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Sound Advice: December 15, 2021

The U.S. Is Slipping Behind

In its early years, the semiconductor industry did not have many customers.  Few businesses in the 1950s could make use of the expensive new devices that allowed computers to function.  But one organization could: the federal government.

The first shipment from Fairchild Semiconductor – the company that helped create Silicon Valley – was for the computers inside the Air Force’s B-70 bomber.  The Minuteman missile soon needed semiconductors too, as did other Cold War weapons systems and NASA equipment.

Only the federal government tends to have the huge resources to make these investments.  After it does, private companies then use the fruits of these investments to develop innovative and profitable products, spurring economic growth and tax revenues that comfortably cover the cost of the original research.

The Defense Department built the original internet – and Google, Microsoft, Amazon, and others expanded it.  The National Institutes of Health funded laboratory experiments – and pharmaceutical companies created treatments based on them, including those for Covid-19.  There are similar stories in energy, automobiles, aviation, and other industries.

In recent decades, however, American investment in research and development (R&D) has lagged.  In 1964, U.S. federal spending on R&D reached a peak of 1.8% of Gross Domestic Product (GDP).  In the decades since, the rate of those expenditures has been reduced by nearly two-thirds.

The U.S. now spends a smaller share of national output on research and development than many other countries, ranking seventh on this measure. As a percentage of GDP, our R&D outlays are about half of those of China, which is the leader.  China is notably ambitious in this area, essentially copying the American strategy for building a strong economy, even as the U.S. has abandoned this strategy.

In The Wall Street Journal this week, Graham Allison, a Harvard professor, and Eric Schmidt, the former C.E.O. of Google, wrote, “In each of the foundational technologies of the 21st century — artificial intelligence, semiconductors, 5G wireless, quantum information science, biotechnology, and green energy — China could soon be the global leader.”

The semiconductor industry is a particularly good case study.  U.S. companies like Fairchild and Texas Instruments initially dominated, followed in later decades by Intel.  But the U.S. semiconductor industry has fallen behind, now making only about 12% of the world’s semiconductors, down from 37% in 1990.

Right now, U.S. companies make none of the most sophisticated chips.  Taiwan, however, is one of the leaders with those chips, which means that a disruption there – hardly out of the question, given China’s aggressive posture – could disrupt the global economy.

In June, the Senate passed a bill that could substantially increase American R&D efforts.  The bill included outlays of almost $250 billion over five years, including $52 billion for semiconductor makers.  The main purpose of the bill is to keep the U.S. from falling behind China.

The bill has yet to pass the House, though it is long overdue. 

N. Russell Wayne, CFP®

Any questions?  Please contact me at nrwayne@soundasset.com


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