May 24, 2021

What’s behind the semiconductor shortage and how long could it last?

Listen to our reports with a personalized podcasts through your Amazon Alexa or Apple devices audio translated into several languages

A global shortage of semiconductors has created serious anxiety in some industries and even caused automakers to halt production in several factories across North America. What led to this shortage, and is there anything manufacturers or the Biden administration can do to meet demand? David Dollar is joined by Don Clark, a contributor to The New York Times, to discuss the factors that triggered the recent supply issues and the potential implications for the future of chip manufacturing in the United States.

Related content:

‘It’s a Roller-Coaster Ride’: Global Chip Shortage Is Making Industries Sweat

Intel to Spend $20 Billion on 2 New Chip Factories in Arizona.

Lagging but motivated: The state of China’s semiconductor industry


This transcript has been lightly edited.

DAVID DOLLAR: Hi, I’m David Dollar, host of the Brookings trade podcast Dollar and Sense. Today, we are talking about the semiconductor shortage which has caught the world off guard and is disrupting the auto industry and other sectors of the economy. My guest is Don Clark, a contributor to The New York Times on technology issues. Welcome to the show, Don.

DON CLARK: Hello there.

DOLLAR: So let’s start with the big picture. How serious is the semiconductor shortage for the economy now that we are recovering from the pandemic recession? What are the sectors that are particularly hurt by this?

CLARK: Well, I think the reason we are here talking today is because of the impact on the auto industry, which is a huge sector of the economy. They have been forced to temporarily close a bunch of plants in North America because of the chip shortage. So that has caused alarm bells in particular. Those are union jobs, the kind of people that voted for President Biden. This has definitely got the world’s attention, but there’s many other sectors of the economy that are affected. And not that the economy is doing that badly, but it’s kind of like we would be in a much better position had this not happened.

DOLLAR: I’ve read a number of your articles. You have some great stories about the types of firms that are affected far away from automobiles. You had one about a cement manufacturer. Does that ring a bell?

CLARK: This is a company that makes a little sensor that you place in places where you are going to pour concrete. So with these things that measure temperature in the ground, they beam signals to some people with laptops nearby and they can tell how quickly cement is hardening so that it’s secure. So these guys are worried about making future sensors. And they are worried not just about themselves, but on all the construction projects that they are involved with.

DOLLAR: So we’ve got chips just throughout the economy now. It’s really an interesting change. So how did we get to this shortage? What’s the failure here? We economists usually think about there being some kind of market failure to get you into a real mess. So, what was the failure here?

CLARK: Well, it’s really a combination of short-term and long-term factors both on the supply side and on the demand side. So the short-term factor, of course, is the pandemic. When the pandemic came around, people pulled in their sales or they just physically couldn’t keep production going. So the automakers in particular shut down temporarily. Meanwhile, everybody else, after sitting around at home, started buying everything you can imagine, particularly computers, appliances or game consoles, tablets, everything to educate and entertain themselves at home. So they started placing orders, and when the car guys came back around in the September time frame, they basically had lost their place in the manufacturing queue to get chip supplies. So they were disproportionately hurt. But there’s some other really interesting factors.

The chip industry has had many shortages before, but they usually are in a particular kind of chip like memory chips. This time it’s across the board, which is a sign that demand is really going through the roof. There’s two vectors. The chips are being used in many more kinds of products, and then each product that is using chips—like a car or a smartphone—they are using many more chips. So the cars that we are making today, they were designed three years ago. The cars next year are going to have even more chips. So it’s this kind of treadmill that wasn’t really factored in.

The other thing to keep in mind is that there’s both the new cutting-edge chips that are scarce supply—those mainly come from this one company, TSMC, in Taiwan, and that’s what’s in, say, the latest Apple smartphone—but also all these old factories, old chips, very simple things that were paid off years ago. In those cases, it’s very hard to upgrade those supply lines. The biggest factor is demand, but after that you get to these supply bottlenecks.

DOLLAR: Right. So to some extent, it sounds like the chip manufacturers didn’t anticipate this big surge in demand, which is kind of understandable because it’s been a really uncertain world.

CLARK: Yeah, and they have been expanding, but the great thing for a chip manufacturer is when their factory is full. They love that. When it’s empty, they lose lots of money. But if there’s a shortage and they can’t fill demand, they sort of leave money on the table. The history of the chip industry has been marked by these periods where they built too many factories so there’s a glut of chips or they built too few factories and there’s a shortage of chips. So they weren’t getting accurate demand signals from their customers. So a lot of the problem here is properly evaluating and forecasting demand, which is very difficult.

DOLLAR: Then I take it these firms cannot easily ramp up production. So the firms that suddenly have large increases in demand, can’t just—

CLARK: Yes, they cannot. There’s two dimensions of that. If they just wanted to build a new factory from scratch, the cutting-edge factories are $10 billion a pop, takes three years to build them. So that’s a long lag right there. Then you have these older factories I was talking about. Some of those are using a kind of smaller silicon wafer to make the chips, and the machines for making those kinds of chips aren’t being made anymore. So they can’t increase production even if they want to. So anyway, it’s not an easy situation.

Read the full transcript.

Biden’s nominees would bring diversity to the Fed—if they’re confirmed

President Biden has announced his roster to fill key vacancies on the Federal Reserve’s 7-seat Board of Governors. If confirmed by the Senate, Biden’s nominees would advance his economic agenda at the central bank. They would diversify the ranks of economic policymakers and likely tighten supervision of Wall Street.

Sarah A. Binder

Senior Fellow – Governance Studies

Twitter
BinderSAB

M

Mark Spindel

Chief Investment Officer, Potomac River Capital LLC

These nominations follow in the wake of Biden’s decisions late last year to reappoint Jerome Powell to a second term as Fed chair and to elevate Lael Brainard as second in command. Powell and Brainard already serve as confirmed governors, but the Senate will also need to approve their four-year leadership posts. If the Senate confirms all five, Biden’s Fed appointees would reverse the heavy GOP-tilt of the Board engineered by the Trump administration.  
Here’s what you need to know.
Diversity counts
Biden has nominated two Black economists, Michigan State’s Lisa Cook and Davidson College’s Phillip Jefferson, to seats on the Board. He has also named former Fed governor and Treasury official, Sarah Bloom Raskin, as the Fed’s vice chair of supervision, a position Congress created in the wake of the global financial crisis as the Fed’s top banking cop.
These appointments help to diversify the Fed’s almost exclusively white ranks. Since Congress revamped the Federal Reserve Act in 1935, creating the 7-seat Board of Governors, 82 people have served on the Board. Just three of them were Black men, and ten of them were white women. And while Biden’s nominations augment the Fed’s racial diversity, confirming Cook, Brainard, and Raskin would expand the number of women governors by just one, since both Raskin and Brainard already have Board service under their belts. Notably though, this would be the first Board with a majority (four) of seven seats filled by women governors.
Rough waters ahead?
Observers expect a broad swath of Senate Republicans to vote to confirm Powell, a Republican, to a second term as chair. However, it remains to be seen how many, if any, Republicans will vote to confirm the other four nominees. Of course, Senate Democrats—if they stick together—can confirm all four without any GOP support, since Democrats banned nomination filibusters back in 2013.
Like most Congressional decisions, Fed confirmation votes are more contentious today than they were even 15 years ago, before the global financial crisis. The figure below shows shrinking Senate support on final confirmation votes for Fed nominations since the Reagan administration. Of those nominees considered on the Senate floor between 1982 and 2011, only one, Alice Rivlin, received less than 94% of the vote. The most dramatic contests came in 2020: The GOP-led Senate rejected Trump’s nominee, Judy Shelton, by a vote of 47-50, and just barely confirmed another Trump nominee, Christopher Waller. Four other Trump picks never even made it to a floor vote.

Nor can Biden count on filling the Board swiftly. Prior to the financial crisis, nominees waited about three months on average for confirmation. After the crisis, the wait time ballooned closer to eight months. The Senate took nearly ten months to confirm Waller, a record delay for the contemporary Senate’s handling of Fed nominees. Even with Democrats in control this year, Republicans have found ways to slow down the Senate.
Beware partisan crosshairs
Decades of rising partisanship are seeping into senators’ views of the Fed, often turning otherwise low profile Board nominations into politically charged votes. At the same time, public attention to the Fed has grown with its expanding imprint on the economy.   
The central bank has played an outsized role in stemming the economic damage caused by the global financial crisis in 2007-08 and the global Coronavirus pandemic in 2020-21. And with interest rates near zero, central bankers need to use more creative and often contentious tools to manage the US economy. Critics from both sides of the partisan aisle blame the Fed for either doing too much—or too little—to stem an array of old and new problems.
Add in rising expectations that the Fed will hike interest rates early this year to combat inflation and a hot economy, these nominees will face questions at the core of central banking—how fast and how soon to take away the punchbowl. Raising the price of money is never easy, but this Board could find tightening especially difficult given the addition of Biden’s governors committed to the Fed’s goal of a stronger and more racially inclusive labor market. 
The parties also disagree about whether the Fed can or should do more to combat climate change, especially in light of Congress’s own tentative steps. Democrats want the Fed to use its supervisory powers to force banks to address climate risk in their lending decisions; Republicans think such policies fall outside the Fed’s mandate. Partisans also contest whether the Fed should do more to redress racial economic inequities.
Presidents use appointments to advance their agendas. The Fed is no exception, despite the myth that central banks like the Fed are “independent.” But given the often partisan Senate confirmation process, Democrats will likely need to hang together to get Biden’s picks over the finish line.

Related Content

FixGov
The six government reforms we need in 2021

Paul C. Light
Wednesday, October 14, 2020

FixGov
Can the Fed stay independent in a polarized era?

Philip A. Wallach
Friday, April 1, 2016

FixGov
Amid polarization, bipartisan oversight still exists in Congress

Naomi Maehr and Molly E. Reynolds
Tuesday, September 21, 2021

Read More »