Thursday, February 26, 2009
Capital Expenditures Are An Investment
Today I would like to talk a little about capital expenditures, and how capital expenditures differ from operating expenses. The purpose of this little explanation is because a lot of the criticism of the stimulus package is just plain wrong. Here is why.
What is a capital expenditure? A battleship or an aircraft carrier is an example of a military capital expenditure. I think reasonable people would agree that a battleship or an aircraft carrier will last more than a couple of years. Building a bridge, roads & highways, a new electric grid are also examples of capital expenditures because they too will last more than a couple of years.
How do we finance a capital expenditure? Capital expenditures are usually financed over a period of years equal to the life of the utility of the capital expenditure. This long term financing in the private and public sector is done by the issuance of corporate bonds and municipal bonds. The Federal Government also issues long term bonds, U.S. Treasury bonds, that can be linked to projects that have a utility of more than a couple of years.
A start up company uses seed money for operating expenses because it has no income. The United States, federal, state, county and city governments have income through taxes and fees, and as the economy recovers, those taxes and fees will increase in amount as the recovery takes place. The taxes and fees will pay principle and interest and retire the debt. As new projects are needed, new borrowings will occur, just as new borrowing takes place in the private sector of the economy.
Concern about a deficit should have been under taken at the beginning of the Iraq War, as fighting the war should have been paid for out of the Federal Government’s operating income, taxes and fees. After the war is over there is no utility in what is left, unless Iraq is going to give us free oil for the next 10 years. The idea that Iraq was going to pay for the cost of the war should be revisited. If Iraq pays for the cost of the war to liberate their country, that would reduce our deficit considerably. Personally, I think that subject should be visited again.
Finally, capital expenditures are an investment. Corporations, governments and ordinary people, families, borrow money for major expenditures and pay for these expenditures over time. That is the way the world finances capital investments. The important thing to keep in mind is that we, as a nation, must keep our country competitive with the rest of the world and we must update and improve our own infrastructure. If we do not meet that challenge, we will have hell to pay.