Some people confuse the two terms. Savings are money you accumulate.
- Saving money for an emergency fund is something we all should do. You save for a vacation or a car.
- Investing requires spending the saved money, with the objective of a return on your investment at a later date.
Individuals invest money for retirement. The value fluctuates and includes risk, but the return over a long period offers more than just savings.
The idea of investing in order to grow also applies to countries. Europe has been on a steady diet of austerity (i.e. cutting of services and benefits) with nothing being invested for growth. Germany has been one of the drivers forcing austerity. Yet interestingly, Germany offers a prime example of spending money by investing for a return.
A NY Times article on July 7, 2013, “Austerity Won’t Work If the Roof is Leaking” by Robert H. Frank, economics professor at Cornell University, takes to task the U.S. propensity to cut without regard to public investing. As a contrasting example, he cites Germany’s investments.
Germany borrows money to invest in infrastructure because of the payoff in the future. With this investment, its unemployment rate was reduced to 5.3% and is still falling (during the financial crisis unemployment was 9.2%).
It is one thing, Frank explains, to inject stimulus to build such things as houses, but an entirely different matter to invest in overdue repairs of infrastructure.
Is repairing a small leak not easier than waiting until you have to replace the roof? Is this not a parallel for our infrastructure? When’s the last time you drove down a road without potholes?
We would offer another example. Remember when East and West Germany were re- unified? Germany had a 10-year plan to invest in East Germany’s infrastructure, education system, etc. The dividends of this investment took over a decade to reap but the return made the united Germany one of the strongest economies in Europe.
Cutting spending just to reduce the deficit offers little return to the taxpayer. Why not invest in infrastructure, education, etc.? The increased employment reduces the need for a social net; more money pours into Social Security coffers, a better educated work force can only help us. This is what we try to do on an individual basis when we invest instead of saving. Perhaps Washington should take note.