‘State capitalism’ never works.
T he Wall Street Journal’s reporters summoned every ounce of their capacity for professional understatement when they called the Trump administration’s demand to recoup 15 percent of the profits derived from the sale of sophisticated electronics to the Chinese “unusual.”
That’s one way to describe the federal government shaking down private companies for a vig in exchange for unlocking the formerly restricted sale of sensitive components and resources with military applications to a great-power rival. A less charitable observer might call it a racket.
The maneuver is an extraordinary intervention into the private economy in ways that expand the remit of the president. It’s also an abdication of the commander in chief’s conventional obligation to preserve U.S. national security. Not that the American targets of Trump’s squeeze seemed to mind. Both Nvidia and Advanced Micro Devices were more than happy to kick a taste up to the big boss if it restored their access to the lucrative Chinese market. They’re not alone.
On Thursday, Bloomberg revealed (and its competitors in media subsequently confirmed) that the U.S. government is looking to secure a stake in the high-end chipmaker Intel. “The agreement could bolster the struggling chipmaker, which has fallen behind rivals after missing key technology waves,” CNN reported. That’s what Intel’s shareholders seem to think. The embattled tech company’s stock price rose by 7 percent on the news.
Intel has struggled to “gain significant share in artificial intelligence chips” even as it spent “heavily to build its foundry business, which manufactures chips for other companies,” CNBC reported. “Intel’s foundry business has yet to secure a major customer.” That’s perhaps to be expected. After all, when the government got into bed with Intel to the tune of $7.865 billion in grants under the CHIPS Act, Uncle Sam sought to remove the profit motive from the equation. The goal of the CHIPS Act as a shining example of industrial policy, a sanitized euphemism for central economic planning, was to repatriate the production of sensitive electronic components. As a bonus, CHIPS would create thousands of new engineering and manufacturing jobs right here at home. The legislation has been a failure on all counts. Now that Intel has gotten in bed with the government, the feds are taking an even bigger interest in the business. It’s a familiar, if not exactly reputable, model, and it doesn’t end well.
Indeed, the Trump administration has sought to break down the already far-too-permeable barrier between private enterprise and state control in subtler ways but with a far broader array of targets. Axios reported Thursday that the president’s inner circle has created a “scorecard that rates 553 companies and trade associations on how hard they worked to support and promote” the One Big Beautiful Bill Act that the president signed in July. Private companies are graded on the degree to which they effuse praise for the bill, and it must be sincere praise. The ranking system “helps us see who really goes out and helps vs. those who just come in and pay lip service,” one administration official told Axios.
Of course, there are no explicit consequences for the firms that find themselves on the “bad” side of this ledger, but no firm with an interest in self-preservation would take the risk. Investors and stakeholders in these companies understand the lay of the land. They know how exposed their firms are to the executive branch’s reprisals, and they know an activist — and vindictive — government when they see one.
Allegations of hypocrisy have never been much of an obstacle for ambitious politicians. Today, the charge isn’t even a deterrent. And yet, the degree to which the Trump administration is leaning into what the Journal’s Greg Ip alleged amounts to “state capitalism” — “a hybrid between socialism and capitalism in which the state guides the decisions of nominally private enterprises,” as he defines it — should alarm anyone who retains their familiarity with the tenets of market economics. In addition to Nvidia, AMD, and now Intel, Ip throws on the pile the “golden share” of the stake that the U.S. government will take from the sale of U.S. Steel to a Japanese firm, as well as the “$1.5 trillion of promised investment from trading partners Trump plans to personally direct.”
Ip does not dwell on the obvious hypocrisy in which the Trump-led GOP is engaged. Rather, he identifies the real problem with “state capitalism”: It doesn’t work.
No matter how enlightened the central planners might be, they will never possess perfect knowledge of the billions of individual daily interactions that together constitute macroeconomic activity. There has never been any viable substitute for the price mechanism as a means of conveying information about the marketplace. “Moreover,” the Foundation for Economic Education’s contributors observed in 2010, “it defies human nature to assume that those who would implement state capitalism would promote solely the general welfare, without any bias toward shaping these institutions to benefit themselves or the special interests they represent.”
If this all sounds like something Democrats would do, that’s only because it is something Democrats did do. And when they did, conservatives and free-market advocates condemned it — and not just because it produced a woefully inefficient allocation of capital but also because it was a naked attempt to exert political control over private interests.
The right even had a fairly ubiquitous term for it: “gangster government.” Michael Barone, author of a book with that very title, saw it in the Obama administration’s supposed rescue of the auto industry, in which the rights of creditors were brushed aside “in order to pay off the Auto Workers Union.” He and others identified it also in the Obama administration’s efforts to intimidate health insurance providers into hiding the costs of Obamacare — a scheme Kathleen Sebelius was foolish enough to put into writing when she warned that “there will be zero tolerance for this type of misinformation and unjustified rate increases.” David Freddoso, the author of another book on Obama’s strong-arm approach to the presidency, saw it in how the administration and its congressional allies funneled tax dollars to special interests and well-connected firms, as well how the Obama administration wielded executive power to challenge cultural conditions and religious precepts the left rejected.
Democrats are loathe to revisit these precedents. They will not concede that Obama’s expansion of the terms of political engagement begat a Republican Party that was willing to play the same game — albeit better and with even more retributive zeal. The right understands that dynamic almost intuitively, but they should also internalize its logic. Bad precedents beget worse precedents. Retribution, even the appearance of it, yields disproportionate reprisals. They started it, might be gratifying, but it only forestalls an inevitable reckoning with the real question: Where does it end?