Spending? Or Investing?

What happens when we fail to recognize the difference between spending and investing?

That question was triggered by a recent column by New York Times columnist Joe Nocera. Nocera was writing about corporate activists and a pending proxy battle between one such group and the DuPont Company, and most of his column dealt with the specifics of that situation. What struck me, however, was the following paragraph, in which he quotes an observation by a corporate lawyer named Martin Lipton. Lipton’s observations have implications that go well beyond a single corporate proxy dispute.

“Activism has caused companies to cut R & D, capital investment, and most significantly, employment,” he said. “It forces companies to lay off employees to meet quarterly earnings.”

“It is,” he concluded, “a disaster for the country.”

Lipton’s focus on employment is important, and has obvious implications for the health of the economy. But even more important, in my view, is the equally undeniable fact that the current fixation on generating an immediate shareholder return has resulted in corporate management diverting monies from investments that will pay dividends in the future in order to satisfy shareholder demands in the present.

Nor is it only corporate America that has become so shortsighted. The U.S. Congress is dominated by slash-and-burn “conservatives” who refuse to invest in critical infrastructure, preferring instead to indulge ideology and/or reward donors by reducing taxes on the wealthy (already at historic lows) still further. The recent slashing of Amtrak’s budget–even in the wake of a horrific derailment–is but one recent example.

I put quotation marks around conservative in the preceding paragraph, because I am old enough to remember when “fiscally conservative” described policymakers who believed in paying for programs—and wars—when they were authorized, rather than financing them “off budget” or putting them on the national credit card. ( We may criticize “tax and spend,” but it’s surely preferable to “borrow and spend.”)

Genuine fiscal conservatives also understood the difference between capital and operating expenditures and the importance of investing in the nation’s future.

Drawing parallels between individual households and the federal budget can be misleading, because there are significant differences between behaviors that are personally prudent and those appropriate to government. Nevertheless, to use a household example, your home mortgage is an investment; your new suit isn’t. Most of us would have very different opinions of two families carrying the same level of debt—in one case a mortgage and in the other a credit card balance from a shopping spree. And most of us would be very critical of a homeowner who chose not to repair the leaky roof so that he could use the money for a vacation instead.

Allowing assets to deteriorate while we indulge more immediate political appetites is hardly “fiscally conservative.”

When businesses fail to invest in necessary equipment, when they cut back on research and development, they risk obsolescence and loss of market share. They lose their competitive edge. That’s bad news for them.

When government fails to invest in infrastructure—bridges, roads, railroads, the electrical grid, new energy technologies, basic medical and scientific research—that’s bad news for us. We all suffer the consequences, because the whole nation’s economic performance is dependent upon the adequacy and accessibility of that infrastructure.

I believe it was Eric Hoffer, the longshoreman-philosopher, who said a nation should ultimately be judged not by what it builds, but by its ability to maintain what it has built.

14 thoughts on “Spending? Or Investing?

  1. Good points……although the line between what’s an expense and what’s an investment is hardly a bright one, and probably isn’t the same one in family budgets, business plans, tax accounting, or governmental operations. Many years back I had a high school classmate who went on to study economics and pioneer some recognized efforts in the field of “Human Resources Accounting”, which treated, for example, the cost of training employees as an investment rather than an expense. I think perhaps in some cases progressives have gone overboard in labeling too many questionable programs as investments which have turned out to be inefficient spending, but on the other hand “conservatives” are often all to quick to reject the notion of investment in this area in the name of “fiscal responsibility”

    As to that new suit not being an investment, I suppose that the young (or older) person looking to make a good first impression in the job interview process might disagree with you slightly, although there’s always the discount rack.

  2. One fact that remains the same between family budgets and those of business, tax accounting and governmental operations is…NEEDS should be provided and paid for first. The problem is that what is considered a “need” by each is different and the people we elect to office get to make these decisions for us sans our input. Sports venues vs. public education, public safety, infrastructure, health care, etc., has put us on the losing end and will continue. Businesses who pour thousands and/or millions into politicians are investing in their own future. The politicians who accept these contributions/payments are also investing in their own future by accepting these offerings – not the well-being and future of their constituents. There is always the political payback to those investors at the expense of the public. Using our tax dollars for public good is spending but it is also investing in the future of all of us and our decendants if well-spent.

    The ‘conservatives” in Congress are willing to spend to increase income of their personal investors but not to preserve Americans or America with their spending. Think Ebanezer Scrooge mentality with no ghosts of Christmas (or Passover) past in sight.

  3. I have mentioned the destructive effect of the accountant mindset in the government several times in this blog in the past. I won’t argue that our definitions of necessary and discretionary spending may differ slightly, but when we’re considering generating revenues to invest in improving or extending our drinking water system, our sewers, roads, etc. versus a new sports venue, the rhetoric in support of the sports venue rings hollow. I have very difficult time believing that a few billionaires can’t pick up their own tabs for venues that are intended to generate more revenues for them. Looking at another way, if it were such a good deal, why aren’t venture capitalists financing the stadium instead of the taxpayers? Maybe it’s the lack of ROI.

  4. “When businesses fail to invest in necessary equipment , when they cut back on research and development, they risk obsolescence of market share. They lose their competitive edge. That’s bad news for them.” ~Sheila

    Another example of this would be the Progressive Community in America who pour millions of dollars into the Southern Poverty Law Center. A few years ago they had, I believe, more than 150 million in the bank. Probably a lot more dollars now.

    I’m not criticizing Morris Dees. It’s the Progressive Community I’m criticizing.

    Morris Dees announced on TV over 25 years ago that he wasn’t going to deal with the systemic problems in the country. His main thrust has always been on identifying extremist radical groups and a few times in the past has taken one or more of them successfully into court.

    The structure of the SPLC is completely ineffective in dealing with the likes of the Koch Brothers or other “Elite Deviants.”

    Unfortunately, the Progressive Community has invested nothing in the R&D to create the NEW structures needed to effectively deal with them.

    This is bad news for all of us. Our democracy can’t exist in the long run without “political equilibrium.”

    It has to have “real” competition on both sides. The Progressive Community and its allies are not competitive at this time.

  5. To be a little more specific: Morris Dees admission was made on Tony Brown’s syndicated TV show from Chicago in 1990. I just happened to be watching TV.

  6. If the Koch brothers could be proven to be racist, bigots, anti-Semites, anti-Christian, anti-Muslim or Buddhism, anti-LGBT or any other anti – other than anti-Democratic party and President Obama – on a legal level, I’m sure the SPLC would have investigated them long ago. I’m sure they would also investigate the GOP and SCOTUS if they had legal grounds to do so but…these agents of public service are protected from prosecution for their illegal acts so why waste time and money on lost causes.

    Sheila’s last paragraph is the kicker; this country did build a strong foundation which has been allowed to crumble around us the past 20 years and more. It only pays dividends to those who have the ready cash to buy politicians to make the decisions regarding spending vs. investing to continue allowing the foundation of America and it’s cities to crumble. They will then buy up the ruins at ten cents on the dollar, do a few repairs and sell it back to us at a high cost with a high rate of interest. They will be spending little on their investment in their own future; the poor will be forced to grasp at straws for salvation because straws – and straw men – will be all that is left to us.

  7. I can understand JoAnn how you feel. The idea that the rich are beyond prosecution, just is not true.

    In 1966, I was part of a trio of attorneys for the Treasury Department who successfully tried H.L. Hunt, supposedly the richest man in the world, in the Tax Court of the US in Dallas for tax evasion. He was exposed and very lucky that he wasn’t convicted in a criminal court.

    Morris Dees hasn’t and will not investigate the elite in this country because he wants to be successful and also make a lot of money at the same time. You can’t do both. He knows that he will scare off his contributors if that was the mission of the SPLC. They would be scared off because of the potential of public exposure and resultant retaliation which is a real reality.

  8. “Activism has caused companies to cut R & D, capital investment, and most significantly, employment…..”

    In my experience it is CEOs in search if truly over the top compensation who are the culprits for this.

    What made the American Dream was focus on and faith in growth. There was always something better just over the horizon. Two things have changed that faith.

    One is that companies constrained by the limitations of accounting pursued better only as more materialustic. (Incorrect spelling that I decided was an improvement over English.) Capitalism’s fatal flaw.

    The other is that business leaders lost patience in innovation as being slow, risky and uncertain and instead took the easy, safe, certain road of advertising. Brand marketing.

    What was predictably unsustainable has turned out to be, well, not sustainable. Temporary. Without a future.

    Shoot the bean counters who believed that keeping score wins games.

    We need to redeploy what works. Define business goals as what best serves humanity. All of us. Gross National Happiness. Not what makes accountants and CEOs happy but we the people.

    We need to revert back to investing in what works by those measures. Innovation. Technology. Education. Sustainability. Health. Being part of life not the CEO of life. Families. Churches (as compared to religions) for those who have a low tolerance for the uncertainty from what can’t be known. Real not false prophets.

    We can and will. The variable is how far we let civilization deteriorate before we’re inspired to.

  9. Marv; H.L Hunt was one man prosecuted almost half a century ago – this is a new world with new monied leaders whose fortunes are in the billions, they rule thanks to SCOTUS. I cannot say a brave new world because we seem to be controled by a bunch of pussies with few lions in the bunch. Even elected officials admitting to being sex offenders are not prosecuted, removed from office or looked down on by those who own and rule this country today through the GOP. Goldsmith sent word from on high early in his administration; we were told not to worry about rules, laws or ordinances, they can be changed. They were never changed…and still have not been changed but the rich are still getting richer, the middle class is becoming poor and the poor are becoming destitute. One lesson this country has learned since Januay 20, 2009; the President of the United States has little power; we are at the mercy of the privately owned Congress who has no mercy. I still lay blame at the feet of those who did NOT vote in recent elections.

  10. This is a direct result of the financialization of the economy. Hedge funds & other vocal owners of relatively small fractions of companies are only interested in their bonus & their funds returns. If the company goes under six months after they cash out, they don’t care. Great way to design (if that’s the word) a system of investment & reward.

  11. JoAnn,

    “Apples don’t fall far from the tree”

    I’m not saying you’re wrong about your comment on H. L. Hunt. But, he’s not unimportant. His son, Bunker, who attempted to corner the Silver market some years ago, controlled the Southern Baptist Convention at the time it moved way to the right. He was coming from the same place as his father.

    “There is a strong belief that a role transcends and survives the person occupying it. The whole concept of the “national interest” (we might add “corporate interest” or “church interest”) implies that no matter who occupies the powerful roles, the agenda of the decision making and of the preferences involved do not change very much, although of course, every occupant of the role changes the role somewhat.” Kenneth E. Boulding, Three Faces of Power (New York: Sage Publications Inc., 1989).

    The Bush family is only a classier?? version of the Hunt family.

    The point I was trying to make is that power can be neutralized. In most cases it has the structure of an “onion.” If you understand the core, the “onion” can be destroyed by removing the outer layers. That’s how the battle for one-man,one-vote was won in Dallas in 1991.

    Roger Staubach neutralized the outer layers and I understood the political machine well enough to neutralize the core. The central core was not strong. It withered away without the outer layers. The political machine was dead.

    I agree 100% with you that we are being “controlled by a bunch of pussies with few lions in the bunch.” They are not strong. It is their cover which gives them the POWER that allows for the illusion of strength. In this instance, there’s a big difference between strength and power.

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