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The Cato Weekly Podcast: Uncle Sam Owning Private Companies?
Host: Laura Bondank-Harmon Guest: Scott Lincicome, Vice President of General Economics and the Herbert A. Stiefel Center for Trade Policy Studies, Cato Institute
Cold Open
[News Clip]: You may be surprised to learn that the newest stakeholder in many American companies is the United States government.
[News Clip]: I think the United States should be given 10% of Intel because Intel has been left behind.
[News Clip]: What is in it for the American taxpayer? And the answer Donald Trump has is we should get an equity stake for our money.
[News Clip]: In an unprecedented expansion of its role in the marketplace, Washington has acquired ownership interests in firms like Intel, U.S. Steel, and Global Foundries, along with companies across the semiconductor and mineral industries. Getting involved in the management of that steel.
[News Clip]: Look, I don’t care if it’s a dollar or a billion dollar stake. That starts feeling like a semi-state-owned enterprise, a la CCCP.
[News Clip]: If the federal government has an equity stake in these companies, just for use of a term, what does that mean exactly? Ownership.
Introduction
Laura Bondank-Harmon: America has long been known as the land of opportunity, a place where people from around the world come to build businesses, create wealth, and pursue a better life. This country’s remarkable prosperity didn’t happen by accident. It grew out of a system that largely allowed individuals to work, invest, innovate, and trade without heavy government intervention. So what happens when government starts becoming an investor, a shareholder, or even a business partner? I’m Laura Bondank-Harmon and this is the Cato Weekly Podcast. Joining us today is Scott Lincicome, Vice President of General Economics and the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute, to explain what state corporatism is, how we got here, and what it could mean for the future of the American economy. Hi, Scott.
Scott Lincicome: Hey.
Laura Bondank-Harmon: So Uncle Sam owning private companies, what is happening?
Scott Lincicome: That’s a great question, because as of about a year ago, Uncle Sam taking an equity stake in a private company during peacetime, not as some sort of emergency bailout, was almost unprecedented. Since then, we now have 30 equity stakes that are either in place or on paper planned. And everybody’s kind of shrugging their shoulders as if this isn’t a big change, when in fact it’s a pretty radical one. Most of these stakes are putting the government as the largest shareholder, not a majority shareholder, but big enough, combined with it being the U.S. government, to have significant control or say over these companies’ operations. And they’re doing so in a wide range of sectors, under a wide range of different laws that really don’t say they can do this, using all sorts of different agencies, too. And the implications, I think, are pretty profound.
Laura Bondank-Harmon: Economists, like yourself, have referred to this as state corporatism. And you’ve said that this goes beyond normal industrial policy, like tariffs and tax breaks. Can you explain the distinction?
Scott Lincicome: Yeah. So a lot of folks like to call this state capitalism, because that’s kind of what they call it in China. The Chinese government has for decades now directed companies by investing directly in them. Chinese state enterprises are still a big part of the Chinese economy. But that always sat wrong with me, because it’s not really capitalism at all. Even in a world that has tariffs and subsidies and the rest, you still generally have a capitalist U.S. system where prices are set freely, and investors and private capital flow to the projects that have the most merit. And the government is an outsider, is a referee, a neutral arbiter. Even when it’s granting tariffs or subsidies, it’s doing so in a somewhat neutral manner, particularly when it does things like set tax policy and regulatory policy. All of a sudden, that’s totally different, right? So state corporatism does something fundamentally different. Instead of the government being a neutral arbiter, a referee, it actually has skin in the game. It’s become a player on the court. And this has really important, fundamental differences. Suddenly, capital doesn’t flow to the best project. It flows toward the company that has the government’s backing, because the government is not going to let its champion fail. But also, the government itself has new incentives to ensure that that company doesn’t fail. In fact, that its share price goes up, because it’s making the taxpayers money if that share price goes up, because the government now owns a stake. And likewise, if that share price goes down, suddenly taxpayers are on the hook. So suddenly, almost out of nowhere, we have over 30 companies that have Uncle Sam’s backstop, that have a person in the White House who is actively engaged in making sure that certain companies do business with that champion, that the share price doesn’t change, that investors are eager to plow money into that company. Now, that creates a whole different set of incentives, a lot of seen and unseen costs that are just radically different from what the U.S. economy has done for so many decades, and done, by the way, to great effect. We have still one of the most vibrant and innovative economies on the planet. We’re one of the wealthiest economies on the planet. Economic growth is outpacing the rest of the developed world. And here we are, abandoning all of that and embracing stuff that countries like China and France and Latin American countries have done over the years, but America hasn’t.
Laura Bondank-Harmon: I can’t imagine we just got here overnight, though. What sort of policies laid the groundwork for this?
Scott Lincicome: Yeah, and it’s certainly not the case that this came totally out of nowhere. In fact, Cato scholars have actually been warning about this type of stuff for years, because if you go back to the Great Recession, that was really the last time you had the White House actively investing taxpayer money in private companies. Now, it did this during a time of economic emergencies. So you had the TARP bailouts for big banks. You had the auto bailouts for Ford and Chrysler and GM. But that was during a crisis time, right? So that is different, but it still was a major intervention into the private sector. And it affected bondholders and shareholders by diluting their stakes. It affected corporate decision-making and the rest. So you had this emergency action, but the emergency action was also limited in time. The government was only going to be involved in these companies until they got back on their feet, until the crisis was over. And in the case of both the auto bailouts and the bank bailouts, there was congressional legislation. There was a law authorizing the executive branch to act. This time around, we don’t have any of that. So even though back then, Cato scholars said, hey, you know, this is a troubling precedent, it’s still totally different in terms of its scope and magnitude from what we’re seeing today. But of course, the folks acting today are looking back to those earlier bailouts as precedent for what they’re doing.
[News Clip]: I don’t feel good about the government owning private properties. I would not trust the company at all if the government owned any of it. The government should certainly use some oversight and some control. But as far as the micromanagement and personal gain, I think that’s wrong. The federal government, the only role that it should play is whatever is specifically laid out in the Constitution.
Laura Bondank-Harmon: So would you say what’s happening today is the next step in what is a longer trend in trade policy?
Scott Lincicome: Yeah, I would say it’s a longer trend, not just in trade policy, but in broader U.S. economic policy. And it really goes beyond just those bailouts, though, because after the bailouts you started seeing more interest in industrial policy from the Obama administration than the Trump administration and the Biden administration. And here the government was kind of saying, you know, there’s been all these big market failures and we need to intervene. And we’re going to intervene almost as a venture capitalist of sorts, because a lot of the Obama-era industrial policy that was implemented through the stimulus bill back in 2009, that was all because we needed to invest in green energy, because the private market, private capital, wasn’t going to do it. So we need to tilt the playing field there. Then Trump comes along and he does all these tariffs and other things because, again, we need to build up the steel industry and we need tariffs to do that. Then, of course, Biden gets here and ramps all that up to 11 with the Inflation Reduction Act, the Chips and Science Act. And all of these had, even though they’re not the government investing, they still have the same principle and same ideas: that the private market can’t handle this and we need to get Uncle Sam involved to put its thumb on the scale. So you put the TARP bailouts plus all of that industrial policy, and this is an almost unsurprising revelation. I think the only real shock here is just how fast it’s happened — going from one company to 30 companies in 12 months, and under all these different provisions, including that Chips and Science Act. That’s a really big surprise.
Laura Bondank-Harmon: So we’ve talked a lot about how we got here. Can you break down what we’re seeing today?
Scott Lincicome: Right. So starting last July with a little company called MP Materials, the Defense Department took a quiet equity stake in the company — a 10 percent shareholding stake. That was followed closely in August by a very high-profile, 10 percent government stake in Intel, the semiconductor champion. After that, we then saw the government turn to minerals and several investments in critical minerals beyond that little MP Materials stake, in a company called Lithium Americas and more of those. After that, the Commerce Department got involved, and you started seeing Chips Act grants used to invest in more technology companies and quantum computing. And we blinked, and the next thing you know, we have more than 30 of these equity stakes in a wide range of companies. We also have a golden share in U.S. Steel for certain corporate decisions. And the government got that stake by leveraging a Japanese investment, saying we will only let the Japanese company Nippon Steel invest in U.S. Steel if they give us this golden share.
[News Clip]: The partnership, as you call it — the president has a golden share, allowing him to veto certain key business decisions, like closing a plant or moving locations.
[News Clip — Trump]: We have a golden stock. We have a golden share, which I control, or the president controls. Now, I’m a little concerned — whoever the president might be — but that gives you total control, with 51 percent ownership by Americans.
Laura Bondank-Harmon: And I did want to talk about that a little more. Can you explain what this golden share is? Does the Trump administration actually have an ownership interest in U.S. Steel?
Scott Lincicome: So, not a direct ownership interest, but they might as well, because they can control where the company builds its factories, how it can invest in the United States, employment decisions, even pricing decisions. So even though they have zero shares in the company, the golden share effectively gives them control over the company’s U.S. operations. It’s effectively a state-owned enterprise, just not with the formal equity stake. And you know who, by the way, thinks that way? The U.S. government. For years and years, the Department of Commerce and the United States at the World Trade Organization have argued that companies with, say, a 10 or 15 percent share of Chinese government ownership are effectively state-owned enterprises and should be treated like the government itself when looking at things like subsidies or other distortions in the global economy. And now here’s the Trump administration doing the exact same thing for U.S. companies.
Laura Bondank-Harmon: And I think you started talking about how the administration got this golden share. It had something to do with the Japanese steel company.
Scott Lincicome: So a Japanese company, Nippon Steel, wanted to buy U.S. Steel and invest in U.S. Steel’s business operations here in the United States. Now, first it started, though, with the Biden administration, because the Biden administration blocked Nippon Steel’s acquisition using the Committee on Foreign Investment in the United States, called CFIUS, which regulates international investments supposedly related to national security, even though there’s not a big national security nexus here. But Biden blocked that transaction. Trump picked it up, and he only allowed the transaction if the United States government were going to get this golden share, which, as we talked about, now gives Uncle Sam a lot of control over the company.
Laura Bondank-Harmon: So it’s interesting that you mention national security, because I think a lot of supporters of these policies have cited to national security concerns, and other concerns like staying competitive with China, in support of government intervention in industry.
[News Clip]: Let’s be clear — critical minerals are more than an economic issue. They’re a national security issue. We felt ignored by Washington, and we’ve seen our industry outsourced towards geopolitical competitors. And you understand that this industry is foundational to our economic and national security. So thank you, Mr. President, for your leadership on these issues.
Laura Bondank-Harmon: Are these arguments legitimate?
Scott Lincicome: Well, there’s a nugget of truth in the national security argument, and that is that even dyed-in-the-wool free traders — Adam Smith, Milton Friedman, even huge free marketers like myself — would argue that there’s a place for the government in terms of things like national defense, defense-related procurement. There might be a need for protectionism or Buy America rules when it deals with real national security issues. There are a few problems, though, with what the Trump administration is doing, because they’ve taken this kind of nugget and expanded it radically outward. And now kind of that little narrow exception is the rule, because there’s not much of a case for taking a golden share in the third-largest steel company in the United States for national security reasons. U.S. Steel didn’t even supply the Defense Department or any of the branches of the military with steel for the weapons systems, the things we need. So you could think plausibly of a national security case, but certainly not in that case. We’ve also seen other cases of the national security exception blown completely out of proportion. We have national security tariffs on sofas, for example. And then again, we have all of these equity stakes that don’t really have a clear national security nexus. A few of them for the Defense Department might, but most of them are really stretched. But the other big problem with this national security case is there are all sorts of other levers that the government can pull to achieve these objectives when national security is a legitimate issue. The government could offer subsidies. It could offer long-term procurement contracts, giving the stability that these companies need to make the things they need for the government — like rare earth magnets for our laser-guided missiles. They can offer those contracts. They can offer protectionism, protecting from import competition. They can do other more market-friendly things, like tax reform and regulatory reform and immigration reform, labor regulation. There are all these levers they can pull that can help manufacturers and help specific companies without having state ownership. And I think that’s really the biggest flaw in all of this. The Trump administration didn’t go out there and try the market-friendly things and then try these traditional things that the U.S. — it just started taking equity stakes, and it did so via legal authority that doesn’t even expressly allow for this. In most cases, it just simply looked at something like the Chips and Science Act and said, well, it doesn’t say we can’t do this, so we’re going to go ahead and take an equity stake, because it doesn’t bar us from that. That’s the type of stuff that, you know, our constitutional studies scholars and colleagues here at Cato can say — that’s just open-ended and unlimited government power. And that’s really not how we’re supposed to operate.
Laura Bondank-Harmon: Right. What about how this is impacting the business side of things? How has this impacted how businesses compete in the market? Bloomberg reported on how a mining company needed permission to build a road in Alaska and ended up giving the government a stake in the company. And this is just one of many, many deals.
Scott Lincicome: Yeah, so there’s a couple of problems. First, you have these direct costs, these seen costs. So we already have seen that the Trump administration has coerced companies into giving these equity stakes. So these companies did not run to Uncle Sam and say, please, please invest in our company. Now, a couple of them did — some kind of industry laggards, because, of course, the losers always want government’s help. But beyond that, you had a lot of companies that needed a permit for a mine in Alaska, and the government only gave it if they could get an equity stake. In Intel’s case, they started accusing the CEO of being a Chinese government agent. He ran to Washington for help; suddenly he gave the government an equity stake. In other cases, the government held up contracts or held up subsidies that had already been promised, until the company relented and gave the government an equity stake. So that’s a big red flag, because if you’re a company operating in one of these strategic sectors, you’re going to be a little bit hesitant to do business with the government. And that matters for things like defense-related technologies. That’s a bit of a problem for investors, too. Maybe they’re just going to stay away from these industries altogether. If I were looking to invest and I saw, oh, well, Uncle Sam’s thumb is on the scale of all of these companies, I’m not getting anywhere near that — I’m going to go invest elsewhere. That’s a big problem, particularly because we’ve seen equity stakes floated for things like AI, and some of the most innovative sectors of the U.S. economy could actually be discouraged from that type of investment.
[News Clip]: Introduce the American AI Sovereign Wealth Fund Act. This legislation would give the public a direct ownership stake in the largest AI companies in America through a one-time 50 percent tax — not on profits, but on stock. It would do two extremely critical things.
Scott Lincicome: Another big problem is we’ve already seen that the White House is willing to pressure companies to do business with their champions. So companies like Nvidia or SpaceX or Apple are basically being told, it’s a nice company you got there, it’d be a shame if anything happened to it — and, oh, by the way, maybe you can do some business with Intel all of a sudden. So what does that do? Well, it means that some of our tech champions might be doing business with a company not for commercial reasons, but for political reasons. They might not be using the best technology, the most efficient innovations. They’re going to just be doing it because they want to keep the government off their backs. These types of distortions really corrupt that classic, modern American capitalist system.
Laura Bondank-Harmon: In your recent piece in our Free Society magazine here at Cato, you mentioned that another problem that state corporatism poses is this perception of corruption and cronyism in Washington. And specifically, you cited to the Department of Defense’s investment in L3Harris recently and how that is quite controversial.
Scott Lincicome: It is. Well, the Department of Defense has an individual in charge of making these big investments who happens to have worked at an investment firm that’s doing business and investing in the same area. The president’s son is an investor in one of these companies, Vulcan Elements. So there’s a lot of these whiffs of corruption and cronyism. And likewise, you’re seeing investors change their investment strategies based on the same type of perception — maybe I should invest in Donald Trump Jr.‘s company, because that’s actually where the government investment is going to go; maybe I should invest in this sector to gain, again, the government’s favor. Well, over time, that’s what we call capital misallocation. It’s just a fancy word for saying investors don’t invest based on commercial returns, on what’s the best innovation to come, what’s the company that’s actually making a profit in the market. They’re investing based on political considerations. And over time, that means a less productive economy, a less efficient economy, and a poorer United States.
Laura Bondank-Harmon: It also just doesn’t really sound like a free market anymore at that point. And if we keep going down this road, if this trend continues, what does the American economy look like five to ten years from now?
Scott Lincicome: Well, a lot more like China and a lot less like the United States. We’re at a point right now where we should be really, really concerned, but we are not beyond the point of no return. The reality is that it is very important, but it’s not like an overwhelming share of U.S. economic output. But the distortions are occurring — we can see them in real time. There is plenty more that are happening beyond. And so right now, we have to stop this in its tracks, because you see in an economy like China’s, or say 1980s France, there were real and tangible harms over time. Those unseen costs tend to build up, and one percent slower economy over a decade or more — we’re talking about trillions and trillions of dollars in wealth, we’re talking about thousands of dollars per household just being poorer, talking about slower, not just slower economic growth and living standards, but less innovative companies. The United States is no longer the tip of the spear in innovation. And that has not just economic implications, but geopolitical implications. So the first step is to get a hold of all of this — and really not just catalog it, which we, of course, are doing — but to really get Congress involved, to go back to these laws and say, wait a second, executive branch, you can’t do this, you don’t have these authorities, and to claw back the investments that have already been taken. Because I think one of the really scary things about this is that these investments are all open-ended. Unlike the TARP and auto bailouts and the rest, unlike things that happened during wartime, back like the Korean War, there is no exit strategy. There’s no “the government must sell when X or Y happens.” So what happens? Well, the government just maintains those shares. It keeps pumping capital into its chosen companies. The next president comes in and says, wow, I have this new lever of power — I can invest in, maybe it’s a president who wants to invest in green energy companies, or maybe divest from fossil fuel companies, and on and on. And suddenly you really do have a huge and unfixable problem. So we’ve got to stop it now.
Laura Bondank-Harmon: Well, is it even politically feasible to unwind the government’s involvement in these companies and the government taking equity?
Scott Lincicome: Well, I mean, as a constitutional matter, yes. The reality is that the executive branch can only act with the authorization of Congress. Congress has the power of the purse. And Congress has at least nominally given the executive branch this power via things like the Chips Act. So if Congress wanted, it could snap its fingers and force divestiture and amend these laws to make clear that they don’t allow for these types of investments, or even better, repeal them altogether. And even as a practical or political matter, we are seeing some realization in Congress, from both Republicans and Democrats, that things have gone too far. The first step is very minor — it’s certainly not as far as I think we must go, but it’s a start. And that is that the latest defense bill sets terms for the Defense Department to make these investments and creates guardrails for those investments: transparency provisions and exit strategies. So look, I would prefer just instant divestiture, but at least you’re seeing in this an acknowledgment in Congress that we are way off the reservation right now and it’s time to get that back. There are others in Congress, of course, that want to go much further — that want a full-on divestiture, that want the government to get out of this business, that again realize that American capitalism, for all its warts, is still the best system out there by far. It has led to immense wealth, immense innovation, and bad things happen when government gets involved, particularly when it’s just an executive branch acting without any oversight. And that’s really where we need to focus. We need to make sure that we stop this in its tracks.
Laura Bondank-Harmon: Okay. And I think you’ve already partially answered this question, but let’s say Congress is preparing to act tomorrow. How do you think we restore the government’s role as a referee rather than a market participant?
Scott Lincicome: Yeah. So the most obvious thing is divestiture, right? The government should sell these equity stakes in an orderly fashion — just get out. Beyond that, we need to go back and look at these industrial policies that have been implemented over the last decade-plus. And if not repeal them outright, fine — let’s just start with provisions that say the government can’t take equity stakes in these companies. Just simply take that off the table. And then other things, like making sure that there are guardrails, that there are transparency provisions. Right now, a lot of these equity stakes — we don’t even know the terms of them. They’ve been reported for months, and it’s just a Commerce Department press release that says we’ve just suddenly invested taxpayer money in some company. So that’s the type of stuff that, at a really granular level, also needs to be done. And then finally, on the non-governmental side, there needs to be a lot more transparency. Aside from the Cato Institute and a couple other organizations out there, there’s just not an accurate accounting of actually how much of this is going on — of the companies, of the laws, of the actual terms, of the capital misallocation that’s taken place. If you look at Intel’s share price, it’s probably inflated by 100 to 200 billion dollars in additional market capitalization simply because it now has the government’s seal of approval. There’s been very little accounting of that outside of some of the stuff that we’ve been doing. We need a lot more of that on the outside to pressure the folks on the inside.
Laura Bondank-Harmon: Well, it sure sounds like Congress has a lot of work to do.
Scott Lincicome: We do too.
Laura Bondank-Harmon: Yeah. Fingers crossed something gets done, and you’re doing great work drawing more attention to this very serious issue. Thank you, Scott, for joining us today, and thank you all for listening to today’s episode of the Cato Weekly Podcast. If you’ve enjoyed today’s discussion, please subscribe and leave a review wherever you get your podcasts. To learn more about the ideas and research discussed in this episode, visit Cato.org.
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