CHIPS and Dip (in unemployment)

This week, we cover November’s jobs and inflation numbers, as well as the first announcement of an award from the CHIPS for America program. The possible achievement of a soft landing—which most neoliberals said was impossible—is perhaps the greatest feat to date of the new approach to economic governance. And the initial rollout of CHIPS funding gives us a chance to look again at how industrial policy can offer a new vision for government’s relationship to markets.

The Rebalancing​

First bite at the CHIP

This week, the Biden administration announced its intent to award BAE Systems, a defense contractor based in Nashua, NH, with the first federal grant from the CHIPS for America program. The grant of $35 million would allow the company to quadruple production of chips used in F-15 and F-35 fighter jets. Commerce Secretary Gina Raimondo explained the decision to hand out a smaller package as their first announcement by saying, “Next year we’ll get into some of the bigger ones with leading-edge fabs. A year from now I think we will have made 10 or 12 similar announcements, some of them multibillion dollar announcements.”

The chip shortages during the COVID pandemic exposed the risk of depending upon manufacturers abroad to meet the nation’s demand for semiconductors. In 1990, the US produced 37 percent of all semiconductors manufactured globally. By 2022, that figure was down to 12 percent. Congress responded with the CHIPS and Science Act, with the Commerce Department taking the lead in building a new plan—and perhaps a new approach—to rebuilding this important industry.

While the modest sum announced this week is just a tiny dip into the $52.7 billion Congress allocated to the Department of Commerce in the CHIPS Act to rebuild the domestic semiconductor supply chain, more than $220 billion in new US manufacturing facilities has been announced by companies hoping to win some portion of the federal money. Even before the vast majority of the funding has been allocated, there is evidence the policy is crowding-in private investments to achieve the administration’s goals of reshoring the manufacturing of semiconductors. This week, Secretary Raimondo said she wants the percentage of semiconductors produced in the US to rise from about 12 percent to closer to 20 percent.

The Biden administration’s affirmative, intentional effort to rebuild the domestic semiconductor industry reflects a new approach to the relationship between the government and markets, known as industrial policy. Industrial policy is most effective and most legitimate when it is part of an economy-wide plan that is inclusive, democratically decided, and accountable.

As CHIPS grants start to flow early next year, we’ll be watching to see whether the industrial policy the Biden administration is embracing continues to advance this new, more progressive approach. The announcement of a “preliminary memorandum of terms” agreed to this week reportedly requires funding to be distributed to the company over time, after the Commerce Department carries out due diligence of the project and the company meets certain milestones—a shift from the unaccountable, no-strings-attached approaches of the recent past. And, according to reports, the company has committed to workforce training, including a program at the local community college, as part of the agreement. There’s more to learn about the agreement, and more to watch as these funds roll out in the coming year—but there continue to be at least some signs that the new approach to economic governance is starting to take root.

Some Like It Hot

A hard landing for neoliberalism

Since President Biden passed the investments that are core to his Bidenomics agenda, neoliberal economists have been sounding the alarm: The only way to bring down inflation, they claimed, was to trigger a recession by forcing millions of workers into unemployment.

In June of 2022, Larry Summers said, “We need five years of unemployment above 5 percent to contain inflation—in other words, we need two years of 7.5 percent unemployment or five years of 6 percent unemployment or one year of 10 percent unemployment.” Many economists and market watchers assumed it was impossible for the Fed and the administration to achieve a soft landing, in which inflation came back down to earth without forcing millions of people into unemployment. In March, JP Morgan’s chief global markets strategist wrote to their clients, “A soft landing now looks unlikely, with the airplane in a tailspin (lack of market confidence) and engines about to turn off (bank lending).” “A soft landing in the US is possible but unlikely” was the title of a Martin Wolf piece in the Financial Times in May.

But, last week, the US added another 199,000 jobs in November, bringing the unemployment rate to 3.7 percent. Meanwhile, the labor force participation rate ticked higher to 62.8 percent, up from 62.7 percent. And the likelihood of a soft landing seems increasingly likely. The Fed appears unlikely to increase interest rates at their next meeting. Meanwhile, inflation is cooling further, as prices continue to decelerate, and energy costs are falling.

Even market analysts are impressed: “We’re running out of superlatives to describe just how resilient the US labor market is and has been,” said Nick Bunker, director of economic research at Indeed Hiring Lab. “The pace of jobs being added is no longer bonkers, but it is sustainable. Unemployment ticked down, alleviating any fears that the US economy might soon tip into a recession.” “We’ve gone from many people saying [a soft landing is] impossible to it being widely recognized now,” says Preston Caldwell, chief US economist at Morningstar. “A soft landing appears to be the greatest likelihood for next year,” said Mark Hamrick, senior economic analyst at Bankrate.

The 3.7 percent unemployment figure is well below the 5 percent that some said was the “natural rate of unemployment.” The achievement of a soft landing amid such historically low unemployment is a blow to another neoliberal shibboleth. The old paradigm held that the way to discipline the market and bring down prices is by disciplining the workers. The natural rate of corporate profit, as measured by the share of national income going to capital owners, could not be touched. But, the new paradigm that Bidenomics is based upon holds that government policy can expand supply in ways that ease price increases, so the Fed can manage inflation without crippling the labor market. It appears to be working.

What to Read

All the Bidenomics that’s fit to print

• In The American Prospect, Robert Kuttner writes about how a coalition in New York has linked climate goals, industrial policy, and good-paying union jobs.
• In Phenomenal World, an interesting investigation into how the European Central Bank and the Fed are dealing with climate goals.
• Writing for The New Republic, Timothy Noah has a piece explaining how the “rich-cession” is good news.
• In the New York Times, Paul Krugman makes the progressive case for Bidenomics.

Who Said It: JRB or FDR?

As you know by now, we close every week with a quote from either President Biden or FDR. If you guessed last week’s quote was from FDR, you were right! It came from his Fireside Chat on packing the court from March 9, 1937.

Now for this week’s quote:

“These unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power for plans like those of [years past] that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.”