Are “Investment” and “Spending” the Same Thing?

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    In his State of the Union address tonight, President Obama will call for America to “invest in things like infrastructure, R&D and education, not just reduce the deficit.” In response, Republicans have tried to argue that “investment” is really “spending” by another name. For instance, Sen. Mitch McConnell said on Sunday that “any time [Democrats] want to spend, they call it investment,” and Rep. Eric Cantor claiming that “the word ‘invest’ is mere code for ‘more spending.’

    So, who’s right? Are “spending” and “investment” synonymous? To answer this question, let’s go back for a moment to Macroeconomics 101, where we learned that national income was comprised of four things: Consumption (C) + Investment (I) + Government Spending (G) + Net Exports (X-M). Now, obviously, “C” and “I” are not the same thing —  “consumption” consists of “durable,” “non-durable,” and “services” spending by households and individuals, while “investment” consists of total spending by businesses on plant and equipment.  

    As for government spending, that consists of three major components: 1) “acquisition of goods and services for current use to directly satisfy individual or collective needs of the members of the community,” 2) “acquisition of goods and services intended to create future benefits, such as infrastructure investment or research spending, is classed as government investment;” and 3) “transfer payments” (e.g., Social Security).

    It’s the difference between #1 and #2 under “government spending” that’s at issue here. Except as (meaningless) political rhetoric, lumping them together clearly makes no sense, which is why economists separate them out. And it’s exactly for this reason that people like Mitch McConnell and Eric Cantor really could use a refresher course in economics, because the question isn’t whether “spending” and “investment” are the same thing, as  they most certainly are not. The question is, how much money do we, as a nation, want to put into “acquisition of goods and services intended to create future benefits, such as infrastructure investment or research spending?”  

    Personally, I’d argue that we shouldn’t skimp on investing in our nation’s future, whether we’re talking about “physical capital,” like building the “smart grids” and high-speed rail networks of the future, or “human capital,” which is basically aiming to have the best educated population – and labor force – in the world. We all invest in ourselves, the only questions are how much we invest, when we invest, and what types of investment we pursue. For Person A, it might be tilted more towards education, while for Person B it might be more towards physical infrastructure, and that’s a debate well worth having. But that’s not the debate Republicans like Eric Cantor and Mitch McDonnell are engaging in when they falsely equate “spending” and “investment.” That’s just stupid.

    P.S. With regard to “spending” in general, that’s another area where Cantor, Boehner, McConnell et al. could also use a refresher course in economics, because according to everything we know about how the economy works, the LAST thing you want to do in the midst of an economic downturn is slash government spending (“G”). Again, that’s just stupid.

    • You can only call it investment if it is done by a person or a corporation, even though it is exactly the same thing when done by a government.  

      But if government does it, then it is inherently wrong and must be eliminated, according to their ideology.  That’s the underlying reason why, for example, McDonnell wants to relinquish the commonwealth’s control of the ABC stores.  Even though it was a good investment, providing a steady, consistent profit and revenue stream, the fact that the government does it blinds him to these realities.  

    • For instance, if McDonnell is serious about tacking transportation and higher education using borrowed money through bonds, to me, that is investing, even though it is a Republicans do it.  That is in part because I believe in Keynesian economics (although to a lesser extent at the state level than the federal) and believe that transportation and education pay long term financial dividends down the road.

      If, however, someone hands out reckless tax cuts and expands the medicare prescription drug program simply to ensure a Republican majority for the next generation (I’m looking at you, Mr. Rove, and at you, Mr. Allen, for that vote….) then that is spending.  

      And you don’t have to be a Democrat to have done it.

    • It’s either consumption or investment.  Welfare and food stamps are consumption.  It’s hard to measure the ROI on investments but here’s one example, according to a recent study at UVA:

      For every tax dollar the state invests in public higher education, the result is more than $13 in increased economic output.

      For every tax dollar the state invests in public higher education, the result is $1.39 in new state tax revenues.

    • NotJohnSMosby

      Investment:  expanding and repairing a major interstate between two major cities.

      Spending:  building “The Bridge to Nowhere” as a jobs program and nothing else.

      Investment:  Higher education

      Spending:  War in Iraq.

      Investment means that you increases value and you have something to show for it.  Spending is something that ends up in a sewer or landfill, or as scrap somewhere.

    • Cool_Arrow

      To me they are close to the same thing but sometimes especially in politics you need to re-phrase what you are saying even if little changes.

      For example most people agree that you should live within your means and not spend what you don’t have. However, not many people (especially those of us in NoVa) could afford to buy a house up-front or pay for our children’s education up-front. These are investments that create future returns. Additionally if a road is seriously f’d up and endangers people you don’t wait until you get the next year’s appropriations, you fix it ASAP. These are investments. People can clearly relate to this and most sane people would agree that we need these investments. When you look at budgets these investments combined with necessary spending such as SS, Medicare, Medicade are such a huge chunk it really defies logic for what can be cut. Doesn’t mean that the Tea Baggers won’t try to say that they can balance the budget by cutting Congressional Pay (Robert Hurt) or Tort Reform (Just about all of them). Just makes it harder to say that I am going to cut “investments” when it is known to be education and infrastructure.