Spending vs. Investing: Sometimes, There's a Difference

By Derek Thompson

Invest is a useful euphemism. It means spend, of course, but implies something more. Spending with a purpose, with a higher expectation. "We're going to spend two billion dollars on more state stimulus." No good. "We're going to invest two billion in American infrastructure and our children." Now we're talking. 

The U.S. is spending more and investing less

The distinction between investing and spending is often rhetorical, but not always. All spending is not equal. Compare Social Security with infrastructure. Social Security pays seniors a monthly check to preserve their lifestyle through retirement. The program is crucial, but it's hard to call it an investment (unless you're bold enough to say it invests in aggregate demand). It's designed to preserve, not pay off. Infrastructure spending, on the other hand, is absolutely an investment. Roads carry people and cargo, free up traffic, and increase productivity. Each dollar spent on new infrastructure pays off in the work in facilitates.

In the 1950s, we built roads. Infrastructure spending was eight times its current level, as a percentage of GDP. Today, we preserve retirement. Medicare, Medicaid, Social Security and other pensions will make up almost half the federal budget in 2020. The U.S. spends $4 on elderly people for every $1 it spends on those under 18. 

The role of government is aging with the population. Total health care spending as a share local/state/federal spending has tripled in the last 40 years, while education spending hasn't really changed. The upshot is that even as the United States is spending more and more, we're investing less and less.  

invest v care in us budget.png

Thomas Friedman, writing on the budget deals in the New York Times this morning, has a good paragraph on the four things we need to do at once:

The truth is, we need to do four things at once if we have any hope of maintaining American greatness: We need more stimulus to keep the economy from slipping back into recession. But we need to combine that stimulus with a credible, legislated, long-term plan for cutting spending and getting the deficit under control -- e.g., the Simpson-Bowles deficit-reduction plan. And we need to raise new revenues in order to reinvest in the sources of our strength: education, infrastructure and government-funded research to push out the boundaries of knowledge. That's right. We need to do four things at once: spend, cut, tax and invest.

Read the full story in the NYT.

This article available online at:

http://www.theatlantic.com/business/archive/2011/06/spending-vs-investing-sometimes-theres-a-difference/240846/