll have to evaluate those too, but I don't think it'll be around the childcare requirement.
I love these questions. Super interesting getting to reflect. There is nothing like this where you can go in the nitty gritty. I also really appreciate the review of the other stuff I've done. So thank you for doing such good work.
[We spoke with Chatterji again the following week.]
Some recent news: the first CHIPS Act grant is now out, with a preliminary memorandum of terms (PMT) allocating $35 million to BAE.
Econ 101 question: over the last couple of years, BAE distributed several billion dollars to shareholders in buybacks and dividends, and agreed to another almost $2 billion in buybacks last June. Why does this company need subsidies?
It's a good question. Let's start with the context of why it was that company. It's the first announcement of what, I think, will obviously be many. What's interesting about it is that it's a relatively small amount of money in the context of the program, as you say, $35 million out of a $39 billion dollar budget that we have for some of these grants, and it's to a U.K. company that has a subsidiary in the United States that does defense contracting, but isn't necessarily one of the companies people had in mind when they talked about these mega fabs around the country.
I think the reason it makes sense as a first one though is because national security has always been the top line priority for the CHIPS program. If you look at the messaging from the Commerce Department and the memo they released when I was there on February 28th, 2023 about the criteria for allocating the money, national security was at the top of the list. When you think about this particular company and their supply of computer chips to key defense systems like the F-35 fighter jets, it makes sense as the first one. I think that we'll definitely see more grants, and they won't all be like this, but this is a good start and an indicator of the emphasis on national security.
In terms of the company itself and their stock buyback, the PMT is a tentative agreement between the government and the company. And now you're going to see some negotiations for how the money is actually allocated if that's what they decide to do. My understanding of it and the way we designed the PMT system is, yeah, a first step, a preliminary memorandum of terms, and now we'll see the government negotiating with this company around things like governance.
One of the really important aspects of governance is what you do with the money that we've provided. So if indeed they do get the $35 million, what does that mean for how they're going to deal with corporate finance issues like buybacks? What does it mean for the workforce? What does it mean for expanding the plant? Things like that. Whether they get it is still TBD.
In terms of the criteria and how they select recipients, it seems that national security is the overriding concern of why this company got it, right? I think with every company that receives funding, there are going to be a couple of questions about it.
We have to see what the final deals look like to understand how the terms of the agreement work and what governance looks like. Stock buybacks in particular are a big issue that we talked about in the design of the CHIPS program when considering the guardrails. Everything from whether they use it to buy back stock, to whether they're investing in countries of concern was on the table in the discussion.
So I expect that conversation will continue and we'll see more details as the deals are finalized.
Intel sold almost half of the share in its new Arizona fab to outside investors. It’s possible that they’ll see some CHIPS money. They were actively trying to generate liquidity, whereas BAE clearly isn’t.
Do you think about companies that are flush with cash differently from companies that don't seem to immediately have capital available, in terms of what the subsidies are valuable for?
Yeah, I see what you're saying. I think it's going to depend on the size of the project. Intel's corporate strategy is to build these multi-billion dollar facilities, while BAE is modernizing a facility, which is a much cheaper enterprise, and building chips that are in the mature nodes, ones that we already know how to build and that are in older technologies. It's clear that they’re different financial propositions. To me those are apples and oranges, but the team at Commerce will be looking at that.
At the end of the day, “What do we need the capital for?” is a good question to ask when allocating a scarce budget. When the bigger awards come out, I think you'll start to see real questions about those tradeoffs. For this early one, given that it's a relatively small amount of money and that it supports a key defense program, those issues are less salient than making sure that we get the governance right as we negotiate the final terms of the deal.
Talk to me about that acronym you mentioned, PMT, and the structure of negotiations for the deals. How is that designed? What was your role there?
When we started the program, we realized that these would be major awards, and even the ones that we're describing here as small are $35 million. There are two questions to address: who gets the money, and what kinds of guardrails are in place to make sure that they're using the money the right way? To do that as a one-shot decision where you would make an announcement and it would be a done deal: it just wasn't operable. The team on this was heavily informed by deals done in the private sector and said, look, let's have a preliminary memorandum of terms so we can make something about this public and be able to say that this is something that we're considering, but then also negotiate some of this really important stuff. I think this process was also designed to take some feedback from various stakeholders about these deals.
The questions you're raising about recipients are important and a good standard to have when evaluating applicants. I think they'll collect information from market participants and hear from stakeholders as they finalize it.
From a political economy standpoint, being able to communicate what you're doing is also really important. If all these deals had to be totally buttoned up and complete by the time you announced them, it'd be very difficult to run a program like that well. With a big industrial policy program, there needs to be some compromise in being able to communicate to people what we're doing. At the end of the day, in government, you have to be able to keep people's faith so that they trust that you're actually delivering the program.
On the other hand, if you start announcing agreements too early, before they’re baked, then you could be in a situation where you're putting the government on the hook for things that aren't actually good deals. Nothing’s perfect, but I see the PMT as a compromise to try to get a marker in the ground and explain what we're doing and why.
It also sends a signal to other market participants who are applying for CHIPS money about how the program might look and work.
When you talk about larger grants coming down the pipeline later this year, compared to that $35 million, what's the rough ballpark that we could expect?
5-15% of the capital cost was the guideline in the report we released in February. For a $10 billion fab, 10% of that, $1 billion, is a huge grant to subsidize some of these projects. Remember that on top of that, there'll be state and local grants, tax abatements, and the investment tax credit that they can use in the federal tax code.
If you think about it, it's a stack of incentives. The CHIPS money from the CHIPS office is one piece of that, but there will also be tax incentives at the federal, state, and local level as well as other grants around workforce from counties and other units. But the CHIPS part of the package could be in the billions of dollars, depending on the size of the project.
Where does that 5–15% guideline come from?
In a situation like that, you look at projects around the world and try to understand the scope of what governments are providing. You don't want to get into a situation where you're competing with what's called the winner's curse. This goes back to the original question about who needs the money and why. If companies are shopping for where to locate, they’re going to try to get the best deal they can. That's how it works. If governments are competing against one another, you often end up in a situation where you're bidding against other government units. This happens in the United States all the time: when companies are trying to locate in one area, they pit two states against each other and they take, in some cases, the highest bidder. That doesn't always happen because there may be other reasons why you want to locate in particular areas.
Generally, economists find this competition pretty wasteful because if weren't bidding against each other, we could actually get this location for a much cheaper price. And it might not even make a difference with these extra incentives and where they actually locate, so you end up overpaying, which is a big issue in any kind of bargaining and bidding situation.
Clarify for readers, when you say it might not make a difference, do you mean in terms of job creation, wealth creation?
Oh yeah, good question. I should explain that there are two ways that it might not make a difference. When there is an economic incentive war and two states, let’s say North Carolina and South Carolina, are competing against each other over where a company will be headquartered, it’s not clear from economic research that the extra money provided by the winning state actually determines the ultimate location. So that's one thing.
Second, it's not clear that at that elevated price, with incentives worth billions of dollars, that you actually can always recoup the money through jobs, taxes paid, or other economic prosperity engines. It's hard because a lot of this stuff is intangible. A lot of places want to be magnets for industrial activity and it's very difficult to quantify the effects. But in general, economists who've studied this and folks on the right and left who are worried about the way we use the public purse are highly critical of economic incentives.
In the context of the CHIPS Act and these large grants, you have to make sure that you're not bidding against other countries, because we're going to pay more than we need to get these factories located in the U.S., and that will mean that we can finance fewer projects with a given budget.
That’s where diplomatic efforts come into play, too. One aspect of industrial strategy is, “What are the mechanics of how we allocate the funds? Which industry do we focus on? What's the governance around things like buybacks or how they allocate the capital?” We also have to stitch together the international coalitions to make sure that we're not bidding against each other.
Tell me a little bit about your involvement there. You were an economist at Commerce, not at State, and you looked at international supply chains. From the implementation side, how do you think about integrating diplomacy and program design?
First is making sure that the people who are doing that international work know about the economic evidence around these things. When a company is deciding where to locate, it's really exciting, most of us might want that company to come to our backyard. Some people worry about the traffic, which I think is a good point too, but you might want your state to win. When you think about that as the U.S. against the rest of the world, you might think about it as a winning and losing kind of scenario.
I sometimes do this exercise in class where you present a jar of pennies. Nobody knows how many pennies are actually in the jar, but you have your students bid on it. The professor will always make money because people will overbid, thinking that the jar of pennies contains ridiculous amounts of money, and also get caught up in the auction part of it and want to win.
Just the same way, if your country's the winner, it often ends up overpaying. We have to make sure folks who are in those discussions understand how we can waste taxpayer dollars with inefficient subsidies.
Who are you talking to for that?
When I was overseeing the CHIPS implementation, it would be colleagues in the State Department and the Commerce Department who discussed technology and trade with our partners and allies around the world.
Let’s say a partner or ally shares their strategy on attracting a fab to their location. We would explain our CHIPS strategy and what we're doing and see if we could harmonize our strategies to make sure we're not inefficiently driving up the price, or figure out if there are opportunities for strategic collaboration.
For something like semiconductors, not every part of the supply chain is going to be in the United States. So we need to think carefully about where different parts of the value chain are located. Some of the diplomatic relations we have are based on problems and solutions from an earlier era, but we have to look at where plants are located and be strategic about which sectors receive government support. New conversations need to happen. Sometimes it's with the same people you've been talking to about another issue, sometimes new relationships need to be built.
I think that's one of the most interesting and maybe insufficiently studied aspects of the legacy of the Biden administration. Can we build up new channels and diplomatic institutions to have these discussions, to make progress and do this the right way? This includes both new channels, like the Technology and Trade Council with Europe, and new sets of countries. Look at the strategic relationship between the U.S. and the Congo, or Chile, or Indonesia. Those might not be places that anyone besides folks who are expert in those regions think about, but cobalt and copper are going to be ingredients for this industrial policy framework. Those countries and their relationships with the U.S. are very important.
Political scientists think about diplomatic relations a lot, but economists don't always focus on it enough. My academic and policy work now is to integrate that into our thinking a little bit more.
You say that not every piece of the supply chain needs to be in the U.S., but part of the CHIPS goal is to move chunks of that supply chain here. Are those the early stage or late stage pieces of development?
There are parts of the supply chain where the expertise is in other parts of the world and they already have a comparative advantage. If they're an ally that we can work with and it's diversified in a bunch of different countries, we don’t necessarily have to build another version of that in the United States. We’re looking for critical supply chain bottlenecks where there's maybe one source of supply in the area that's not as secure or resilient. Because we have a limited budget, we can't focus on every single part of the supply chain. Consider the famous example of ASML making the EUV equipment in the Netherlands. It's not practical to build a whole new company in the United States for that. We have a good relationship with the Dutch and ASML is a global company. The Japanese have several companies in the chemicals area, which is really important for semiconductors. It seems like other countries are going to have key parts of the supply chain, and we're going to work together.
There are some pieces, like the mega fabs, that we want to have in the United States, but there are lots of other pieces that we can work on with our partners and allies. There might be parts of the supply chain, like packaging, assembly, and test, that would be good to have in countries that are adjacent to the United States, like Mexico.
When critics make points about the industrial policy, I think they're imagining a world where we're trying to bring everything to one place, and that is both cost-prohibitive and impractical on an operational level. But you do want to think about the key areas.
What does interacting with the diplomatic side of the executive branch look like for you as an implementation coordinator?
The great thing is that folks at State and Commerce have these connections already. They're often organized by their countries, regions, or industries of expertise, and they already have relationships with the relevant ministries in other countries. The job of someone like me is to make sure they seek me out to hear what's going on with the CHIPS Act.
Let's say a partner or ally is talking through one of those channels and says, “Hey, can you tell us what's going on? How's the implementation going?” Then my colleague in the United States government will send me a note and ask me to brief them on it. Sometimes there's a memo, sometimes it's just a verbal briefing. Sometimes I might seek them out to say, “Hey, these are some countries that are really important. I'm hearing from this company that's located here. What kind of relationship do you have there? How are they thinking about their strategy?”
So it's a two-way exchange, mostly verbally. It will sometimes coalesce around a big event, like if there's a big summit or dialogue or memorandum of understanding being signed, where there could be some more specifics about things that we’re driving toward. The information flow that I find to be really useful culminates around events like APEC, the Indo-Pacific Economic Framework, or the TTC between the U.S. and the EU that I mentioned earlier.
The theory of the case is that, absent subsidies, recipient companies wouldn't do the things that we want them to do. Looking ahead, how do you ensure that the fab in Arizona, or the BAE Systems one in Nashua, New Hampshire is still doing the things we want 10, 15 years from now, once the CHIPS money runs out?
I think it's the essential question and it’s the most difficult part of executing the CHIPS program. To your point, how do you make sure you're supporting the marginal product, the product that wouldn't have happened otherwise? And not compensating companies for things they already did, which isn't an effective use of taxpayer money and would defeat the purpose.
Sometimes it's hard to know, because until the company is producing that product or putting the shovels in the ground, we can’t predict what's going to happen absent our intervention. We don't get those counterfactuals till much later. It takes a lot of intense interaction with the company and an understanding of the industry to determine what capacity could be built without you. Those are judgment calls that public officials will be held accountable for.
Once a project is approved for a subsidy, you have to set up tranche payments to make sure that they're hitting key milestones that were agreed to ahead of time. This lets the government say, “Look, if we don't see progress in this direction, the next tranche is not coming,” and reevaluate.
You can't avoid making mistakes, but you can avoid making mistakes worse. When the public looks at the program, they should understand that not every bet is going to pay off, but that we're going to cut off the bad bets or ones that are not fulfilling the spirit of the program. Our hope is that the government tranches the money, they continue to support it, and these programs are as successful as they can be.
Tranching helps ensure that the project stays on track, but there are also clawback provisions. After the money is handed out, the Commerce Department has the ability to claw it back under certain circumstances. That's a punitive measure that won’t necessarily solve a problem, but it is an ex-post remedy.
Stakeholder attention will be very important too. There are deals being struck with companies in this space and their workers, or with community colleges. We have to make sure there's accountability on those. Press and local coverage can play a role by asking, “We said we're going to train this many people and they're going to get jobs at this plant. To what extent have we actually made it happen?” That’s a softer but equally important accountability.
I don't think we'll see a full picture of whether this will work for at least five or so years, given how long these plants take to build and how long the outcomes will take to observe. But we'll probably see some intermediate indicators. When I was evaluating these types of programs as an economist, it would take a long time to get the data on wages, workforce, and production. We’re not there yet, with the awards just starting to go out.
Are there other industries of national importance that would benefit from this kind of targeted industrial policy?
I'm looking at this now in some of my research. We're currently focused on semiconductor chips, all of the inputs and reindustrialization needed to build up electric vehicles, and the ingredients for the transition to a less carbon-intensive economy. Those make sense to start with.
Biopharmaceuticals are another area where a lot of critical inputs are coming from abroad. But I'm of the school of thought that we’ve got to get the ones we're already working on right. It's a massive project. Honestly, addressing the questions that you asked me during this discussion will probably be more productive than expanding to other areas too quickly. We'll see what happens.
It’s also going to come down to political will, which I think depends on political configuration and how well we're doing in these areas. There’s a lot of skepticism, but if people feel like we're succeeding, they'll be more likely to support similar programs. And I get that until we succeed, that skepticism will continue to be there.
Thanks to Rita Sokolova for her edits for clarity on this transcript.
We publish an interview like this one every week. Consider subscribing, or telling your friends.