Spending versus investing

In President Obama’s State of the Union address he made a distinction between spending money and investing money. N.C. State University economist Mike Walden explains the difference between the two.

“Now we are not going to get into the politics of this; we are going to stay with the economics. But there is a real difference in economics in how you spend money. And one of the ways it is different is, Are you spending money to consume things now? That is, you are using the money up, and you are using what the money has bought all now. Or are you spending money that is going to actually blossom into potentially more money down the road? And the difference there, we say, is spending for consumption versus spending for investing.

“Spending for consumption would be spending money on things that give us pleasure now. The pleasure and the benefit is quickly gone. That is not to say it is bad, but it is, simply, we spend the money. We use it now. We use the product or service now, and it is gone. Food would be the best example of that. We eat the food; it is gone. It gives us nutrition — nourishment — now, but there is relatively little long-lasting effect. In contrast, if we spend money on something like, let’s say, education that supposedly is going to give us a long-lasting benefit — someone spends money on education whether at the K through 12 or college level, they get a degree, they are going to be more productive down the road. So that spending that they have done on education has long-lasting benefits.

“And I think what the president was saying — and again we are not getting into politics of this — but I think what the President was saying, and I think that he is right, if you look at how Americans in the last, say, 30 years have spent their money, we are spending relatively more on consumption (things that give us pleasure now) and relatively less on spending on investing that is going to give us long-lasting returns. And maybe we need to change that mix.”