Knowing is not the Point

by | Mar 1, 2023

It seems everywhere you look, industrial policy is creeping back into America. 

Just yesterday, the “Bread and Circus Brigade” opened the gates to a $53 billion trough.

That’s the amount of subsidies the U.S. government is willing to feed corporate semiconductor giants to entice them to build chip fabrication plants here in the U.S. – i.e. the CHIPS Act.

Now, thankfully, companies have a few hurdles to clear first. I mean, after all, the commies in Biden’s administration have their priorities too.

In order to get the Commerce Department to strike a check, the government will “be implementing a number of safeguards to ensure companies that receive funding are holding up their end of the bargain.”

And that bargain includes:

  • Diversity and inclusion will be a staffing priority (gotta make sure propagandists have a place to sit during the day).
  • They must hire union button pushers (presuming robots don’t do everything).
  • All iron and steel will be Made in the U.S.A. (I guess that rules out repurposing or recycling existing facilities).
  • The companies have to provide affordable child care (think about the children).
  • They can’t just use the money to pay dividends or buy-back stock (which assumes the government should be handing out checks in the first place).
  • They gotta share their profits with the government (wink, wink, nudge, nudge).
  • No business expansion in China for 10 years (our commies don’t like their commies)

“We are not writing blank checks,” assured Gina Raimondo, the head comrade overseeing this particular feeding frenzy.

That’s a relief…

Now, all this Nouveau Industrialism is giving “journalists” plenty to write about. And those that pretend at “free markets” tend to say something like, “Governments seldom know better than markets which technologies will succeed, and often burden the effort with objectives having nothing to do with helping the targeted industry thrive.”

This rather high-handed justification is technically true.

The individuals making decisions for companies tend to have a lot of experience risking money and making profits. You would expect them to be much better at allocating capital than government lackeys.

But the truth is, no one is that great at making these decisions.

In the book “Why Things Fail,” Paul Ormerod notes that the success rate for new businesses is generally low, with some studies suggesting that as many as 80% of new businesses fail within the first five years. Even when you look past those first five years, 50% of businesses still ultimately fail.

And this jives with what I know of company profitability. The average economic profit across all publicly traded U.S. companies is basically zero. Meaning that half of all companies don’t create shareholder value.

So, why not let the lackeys have at it?

Well, it’s not about good decisions. It’s about bearing the risk of failure.

When private interests fail, the Board, CEO, and shareholders feel the pain. But when public interests fail, no one takes the blame.

In 2011, Solyndra filed for bankruptcy after receiving a $535 million loan guarantee from the US Department of Energy (DOE) in 2009.

But Obama didn’t suffer. He didn’t hold an urgent press briefing acknowledging that donor considerations clouded his judgment. Only taxpayers suffered.

With the CHIPS act, we can expect to suffer more.

Think Free. Be Free

Don Yocham, CFA

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