Biden’s industrial policy machine is already sputtering

Since Joe Biden took office, his administration has not shied away from pursuing aggressive industrial policy in sectors deemed essential or strategic. At its core, the administration believes that aggressive subsidy strategies will spur favored industries. Specifically, the administration hopes electric vehicles and semiconductors will take off and provide Americans with an abundance of clean energy-powered vehicles and secure domestic computing capabilities. Through bills like the CHIPS and Science Act or the Inflation Reduction Act, the administration set out to put its vision into practice.

In just a couple of years, however, that machine’s engine has started to sputter.

Any type of market investment carries inherent risks, even in seemingly “slam-dunk” markets.

A closer look at the IRA’s electric vehicle provisions shows this subsidy-heavy approach will place a hefty burden on taxpayers without delivering on promised returns. Last year, EV ownership rose, with nearly 1.2 million new vehicles hitting the road. This put EVs at 8.1% of the total automobile market by year end. These were records in both sales volume and market share, which normally would warrant optimism.

Nevertheless, year-over-year growth figures suggest EV sales might be growing more slowly than expected. EV sales grew by 40% in the fourth quarter of 2023, posting the lowest growth rate in recent years. This was a 9% drop in growth compared to the third quarter of 2023 and a 12% drop from the fourth quarter in 2022.

While demand for EVs might be cooling down, the costs of the IRA are, paradoxically, ballooning. A recent analysis by the Taxpayers Protection Alliance highlighted that costs of EV tax credits have outpaced initial projections by more than $224 billion, due to an unforeseen increase in manufacturing of EVs and EV batteries.

Under normal circumstances, decreases in demand that coincide with increases in supply usually means a win for consumers. In those cases, suppliers must bear the costs of their over-investment and lower prices to raise demand back up. Because over-supply is fueled by government subsidies, taxpayers are the ones who end up shouldering the bill.

A similar situation is brewing in the semiconductor industry. Despite the passing of the CHIPS Act as a response to the pandemic-induced semiconductor shortage, the semiconductor industry saw sales decrease by 9.4% in 2023. Additionally, American chipmaker Intel and the Taiwan Semiconductor Manufacturing Company recently announced they are delaying the production of new chipmaking factories.

Industrial policy efforts in emergent industries such as electric vehicles or semiconductors usually face a race against the clock. As the term implies, emergent markets are markets with rapidly shifting conditions. This makes it more likely that industrial policy efforts will become inefficient, wasteful, or redundant from the moment they are put in place. For example, a semiconductor factory takes up to three years to construct. In that same three-year span, however, the semiconductor market went from a worldwide shortage to a surplus and challenges with demand.

Additionally, industrial policy runs the risk of politization. Politicians can use public funds as leverage to advance their political agendas. For example, soon after passing the CHIPS Act, the Biden administration established a provision for CHIPS Act funds that forced potential grantees to cover employees’ child care expenses if they wanted the money. Even when industrial policy aims to target a narrowly defined issue, it runs the risk of being packaged alongside additional regulations, which slow down the implementation process, decreasing its effectiveness.

Any type of market investment carries inherent risks, even in seemingly “slam-dunk” markets. Over the last decade, for example, consumers have seen companies like Google and Microsoft enter markets like augmented reality or livestreaming. Despite their robust capital and technological prowess, both companies have struggled to get their endeavors off the ground.

Industrial policy is not isolated from these risks. In the case of private companies, it is shareholders — who bought into the business voluntarily — who bear the costs of poor performing investments. With public industrial subsidies, it’s the taxpayer who pays the costs.

With the national debt approaching $35 trillion, policymakers should question whether burdening American taxpayers with another potential tax liability is worth it — a question they should ask in all circumstances. Even the most novice investors understand that it’s better to pay off debt before taking on more risk in the form of new investments. The Biden administration would do well for the American taxpayer if it followed this advice and turned off the industrial policy machine.