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.