In 1961, with global politics chilled by the looming Cold War, President Dwight D. Eisenhower delivered his farewell address, warning the nation of a military-industrial complex.
“In the councils of government, we must guard against the acquisition of unwarranted influence,” Eisenhower said. “The potential for the disastrous rise of misplaced power exists and will persist.” That is true of great corporate influence over policy, combined with political power, whether the buying branch is the military or some other federal power.
More than 60 years later, those words ring prophetic. A new industrial complex is taking shape, not in arms and artillery, but in silicon and circuitry.
In 2020, governments worldwide locked down businesses and citizens in an attempt to mitigate the spread of COVID-19. Mandated shutdowns brought supply chains to a standstill, leaving goods stranded and consumers waiting. Taiwan Semiconductor Manufacturing Company, TSMC, produces more than 50 percent of the world’s semiconductors, the miniscule computer chips found in nearly all electronic devices.
In 2022, The Daily Economy published contemporary coverage of the phenomenon:
If you’ve tried to make a purchase recently, anything from a new car to a laptop to a washing machine, you’ve likely felt the pinch of the supply shortfall. Any product relying on semiconductor chips is likely to be delayed, limited, or just plain unavailable. General Motors earnings slid 40 percent earlier this year, as nearly 95,000 vehicles languished for want of this or that semiconductor chip. Semiconductor shortages delayed the production of as many as eight million vehicles. While carmakers were hit by the shortage first, Goldman Sachs estimates 169 industries have been impacted. Sony couldn’t produce enough PlayStation 5 consoles to meet day-one demand. Apple and Samsung scrambled to find the chips suitable for LED backlighting in their tablets and laptops.
Firms that embed chips in their products kept around a 40-day supply on hand in 2019. That inventory crashed to less than five days in 2021, according to a Commerce Department report.
The market shock motivated Washington, DC to embrace a protectionist path, passing the 2022 CHIPS and Science Act, intended to re-shore semiconductor production. The Act’s cheerful backronym “for the Creating Helpful Incentives to Produce Semiconductors (CHIPS)” optimistically focuses on the intent, rather than the impact, of meddling such complex manufacturing.
Similar subsidy programs have since been launched in Europe, Japan, and South Korea, placing semiconductors at the center of a global industrial-policy arms race. The CHIPS and Science Act was designed to reduce dependence on Asian manufacturing and bring semiconductor production back to US soil. Well before the massive subsidies were introduced, Intel, Samsung, and Micron began construction of manufacturing centers in the US. TSMC from Taiwan, Samsung from South Korea, and Micron Technologies based in Boise, Idaho, are recognized as the “Big Three” in advanced semiconductor chip production. Their accelerating US expansion has also brought the industry into deeper entanglement with government.
Washington’s appetite for power knows no bounds. Not content to maintain his predecessor’s subsidies, US President Donald Trump is exploring options to take a direct government-owned share in not just Intel, but defense firms such as Lockheed Martin, Boeing, and Palantir. This continues an outlandish precedent where the US government owns a “golden share” of US Steel and most recently acquired an $11 billion or 10 percent stake in Intel.
Intel’s stock has halved since 2021, and remains a struggling firm despite $7.86B in CHIPS Act subsidies. Rather than allowing Schumpeterian creative destruction to take its course, policymakers decided to restore Intel’s position as the “national champion.” The government’s direct stake and subsidies ensured Intel’s survival and renewed its relevance. Washington now expects a quid pro quo from firms that took subsidies. In addition to this, Nvidia’s $5 billion, four-percent stake in Intel completed a triangle linking Silicon Valley’s crown jewel, Washington’s chosen national champion firm, and federal policymakers. By buying into a failing firm propped up by public funds, Nvidia bought itself a seat alongside Washington bureaucrats, outside the usual regulatory channels. That’s access its rivals can’t match.
When Washington subsidizes, invests in, and regulates the same industry, it stops being a neutral umpire and becomes an active player on the field. Policy decisions soon skew toward protecting the government’s investment and interests, rather than fostering true competition and innovation. Firms like TSMC, AMD, and Samsung will face a moral hazard, and replicate it to their competitors: it will now be much more cost effective to court politicians than to invest in R&D or compete on innovation — creating things buyers want.
James Buchanan, Nobel laureate and author of Politics without Romance, claimed we should never assume policymakers act as benevolent social planners, “Politicians do, in many cases, try to further what they think is the interest of the whole group, but in a sense, they’re just like the rest of us. Sometimes they’re motivated in terms of their own private interest, just like a businessman.” In this case, tying Washington’s interest directly to Intel’s success will shape semiconductor research and development, regulation, and global markets for years to come. Political and corporate incentives align to promote the interests of those who broker the deals — not the constituents or customers.
Reflecting upon recent financial disclosures, President Trump personally owns shares of Nvidia and Intel worth between $500,000 to $1,000,000. Coincidentally, in true Art of the Deal fashion, Intel’s stock rose 23 percent from the new partnership with Nvidia, while Nvidia’s own stock rose roughly 4 percent. The public is left wondering whether policy is being crafted to serve national security or private portfolios. Ultimately, the price of this alliance will be borne by consumers, who face higher costs and slower innovation, and by taxpayers, forced to fund the rescue of a company the market had already written off.
The line between policymaker and producer has all but vanished; the businessman and the bureaucrat are now one and the same. This is no longer a free market but a semiconductor cartel, where government, regulators, and industry titans coordinate the future of computing power. By combining subsidies, ownership stakes, and regulation, Washington leaves little room for genuine competition. This “tech industrial complex” locks in incumbents, crowds out rivals, and turns policy into corporate protection.
National economic policy of the favor-buying and rent-seeking kind will only accelerate, as other industries seek to garner favor and funding from buyable bureaucrats. The innovation engine that made Silicon Valley great risks becoming a state-sponsored utility. As Milton Friedman famously quipped, “If the federal government were put in charge of the Sahara Desert, within five years there would be a shortage of sand.”
To avoid turning the semiconductor industry into a barren desert, Washington must step back and let market signals and free investment irrigate innovation.
