Supplying Demand: The Chip Shortage in Macro Context

Summary

This post is the first in a series that uses the history and economics of the American semiconductor industry to ask big picture questions about the future of fiscal policy and industrial policy. As the pandemic ends, the US will have a world-historical opportunity to revamp its public and economic infrastructure. However, to ensure that industrial policy is effective, many older strategies need to be updated to ensure that they are consistent with the suite of macroeconomic policy settings that support tight labor markets. Today’s post argues that the present shortage of semiconductor chips shows how dependent “supply-side” factors are on “demand-side” factors, and sketches a way forward for policy on that basis.

The Chip Shortage in Macro Context

Recently, we have seen a flurry of news about semiconductor shortages leading to production stoppages and supply shortfalls in numerous product categories. Since semiconductors play some role in nearly every part of a modern economy, the shortage has created an emerging bipartisan consensus to “Do Something.” However, to understand the effective scale and strategy of “Doing Something,” we first need to understand what the current shortage, and its attendant market dynamics, is revealing about the economy.

Fiscal Policy and Capital Expenditure

Throughout the 2010s, prominent economists like Larry Summers and Tyler Cowen were keen to explain the observed slowdown in real productivity growth and private fixed investment without reference to demand-side factors. Cowen’s thesis centered around a slowdown in the pace of technological advancement. Summers posited a variety of “structural” dynamics — demographics, business model shifts, inequality — that were suppressing the need or willingness of firms to increase capital spending. While structural factors may play some role, both of these arguments insufficiently recognize how deeply “demand-side” dynamics are intertwined with, and often causal to, capacity and productivity outcomes.

Figure 1 — Source: Bureau of Economic Analysis (BEA)
Figure 2 — Source: BEA
Figure 3 — Source: BEA
Figure 4 — Source: BEA
Figure 5— Source: BEA
Figure 6: Source: Federal Reserve Board of Governors, Authors’ Calculations
Figure 7: See footnote regarding the role of hedonic adjustment in accounting for “real” economic gains in semiconductor manufacturing¹. Nominal capacity expansion would still be outsized over the same period (see Figure 2), but of much lower magnitudes. Source: Federal Reserve Board of Governors, Authors’ Calculations

Capacity, Supply and the Labor Market

In light of persistently underutilized capacity and underinvestment, it should come as no surprise that the labor market trends within semiconductor manufacturing show the same consistent weaknesses. Employment, like capital investment, peaked with the tech boom and never really recovered from the ensuing recession that “officially” began in 2001.

Figure 8— Source: Bureau of Labor Statistics (BLS)
Figure 9— Source: BLS, Authors’ Calculations

Bringing It All Together: The Role of Policy

Our lawmakers should strategize about the current shortage of semiconductors in full recognition of the fact that increased spending and coordination between the public and private sector can lead to increased output, a stronger economy, and better investment and employment outcomes across the board. However, doing so requires a broader vision of what counts as a public good. In a way, supply chains themselves are infrastructure. Decades of offshoring and development of just-in-time supply chains have enhanced profitability for individual firms at the expense of the robustness and legibility of the system as a whole. Fiscal policy has a potentially massive scope to ensure that investment is systemically coherent, and demand is managed for the benefit of firms and workers alike.

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Employ America

We write, crunch #’s, and tweet about the labor market and economic policy.