The U.S. government is making a big bet on semiconductors, driven by a desire to onshore production and reduce reliance on foreign supply chains. The CHIPS and Science Act of 2022 promises $280 billion in funding aimed at revitalizing semiconductor manufacturing in the U.S. With so much taxpayer money at stake, it’s worth asking whether investments will deliver the economic boost policymakers hope for.

A recent analysis using the Penn Wharton Budget Model (PWBM) sheds light on the issue. According to the researchers who ran the simulations, the economic returns on investment and production credits to the computer and electronic product manufacturing sector don’t live up to the hype. While targeted tax incentives and government grants are indeed likely to increase production in the semiconductor sector, their effect on the broader U.S. economy is projected to be modest, at best.

The PWBM analysis looked at policies targeting the semiconductor industry, such as a 10 percent production credit and a 10-percentage-point increase in business expense deductions. These incentives are similar to those found in the CHIPS Act, like the 25 percent investment tax credit for semiconductor manufacturing and equipment purchases. The Penn Wharton model found that, while incentives like these do increase output in the semiconductor sector, the overall effect on U.S. gross domestic product is negligible.

The reason is that semiconductors, despite their importance, are a small share of the total U.S. economy. Even with $52 billion in subsidies targeted directly at the semiconductor industry in the CHIPS Act—including $39 billion in domestic fabrication incentives—the effects on economy-wide production will be diluted. The semiconductor sector is not large enough to dramatically alter the national economic landscape. Furthermore, the PWBM model highlights how sector-specific subsidies create distortions, pulling resources into one part of the economy at the expense of others.

Recent news stories highlight some of the beneficiaries of CHIPS Act funding. Polar Semiconductor recently received $123 million in direct funding to expand and modernize its Bloomington, Minnesota facility. Wolfspeed secured $1.5 billion in financing, with $750 million coming from CHIPS Act grants and another $750 million from private investors like Apollo Global Management. These funds will help finance factory expansions in North Carolina and New York. Meanwhile, Intel was awarded up to $3 billion in additional funding under the CHIPS Act to support its “Secure Enclave” program, aimed at expanding the supply of microelectronics for the U.S. Defense Department.

These companies’ business models can be contrasted with that of a company like Nvidia. Nvidia’s meteoric rise has been driven by its dominance in AI and graphics processing. The company designs its semiconductor chips but outsources the actual manufacturing to third-party foundries, rather than owning and operating its own fabrication facilities. This approach allows Nvidia to focus on innovation and chip design, while leveraging specialized manufacturers like Taiwan Semiconductor Manufacturing Company to produce its chips at scale.

While Nvidia’s business model may not address all of the national security concerns surrounding semiconductors, it does highlight how semiconductor firms are able to thrive in the absence of significant government subsidies.

There is also growing concern over the lack of transparency surrounding how CHIPS Act contracts are being awarded. Members of Congress, including Senators Ed Markey, Elizabeth Warren, and Bernie Sanders, have called for more oversight, urging the Department of Commerce to release details on the terms of the agreements.

Another legislative development tied to the CHIPS Act is the Chips Permitting Reform Act, which was signed into law earlier this month. That legislation, sponsored by Senators Ted Cruz and Mark Kelly, exempts projects receiving federal financial assistance for microchip production from cumbersome environmental reviews, allowing chip manufacturers to expedite construction without waiting for lengthy regulatory approvals under the National Environmental Policy Act.

The bill’s proponents argue the exemptions are necessary to ensure the U.S. can rapidly scale up its semiconductor manufacturing capabilities, especially in the face of rising competition from China. However, granting exemptions from environmental reviews exclusively to chip manufacturers, without extending similar considerations to other industries, appears difficult to justify given the national benefits from semiconductor policies may be tiny. Meanwhile, additions to government debt from semiconductor subsidies are estimated to be substantial (see nearby table).

As Congress seeks greater transparency in how CHIPS Act funds are allocated and ever-more carveouts are granted to the industry over time, Americans are right to be skeptical about whether their tax dollars are being put to good work. The findings from the Penn Wharton Budget Model suggest semiconductor investments may not deliver the broad economic benefits lawmakers envision. The CHIPS Act may expand some domestic supply chains, but its impact on the overall economy will be far from impressive.