Will National Security be the Death of Us?
In his first State of the Union address, John Quincy Adams laid down the fundamental principle of strategy for a commercial republic: “let us not be unmindful that liberty is power; that the nation blessed with the largest portion of liberty must in proportion to its numbers be the most powerful nation upon earth…”
This proposition, which must have seemed far from obvious at the time, has proved remarkably true. American power flows from American wealth and our wealth from our freedom.
Yet almost necessarily, the job of making strategy for national defense falls to people whose study is not to encourage enterprise but to compel outcomes: soldiers, military historians and academic strategists, diplomats must always think of war as a continuation of politics by other means.
These are honorable undertakings. Yet the natural result of ceding strategy to such people is to give short shrift to the liberty that Adams recognized as the source of our power. It’s not that those professionally concerned with defense and diplomacy don’t value liberty. They devoted their lives to liberty’s defense. Yet they naturally tend to underestimate how essential free enterprise is to our power.
In the most recent example, it has been the State Department—supported by the rest of the security bureaucracy—that has driven the sanctions against U.S. semiconductor exports to China. Predictably to anyone familiar with the power of free markets, those sanctions have weakened U.S. companies and strengthened the Chinese. Micron, the only large U.S.-based manufacturer of memory chips, is losing some $2 billion a year in sales—nearly 10% of its revenue—thanks to our diplomats. Deprived of access to U.S. chips, the Chinese semiconductor industry has made a decade of progress in one-fifth that time.
Meanwhile, the CHIPS act, authorizing some $280 billion in subsidies for the same U.S. firms the sanctions punish, was originally drafted by the State Department. It passed the Senate only after 60 senators attended a secret briefing in a “secure room” where Deputy Defense Secretary Kathleen Hicks and National Intelligence Director Avril Haines lectured them on what would happen to a chipless America.
Fantastically, according to Time magazine, the senators found most compelling Hicks’ claim that 98% of the chips bought by the U.S. military were “packaged and tested” in Asia. Apparently, no one told the senators that packaging and testing have traditionally been down-market activities. They were the first aspects of chip manufacture outsourced to Asia because the required skill levels were so modest. Nor it seems were the senators told that packaging and testing is increasingly done outside China or even Taiwan in other Asian nations.
Not surprisingly the act itself displays titanic ignorance of the industry it seeks to foster, bribing U.S. companies to get into the lowest margin sector of the semiconductor industry, the actual manufacturing of the chips.
The real money in semiconductors is in design in which the United States leads the world by far. Nvidia (NVDA), which invented the Graphics Processing Unit that made Artificial Intelligence, practically required no subsidies to do so. The GPU was originally developed to improve graphics in video games. No government agency would have foreseen that path.
The justification for the CHIPS act subsidies is that the United States must “onshore” chip manufacturing lest someday China—presumably having conquered Taiwan, the world’s leading chip manufacturer—refuse to sell us chips. Left unmentioned is that this fantastical fear is even remotely plausible only because of the State Department’s determination to wage guerilla war on China’s nascent semiconductor industry, starting with the lie that Huawei was sneaking little spy devices into its telecommunications equipment.
National security is catnip for Republicans who shed lifelong commitments to free enterprise with startling alacrity whenever that phrase is invoked. Despite all the talk about our polarized politics, the CHIPS act passed the Senate by nearly a two-thirds vote, while the House delivered an overwhelming majority: 243–187–1.
As long as U.S. strategy is dominated by people and institutions who fail to appreciate that “liberty is power,” both our liberty and our power remain at risk.P.S. We are excited to invite you to a free, live webinar with George Gilder, tomorrow, on Thursday, Feb. 15, at 10 a.m. Eastern Standard Time. In this Startup Investing Masterclass, George is teaming up with Jon Medved, the founder of OurCrowd, to discuss investing in private placements. George and John Schroeter from Gilder’s Private Reserve will be interviewing the CEO of George’s latest AI startup pick… so you’ll be receiving a great startup pick just by attending! Click here now to attend this amazing event.