By Charles Lieberman

About the author: Charles Lieberman is the former head of the monetary analysis staff of the Federal Reserve Bank of New York and the former chief economist of Chase Securities. He is a co-founder and managing partner of Advisors Capital Management, a registered investment advisory firm.

The decision by President Donald Trump to replace billions in federal grants with a 10% stake in Intel is being understood by many as a step toward socialism -- a future U.S. in which the government owns or controls private companies.

Socialism has failed everywhere it has been tried. But the U.S. government has successfully used taxes, regulations, and subsidies to encourage or discourage private enterprise for decades. What matters now is whether there is sufficient reason for the government to do so with Intel.

During World War II, the government directed private companies, notably auto and plane manufacturers, to focus entirely on producing military equipment. It also helped ensure there were adequate supplies of raw materials for those products. Even under normal economic conditions, the government encourages or discourages certain products and behaviors, often through tax incentives. Heavy taxation of tobacco products is one example. Limiting the use of coal to produce electricity and subsidizing larger families and the use of solar panels with tax deductions are a few others.

These policies exist because economic theory implies the government should intervene when the market is unable to take externalities into account.

For example, the cost of building and maintaining a lighthouse may exceed the benefit the lighthouse would offer any single shipowner -- they won't do it on their own. Yet the overall benefit to society provided by a lighthouse, from avoiding ship and cargo crashes, probably exceeds those costs. So the government should construct the lighthouse.

That is a very basic example of how the government can correct a market failure. The idea easily extends elsewhere: Only the government can effectively supply public goods, such as a postal service, police, and firefighters. There is little dispute that these activities are better managed by the government.

Even so, as Adam Smith explained in Wealth of Nations, a market economy works extremely well by incentivizing people to produce what the public wants, and to do so as efficiently as possible. Market forces are excellent directors of economic outcomes -- a lesson that many politicians ignore so they can impose their own vision of what society should consume, at prices of their choosing, and supplied by firms they favor.

Free market purists want the government to stay out of the way of business and allow firms to thrive or fail based on the consequences of their management decisions. There is no disputing that; broadly, this approach has contributed enormously to the growth and development of the U.S. economy and to the high standard of living enjoyed by Americans.

And so these free marketeers are disturbed by the government's interest in Intel.

There is a national security need to have several successful domestic firms producing advanced computer chips. It is increasingly clear that advanced chips greatly improve our offense and defense capabilities. Potential profits are a sufficient motive for their development by the private sector. And so free market competition will press firms to improve their technology over time, to produce better chips at lower cost.

But there is an important externality: A country with a leading-edge technology sector will grow faster, elevating living standards for the entire nation at a faster pace. Better chips will certainly make more effective missiles, but they may also enable scientists to make even more significant discoveries that have broad social applications. They may help uncover more effective drugs and vaccines, for example.

Perhaps the private sector would engage in that sort of research and development without government support. But it would be resource and time intensive, its benefits hard to predict, and vulnerable to termination. It behooves society to accelerate this process.

The government can get carried away, however.

It is one thing to give Intel $8.9 billion to pursue better technology and leave it to the company to figure out how to accomplish that goal. It is quite another for a government official sitting behind a desk in Washington to instruct Intel what lines of research to pursue and how to conduct that research. Bureaucrats aren't particularly well placed to decide which raw materials are best used as substrates or how high to pile up wafer materials.

The government crosses the line when it makes research or business decisions. Likewise, the social engineering contemplated by socialists like Bernie Sanders (D., Vt.) and New York City mayoral front-runner Zohran Mamdani comes with unspoken consequences that would likely be very harmful to the country's economic welfare. Government-owned, discounted supermarkets would certainly help the poor, but it could also drive privately owned supermarkets out of business and cost the government enormously at a time when it is already running deficits. There are far more efficient ways to accomplish the same goal, such as the existing Supplemental Nutrition Assistance Program.

Government grants to universities or even private companies make sense to promote faster innovation that ultimately leads to better products and improved social welfare. Providing financial support better enables the private sector to assume the risks of innovation to the benefit of all.

The government should promote the creativity of the private sector by enabling it. But it cannot hope to improve outcomes by replacing private enterprise.

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August 28, 2025 14:50 ET (18:50 GMT)

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