In 2020, the United States Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act1). The CARES Act created a new lending program for small businesses. Most technology businesses can benefit from the CARES Act. The exceptions are organizations that are controlled by venture capital or private equity firms and some online retailers.
This legislation is designed to give businesses the boost they need to weather the storm caused by COVID-19. The CARES Act is of special interest to the technology industry as it offers this industry much needed financial relief. The loans, grants, and tax provisions laid out in this legislation have the potential to impact technology-related businesses and guide the decisions these businesses make regarding their workforce, research, and expansion.
While the argument can be made that the intentions of the government in creating the CARES Act were positive, its uneven rollout and inability to provide substantial protection for the tech industry has made some wonder whether the government should be providing grants or funding to businesses in the tech field. In other words, do government subsidies help the tech industry?
Do Government Subsidies Help the Tech Industry?
In short – yes. Government subsidies assist the tech industry by covering the costs of production research and the distribution of goods or services. They can do this by offering tax credits, grants, loans, or reimbursements as is seen in the CARES Act.
These subsidies make it possible for the tech industry to increase the overall supply of goods or services that they offer. This in turn increases the demand for the good or service, which lowers the overall price of the service. The idea is that when governments give subsidies to the tech industry, it’s a win-win both for the supplier and the customer. Subsidies give the tech industry more money to dedicate to research and development. Customers can enjoy life-improving products at a cheaper price since tech developers don’t need to break even on their production costs.
On the other side of the argument, when the government subsidizes the tech industry, it will either need to reallocate taxes from existing budgets or raise taxes. Some would argue that subsidies and other incentives discourage tech firms from cutting costs.
Those who see the government’s subsidies for tech firms as a negative are not suggesting that the devices, products, and services that the tech industry is producing are not welcome or desirable. Their argument is that policymakers should allow the marketplace to determine winners and losers. They feel that government intervention has produced more negatives than positives.
This is an argument that some would point to the CARE Act as supporting. The money has been given out, but it has done little to bolster businesses that were not fundamentally sound. It may have given them a window of operation, but tech businesses that were weak before the pandemic are not coming out stronger as a result of receiving subsidies.
On the other side of the coin, you see tech organizations like Zoom go from 10 million meeting attendees to well over 200 million meeting attendees in the span of just a couple of weeks. They had a fundamentally sound product, and the market rewarded them without the need for additional subsidies.
Finally, some would argue that the government subsidizing technology increases the incentives of lobbies and special-interest groups to use their wealth and influence to dictate the course of politics. It’s felt that even when government programs have the best intentions to promote technology, government officials and the bureaucrats behind them lack proper incentives to manage taxpayer money in a prudent way. There’s no reward for the government if their subsidies produce results, and they are not punished if subsidies or grant money fail to have the desired results.
Why the Government Should Continue to Subsidize Technology
With all the above arguments being stated, there are valid reasons why the government has and will continue to invest in technology. The first reason is that when the investment works, it produces phenomenal results.
Silicon Valley, which is the world icon of technology and innovation, was built using public funds. The impact that Silicon Valley has had on the US economy and the world cannot be denied. According to the Brookings Institution, 18 of the 25 most monumental breakthroughs in computer technology between 1946 and 1965 received funding from the federal government.
Worldwide, there is a recognition that technology is the key to economic growth. Whether it is healthcare, AI, robotics, clean energy, advanced manufacturing, or space technology, the tech field is playing a role and will continue to play a role in making the world what it will become.
When the government encourages technological development through grants, tax breaks, and other incentives, it’s doing something that’s in its own best interests. These incentives encourage competition as companies receiving government funds need to produce tangible results if they are going to continue to receive funding. This in turn leads to improved products and services.
For this reason, governments around the world are dedicating funds to support innovation in technology. State funding provides businesses with the resources that would otherwise be unavailable to them. The question is not if governments should be funding the tech industry, the question that should be asked is, are they funding it enough?
Space technology, nanotechnology, medical technology, and a whole host of other fields are developing so quickly that there is a need not only for financial backing but also communication on a nationwide scale in order to grow tech as an industry.