CHIPS-Plus Irony

Policymakers and advocates have tried to assure the public that the CHIPS-Plus bill being considered in the Senate this week is necessary to shore up America's semiconductor industry, primarily against China.

What proponents don't mention is that this corporate welfare would be solely financed by additional U.S.-government issued debt of at least $93 billion (see below) over the next 10 years, financed in significant part by foreign countries, including China. Is adding to the federal debt the best way of securing the country? Currently, 33 percent of U.S. debt is foreign-owned.

As we detailed last week, the Congressional Budget Office (CBO) reported that the bill would increase the deficit by $79 billion over the decade, resulting from a $55 billion increase in spending and a net $24 billion revenue reduction from investment tax credit narrowly targeted at semiconductor manufacturing.

China already owns almost $1.1 trillion in U.S. debt. If China were to own a share of the debt from CHIPS in proportion to their current share of U.S. debt held by the public, the total CHIPS debt owned by China would be around $4.2 billion.

However, the fiscal cost would be even higher than reported in CBO's cost estimate because the act would increase the costs to finance the federal debt. Debt interest impacts are not currently included in CBO's official cost estimates. Thankfully though, CBO published an interactive workbook that allows users to see how changes in spending and revenues would affect deficits and debt service costs relative to its May 20202 baseline.  

The deficit spending in the CHIPS-Plus Act would add $9 billion in debt interest costs and the revenue changes would add another $5 billion in costs. If interest rates continue to rise, the debt interest costs would also increase.

This information should also be taken into account when considering the fiscal impact of the CHIPS-Plus Act or any other proposals. The Cost Estimates Improvement Act introduced by Representative Michael Cloud (R-TX) would require CBO to include the projected debt service costs in its legislative cost estimates.

The bill also includes an additional $200 billion in authorizations of appropriation. If appropriated, those funds would also add to the deficit and debt interest impacts. According to Axios, a CBO estimate of these additional authorizations should be forthcoming soon. As a rule of thumb, each $100 million increase in spending in 2023 will add $27 million to debt interest costs over the decade.

Increasing deficit spending is no way to help American companies compete. If policymakers are concerned about domestic semiconductor chip production, they should take care not to create an industry dependent on subsidies paid for by the taxpayer — and putting us further in debt to China.