How to Make the U.S. Semiconductor Industry Boom Again

why we keep going back to this. Well. I mean, for one, there's just a lot of news, like so many things have happened, whether it's a sort of new ventures from say Intel, or new spending plans from Tawan Semi, or new legislation being proposed, So there's all kinds of new news. But I also think, um, it's just a really good it's a good topic for us. Yeah. I think it's an interesting mix of technology and sort of

business competition and also government policy. And we've spoken a lot about this, but government policy plays such a big role in sort of um incubating semiconductor industry, and I think we spoke about this probably the most with Taiwan and t SMC, But even in the US, you have that history of government support nurturing the early stages of the semiconductor industry as well. Yeah, that's exactly right, Like it touches on all these things technology, competition, market, stock market.

But as you say, you know, there is a long history in China now currently Taiwan, Japan, the US of governments playing a role. And I think there's like this sort of broader macro thing which we talked about all the time, of sort of more activist role for government, for democratically elected or elected leaders, like thinking taking a more active role in shaping economy and managing the economy and so like. Because of that and because of the

history of chips. Uh, semiconductors fit right into our fit right into our wheelhouse. Yeah, it's sort of a nice petree dish, I guess for a greater fiscal role for government's Yeah, exactly exactly right. And uh, every time we do semi conductor episodes, people listen to them and they want more, so we are going to deliver. So here

we are again. Yeah, so here we are. Here we are gonna so you know, like I've forgotten all the ones we've done, We've done the fall of Intel, the rise of Taiwan, semi China's own ambitions, the stumbles of the US. I don't know if we've like really done one yet on what it would take for the US to really have a sustained recovery in its semiconductor manufacturing prowess.

And of course we know that that's important because we have this acute semiconductor shortage, particularly affecting autos, but also there is this sort of long term maybe it's a defense of it's a geopolitical concern beyond this acute moment that it is problematic, that's such an important piece of

basically everything that gets built is almost entirely important. I'm pretty sure we've touched on it in various episodes, but you're right, we haven't done a whole episode dedicated to US policy in the same way that we've done it for Taiwan or China. Yeah, exactly right. So today I'm very excited because we're going to finally talk about some of the history of semiconductor policy in the United States and also perhaps what policies could could revive the domestic industry.

All right, let's do it, all right, So I'm very excited to speak to our guests. It's sort of actually the perfect combo because we actually have two guests today. One of them is an economist and one of them is a technologist. Alex Williams and huss And Kohn wrote a piece for Employee America back in March total titled a Brief History of Semiconductors, How the US cut cost and lost the leading edge and m Alex is an

economist and research analyst and Employe America. Husson he's a PhD from Carnegie Mellon on semiconductor policy specifically, and he now works in tech in both operations and procurement. So between the two of them, kind of the perfect way to talk about the macro and the micro at once. Uh, Alex and Husson, thank you so much for joining us. Really excited to hear. Yeah, glad to be here. So

what is it from your perspective? I mean, as I said, you guys wrote this piece on Employee America, which normally is sort of very focused on bigger picture macro stuff, labor market stuff in general. Why from your perspectives is semi conductors as sort of a thing that fits into that rubric. So I think the big overriding theme behind this, uh, this series that we've been doing on semi conductors. We

have two pieces out so far. We have a third one that should be ideally coming out right around when this episode goes public, and then a fourth one after that. But the I you just like us, once you start the semi conductor series, you can't stop. It's so true. We originally were going to write one piece and then it was so big, and then it kept going. It just yeah, there's something about this industry that every every time you look a little bit closer, there's an entire

other world that opens up. All right, Sorry, keep going. I didn't mean to interrupt you. Oh, no, worries. So really what we wanted to talk about was was semiconductors is a lens for thinking about sort of the intersection of you know, industrial policy, trade policy, stagnant demand over the period since the two thousand crash and dot coms

and things like that. And the idea was that we're a labor market focused institution, but industrial policy, you know, of its nature, has a strong you know, labor market focus, and that the idea is that you're directing the economy to make best use of its resources, even if sort of short run profit considerations or efficiency considerations don't necessar sarely support that. So it seems, you know, a little strange.

We write about the FED a lot, we write about labor markets a lot, But the idea is that we wanted to bite off something a little bit bigger to say, okay, cool, we do care a lot about labor markets. But part of that is up skilling, and part of that is focusing economic policy around specific industrial objectives. And when you do that, you naturally you can't help but intervene in

the labor market to do so. On the one hand, and on the other hand, you know, there's been real sort of bipartisan support for sort of doing something about semiconductors. Like there's really regardless of what political party you look to, there's you know, energy behind doing something about this situation. And we wanted to kind of spell out, you know, from a perspective that sees these labor market outcomes as critical and not just accidental. We wanted to spell out

what that kind of policy intervention should look like. If I can had one thing on just the industrial policy lens. It's really interesting because the semiconductor industry has has been at the forefront of a lot of these debates in the past. And if you revisit the industrial policy debates of the nineteen eighties UM when they were talking about saving steel and auto, they weren't focused on the semiconductor

industry as a place that needed intervention. And so I do think given this moment in time and the focus on the industry, is a good chance for us to reflect on you know, we had a chance to do i P in the past, and we chose not to because we we thought, hey, the booming industries will save us. And we're kind of back at that same debate with an industry that that was ignored in those previous debates. So it is a good chance for us to kind of revisit the history too and say what can we

learn from the past debates that we had. So Alex mentioned this idea of industrial policy being tied to labor markets and also allowing um an industry to sort of look past short term inefficiencies for the sake of like longer term competitive gains. Can you talk a bit about how that relates to semiconductors specifically, like why is that

important for the semiconductor business? Model. One of the lessons that gets lost when we talk about off shoring of production is that it's not just moving a facility offshore, you actually move that expertise offshore. So a factory is not just a box with a bunch of machines in it that are outputting widgets. It is that capex, but it's also the people who come together to produce out

of that factory. And so one of the major consequences of sort of the last thirty years of the like offshoring revolution in manufacturing from the United States perspective is that we also lost a lot of latent expertise within the economy. So actually, my advisor has worked with other researchers and students that showed that when plans shut down, a lot of the folks who are in the scientific research department leave the industry. They don't patent in the

industry anymore. So now you have scientific expertise exiting the industry entirely. And similarly, think of like blue collar workers who you know, they might be doing servicing of machinery or they might be floor operators. They have to go find work elsewhere, and they have a lot of latent knowledge about processes and how to actually build things that gets lost when they go work in a different industry. Altogether.

The upshot is that um, that human capital is not just like jobs, but they're actually the people who figure out solutions on how to make how to push technology forward, right, and not just from a academic perspective, pushing technology forward with invention, but actually with you know, tweaking on the shop floor and translating uh research and development ideas into

production capabilities. And the role that policy can play in this is you know, after say the two thousand you know dot com bubble bursting, you had to situation where you know, in a lot of sort of economic models, you think, oh, there's a crash, it's going to force out the less competitive companies so that the more competitive ones can restructure themselves and win the day. But the issue is is that you had substantial labor market attrition.

So this sort of you know, sort of squeezing effect like an accordion where people get pushed in and out of the labor market creates just an incredible excess waste of capacity when under a policy supported softer budget constraint regime, you could actually preserve and inculcate that you know that human capital, as it were, one of the things that you guys talk about in this piece as sorry, And as you mentioned, there's two pieces by now, but I'm looking at the one that you wrote in margin, and

you draw this distinction between industrial policy, and I hadn't heard the term before, but it's very useful science policy. And I think you know, when people think, oh, let's you get to take to revive of US industry or revive tech expertise, like oh what about R and D and spending, and you sort of put that in this

category of science policy. But can you talk about the sort of the distinction between these two things and the some of the approaches that have been taken in the past, Because this isn't the first time that there has been anxiety about chips elsewhere sort of pulling away from US. So I'm gonna say one quick thing before leaving it to Hussan to talk about the history of this split.

But I think that the core thing to remember here is there's this idea that technology is just some overlay that sits on top of existing productive processes, whether you're thinking of like you know, sort of total factor productivity or other ideas of technology that it just sort of

is this faery dust sprinkled over existing production. The issue is is that for technology to really be incorporated in the capital stock, it has to feed out through and become incorporated in the actual physical products used in production. And so if you don't have an industry that is booming, that is getting turnover in CAPEX where older technology production equipment is being replaced with newer technology production equipment. The things that you know how to do with the frontier

don't necessarily translate into production outcomes. But I will leave the history of of you know this this situation to Hassan. What Alex said is is very apt. I think where the policy mistake happened in the past was this framing of America needs to maintain its lead. In order to maintain our lead, we're going to fund R and D. The production and competition aspect of technology will be left

up to firms in the market. And so there was a broad policy consensus to say, will fund R and D, whether that's through the military or through institutions like the NSF for national labs. The problem becomes that there is this translation that has to happen ween a researcher, who is,

you know, doing cutting edge research and what is commercializable. So, just as one small anecdote, as part of my work on alternative Secilican SEAMOSS and graduate school UM, the industry was evaluating proposals by different academic researchers, and a researcher got up in front of an audience of industry researchers and was very confident that I solved your problem. I have your next transistor and went through and presented all sorts of data on its ability to operate and and

showed that it was better in some cases. And the first question was what temperature does your transistor operate at? And very confidently the researcher said, oh, uh, seventy seven kelvin. It's cool that by liquid nitrogen. So just very spent two seconds thinking about it. That's not something you or I could put in our laptop or cell phone, and that's sort of you know, that's but that's kind of

the where the disconnect is. We fund a lot of researchers who have leeway to go do all sorts of crazy things, and they do invent very interesting ideas, but at the end of the day. To take that, UM, the realm of science to the realm of technology requires a lot of translation and attention to you know, different types of variables like can I make a million of these?

Can I put them in people's homes? Um? And something like a transistor at you know, this liquid nitrogen cooled fails that test for a technologist, but maybe not a scientist. Can we get into, like, um, the actual historical aspects of some of this, So just in terms of the industrial versus science policy split, you talk a lot about it in relation to what happened to the semiconductor industry

in the nineties. Could you describe that period and exactly what happened and how it sort of set the US up for being less competitive in the tooth puss To come to where we were the decisions that were made in the nineties, it helps to take a step back. So at the founding of the semiconductor industry, you have this breakthrough at Bell Labs, and the military is extremely interested in this and it plays a very heavy handed role in shaping the diffusion of transistor technology across basically

the entire economy. UM. It requires Bell Labs to openly license it um and it requires second source and contracts for any firms that are manufacturing transistors. The end result is that because of the military implications of this technology, we had this de facto industrial policy saying we need to diffuse semiconductor expertise throughout the economy. So that kind of lays the foundation for the U s having a

durable lead for a couple of decades. Beginning in the late nineties seventies, Japanese firms begin to catch up, beginning with their their targeting of d RAM markets UM and they take the process lead from US firms. And this is sort of a major major watershed moment in the industry because the industry does actually ask for help, but it's first ask for help is on trade grounds, and it basically gets uh it asked for, like anti dumping

measures against Japanese UM suppliers. There's all sorts of debates that happened. The big electronics manufacturers think firms like HP or IBM kind of sit out these debates because they actually like having cheap chips from Japan and there isn't a major push towards more heavy handed government involvement. The industry does get some wins in the nineteen eighties where the government allows them to do collaborative research, but even

there it's pretty hands off. The government basically says, all we're going to do is fund advanced lithography and help you coordinate some of your investments across firms, but we're not going to take an active hand in shaping where the industry needs to go. We're going to look to the industry to kind of define where we need to go. And that kind of gets institutionalized in a few different institutions, the first being the SRC, which is a semi conductor

Research Corporation which funds university research. Then SEMITECH, which is the most talked about industrial consortia UM which was jointly funded between U s sm E conductor firms and the do O D. And then the lastly is the National Technology road Map for Semiconductors, which is basically the industry saying here's where we think semiconductors are going to be in fifteen years and here the technical capabilities will need.

And hey, government would be great if you helped to coordinate some of the early stage research research that we're going to need, you know, fifteen years from now. For future products. So how did that work out? The good side is that in the early nine nineties you actually have a resurgence for U S SMI conductor firms. They begin to recapture market share, and it is kind of like a everyone celebrates. Hey, this policy regime that we

we established seems to be working. But the US takes its foot off the pedal and actually begins to wind down a lot of these institutions. One they no longer have a national focus. They begin Internet nationalized, so SEMITECH begins to introduce international members beginning the late nineties. The Technology Roadmap begins to introduce international members also in the late nineties, so it's no longer national technology roadmap, it's

an international technology roadmap. UM. The end result is that a lot of entrepreneurs outside of the US kind of have a blueprint for what it's going to take to compete with US firms, and they they begin to catch up in key UH industry processes. So you see it in things like d RAM where Korean firms have have majorly caught up to even Japanese firms, and most Japanese

firms have left the market. UM. And you see it now with the rise of foundries, where foundry firms were able to catch up to integrated device manufacturers and overtake you know, most recently with t SMC and Samsung overtaking

Intel in terms of their process capabilities. And then the third sort of a trend that kind of makes this more exacerbated is you have a major technology revolution in the late two thousands where traditional manufacturing also sees get more expensive and US firms, which we're funding heavily in R and D and were previously integrated device manufacturers so they were vertically integrated, they begin to pull out most of their manufacturing and rely more and more on foundries, right,

and so that helps those founderies also increase their overall CAPEX bend because they now have more customers kind of they have a stronger customer base to drive their R and D in capex and and help them further push the frontier of manufacturing. So ultimately, it worked out well in the near term in that a lot of these companies became more profitable because they were able to coordinate their research and development more tightly with one another, and they were able to sort of hone in on a

particular vision of industry organization. But the problem is is that by distributing who is working on what in that manner,

you don't build out redundancies in the system. If every individual firm is competing on every individ dual product line or if not product line approach to production, so like sort of production methodology or what have you, you just from an evolutionary perspective, have more people working on the same thing, so more sort of opportunities for kinds of you know, mutations in the method of production that may

or may not be worthwhile. If you cut out that entire you know, base, once what you're working on starts to not quite work as well, you don't have a rolodex of strange ideas or mutations or slight differences that you can point to. On the one hand, and on the other hand, you self consciously shrunk the market for semicap for productive for producing machinery to produce semiconductors for

domestic firms. And so these two together lead to this kind of self reinforcing situation where you're running really quickly, but the moment you trip, you're on the ground. Just one more has oracle question Before we move on to modern day efforts to boost U S semiconductor expertise and capacity.

Can you talk a little bit more about Japan in the nineteen eighties, because this was such a big deal in terms of competition with the US, and they kind of on the one hand they went down a similar path in that the government was promoting their own domestic industry. But on the other hand, they didn't have nearly as much involvement um from the military because Japan's military it kind of exists, but it's nowhere near the size um

or scale of the U S. Did you describe that contrast. So, the major institution in Japan that drove industrial policy for semi conductors and also computing is MITTY, which is and I always forget the exact name, but it's the Ministry for International Trade. They actually played a very heavy handed role in reshaping both the semiconductor and computing industries during

the nineteen eighties. They set targets for what their technology, what their internal firms needed to be capable of UM at a technology level, so they said, by four we need to have x y z process and product capabilities, and they would actually reshape firms by force forcing UM

collaborations between competitors on specific technology approaches. The end result was that it allowed them to leap frog American firms in product categories like d RAM, where they took a more conservative path um to reaching sort of the targets that have been laid out by Mitti and capturing huge

portions of market share. The apex of fears over Japanese domination of the industry came with the announcement of Japan's fifth Generation Supercomputing project, which I believe was in four sort of based on the heels of their success with their v l s I program UM, where they basically said, we're going to now that we've caught up to the frontier in some econo pers and computing, we're going to define the next generation of computing with advances and semic

connectors and computing technology. However, that program mostly was a failure UM. It petered out and sadly going into the ES from Japan's perspective, the the economy more broadly UM stagnated UM and you know today Japanese computer and semic connector firms are nowhere near the leadership they were in

the eighties and nineties. So they did take a very different tact to sort of play catch up to U S firms, but they were also unable to to sort of build on that catch up phase to establish long term dominance the way the U S industry was able to do in the decades prior. If I can just offer a short summary of that in a in a certain way. So much of industrial policy for ketchup is effective, especially in East Asia, because the rest of the world presents a target and the goal of policy is to

hit that target. When you're at the technical logical frontier or when you're attempting to gain the technological frontier, you need to not only be good at hitting targets, but you need to become good at specifying or imagining targets that no one sees yet, which is a different necessity and sort of speaks to the fact that there is

a role for industrial policy. But the fact that there is a role for industrial policy doesn't mean that there's no role for science policy, which sort of funds people thinking about where targets might be or where targets ought

to be. That that's super that's super interesting. So you still have to have that R and D. You have to have the crazies that think about can we have a chip that's a negative seventies seven kelvin And Okay, maybe that's never gonna be in a phone, but there have to be people out there and investment in figuring out what that that true? Like pure science tech frontier is, you know, I know where we gotta get to, like the sort of present tense like what's to be done?

But you know, one of the questions I'm still like curious about her that I feel like we need to talk abo out of. We we have. Part of the consternation right now is the sort of model that you talked about where we have design in the US and a lot of companies that are still extremely good at it, but manufacturing overseas. The separation of design and production the foundries, and that's what left has left us sort of like

I guess GEO politically vulnerable. Perhaps how much is the role of Wall Street specifically in the history a contributor to companies opting for this business model. So I think that is a good question, and I think we're you again. I don't have like a deep study on it, but I do think you saw a change in the industry when you saw generational change in its leadership. So UM in the late eighties and early nineties, many of the leaders of US semi connector firms like Intel or fair

Child or am D, we're still their founders. And there was actually, when you talk about this split between design and manufacturing, a model from integrated vertically integrated manufacturers that quote real men have fabs UM. It was meant as an insult towards foulist firms who, you know, we're relying

on foundries to build their chips. And there was a generational change in that leadership that also sort of saw, I think the financialized approach of hey, you know, we can shed some of our assets and reduce our overall costs and increase our margins if we rely on foundries UM.

SO I think it was a mix of both Wall Street's influence, but also when that first generation of leaders left the industry, new managers came in and took a different approach to UM technology development and influence in terms of mood and approach rather than profit pressures, you know necessarily or a priori So maybe just to set the scene for the present day, when you look at the U S semiconductor industries competitiveness its place in the world, What do you see as lacking and where are the

biggest areas for potential improvement, and then we can talk a little bit about how we might get there. So I think if you were to look at the U S. Smiconductor industry today, there are certainly pockets of excellence. We have world leading firms and electronic design automation like Synopsis

and Cadence. We have world leading firms and equipment manufacturing like Applied Materials and k l A. Ten Core, And we have world leading fabulous design firms like Qualcom and in Video, and increasingly a new crop of tech giants like Google, Apple and Facebook who have realized they can get into chip design for their specific workloads. Where the U S industry has gotten weakest is it's specifically in

its semiconducting manufacturing ecosystem. Although we do have quite a few fabs still in the US, both at the leading edge and at the trailing edge, we don't have sort of a thick ecosystem of equipment suppliers and manufacturers on the ground working together to push the edge on what's possible.

And that's one place where, for example, a weakness is we don't have any EUV lithography machines in the US producing commercially outside of Intel, right, we have just one company in the U S who is using that technology. And we don't have that learning environment between multiple manufacturers and suppliers who are visiting multiple sites, who are kind of learning best in class techniques from different firms to

continue to push the envelope. And and that kind of hinders our ability to innovate because you don't get innovation across the entire stack. You kind of focus your innovation on the places where we do lead, So you don't you don't kind of bring that full package together where you're where you're developing new technologies in the fab and helping that helping leverage those findings with suppliers and equipment

manufacturers and design firms. And this is exactly the role of industrial policy and speaks to the sort of target metaphor that you know I used earlier, which is that if you have these cutting edge firms at the absolute peak of your industry, while you are at the technological frontier, it's clear that you have people who know how to

set targets. The issue becomes translating that into a you know, industrial organization, you know, sort of like an ecosystem is a very good word for it, where you know, sort of there are a variety of firms engaged in and you know who in principle can help hit that target that is being specified by those sort of absolute front

of the line firms. So the idea is that an introduction of industrial policy into the existing industry like will sort of allow it to do what it does well even better by virtue of adding support and supply line.

So I realized, there's one more question I want to get to, uh, and it's related to this before we get to the sort of pure question of like, all right, what is the best policy it looks like and uh huss and you sort of hinted at it when you were talking about Japan's rise and fall, and it's something Alex that your colleague Scanda m. Nath has talked a

little bit about. But what is also the role of just the sort of sluggish economy and all this the lack of capital deepening, the lack of capital investment of course, from the Great Financial Crisis to you know, the virus, the pandemic economic growth was weak. Tech really never really tech spending never really recovered in the same way after the dot com bubble. What is the role that just like our our our acceptance of poor growth contributed to

this sort of hollowing out of techno. How so, our first piece in the series, actually, which is called supp lying demand the chip shortage in macro context, delves into this question, you know, pretty pretty intensively, and the simplest answer is a basic, you know, sort of Canzian answer. If you don't have strong demand, manufacturers are going to see that and say, Okay, our present capacity, in whatever technological quality it's in is sufficient to meet what we

think is going to happen. So there's no need for us to invest in new capacity here because at that point we'll just flood the market and we'll begin to eat into our own margins. So if you can durably predict that there's going to be low demand for a long period of time, you can cut capex and not have it, you know, negatively impact you because there's no demand for you know, anyone in in that market space.

But the problem is is that if you have say technology advancing at a constant rate, and like I said before, for that technology to enter into the production process. It has to come through, it has to become embodied in

new capital goods for production. If you don't have a macroeconomic environment that has enough you know, effective demand to persuade producers to invest in new capital goods and to add capacity, you're not going to see that technology be taken up because you're not going to see the capex happen.

An environment of low effective demand is going to redound not only on poor employment, which you know, creates a less skilled labor force, you know, and even without even speaking to layoffs caused by you know, sort of market slowdowns, but it's just going to not have technological advances that do happen be incorporated into the economy as a whole as quickly as it could be, and so you'll see

a productivity slowdown as well. So does that suggest that one of the fixes for the market right now could be setting some sort of demand floor, like just ensuring that the government is there to buy up excess capacity of semiconductors. So I think that that's a a necessary part of the fiscal spending, part of an industrial policy plan. However, it's very difficult to specify beforehand where that should be done.

As I'm sure Huston can speak to, semiconductors are an astoundingly differentiated market where you know, the there's there's very little that is you know, you could think of as a simple baseline. You know, in the same way that price supports for commodities like milk, you can define a basic this is milk everywhere you go, this is what

milk is. So before we can do that, really what needs to be done is the US government would need to build out a data gathering apparatus to get a full picture of what supply chains look like now, because with the level of differentiation, it's difficult to say what that would look at before that data is gathered. They'll I'll let us and speak on that if he wants to. And actually this is a place where the Biden administer

it should sort of started on the right foot. Um. It was one of the first executive orders that they announced was a supply chain review of semi conductors, and it's sort of as as Alex hinted at earlier, I think it's really important because there is a major bipartisan consensus on doing something. But to cut through the noise and get to the what is this something we should do. I do think the government has to take time to take stock of where are our biggest vulnerabilities in the

supply chain today? UM. We've had some a lot of noise related to the shortage, especially with say automakers, But I don't think there's anyone who's saying we need to completely reshore the automobile I see supply chain. UM. I think instead, you know, the conversation we should be having at at an industrial policy level is what are the internal capabilities that we need to maintain in order to maintain a resilient UM semi conductor ecosystem in the United States,

and how can we support that? So there may be areas of that ecosystem that are best supported with purchase guarantees, um, you know, for specific markets to make them competitive. UM, But I do think other areas would have other support mechanisms as well. Right So, with autos, although it's a problem right now, my understanding is that the actual technology that's missing is they're cheap, they're low end. It's not like necessarily the most urgent thing. Ultimately, it's just sort

of a weird thing going on right now. So in your view, like, where should we be looking like, where do you think we're going to find the supply chain vulnerabilities and what are some of the perhaps best policies that we could be putting forth in terms of like legislation and dollars that that might go towards addressing it or maybe building a system that can resiliently address issues

as they come up. I think I'll talk a little bit about the specific deficiencies that I see, and then Alex can maybe talk more about some of the proposals that we've seen and where those are most promising. So I think we're where where the U S has a deficiency is we've weakened sort of our overall ecosystem for manufacturing innovation, and I think I would give to give

a good counterexample of what that might look like. Is You've had Dan Wang on this podcast to talk previously about how magical of a place Shenzen is for its electronics ecosystem where you have engineers from across the world kind of coming together and tunkuring to build new things. And if you go back to Silicon Valley in the nineties,

that's what you had. You had, you know, engineers from different firms coming together, meeting up at local bars and kind of learning from each other and learning from local suppliers on what best and class capabilities were. Because today that our domestic ecosystem has been so thinned out, you really only have you know, a few company towns where you don't get that same sharing of information. That's one weakness.

I think the other weakness that we have is we we have reliance on individual rule suppliers for key key links in the supply chain. So the one that's gotten talked a lot about is t SMC at the leading edge, where you can't manufacture a trip at five or seven

animeters without relying on t SMC. But we're also seeing it in trailing edge nodes where a lot of materials and components are single source, sometimes out of Taiwan or sometimes out of other countries like China, and those create vulnerabilities for our entire industrial ecosystem because hey, guess what that two dollar integrated circuit that's nothing to write home about.

You can only get from one plant. And so I think you know that leads you to the first policy point that that Alex introduced, which is we need to do a review of our supply chains to understand where those gaps really are and then think about remedies. And I would say, in terms of taking seriously that the first step towards coming up with a truly efficacious industrial policy program. In terms of proposals on the table to do this, the Endless Frontiers Act doesn't really address this

too much. A lot of its funding is still focused through academia, even though it does engage with the Manufacturing

USA program. The Chips Act does provide for a survey of manufacturers, you know, about national security concerns, particularly across the supply chain UH, and it does the uh, you know, sort of in my opinion, good move of anchoring that in the Department of Commerce rather than the you know, the n c s C, the National uh Counterintelligence and Security Council or something like that has a similar you know, national security in the semiconductor supply chain a project that

it's working on. UM. But really the the ideal is the sort of spec infrastructure plan that the Biden administration put forward, which includes fifty billion dollars for the establishment of an Office of the Department of Commerce to monitor domestic industrial capacity just across the board, which you know, insofar as the problems in semiconductors are you know, significant

and melorable through industrial policy. But there's also a critical sense that this industrial policy tool kit is something that we are going to have to get better at as we sort of confront the absolute necessity of adapting the economy to climate change in ways other than just reducing fossil fuel usage in order to adapt to a significantly changing landscape, having active monitoring of domestic industrial capacity and factors impacting it from a variety of sources is going

to be something that we're going to have to get much better at. And semiconductors provide, through their complexity and through their product differentiation, just an incredible sandbox for testing out methods for doing this. I have a devil's advocate question, which is, what do you say to people who are sort of um markets fundamentalists, let's call them, who would say that, well, the US has squandered its edge in semiconductor is Intel has made a ton of missteps in

its own business. It doesn't deserve to have help from the government in any way because it's just not going to be efficient or it's not going to be competitive with Taiwan or China and other manufacturers. What's the response there.

I agree that any industrial policy should not be viewed as a giveaway to national firms, and I think the any administration looking to implement industrial policies should be also looking to make sure that they're either getting concessions from firms that they're providing help to, or using it to seed not just existing firms, but also helping um you know,

new firms take advantage of those. But the other comment I'd make is we should be kind of blunt that there is no free market operation in the global semiconductor industry when Taiwan is subsidizing the production of fads. China has openly stated its ambitions for the for its domestic semiconductory industry, and Korean Japan, of course, have a long history of supporting their domestic industries as well, and there's

also talk now of Europe funding leading edge fat. So the question kind of comes given that, you know, national governments across the world are going to be subsidizing and protecting their industries, what do we need to do in order to make sure that we have a sufficiently capable and resilient ecosystem to service our economy. Because as Alex kind of hinted at semi characters are so pervasive they they touch every part of a modern twenty century economy.

And to find ourselves at the mercy of far flung suppliers because that's what the market requires, I think, is a risk that a government doesn't actually want to take, regardless of its adherence to free market principles. And worse

than that, it's bad economics. The idea that you know, free market principles would say that you should, you know, pursue comparative advantage and let these other countries with their cheaper labor do these lower value add processes, and you know sort of and the torpedoes to the domestic economy, you know, relies on this notion that you know, we are specializing in high value add and they're specializing in low value add and then we sell our high value

add and buy their low value add and then it's better for everyone. This is sort of the you know, happy family of the Riccardian models you know, from you know, a thousand years ago. The problem is is that in an actual dynamic economy, everyone firms and nations alike are trying actively to move up the value chain. So if you sort of say, hey, sure you can have all of this, you know, sort of low value add work, like have fun. We're going to be, you know, just

doing the ultra high tech. You know, we're just going to design the chips and you'll never catch us up at that. And then you know, five years, ten years, fifteen, twenty years later, these firms that we're doing what used to be low value add work have stacked up enough process improvements that all of a sudden, hey, if you want to produce something at five nanometers or seven nimeters,

you have to go through them. Because at the time we decided, oh, you know, this is sort of schlap work and you know, sort of Ricardian comparative advantage will take care of us forever. Markets don't work that way. Was anyone ever like warning about this back then? Where there people are like, oh, maybe it's not a good idea that all these companies for all these products are just sort of assuming, you know, just sort of thinking of Taiwan is their factory and you know, let's just

do the high tech stuff here. Chalmers Johnson famously I think Hussin can speak to more. I mean, there was an enormous freak out in the nine eighties when Japan became ascendant. Uh, and that's where the d D really did get involved. But but I don't I don't think anyone in the eighties and nineties sort of as we were, you know, crafting the path that we ended up now foresaw a future where you know, the U. S. Economy could be ground to a halt by foreign ship supplier availability. Right.

I think it's kind of gotten to a point where, well beyond what the architects of our current policy regime sort of imagined. Do you want do you like? How optimistic do either of you feel based on you know, we have this sort of emerging bipartisan consensus. It might

be like one of the only bipartisan issues that there is. Like, it really does seem like both Republicans and Democrats are kind of on similar pages on this, and there's willingness to spend money and identification of some of the issues. So how optimistic are you that this sort of like long decay of our production no how can start to be reversed? Just speaking from a policy perspective, I think it really all comes down to the correct choice. And I'll let Husson speak a little bit more to what

that correct choice of policy program is. I was gonna say two things on how optimistic I am one is. I think in the short term I'm very optimistic that we will pass policy. Whether it's the right policy depends on making sure we get policymakers to listen on what

approaches we have. I think in the long term, on whether or not this episode helps the United States adopt afford looking industrial policy strategy that can be leveraged for say, climate change is still is a much bigger question, and that's the level that I would like to see US get to UM for for success. I think what Alex has done and and has seen in proposals that are out there today is that the right pieces are in

proposals UM. Whether that's the Endless Frontiers Act, the Biden Infrastructure Bill, or work from some senators like Senator Coon's, the pieces are there, I think to be really successful in the short term, it's about pulling out the right specific proposals and and merging them together into the right approach with a focus on supply chain analysis, setting clear goals for what the US semiconductor ecosystem should be capable of, and then building up that supply chain, a supply chain

monitoring muscle to sort of look forward and beyond the semiconductor industry to where else will want to manage our industrial capabilities to tackle, you know, future challenges with climate change, anything else, Alex and husting any sort of last things we didn't ask about. Our key ideas you want to

keep something you want to get across. I guess just to look out for sort of the next two pieces in this series, which the next one will be a sort of thorough account of what the Industrial Policy tool Kit ought to be UH for for our government's looking to implement this UH and the one after that being sort of a longer theory based, you know, sort of argument against this this Ricardian comparative advantage approach to trade policy,

which the semiconductor industry illustrates particularly well, but which holds across sectors. I can't wait to read them all right, Husson and Alex, thank you both so much for coming up. Thanks so much for having us. This is wonderful. Thanks guys, that was great. I found that to be a very helpful UH conversation to sort of like frame where we are right now. I really like I like this idea. I mean, it's we've we've talked about this, you know,

Dan Long and a few others. You know, obviously this idea of like learning by doing the importance of actual like getting your hands already know how. But I felt like, you know, is Alex put it that, you know, technology isn't just something that's like is handed down to producers and then they like upgrade the thing like production is like what technology is. It's just like a very like sort of like useful way to think about the challenge. Yeah.

And I also like this idea that you know, people tend to think about industrial policy and government involvement in industry as a sort of um like a really boring, very controlling, like stifle stifling of innovation, I think, but the way um Alex and Husson kind of described it, it can be a backstop for getting really creative innovation

in different products. And I think a lot of people don't necessarily think of it that way totally, right, And I just think, you know, I really appreciate this sort of like more granular discussion about the different periods of our different policy regimes and thinking like, oh, we can do this just by funding a lot of R and D, and of course I don't think anyone is going to deny that R and D is extremely important. But then

also the demand side of element. But you can't just get the demand because there's no such thing as just a chip or saying you know, I can't say we're gonna bull the chips, having to identify them. It's a difficult problem. And I think you know that that point that Husted made at the end, like what matters is getting the policy right, Like there isn't going to be a sort of nice, a nice clean up, one shot solution. It's got to be a sort of a multi pronged focus. Yeah. Absolutely,

I'm sure. I have this terrible feeling that in like two decades, we're going to be having a conversation about this moment in time, talking about whether or not the US's attempts to revive its semiconductor industry We're successful or not. It's going to be a never ending semi series. We will we will definitely talk about it in two decades, but maybe it'll maybe we'll be looking back at how it was, how the US turned it around. Absolutely, Okay,

shall we leave it there, Yeah, let's leave it there. Yeah, this has been another episode of the All Thoughts Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joey Wasn't Though. You can follow me on Twitter at the Stalwart. Follow our guests on Twitter Alex Williams, He's at Tragic Bios. Follow Hussan con on Twitter. He's at Hussan Cohn and check out all of their writing. And you know there's ones coming up at the Employee America Medium page or at the Employee

America website. Lots of super deep stuff there. Be sure to follow our producer Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast Francesca Levi at Francesca Today, and check out all of our podcasts at Bloomberg onto the handle at podcasts. Thanks for listening.