To Spend or Not to Spend.....Is Not the Right Question

A Simplified Primer on Spending,
Consuming, Saving, and Investing

by Ed Warshawer,
Special to Channeling Barack Obama™

Until our leaders and pundits learn the difference in the ways money can be spent, the U.S. will continue to wrestle with the simplistic, ideological issue of whether “to spend,” like a Liberal Democrat, or “not to spend,” like a Conservative Republican.

We go round and round, and we get nowhere. We don’t ever settle the debate. And given the minimal level of economic understanding in the country, this is no surprise.

The Three Basic Forms of “Spending”

Spending comes in three basic forms:

1: Consuming
2: Saving
3: Investing

Here’s how each one works:

CONSUMING

Consuming is the kind of expenditure that Conservatives talk about when they use the term, “spending.” This kind of expenditure pays for something that is purchased and used, and then is gone forever.

When Republicans talk about hiring people to dig holes and fill them back up, that’s an excellent example of consumption. It may feel good immediately, like a triple-dip ice cream cone. But once the money is spent and the ice cream is gone, only memories and a stomachache remain.

And, of course, the credit-card bill, or the I.O.U., or the National debt.

SAVING

Saving is the kind of expenditure that Americans in general talk about when they use the term, “investing.” Saving of course means putting money into a bank account or a Treasury bill or a corporate bond: money that earns interest while being set aside for future use. But “saving” also means something else.

Americans usually say that they are “investing” when they buy stock, or index funds, or other mutual funds. Many people don’t seem to realize that when stock shares are bought on the stock market, the money does not directly affect the underlying company. Except when buying part of an initial offering of stock, the money that you “invest” in stock actually goes directly into the pocket of another investor.

Thus, when you buy stock, you are “saving” your money by setting it aside for some future time.

Saving in a Bank or a Bond

The main difference between “saving” in a bank and “investing” in stock is this:

The bank account maintains the nominal value of what you put into it, while providing interest that you hope will outpace the rate of inflation.

In other words, if you put $100 into a Certificate of Deposit, when you get your money back, it will be more than $100. But you don’t know ahead of time whether your money plus interest will still buy what the original $100 would have bought at the beginning.

Saving in the Stock Market

The stock account lets the value of your purchase vary, growing and shrinking at various times, while providing a combination of dividends and a growing price. Such a combination has a better chance of outpacing inflation, but it is less-likely to be the same nominal amount that it was when you bought the stock.

In other words, if you buy $100 worth of stock, when you go to sell it the total price will probably be some different number, either more or less than the $100.

Both of these items represent savings: the putting aside of money for some future use. They just have different risks and advantages.

INVESTING

True “investing” means putting some resource to use to create something more—something greater—than what existed before your investment.

In this real “investing,” when you put some money into starting up a company—and you receive stock in exchange for your investment—you are participating in an opportunity for real growth.

Unlike what we generally mean when we use the term, investing, where you just buy some stock that someone else already owns—which makes nothing new for the underlying company—real investing creates opportunity, and synergistic possibilities for a better future.*

Other forms of real “investing” that are commonly mentioned these days include:

“Investing” in education, in the effort to make better citizens, capable of creating a better future for the country.

“Investing” in roads and bridges, so that people and products can get to markets and to each other.

“Investing” in family planning, so that people do not have so many children that they cannot afford to care for them, and thus create an economic or social burden on society.

“Investing” in the space program, which yielded tremendous new products and opportunities ranging far beyond the specifics of putting people on space stations and the moon.

Some of these forms of “investing” are exactly what Conservatives mean when they complain about “big spending” by Liberals. Conservatives may be correct in thinking that some of these investments may not be the best investments. But they are mistaken in the confusion between “spending” and “investing.”

Capital Investing Versus Government Spending

In looking at the current economic crisis—and what we can and need to do about it—one thing that we ought to avoid is this foolish argument over “spending.” When the Republicans say “spending,” they mean wasteful “consuming.” When the Democrats say “spending,” they mean “investing.” But both Democratic and Republican investment choices are too-often clouded by the failure to distinguish between actual “consuming” and true “investing.”

True investing consists of funding capital projects that are likely to yield synergistic benefits in the future. In this, the Democrats are right. But those programs that do not promise to yield such benefit ought not to be undertaken right now. At least not as part of a “stimulus package.” In this, it is the Republicans who are right.

The Value of Actual Investment

A good example of investing in a capital project is the building of roads and bridges and government buildings. When you invest in such things, you not only borrow the money from the future, you also borrow the expense from the future. As George Bailey pointed out in It’s a Wonderful Life, when you buy a structure on credit, you get the benefit of it now, while you’re paying for it, rather than waiting until you can pay for it—and may no longer need it—in the future.

The roads we build today, just like the wonderful, old WPA projects still standing all over the country eighty years after the Great Depression, will save our grandchildren the expense of building them in the future.

When you actually invest—rather than when you consume—you actually do invest in a better and brighter American future.

© 2008 Ed Warshawer
Used by Permission

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*In fact, this idea of improving the future is so important that it actually is a required part of the charter of public corporations. Really. This corporation thing is not just about taking money out of the hands of the public. Incorporation is about “contributing to the common good.”

Doesn't Anyone Else Remember Republican Budget Blow-outs?

Throughout the Last Century of America’s History, it has been the Republicans who create massive debt and Depression, and it is the Democrats who bail America out.

Republicans Still Debate the Effects of FDR’s “New Deal,” despite the job growth that was created once Franklin Roosevelt took office. The unemployment rate in the four years from 1933 to 1937 shrunk by about 40%—forty-percent job creation by the New Deal!

But the Republicans Still Want to Wait and See about this stimulus package, because it might not get us out of the Bush Depression in the first 100 days of the Obama administration. After all, it's not Republican mortgages being foreclosed. It's not Republicans who are being laid off.

Republicans Still Revere Ronald Reagan as a Conservative, ignoring the huge excesses in spending during his years.

It Took a Democratic Administration, under President Bill Clinton, to retire the biggest debt that America had ever had and to provide America with a budget surplus. The same budget surplus squandered under George W. Bush.

“Bi-Partisan” Means Both Sides Have to Chip In

Bi-Partisan Is What We, the American People, Want Now. But the members of the Republican Party remain blinded by the foolishness of their failed ideology. Giving Republicans the most-generous consideration (that they are blinded by ideology, rather than that they just might not care how much the “real Americans” of real individual responsibility, suffer), it's a pretty sad fixation on failed ideals.

What's the Difference Between
Consuming and Investing, Anyhow?

The Biggest Flaw in Republican Reasoning right now—besides their blindness to history and the historical effects of job-growth on the welfare of the American people—is that they can’t tell the difference between “spending” and “investing.” By far, most of what the stimulus package offers is investment in things that will last.

Capital Investment Means Borrowing the Infrastructure Projects of Tomorrow, for the working people today. For decades to come, we will have the infrastructure—without additional cost. And meanwhile, those of us who truly live by “individual responsibility” pay our mortgages and put food on the table.

If You Can’t Understand That, then you really shouldn’t be running the nation’s economy. If your idea of an “investment” is a luxury Lexus or BMW, you haven’t a clue why the American economy suffers so greatly under the Republicans Party.

Can America Really Afford Republicans Right Now?

All Those Republicans Stonewalling the American People: you can be sure that they're not missing their Congressional paychecks. Not what you would call a bonus exactly. But then, the Republicans in Congress have their nationalized health care, too.

Are We Really Paying the Republicans Now in Congress to fiddle while America suffers from past Republican excesses?

Not All Jobs Are Created Equal

At a Time When Americans Call for Jobs, Jobs, Jobs, it's tempting for the Democrats to give us what we want. The form of those jobs seems hardly to matter, and considerations of the expense—when it all comes out of money that we no longer have—seem irrelevant.

That's the Sticking Point for Republicans, who believe that the only legitimate means to create jobs is to cut taxes. Lower and lower and lower. Regardless of whether any corporations are earning enough money to pay taxes in the first place. Regardless of whether jobless American citizens have payroll taxes to pay, either.

It's Time for American Capital Investment.

"Capital Investment" Means Building for the Future, using whatever resources you have available today. We have a tremendous jobs shortfall right now, with an abundance of labor, and we need to get that labor employed—so that people can earn income—and pay taxes—and businesses can sell them things. Let the cars fly off the lots! Let the homes get mortgaged! Let the flat-panel TVs get sold!

But First: There's an economically sound way to do this.

Let's Build the Roads.

Let's Build the Bridges.

So That Once America Is Back to Work, we will have invested our money—and our debt—in something tangible that we can ride on.

Why a Spending Bill Just Won't Cut It

As a Nation, Most of Us Seem Not to Understand the difference between consumption and capital investment: Those roads and bridges add substance, where tax credits and tax cuts are the true short-term wastes.

What Matters Most Right Now is not how much tax we are paying, but whether we are earning a paycheck at all.

We're Losing Our Jobs. We're afraid of losing our homes, or at least our home value.

And So We Don't Spend.


Tax Cuts for Broke Corporations or for the unemployed? Neither pays much in taxes, so the point is moot.

Bonuses for the Wealthy, that get parked in Treasury bills and Certificates of Deposit? Parked money is not getting lent by banks, nor invested by anyone else, so the stimulus effect is nil.

"Rescuing" Banks Whose Reserves, marked to market, are currently without value—and are getting worse? These banks have no choice, under "mark to market" rules, to do anything but shore up their reserves. Thus, no credit is released by these "bailouts."


Stimulating a Stagnant Economy Is One Thing.

Restoring Consumer Confidence is another. It's what will turn our economy around. Whether now or later.

Maybe in the Mean Time, We Can Learn about the difference between consuming and speculating, and between speculation and capital investment. So that we won't have to go through this again.

Right Now, Let's Invest in Our Future, with roads and bridges and other infrastructure. It's not the same thing as spending. It's capital improvement.

It's Time Americans—Including Democrats and Republicans in Congress—Learned the Difference.