In an August 22 agreement with Intel, President Trump really jumped the shark in his ongoing efforts to institute a slush fund to “invest” in American industries allegedly to save them and to provide for national security needs, following the dubious precedents of Fascist Italy and Nazi Germany in vainly attempting to defy entrepreneurial market judgments concerning the unprofitability of various industrial ventures via government investments in the private sector.
Trump had already made a number of moves along such lines before the Intel deal. On June 13, Trump invoked the Defense Production Act to extort a golden share from US Steel as the price for its acquisition by Nippon Steel. In late July, Trump used the threat of tariffs to extort over a trillion dollars in de facto tribute from Japan and from the European Union for making various slush fund investments and for giving certain crony exporters preferred access to their markets.
The Intel deal offers a new twist on this theme. The phrase “jumping the shark” was first coined by television critics (inspired by a stunt performed by Henry Winkler’s “Fonzie” character in the sitcom Happy Days) to imply that a formerly creative franchise has exhausted its original purpose and is now starting to become a ridiculous caricature of its former self. Sadly, this is exactly what Trump and the executives of Intel have done to that once great company.
Intel was originally founded in the late-1960s by legendary pioneers of integrated circuits and associated manufacturing techniques who had defected from other Silicon Valley firms that didn’t fully appreciate their talents. In what at that time was the hypercompetitive world of chip-making, having the best, most creative brains on your team to stay on the cutting edge of product design and manufacturing technologies was the ticket to commanding the largest market share and earning the most profits, and Intel proved to be the most successful firm in finding and employing such brains.
By 1984 though, Intel and other industry giants had lobbied Congress to enact the Semiconductor Chip Protection Act, which over the long run crippled much of the competition in the industry. Instead of ensuring success by outwitting competitors (smeared as “chip pirates” by the lobbyists) and continually innovating new products and new manufacturing techniques to stay on top, Intel could increasingly turn to its lawyers to defend its market share. Since the intended functionality of a chip often dictates its optimal layout, an incumbent chip-maker like Intel could simply register its existing chip topographies with the US Copyright Office to block most of its potential competitors. In the lucrative markets for desktop, laptop, and server microprocessors, Intel became an overwhelmingly dominant player, usually with Advanced Micro Devices (AMD) being the only other significant competition, with AMD often stuck in a very distant second place.
To be sure, fending off AMD over the decades did require some ongoing innovations by Intel, but the culture of intense cutting-edge creativity that originally drove the company’s success dissipated long ago. However, consumer demand for microprocessors has shifted in fundamental ways lately, and top talent and their innovations have found their way to other companies. Intel-free smartphones are the hot consumer item now, not “Intel Inside” laptops and desktops. For chips requiring the most advanced manufacturing methods, Taiwan Semiconductor (TSMC) now outclasses all competitors, while the new booming field of artificial intelligence chips sees Nvidia and AMD well ahead of Intel. Even old rival AMD has been gaining significant market share at Intel’s expense lately in market segments traditionally ruled by Intel.
Intel’s financial statistics paint a correspondingly bleak picture of these recent developments. Return on equity over the past 12 months has been a horrific -18.62 percent. The current forward price-to-earnings ratio is at a sky-high 222.22. Intel absolutely must get its creative juices flowing again and update its product line if it is ever to have any hope of justifying its total capitalization of $145 billion to sensible investors. Intel urgently needs to move in a new direction, most likely requiring a new leadership at the helm as well.
So what has Trump accomplished with his Intel deal? Intel had previously been promised billions of dollars under grants awarded, but not yet funded, by the Biden administration under the CHIPS Act. The primary condition of these grants was that companies like Intel, TSMC, and Samsung were supposed to manufacture chips in the US. On August 8, Trump accused Intel CEO Lip-Bu Tan of being conflicted and demanded his resignation, apparently prompted by Senator Tom Cotton (R-AR) writing a letter two days earlier accusing Tan of inappropriate ties to firms linked to the Chinese Communist Party and to the Chinese People’s Liberation Army.
Apparently Trump was able to leverage these accusations and the withheld CHIPS funding to extort a purchase of Intel shares on favorable terms. The US government paid Intel $8.86 billion for a 9.9 percent stake in the company, constituting a price of $20.47 per share of common stock. With the market trading around $25 per share shortly before the announcement of the deal, the US government effectively pilfered two billion dollars worth of Intel equity at the expense of other Intel shareholders by paying such a low price for its stake. There was, however, a most curious caveat about the government’s shareholdings noted in Intel’s press release:
The government’s investment in Intel will be a passive ownership, with no Board representation or other governance or information rights. The government also agrees to vote with the Company’s Board of Directors on matters requiring shareholder approval, with limited exceptions.
In other words, Intel will still go through the motions of increasing its capacity to make chips in America (as it had already committed to do under its CHIPS grants), but now the incumbent Board of Directors won’t be transparent to nor held responsible by the company’s largest shareholder if these new investments happen to generate losses. Entrenching existing directors and officers in this manner doesn’t seem to be calculated to bring about the changes the company desperately needs, nor does it resolve Senator Cotton’s concerns about CEO Tan.
Furthermore, moving chip-making from where it is most profitable to higher cost locations in the United States just to harvest government-funded subsidies or investments is not an exercise in better engineering; it is an exercise in predatory political rent-seeking. The only creativity on display here is in plundering private shareholders and in harvesting fiat dollars being created out of thin air by the Federal Reserve System. With this rotten deal Intel truly has jumped the shark and has become a very different company from its roots as a pioneering technological innovator.
So what does President Trump say in response to the deal’s critics? In a Truth Social post he wrote:
I PAID ZERO FOR INTEL, IT IS WORTH APPROXIMATELY 11 BILLION DOLLARS. All goes to the USA. Why are “stupid” people unhappy with that? I will make deals like that for our Country all day long. I will also help those companies that make such lucrative deals with the United States States. I love seeing their stock price go up, making the USA RICHER, AND RICHER. More jobs for America!!! Who would not want to make deals like that?
Why indeed would anyone object to running up gigantic federal deficits further and to undermining property rights of private shareholders? Perhaps it is because even people who aren’t so sharp or sophisticated about economics know all too well that pouring billions of dollars into a struggling business is not a smart thing to do, especially when the directors aren’t subsequently held responsible for the consequences.
Other people with a more solid grasp of economics might also realize that misallocations of capital goods make America poorer and result in fewer rewarding jobs for American workers, contrary to Trump’s cargo cult notions about how to make America more prosperous. It is bad enough that central bank suppression of interest rates and federal government guarantees of economic security have been discouraging thrift, even while gigantic deficits have been consuming whatever little savings are available, thereby deindustrializing America. Long before Trump ever became president, America ceased having a surfeit of capital goods it could afford to squander. Yet, the squandering of scarce capital is what happens whenever governments interfere with free market allocations of savings or otherwise mess with the property rights of business owners, which is precisely what Trump is doing with deals like this.
If we Americans must suffer under the curse of socialistic central planning, I would humbly suggest that we build a huge pyramid in Arizona instead of building an Intel chip factory there; an imposing pyramid would at least offer a much more durable and impressive monument to America’s former glory than yet another crumbling shell of a ruined factory would. Our crime-ridden cities are littered with too many of the latter already.