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USA Inc.
About USA Inc.
Created and Compiled by Mary Meeker
February 2011
This report looks at the federal government as if it were a business, with the goal of informing the
debate about our nation’s financial situation and outlook. In it, we examine USA Inc.’s income
statement and balance sheet. We aim to interpret the underlying data and facts and illustrate
patterns and trends in easy-to-understand ways. We analyze the drivers of federal revenue and
the history of expense growth, and we examine basic scenarios for how America might move
toward positive cash flow.
Thanks go out to Liang Wu and Fred Miller and former Morgan Stanley colleagues whose
contributions to this report were invaluable. In addition, Richard Ravitch, Emil Henry, Laura
Tyson, Al Gore, Meg Whitman, John Cogan, Peter Orszag and Chris Liddell provided inspiration
and insights as the report developed. It includes a 2-page foreword; a 12-page text summary;
and 460 PowerPoint slides containing data-rich observations. There’s a lot of material – think of
it as a book that happens to be a slide presentation.
We hope the slides in particular provide relevant context for the debate about America’s
financials. To kick-start the dialogue, we are making the entire slide portion of the report
available as a single work for non-commercial distribution (but not for excerpting, or modifying or
creating derivatives) under the Creative Commons license. The spirit of connectivity and sharing
has become the essence of the Internet, and we encourage interested parties to use the slides to
advance the discussion of America’s financial present and future. If you would like to add your
own data-driven observations, contribute your insights, improve or clarify ours, please contact us
to request permission and provide your suggestions. This document is only a starting point for
discussion; the information in it will benefit greatly from your thoughtful input.
This report is available online and on iPad at www.kpcb.com/usainc
In addition, print copies are available at www.amazon.com
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USA Inc.
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Foreword
George P. Shultz, Paul Volcker, Michael Bloomberg, Richard Ravitch and John Doerr
February 2011
Our country is in deep financial trouble. Federal, state and local governments are deep in debt
yet continue to spend beyond their means, seemingly unable to stop. Our current path is simply
unsustainable. What to do?
A lot of people have offered suggestions and proposed solutions. Few follow the four key
guideposts to success that we see for setting our country back on the right path:
1) create a deep and widely held perception of the reality of the problem and the stakes involved;
2) reassure citizens that there are practical solutions;
3) develop support in key constituencies; and
4) determine the right timing to deliver the solutions.
USA Inc. uses each of these guideposts, and more; it is full of ideas that can help us build a
better future for our children and our country.
First, Mary Meeker and her co-contributors describe America’s problems in an imaginative way
that should allow anyone to grasp them both intellectually and emotionally. By imagining the
federal government as a company, they provide a simple framework for understanding our
current situation. They show how deficits are piling up on our income statement as spending
outstrips income and how our liabilities far exceed nominal assets on our balance sheet. USA
Inc. also considers additional assets – hard to value physical assets and our intangible wealth –
our creativity and energy and our tradition of an open, competitive society.
Additionally, the report considers important trends, pointing specifically to an intolerable failure to
educate many in the K-12 grades, despite our knowledge of how to do so. And all these
important emotional arguments help drive a gut reaction to add to data provided to reinforce the
intellectual reasons we already have.
Second, USA Inc. provides a productive way to think about solving our challenges. Once we
have created an emotional and intellectual connection to the problem, we want people to act and
drive the solution, not to throw up their hands in frustration. The authors’ ingenious indirect
approach is to ask what a turnaround expert would do and what questions he or she would ask.
The report describes how we first stumbled into this mess, by failing to predict the magnitude of
program costs, by creating perverse incentives for excessive behavior, and by missing important
trends. By pointing to the impact of individual responsibility, USA Inc. gives us reason to believe
that a practical solution exists and can be realized.
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Third, the report highlights how powerful bipartisan constituencies have emerged in the past to
tackle great issues for the betterment of our nation, including tax reform, civil liberties,
healthcare, education and national defense. Just as presidents of both parties rose to the
occasion to preside over the difficult process of containment during the half-century cold war, we
know we can still find leaders who are willing to step up and overcome political or philosophical
differences for a good cause, even in these difficult times.
Finally, the report makes an important contribution to the question of timing. Momentum will
follow once the process begins to gain support, and USA Inc. should help by stimulating broad
recognition and understanding of the challenges, by providing ways to think about solutions, and
by helping constituencies of action to emerge. As the old saying goes, “If not now, when? If not
us, who?”
With this pioneering report, we have a refreshing, business-minded approach to understanding
and addressing our nation’s future. Read on…you may be surprised by how much you learn. We
hope you will be motivated to help solve the problem!
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Table of Contents
About USA Inc. ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ii
Foreword ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ iii
Summary ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ vii
Introduction ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 5
High-Level Thoughts on Income Statement/Balance Sheet ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 25
Income Statement Drilldown ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 53
Entitlement Spending ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 72
Medicaid ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 94
Medicare ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 100
Unemployment Benefits ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 121
Social Security ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 129
Rising Debt Level and Interest Payments ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 142
Debt Level ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 145
Effective Interest Rates ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 161
Debt Composition ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 168
Periodic Large One-Time Charges ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 177
TARP ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 188
Fannie Mae / Freddie Mac ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 193
ARRA ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 200
Balance Sheet Drilldown ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 209
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What Might a Turnaround Expert Consider? ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 221
High-Level Thoughts on How to Turn Around USA Inc.’s Financial Outlook ∙ ∙ ∙ ∙ 237
Focus on Expenses ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 253
Reform Entitlement Programs ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 255
Restructure Social Security ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 256
Restructure Medicare & Medicaid ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 268
Focus on Operating Efficiency ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 329
Review Wages & Benefits ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 335
Review Government Pension Plans ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 338
Review Role of Unions ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 342
Review Cost Structure & Headcount ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 345
Review Non-Core 'Business' for Out-Sourcing ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 349
Focus on Revenues ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 355
Drive Sustainable Economic Growth ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 356
Invest in Technology / Infrastructure / Education ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 366
Increase / Improve Employment ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 383
Improve Competitiveness ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 389
Consider Changing Tax Policies ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 395
Review Tax Rates ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 396
Reduce Subsidies / Tax Expenditures / Broaden Tax Base ∙ ∙ ∙ ∙ ∙ ∙ ∙ 400
Consequences of Inaction ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 413
Short-Term, Long-Term ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 415
Public Debt, Net Worth vs. Peers ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 416
Lessons Learned From Historical Debt Crisis ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 422
General Motors ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 431
Summary ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 437
Appendix ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 453
Glossary ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ xix
Index
∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ xxvii
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USA Inc.
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Summary
Imagine for a moment that the United States government is a public corporation. Imagine
that its management structure, fiscal performance, and budget are all up for review. Now
imagine that you’re a shareholder in USA Inc. How do you feel about your investment?
Because 45% of us own shares in publicly traded companies, nearly half the country expects
quarterly updates on our investments. But although 100% of us are stakeholders in the United
States, very few of us look closely at Washington’s financials. If we were long-term investors,
how would we evaluate the federal government’s business model, strategic plans, and operating
efficiency? How would we react to its earnings reports? Nearly two-thirds of all American
households pay federal income taxes, but very few of us take the time to dig into the numbers of
the entity that, on average, collects 13% of our annual gross income (not counting another 15-
30% for payroll and various state and local taxes).
We believe it’s especially important to pay closer attention to one of our most important
investments.
As American citizens and taxpayers, we care about the future of our country. As investors, we’re
in an on-going search for data and insights that will help us make more informed investment
decisions. It’s easier to predict the future if one has a keen understanding of the past, but we
found ourselves struggling to find good information about America’s financials. So we decided to
assemble – in one place and in a user-friendly format – some of the best data about the world’s
biggest “business.” We also provide some historical context for how USA Inc.’s financial model
has evolved over decades. And, as investors, we look at trend lines which help us understand
the patterns (and often future directions) of key financial drivers like revenue and expenses.
The complexity of USA Inc.’s challenges is well known, and our presentation is just a starting
point; it’s far from perfect or complete. But we are convinced that citizens – and investors –
should understand the business of their government. Thomas Jefferson and Alexis de
Tocqueville knew that – armed with the right information – the enlightened citizenry of America
would make the right decisions. It is our humble hope that a transparent financial framework can
help inform future debates.
In the conviction that every citizen should understand the finances of USA Inc. and the plans of
its “management team,” we examine USA Inc.’s income statement and balance sheet and
present them in a basic, easy-to-use format. We summarize our thoughts in PowerPoint form and
in this brief text summary at www.kpcb.com/usainc. We encourage people to take our data and
thoughts and study them, critique them, augment them, share them, and make them better.
There’s a lot of material – think of it as a book that happens to be a slide presentation.
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USA Inc.
vii
There are two caveats. First, we do not make policy recommendations. We try to help clarify
some of the issues in a straightforward, analytical way. We aim to present data, trends, and facts
about USA Inc.’s key revenue and expense drivers to provide context for how its financials have
reached their present state. Our observations come from publicly available information, and we
use the tools of basic financial analysis to interpret it. Forecasts generally come from 3rd-party
agencies like the Congressional Budget Office (CBO), the nonpartisan federal agency charged
with reviewing the financial impact of legislation. Second, the ‘devil is in the details.’ For US
policy makers, the timing of material changes will be especially difficult, given the current
economic environment.
By the standards of any public corporation, USA Inc.’s financials are discouraging.
True, USA Inc. has many fundamental strengths. On an operating basis (excluding Medicare
and Medicaid spending and one-time charges), the federal government’s profit & loss statement
is solid, with a 4% median net margin over the last 15 years. But cash flow is deep in the red (by
almost $1.3 trillion last year, or -$11,000 per household), and USA Inc.’s net worth is negative
and deteriorating. That net worth figure includes the present value of unfunded entitlement
liabilities but not hard-to-value assets such as natural resources, the power to tax or mint
currency, or what Treasury calls “heritage” or “stewardship assets” like national parks.
Nevertheless, the trends are clear, and critical warning signs are evident in nearly every data
point we examine.
F2010 Cash Flow = -$1.3 Trillion; Net Worth = -$44 Trillion
With a Negative Trend Line Over Past 15 Years
USA Inc. Annual Cash Flow & Year-End Net Worth, F1996 – F2010
$400
$15,000
Annual Cash Flow ($Billion)
$0
-$400
-$800
-$1,200
One-Time Expenses*
Cash Flow (left axis)
$0
-$15,000
-$30,000
-$45,000
Year-End Net Worth ($Billion)
Net Worth (right axis)
-$1,600
-$60,000
F1996 F1998 F2000 F2002 F2004 F2006 F2008 F2010
Note: USA federal fiscal year ends in September; Cash flow = total revenue – total spending on a cash basis; net worth includes unfunded future liabilities from
Social Security and Medicare on an accrual basis over the next 75 years. *One-time expenses in F2008 include $14B payments to Freddie Mac; F2009
includes $279B net TARP payouts, $97B payment to Fannie Mae & Freddie Mac and $40B stimulus spending on discretionary items; F2010E includes $26B
net TARP income, $137B stimulus spending and $41B payment to Fannie Mae & Freddie Mac. F2010 net worth improved dramatically owing to revised
actuarial estimates for Medicare program resulted from the Healthcare reform legislation. For more definitions, see next slide. Source: cash flow per White
House Office of Management and Budget; net worth per Dept. of Treasury, “2010 Financial Report of the U.S. Government.”
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USA Inc. | Summary
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Underfunded entitlements are among the most severe financial burdens USA Inc. faces.
And because some of the most underfunded programs are intended to help the nation’s
poorest, the electorate must understand the full dimensions of the challenges.
F2010 USA Inc. Revenues + Expenses At A Glance
Unfunded Entitlement (Medicare + Social Security) + Underfunded
Entitlement Expenditures (Medicaid) =
Among Largest Long-Term Liabilities on USA Inc.'s Balance Sheet
Corporate
Income Tax
$191B
F2010
Revenues =
$2.2T
Other
$208B
10%
9%
41%
Individual
Income Tax
$899B
Discretionary
One-Time Items
$152B
Non-Defense
Discretionary
$431B
F2010 USA Inc. Expenses =
$3.5T
12%
20%
Net Interest
Payment
$196B
6%
4%
20%
Entitlement
Programs
22%
Social
Security
$707B
All
Other
Federal
Employee
Benefits
$1.6T $2.1T
Veteran
Benefits
USA Balance Sheet Liabilities Composition, F2010
Federal
Debt
Unfunded
Social
Security
$3.7T $9.1T $7.9T
Unfunded
Medicare
$22.8T
Medicaid*
$35.3T
40%
Social
Insurance Tax
$865B
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Defense
$694B
16%
Medicare +
Federal
Medicaid
$724B
Unemployment Insurance
+ Other Entitlements
$553B
Note: USA federal fiscal year ends in September; *individual & corporate income taxes include capital gains taxes. Nondefense
discretionary includes federal spending on education, infrastructure, law enforcement, judiciary functions…
Source: White House Office of Management and Budget.
USA Inc. | Summary
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Note: Medicaid funding is appropriated by Congress (from general tax revenue) on an as-needed basis every year, therefore,
there is no need to maintain a contingency reserve, and, unlike Medicare, the “financial status” of the program is not in question
from an actuarial perspective. Here we estimated the net present value of future Medicaid spending through 2085E, assuming a
3% discount rate. Data source: Dept. of Treasury, Dept. of Health & Human Services Center for Medicare & Medicaid Services.
USA Inc. | Summary
Some consider defense outlays – which have nearly doubled in the last decade, to 5% of GDP –
a principal cause of USA Inc.’s financial dilemma. But defense spending is still below its 7%
share of GDP from 1948 to 2000; it accounted for 20% of the budget in 2010, compared with
41% of all government spending between 1789 and 1930. The principal challenges lie
elsewhere. Since the Great Depression, USA Inc. has steadily added “business lines” and, with
the best of intentions, created various entitlement programs. They serve many of the nation’s
poorest, whose struggles have been made worse by the recent financial crisis. Apart from Social
Security and unemployment insurance, however, funding for these programs has been woefully
inadequate – and getting worse.
Entitlement expenses amount to $16,000 per household per year, and entitlement spending far
outstrips funding, by more than $1 trillion (or $9,000 per household) in 2010. More than 35% of
the US population receives entitlement dollars or is on the government payroll, up from ~20% in
1966. Given the high correlation of rising entitlement income with declining savings, do
Americans feel less compelled to save if they depend on the government for their future savings?
It is interesting to note that in China the household savings rate is ~36%, per our estimates
based on CEIC data, in part due to a higher degree of self-reliance – and far fewer established
pension plans. In the USA, the personal savings rate (defined as savings as percent of
disposable income) was 6% in 2010 and only 3% from 2000 to 2008.
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Millions of Americans have come to rely on Medicare and Medicaid – and spending has
skyrocketed, to 21% of USA Inc.’s total expenses (or $724B) in F2010, up from 5% forty
years ago.
Together, Medicaid and Medicare – the programs providing health insurance to low-income
households and the elderly, respectively – now account for 35% of total healthcare spending in
the USA. Since their creation in 1965, both programs have expanded markedly. Medicaid now
serves 16% of all Americans, compared with 2% at its inception; Medicare now serves 15% of
the population, up from 10% in 1966. As more Americans receive benefits and as healthcare
costs continue to outstrip GDP growth, total spending for the two entitlement programs is
accelerating. Over the last decade alone, Medicaid spending has doubled in real terms, with
total program costs running at $273 billion in F2010. Over the last 43 years, real Medicare
spending per beneficiary has risen 25 times, driving program costs well (10x) above original
projections. In fact, Medicare spending exceeded related revenues by $272 billion last year.
Amid the rancor about government’s role in healthcare spending, one fact is undeniable:
government spending on healthcare now consumes 8.2% of GDP, compared with just
1.3% fifty years ago.
Total Government* Healthcare Spending Increases are Staggering –
Up 7x as % of GDP Over Five Decades vs. Education Spending Only Up 0.6x
8%
USA Total Government Healthcare vs. Education Spending as % of GDP, 1960 – 2009
8.2%
Spending as % of GDP
6%
4%
2%
1.2%
Total Government (Federal + State + Local) Spending on Healthcare
Total Government (Federal + State + Local) Spending on Education
0%
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
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Note: *Total government spending on healthcare includes Medicare, Medicaid and other programs such as federal
employee and veteran health benefits; total government spending on education includes spending on pre-primary through
tertiary education programs. Source: Dept. of Education, Dept. of Health & Human Services.
USA Inc. | Summary
The overall healthcare funding mix in the US is skewed toward private health insurance due to
the predominance of employer-sponsored funding (which covers 157MM working Americans and
their families, or 58% of the total population in 2008 vs. 64% in 1999). This mixed private-public
funding scheme has resulted in implicit cross-subsidies, whereby healthcare providers push
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costs onto the private market to help subsidize lower payments from public programs. This
tends to help drive a cycle of higher private market costs causing higher insurance premiums,
leading to the slow erosion of private market coverage and a greater enrollment burden for
government programs.
The Patient Protection and Affordable Care Act, enacted in early 2010, includes the biggest
changes to healthcare since 1965 and will eventually expand health insurance coverage by
~10%, to 32 million new lives. Increased access likely means higher spending if healthcare
costs continue to grow 2 percentage points faster than per capita income (as they have over the
past 40 years). The CBO sees a potential $143B reduction in the deficit over the next 10 years,
but this assumes that growth in Medicare costs will slow – an assumption the CBO admits is
highly uncertain.
Unemployment Insurance and Social Security are adequately funded...for now. Their
future, unfortunately, isn’t so clear.
Unemployment Insurance is cyclical and, apart from the 2007-09 recession, generally operates
with a surplus. Payroll taxes kept Social Security mainly at break-even until 1975-81 when
expenses began to exceed revenue. Reforms that cut average benefits by 5%, raised tax rates
by 2.3%, and increased the full retirement age by 3% (to 67) restored the system’s stability for
the next 25 years, but the demographic outlook is poor for its pay-as-you-go funding structure. In
1950, 100 workers supported six beneficiaries; today, 100 workers support 33 beneficiaries.
Since Social Security began in 1935, American life expectancy has risen 26% (to 78), but the
“retirement age” for full benefits has increased only 3%.
Regardless of the emotional debate about entitlements, fiscal reality can’t be ignored – if
these programs aren’t reformed, one way or another, USA Inc.’s balance sheet will go
from bad to worse.
Federal Government Spending Had Risen to 24% of GDP in 2010,
Up From an Average of 3% From 1790 to 1930
Federal Government Spending as % of GDP, 1790 – 2010
40%
35%
Federal Spending as % of GDP
30%
25%
20%
15%
10%
3% Trendline Average
1790-1930
24% in 2010
5%
0%
1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010
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Source: Federal spending per Series Y 457-465 in "Historical Statistics of the United States, Colonial Times to 1970, Part II“ and per
White House OMB. GDP prior to 1930 per Louis Johnston and Samuel H. Williamson, "What Was the U.S. GDP Then?"
MeasuringWorth, 2010. GDP post 1930 per White House OMB. Neither federal spending nor GDP data are adjusted for inflation.
USA Inc. | Summary
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USA Inc.
xi
Entitlement Spending Increased 11x
While Real GDP Grew 3x Over Past 45 Years
USA Real Federal Expenses, Entitlement Spending, Real GDP % Change, 1965 – 2010
% Change From 1965
1200%
1000%
800%
600%
400%
200%
Total Expenses
Entitlement Programs
Real GDP
Entitlement
Expenses
+10.6x
Total
Expenses
+3.3x
Real GDP
+2.7x
0%
1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009
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Note: Data adjusted for inflation. Source: White House Office of Management and Budget.
USA Inc. | Summary
Take a step back, and imagine what the founding fathers would think if they saw how our
country’s finances have changed. From 1790 to 1930, government spending on average
accounted for just 3% of American GDP. Today, government spending absorbs closer to 24% of
GDP.
It’s likely that they would be even more surprised by the debt we have taken on to pay for this
expansion. As a percentage of GDP, the federal government’s public debt has doubled over the
last 30 years, to 53% of GDP. This figure does not include claims on future resources from
underfunded entitlements and potential liabilities from Fannie Mae and Freddie Mac, the
Government Sponsored Enterprises (GSEs). If it did include these claims, gross federal debt
accounted for 94% of GDP in 2010. The public debt to GDP ratio is likely to triple to 146% over
the next 20 years, per CBO. The main reason is entitlement expense. Since 1970, these costs
have grown 5.5 times faster than GDP, while revenues have lagged, especially corporate tax
revenues. By 2037, cumulative deficits from Social Security could add another $11.6 trillion to
the public debt.
The problem gets worse. Even as USA Inc.’s debt has been rising for decades, plunging interest
rates have kept the cost of supporting it relatively steady. Last year’s interest bill would have
been 155% (or $290 billion) higher if rates had been at their 30-year average of 6% (vs. 2% in
2010). As debt levels rise and interest rates normalize, net interest payments could grow 20% or
more annually. Below-average debt maturities in recent years have also kept the Treasury’s
borrowing costs down, but this trend, too, will drive up interest payments once interest rates rise.
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USA Inc.
xii
Can we afford to wait until the turning point comes? By 2025, entitlements plus net
interest payments will absorb all – yes, all – of USA Inc.'s revenue, per CBO.
Entitlement Spending + Interest Payments Alone Should
Exceed USA Inc. Total Revenue by 2025E, per CBO
Entitlement Spending + Interest Payments vs. Revenue as % of GDP, 1980 – 2050E
Total Revenue & Entitlement + Net Interest
Payments as % of GDP
40%
30%
20%
10%
Revenue
Entitlement Spending + Net
Interest Payments
0%
1980 1990 2000 2010E 2020E 2030E 2040E 2050E
Source: Congressional Budget Office (CBO) Long-Term Budget Outlook (6/10). Note that entitlement spending includes federal government expenditures on Social
Security, Medicare and Medicaid. Data in our chart is based on CBO’s ‘alternative fiscal scenario’ forecast, which assumes a continuation of today’s underlying
fiscal policy. Note that CBO also maintains an ‘extended-baseline’ scenario, which adheres closely to current law. The alternative fiscal scenario deviates from
CBO’s baseline because it incorporates some policy changes that are widely expected to occur (such as extending the 2001-2003 tax cuts rather than letting them
expire as scheduled by current law and adjusting physician payment rates to be in line with the Medicare economic index rather than at lower scheduled rates) and
that policymakers have regularly made in the past.
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USA Inc. | Summary
Less than 15 years from now, in other words, USA Inc. – based on current forecasts for revenue
and expenses - would have nothing left over to spend on defense, education, infrastructure, and
R&D, which today account for only 32% of USA Inc. spending, down from 69% forty years ago.
This critical juncture is getting ever closer. Just ten years ago, the CBO thought federal revenue
would support entitlement spending and interest payments until 2060 – 35 years beyond its
current projection. This dramatic forecast change over the past ten years helps illustrate, in our
view, how important it is to focus on the here-and-now trend lines and take actions based on
those trends.
How would a turnaround expert determine ‘normal’ revenue and expenses?
The first step would be to examine the main drivers of revenue and expenses. It’s not a pretty
picture. While revenue – mainly taxes on individual and corporate income – is highly correlated
(83%) with GDP growth, expenses – mostly entitlement spending – are less correlated (73%)
with GDP. With that as backdrop, our turnaround expert might try to help management and
shareholders (citizens) achieve a long-term balance by determining “normal” levels of revenue
and expenses:
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USA Inc.
xiii
• From 1965 to 2005 (a period chosen to exclude abnormal trends related to the recent
recession), annual revenue growth (3%) has been roughly in line with GDP growth, but
corporate income taxes have grown 2% a year. Social insurance taxes grew 5% annually and
represented 37% of USA Inc. revenue, compared with 19% in 1965. An expert might ask:
o What level of social insurance or entitlement taxes can USA Inc. support without reducing
job creation?
o Are low corporate income taxes important to global competitive advantage and stimulating
growth?
• Entitlement spending has risen 5% a year on average since 1965, well above average annual
GDP growth of 3%, and now absorbs 51% of all expenses, more than twice its share in 1965.
Defense and non-defense discretionary spending (including infrastructure, education, and law
enforcement) is up just 1-2% annually over that period. Questions for shareholders:
o Do USA Inc.’s operations run at maximum efficiency? Where are the opportunities for cost
savings?
o Should all expense categories be benchmarked against GDP growth? Should some grow
faster or slower than GDP? If so, what are the key determinants?
o Would greater investment in infrastructure, education, and global competitiveness yield
more long-term security for the elderly and disadvantaged?
With expenses outstripping revenues by a large (and growing) margin, a turnaround expert
would develop an analytical framework for readjusting USA Inc.’s business model and strategic
plans. Prudence would dictate that our expert assume below-trend GDP growth and above-trend
unemployment, plus rising interest rates – all of which would make the base case operating
scenario fairly gloomy.
This analysis can’t ignore our dependence on entitlements. Almost one-third of all
Americans have grown up in an environment of lean savings and heavy reliance on
government healthcare subsidies. It’s not just a question of numbers – it’s a question of
our responsibilities as citizens…and what kind of society we want to be.
Some 90 million Americans (out of a total population of 307 million) have grown accustomed to
support from entitlement programs; so, too, have 14 million workers in the healthcare industry
who, directly or indirectly, benefit from government subsidies via Medicare and Medicaid. Low
personal savings and high unemployment make radical change difficult. Political will can be
difficult to summon, especially during election campaigns.
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USA Inc.
xiv
At the same time, however, these numbers don’t lie. With our demographics and our
debts, we’re on a collision course with the future. The good news: Although time is
growing short, we still have the capacity to create positive outcomes.
Even though USA Inc. can print money and raise taxes, USA Inc. cannot sustain its financial
imbalance indefinitely – especially as the Baby Boomer generation nears retirement age. Net
debt levels are approaching warning levels, and some polls suggest that Americans consider
reducing debt a national priority. Change is legally possible. Unlike underfunded pension
liabilities that can bankrupt companies, USA Inc.’s underfunded liabilities are not legal contracts.
Congress has the authority to change the level and conditions for Social Security and Medicare
benefits; the federal government, together with the states, can also alter eligibility and benefit
levels for Medicaid.
Options for entitlement reform, operating efficiency, and stronger long-term GDP growth.
As analysts, not public policy experts, we can offer mathematical illustrations as a framework for
discussion (not necessarily as actual solutions). We also present policy options from third-party
organizations such as the CBO.
Reforming entitlement programs – Social Security.
The underfunding could be addressed through some or all of the following mechanical changes:
increasing the full retirement age to as high as 73 (from the current level of 67); and/or reducing
average annual social security benefits by up to 12% (from $13,010 to $11,489); and/or
increasing the social security tax rate from 12.4% to 14.2%. Options proposed by the CBO
include similar measures, as well as adjustments to initial benefits and index levels. Of course,
the low personal savings rates of average Americans – 3% of disposable income, compared with
a 10% average from 1965 to 1985 – limit flexibility, at least in the early years of any reform.
Reforming entitlement programs – Medicare and Medicaid.
Mathematical illustrations for these programs, the most underfunded, seem draconian: Reducing
average Medicare benefits by 53%, to $5,588 per year, or increasing the Medicare tax rate by
3.9 percentage points, to 6.8%, or some combination of these changes would address the
underfunding of Medicare. As for Medicaid, the lack of a dedicated funding stream (i.e., a tax
similar to the Medicare payroll tax) makes the math even more difficult. But by one measure
from the Kaiser Family Foundation, 60% of the Medicaid budget in 2001 was spent on so-called
optional recipients (such as mid- to low-income population above poverty level) or on optional
services (such as dental services and prescription drug benefits). Reducing or controlling these
benefits could help control Medicaid spending – but increase the burden on some poor and
disabled groups.
Ultimately, the primary issue facing the US healthcare system is ever-rising costs, historically
driven by increases in price and utilization. Beneath sustained medical cost inflation is an
entitlement mentality bolted onto a volume-based reimbursement scheme. All else being equal,
the outcome is an incentive to spend: Underlying societal, financial, and liability factors combine
to fuel an inefficient, expensive healthcare system.
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USA Inc.
xv
Improving operating efficiency.
With nearly one government civilian worker (federal, state and local) for every six households,
efficiency gains seem possible. A 20-year trend line of declining federal civilian headcount was
reversed in the late 1990s.
Resuming that trend would imply a 15% potential headcount reduction over five years and save
nearly $300 billion over the next ten years. USA Inc. could also focus intensively on local private
company outsourcing, where state and local governments are finding real productivity gains.
Improving long-term GDP growth – productivity and employment.
Fundamentally, federal revenues depend on GDP growth and related tax levies on consumers
and businesses. Higher GDP growth won’t be easy to achieve as households rebuild savings in
the aftermath of a recession. To break even without changing expense levels or tax policies,
USA Inc. would need real GDP growth of 6-7% in F2012-14 and 4-5% in F2015-20, according to
our estimates based on CBO data – highly unlikely, given 40-year average GDP growth of 3%.
While USA Inc. could temporarily increase government spending and investment to make up for
lower private demand in the near term, the country needs policies that foster productivity and
employment gains for sustainable long-term economic growth.
How Much Would Real GDP Need to Grow to Drive USA Inc. to Break-Even
Without Policy Changes? 6-7% in F2012E-F2014E & 4-5% in F2015-
F2020E…Well Above 40-Year Average of 3%
8%
CBO’s Baseline Real GDP Growth vs. Required Real GDP
Growth for a Balanced Budget Between F2011E and F2020E
6%
Real GDP Y/Y Growth (%)
4%
2%
0%
2009 2011E 2013E 2015E 2017E 2019E
-2%
-4%
Real GDP Annual Growth (CBO Baseline Forecast)
Real GDP Annual Growth Needed to Eliminate Fiscal Deficit
1970-2009 Average Real GDP Growth
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Source: CBO, “The Budget and Economic Outlook: Fiscal Years 2010 to 2020,” 8/10.
USA Inc. | Summary
Productivity gains and increased employment each contributed roughly half of the long-term
GDP growth between 1970 and 2009, per the National Bureau of Economic Research. Since the
1960s, as more resources have gone to entitlements and interest payments, USA Inc. has
scaled back its investment in technology R&D and infrastructure as percentages of GDP.
Competitors are making these investments. India plans to double infrastructure spending as a
percent of GDP by 2013, and its tertiary (college) educated population will double over the next
ten years, according to Morgan Stanley analysts, enabling its GDP growth to accelerate to 9-
10% annually by 2015 (China’s annual GDP growth is forecast to remain near 8% by 2015).
USA Inc. can’t match India’s demographic advantage, but technology can help.
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USA Inc.
xvi
For employment gains, USA Inc. should minimize tax and regulatory uncertainties and
encourage businesses to add workers. While hiring and R&D-related tax credits may add to
near-term deficits, over time, they should drive job and GDP growth. Immigration reform could
also help: A Federal Reserve study in 2010 shows that immigration does not take jobs from
U.S.-born workers but boosts productivity and income per worker.
Changing tax policies.
Using another simple mechanical illustration, covering the 2010 budget deficit (excluding onetime
charges) by taxes alone would mean doubling individual income tax rates across the board,
to roughly 26-30% of gross income, we estimate. Such major tax increases would ultimately be
self-defeating if they reduce private income and consumption. However, reducing tax
expenditures and subsidies such as mortgage interest deductions would broaden the tax base
and net up to $1.7 trillion in additional revenue over the next decade, per CBO. A tax based on
consumption - like a value added tax (VAT) - could also redirect the economy toward savings
and investment, though there would be drawbacks.
These issues are undoubtedly complex, and difficult decisions must be made. But
inaction may be the greatest risk of all. The time to act is now, and our first responsibility
as investors in USA Inc. is to understand the task at hand.
Our review finds serious challenges in USA Inc.’s financials. The ‘management team’ has
created incentives to spend on healthcare, housing, and current consumption. At the margin,
investing in productive capital, education, and technology – the very tools needed to compete in
the global marketplace – has stagnated.
America’s Resources Allocated to Housing + Healthcare Nearly Doubled as a Percent
of GDP Since 1965, While Household and Government Savings Fell Dramatically
25%
20%
Healthcare + Housing Spending vs. Net Household +
Government Savings as % of GDP, 1965-2009
Housing + Healthcare Spending as % of GDP
Net Household + Government Savings as % of GDP
20%
As % of GDP
15%
10%
5%
11%
7%
0%
1965 1970 1975 1980 1985 1990 1995 2000 2005
-5%
-10%
-9%
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Note: Housing includes purchase, rent and home improvement. Government savings occur when government runs a surplus.
Source: BEA, CMS via Haver Analytics.
USA Inc. | Summary
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USA Inc.
xvii
With these trends, USA Inc. will not be immune to the sudden crises that have afflicted others
with similar unfunded liabilities, leverage, and productivity trends. The sovereign credit issues in
Europe suggest what might lie ahead for USA Inc. shareholders – and our children. In effect,
USA Inc. is maxing out its credit card. It has fallen into a pattern of spending more than it earns
and is issuing debt at nearly every turn. Common principles for overcoming this kind of burden
include the following:
1) Acknowledge the problem – some 80% of Americans believe ‘dealing with our growing
budget deficit and national debt’ is a national priority, according to a Peter G. Peterson
Foundation survey in 11/09;
2) Examine past errors – People need clear descriptions and analysis to understand how the
US arrived at its current financial condition – a ‘turnaround CEO’ would certainly initiate a
‘no holds barred’ analysis of the purpose, success and operating efficiency of all of USA
Inc.’s spending;
3) Make amends for past errors – Most Americans today at least acknowledge the problems
at personal levels and say they rarely or never spend more than what they can afford (63%
according to a 2007 Pew Research study). The average American knows the importance
of managing a budget. Perhaps more would be willing to sacrifice for the greater good with
an understandable plan to serve the country’s long-term best interests;
4) Develop a new code of behavior – Policymakers, businesses (including investment firms),
and citizens need to share responsibility for past failures and develop a plan for future
successes.
Past generations of Americans have responded to major challenges with collective
sacrifice and hard work. Will ours also rise to the occasion?
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USA Inc. xviii
USA Inc. – Outline
1
2
3
4
5
6
7
8
Introduction
High-Level Thoughts on Income Statement/Balance Sheet
Income Statement Drilldown
Balance Sheet Drilldown
What Might a Turnaround Expert – Empowered to Improve
USA Inc.’s Financials – Consider?
Consequences of Inaction
Summary
Appendix
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USA Inc.
2
This work is licensed for non-commercial distribution (but NOT for excerpting, or modifying or creating derivatives) under the Creative Commons
Attribution-NonCommercial-NoDerivs 3.0 Unported CC BY-NC-ND license. You can find this license at http://creativecommons.org/licenses/by-ncnd/3.0/legalcode
or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, CA, 94105, USA.
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USA Inc.
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USA Inc.
4
Introduction
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USA Inc. | Introduction
5
�About This Report
www.kpcb.com USA Inc. | Introduction 6
Presentation Premise
� For America to remain the great country it has been for the past 235 years,
it must determine the best ways to honor the government’s fundamental
mission derived from the Constitution:
� …to form a more perfect union, establish justice, insure domestic tranquility,
provide for the common defense, promote the general welfare and secure the
blessings of liberty to ourselves and our posterity.
� To this end, government should aim to help create a vibrant environment for
economic growth and productive employment. It should manage its operations
and programs as effectively and efficiently as possible, improve its financial
position by driving the federal government’s income statement to long-term
break-even, and reduce the unsustainable level of debt on its balance sheet.
www.kpcb.com
USA Inc. | Introduction
7
USA Inc. Concept
Healthy financials and compelling growth prospects are key to success for businesses
(and countries). So if the US federal government – which we call USA Inc. – were a
business, how would public shareholders view it? How would long-term investors evaluate
the federal government’s business model, strategic plans, and operating efficiency? How
would analysts react to its earnings reports? Although some 45% 1 of American households
own shares in publicly traded companies and receive related quarterly financial statements, not
many “stakeholders” look closely at Washington’s financials. Nearly two-thirds of all American
households 2 pay federal income taxes, but very few take the time to dig into the numbers of the
entity that, on average, collects 13% 3 of all Americans’ annual gross income (not counting
another 15-30% for payroll and various state and local taxes).
We drill down on USA Inc.’s past, present, and (in some cases) future financial dynamics and
focus on the country’s income statement and balance sheet and related trends. We isolate and
review key expense and revenue drivers. On the expense side, we examine the major
entitlement programs (Medicare, Medicaid and Social Security) as well as defense and other
major discretionary programs. On the revenue side, we focus on GDP growth (driven by labor
productivity and employment in the long run) and tax policies.
We present basic numbers-driven scenarios for addressing USA Inc.'s financial challenges. In
addition, we lay out the type of basic checklists that corporate turnaround experts might use as
starting points when looking at some of USA Inc.’s business model challenges.
Source: 1) 2008 ICI (Investment Company Institute) / SIFMA (Securities Industry and Financial Markets Association) Equity
and Bond Owners Survey; 2) Number of tax returns with positive tax liability (91MM) divided by total number of returns filed (142MM), per Tax Foundation
calculations based on IRS data; 3) Total federal income taxes (ex. payroll taxes) paid divided by total adjusted gross income, per IRS 2007 data.
www.kpcb.com
USA Inc. | Introduction
8
Why We Wrote This Report
As American citizens / tax payers, we care about the future of our country.
As investors, we search for data and insights to help us make better
investment decisions. (It’s easier to predict the future with a keen
understanding of the past.)
We found ourselves searching for better information about the state of America’s
financials, and we decided to assemble – in one place and in a user-friendly format
– some of the best data about the world’s biggest “business.” In addition, we have
attempted to provide some historical context for how USA Inc.’s financial model has
evolved over decades.
The complexity of USA Inc.’s challenges is well known, and our presentation is just
a starting point; it’s far from perfect or complete. But we are convinced that citizens
– and investors – should understand the business of their government. Thomas
Jefferson and Alexis de Tocqueville knew that – armed with the right information –
the enlightened citizenry of America would make the right decisions. It is our
humble hope that a transparent financial framework can help inform future debates.
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USA Inc. | Introduction
9
What You’ll Find Here…
In the conviction that every citizen should understand the finances of
USA Inc. and the plans of its “management team,” we examine USA Inc.’s
income statement and balance sheet and present them in a basic, easy-touse
format.
In this document, a broad group of people helped us drill into our federal
government’s basic financial metrics. We summarize our thoughts in PowerPoint
form here and also have provided a brief text summary at www.kpcb.com/usainc.
We encourage people to take our data and thoughts and study them, critique them,
augment them, share them, and make them better. There’s a lot of material – think
of it as a book that happens to be a slide presentation.
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USA Inc. | Introduction
10
…And What You Won’t
We do not make policy recommendations. We try to help clarify some of the
issues in a simple, analytically-based way. We aim to present data, trends, and
facts about USA Inc.’s key revenue and expense drivers to provide context for
how its financials have reached their present state.
We did not base this analysis on proprietary data. Our observations come
from publicly available information, and we use the tools of basic financial
analysis to interpret it. Forecasts generally come from 3rd-party agencies like the
Congressional Budget Office (CBO). For US policy makers, the timing of material
changes will be especially difficult, given the current economic environment.
No doubt, there will be compliments and criticism of things in the
presentation (or missing from it). We hope that this report helps advance the
discussion and we welcome others to opine with views (backed up by data).
www.kpcb.com
USA Inc. | Introduction
11
We Focus on Federal,
Not State & Local Government Data
� Federal / State & Local Governments Share Different Responsibilities
� Federal government is financially responsible for all or the majority of Defense, Social
Security, Medicare and Interest Payments on federal debt and coordinates / shares
funding for public investment in education / infrastructure.
� State & local governments are financially responsible for all or the majority of Education,
Transportation (Road Construction & Maintenance), Public Safety (Police / Fire
Protection / Law Courts / Prisons) and Environment & Housing (Parks & Recreation /
Community Development / Sewerage & Waste Management).
� Federal / state & local governments share financial responsibility in Medicaid and
Unemployment Insurance.
� We Focus on the Federal Government
� State and local governments face many similar long-term financial challenges and may
ultimately require federal assistance. To be sure, the size of state & local government
budget deficits ($70 billion 1 in aggregate in F2009) and debt-to-GDP ratio (7% 2 on
average in F2008) pales by comparison to the federal government’s ($1.3 trillion budget
deficit, 62% debt-to-GDP ratio in F2010). But these metrics may understate state & local
governments’ financial challenges by 50% or more 3 because they exclude the long-term
cost of public pension and other post employment benefit (OPEB) liabilities.
www.kpcb.com
Note: 1) Per National Conference of State Legislatures, State fiscal years ends in June. $70B aggregate excludes deficits
from Puerto Rico ($3B deficits in F2009). 2) Debt-to-GDP ratio per Census Bureau State & Local Government Finance; 3)
Calculation based on the claim that $1T of collective short fall in State & local government pension and OPEB funding
would be $2.5T using corporate accounting rules, per Orin S. Kramer, “How to Cheat a Retirement Fund,” 9/10.
USA Inc. | Introduction
12
�Summary
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USA Inc. | Introduction
13
Highlights from F2010 USA Inc. Financials
� Summary – USA Inc. has challenges.
� Cash Flow – While recession depressed F2008-F2010 results, cash flow has been negative
for 9 consecutive years ($4.8 trillion, cumulative), with no end to losses in sight. Negative
cash flow implies that USA Inc. can't afford the services it is providing to 'customers,' many
of whom are people with few alternatives.
� Balance Sheet – Net worth is negative and deteriorating.
� Off-Balance Sheet Liabilities – Off-balance sheet liabilities of at least $31 trillion (primarily
unfunded Medicare and Social Security obligations) amount to nearly $3 for every $1 of debt
on the books. Just as unfunded corporate pensions and other post-employment benefits
(OPEB) weigh on public corporations, unfunded entitlements, over time, may increase USA
Inc.’s cost of capital. And today’s off-balance sheet liabilities will be tomorrow’s on-balance
sheet debt.
� Conclusion – Publicly traded companies with similar financial trends would be pressed by
shareholders to pursue a turnaround. The good news: USA Inc.’s underlying asset base and
entrepreneurial culture are strong. The financial trends can shift toward a positive direction,
but both ‘management’ and ‘shareholders’ will need collective focus, willpower, commitment,
and sacrifice.
Note: USA federal fiscal year ends in September; Cash flow = total revenue – total spending on a cash basis; net worth includes
unfunded future liabilities from Social Security and Medicare on an accrual basis over the next 75 years. Source: cash flow per
White House Office of Management and Budget; net worth per Dept. of Treasury, “2010 Financial Report of the U.S.
www.kpcb.com
Government,” adjusted to include unfunded liabilities of Social Security and Medicare.
USA Inc. | Introduction
14
Drilldown on USA Inc. Financials…
� To analysts looking at USA Inc. as a public corporation, the financials are challenged
�
Excluding Medicare / Medicaid spending and one-time charges, USA Inc. has supported a 4% average net
margin 1 over 15 years, but cash flow is deep in the red by negative $1.3 trillion last year (or
-$11,000 per household), and net worth 2 is negative $44 trillion (or -$371,000 per household).
� The main culprits: entitlement programs, mounting debt, and one-time charges
�
�
�
Since the Great Depression, USA Inc. has steadily added “business lines” and, with the best of intentions,
created various entitlement programs. Some of these serve the nation’s poorest, whose struggles have
been made worse by the financial crisis. Apart from Social Security and unemployment insurance,
however, funding for these programs has been woefully inadequate – and getting worse.
Entitlement expenses (adjusted for inflation) rose 70% over the last 15 years, and USA Inc. entitlement
spending now equals $16,600 per household per year; annual spending exceeds dedicated funding by
more than $1 trillion (and rising). Net debt levels are approaching warning levels, and one-time charges
only compound the problem.
Some consider defense spending a major cause of USA Inc.’s financial dilemma. Re-setting priorities and
streamlining could yield savings – $788 billion by 2018, according to one recent study 3 – perhaps without
damaging security. But entitlement spending has a bigger impact on USA Inc. financials. Although
defense nearly doubled in the last decade, to 5% of GDP, it is still below its 7% share of GDP from 1948 to
2000. It accounted for 20% of the budget in 2010, but 41% of all government spending between 1789 and
1930.
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Note: 1) Net margin defined as net income divided by total revenue; 2) net worth defined as assets (ex. stewardship assets like national
parks and heritage assets like the Washington Monument) minus liabilities minus the net present value of unfunded entitlements (such as
Social Security and Medicare), data per Treasury Dept.'s “2010 Annual Report on the U.S. Government”; 3) Gordon Adams and Matthew
Leatherman, “A Leaner and Meaner National Defense,” Foreign Affairs, Jan/Feb 2011)
USA Inc. | Introduction
15
…Drilldown on USA Inc. Financials…
� Medicare and Medicaid, largely underfunded (based on ‘dedicated’ revenue) and
growing rapidly, accounted for 21% (or $724B) of USA Inc.’s total expenses in F2010,
up from 5% forty years ago
� Together, these two programs represent 35% of all (annual) US healthcare spending; Federal Medicaid
spending has doubled in real terms over the last decade, to $273 billion annually.
� Total government healthcare spending consumes 8.2% of GDP compared with just
1.3% fifty years ago; the new health reform law could increase USA Inc.’s budget
deficit
� As government healthcare spending expands, USA Inc.’s red ink will get much worse if healthcare costs
continue growing 2 percentage points faster than per capita income (as they have for 40 years).
� Unemployment Insurance and Social Security are adequately funded...for now. The
future, not so bright
� Demographic trends have exacerbated the funding problems for Medicare and Social Security – of the
102 million increased enrollment between 1965 and 2009, 42 million (or 41%) is due to an aging
population. With a 26% longer life expectancy but a 3% increase in retirement age (since Social
Security was created in 1935), deficits from Social Security could add $11.6 trillion (or 140%) to the
public debt by 2037E, per Congressional Budget Office (CBO).
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USA Inc. | Introduction
16
…Drilldown on USA Inc. Financials
� If entitlement programs are not reformed, USA Inc.’s balance sheet will go from bad to
worse
� Public debt has doubled over the last 30 years, to 62% of GDP. This ratio is expected to surpass the
90% threshold* – above which real GDP growth could slow considerably – in 10 years and could near
150% of GDP in 20 years if entitlement expenses continue to soar, per CBO.
� As government healthcare spending expands, USA Inc.’s red ink will get much worse if healthcare costs
continue growing 2 percentage points faster than per capita income (as they have for 40 years).
� The turning point: Within 15 years (by 2025), entitlements plus net interest expenses
will absorb all – yes, all – of USA Inc.’s annual revenue, per CBO
� That would require USA Inc. to borrow funds for defense, education, infrastructure, and R&D spending,
which today account for 32% of USA Inc. spending (excluding one-time items), down dramatically from
69% forty years ago.
� It’s notable that CBO’s projection from 10 years ago (in 1999) showed Federal revenue sufficient to
support entitlement spending + interest payments until 2060E – 35 years later than current projection.
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Note: *Carmen Reinhart and Kenneth Rogoff observed from 3,700 historical annual data points from 44 countries that the
relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP.
Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We note that while
Reinhart and Rogoff’s observations are based on ‘gross debt’ data, in the U.S., debt held by the public is closer to the European
countries’ definition of government gross debt. For more information, see Reinhart and Rogoff, “Growth in a Time of Debt,” 1/10.
USA Inc. | Introduction
17
How Might One Think About Turning Around USA Inc.?...
� Key focus areas would likely be reducing USA Inc.’s budget deficit and improving /
restructuring the ‘business model’…
� One would likely drill down on USA Inc.’s key revenue and expense drivers, then develop a
basic analytical framework for ‘normal’ revenue / expenses, then compare options.
�
�
Looking at history…
Annual growth in revenue of 3% has been roughly in line with GDP for 40 years* while
corporate income taxes grew at 2%. Social insurance taxes (for Social Security / Medicare)
grew 5% annually and now represent 37% of USA Inc. revenue, compared with 19% in 1965.
Annual growth in expenses of 3% has been roughly in line with revenue, but entitlements are
up 5% per annum - and now absorb 51% of all USA Inc.’s expense - more than twice their
share in 1965; defense and other discretionary spending growth has been just 1-2%.
�
One might ask…
Should expense and revenue levels be re-thought and re-set so USA Inc. operates near
break-even and expense growth (with needed puts and takes) matches GDP growth, thus
adopting a ‘don’t spend more than you earn’ approach to managing USA Inc.’s financials?
Note: *We chose a 40-year period from 1965 to 2005 to examine ‘normal’ levels of revenue and expenses. We did not choose the most recent
40-year period (1969 to 2009) as USA was in deep recession in 2008 / 2009 and underwent significant tax policy fluctuations in 1968 /1969, so
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many metrics (like individual income and corporate profit) varied significantly from ‘normal’ levels.
USA Inc. | Introduction
18
…How Might One Think About Turning Around USA Inc.?
One might consider…
�
�
�
Options for reducing expenses by focusing on entitlement reform and operating efficiency
�
�
Formula changes could help Social Security’s underfunding, but look too draconian for Medicare/Medicaid;
the underlying healthcare cost dilemma requires business process restructuring and realigned incentives.
Resuming the 20-year trend line for lower Federal civilian employment, plus more flexible compensation
systems and selective local outsourcing, could help streamline USA Inc.’s operations.
Options for increasing revenue by focusing on driving long-term GDP growth and changing tax
policies
� USA Inc. should examine ways to invest in growth that provides a high return (ROI) via new investment in
technology, education, and infrastructure and could stimulate productivity gains and employment growth.
�
Reducing tax subsidies (like exemptions on mortgage interest payments or healthcare benefits) and
changing the tax system in other ways could increase USA Inc.’s revenue without raising income taxes to
punitive – and self-defeating – levels. Such tax policy changes could help re-balance USA’s economy
between consumption and savings and re-orient business lines towards investment-led growth, though
there are potential risks and drawbacks.
History suggests the long-term consequences of inaction could be severe
�
USA Inc. has many assets, but it must start addressing its spending/debt challenges now.
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USA Inc. | Introduction
19
Sizing Costs Related to USA Inc.’s Key Financial Challenges
& Potential AND / OR Solutions
� To create frameworks for discussion, the next slide summarizes USA Inc.’s various
financial challenges and the projected future cost of each main expense driver.
� The estimated future cost is calculated as the net present value of expected
‘dedicated’ future income (such as payroll taxes) minus expected future expenses
(such as benefits paid) over the next 75 years.
� Then we ask the question: ‘What can we do to solve these financial challenges?’
�
The potential solutions include a range of simple mathematical illustrations (such as
changing program characteristics or increasing tax rates) and/or program-specific
policy solutions proposed or considered by lawmakers and agencies like the CBO
(such as indexing Social Security initial benefits to growth in cost of living).
� These mathematical illustrations are only a mechanical answer to key financial
challenges and not realistic solutions. In reality, a combination of detailed policy
changes will likely be required to bridge the future funding gap.
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USA Inc. | Introduction
20
Overview of USA Inc.’s Key Financial Challenges
& Potential and/or Solutions
Rank
Financial
Challenge
Net Present Cost 1
($T / % of 2010 GDP)
Mathematical Illustrations
and/or Potential Policy Solutions 2
1 Medicaid $35 Trillion 3 / 239%
2 Medicare $23 Trillion / 156%
• Isolate and address the drivers of medical cost inflation
• Improve efficiency / productivity of healthcare system
• Reduce coverage for optional benefits & optional enrollees
• Reduce benefits
• Increase Medicare tax rate
• Isolate and address the drivers of medical cost inflation
• Improve efficiency / productivity of healthcare system
3
Social
Security
$8 Trillion / 54%
• Raise retirement age
• Reduce benefits
• Increase Social Security tax rate
• Reduce future initial benefits by indexing to cost of living growth rather
than wage growth
• Subject benefits to means test to determine eligibility
4
Slow GDP /
USA
Revenue
Growth
--
• Invest in technology / infrastructure / education
• Remove tax & regulatory uncertainties to stimulate employment growth
• Reduce subsidies and tax expenditures & broaden tax base
5
Government
Inefficiencies
--
• Resume the 20-year trend line for lower Federal civilian employment
• Implement more flexible compensation systems
• Consolidate / selectively local outsource certain functions
Note: 1) Net Present Cost is calculated as the present value of expected future net liabilities (expected revenue minus expected costs) for each program / issue over the
next 75 years, Medicare estimate per Dept. of Treasury, “2010 Financial Report of the U.S. Government,” Social Security estimate per Social Security Trustees’ Report
(8/10). 2) For more details on potential solutions, see slides 252-410 or full USA Inc. presentation. 3) Medicaid does not have dedicated revenue source and its $35T net
present cost excludes funding from general tax revenue, NPV analysis based on 3% discount rate applied to CBO’s projection for annual inflation-adjusted expenses.
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USA Inc. | Introduction 21
The Essence of America’s Financial Conundrum
& Math Problem?
While a hefty 80% of Americans indicate balancing the budget should
be one of the country’s top priorities, per a Peter G. Peterson
Foundation survey in 11/09…
…only 12% of Americans support cutting spending on Medicare or
Social Security, per a Pew Research Center survey, 2/11.
Some might call this ‘having your cake and eating it too…’
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USA Inc. | Introduction
22
The Challenge Before Us
Policymakers, businesses and citizens need to share responsibility for
past failures and develop a plan for future successes.
Past generations of Americans have responded to major challenges
with collective sacrifice and hard work.
Will ours also rise to the occasion?
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USA Inc. | Introduction
23
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USA Inc. | Introduction
24
High-Level Thoughts on
Income Statement/Balance Sheet
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USA Inc. | High Level Thoughts
25
How Would You Feel if…
…your Cash Flow was NEGATIVE for
each of the past 9 years…
?
…your Net Worth* has been
NEGATIVE for as long as you can
remember…
… it would take 20 years of your
income at the current level to pay off
your existing debt – assuming you
don’t take on any more debt.
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Note: *See slide 30 for net worth qualifier.
USA Inc. | High Level Thoughts
26
Welcome to the Financial Reality (& Negative Trend) of USA Inc.
F2010 Cash Flow = -$1.3 Trillion; Net Worth = -$44 Trillion
USA Inc. Annual Cash Flow & Year-End Net Worth, F1996 – F2010
$400
$15,000
Annual Cash Flow ($Billion)
$0
-$400
-$800
-$1,200
One-Time Expenses*
Cash Flow (left axis)
$0
-$15,000
-$30,000
-$45,000
Year-End Net Worth ($Billion)
-$1,600
Net Worth (right axis)
F1996 F1998 F2000 F2002 F2004 F2006 F2008 F2010
-$60,000
Note: USA federal fiscal year ends in September; Cash flow = total revenue – total spending on a cash basis; net worth includes unfunded future liabilities from
Social Security and Medicare on an accrual basis over the next 75 years. *One-time expenses in F2008 include $14B payments to Freddie Mac; F2009
includes $279B net TARP payouts, $97B payment to Fannie Mae & Freddie Mac and $40B stimulus spending on discretionary items; F2010 includes $26B net
TARP income, $137B stimulus spending and $41B payment to Fannie Mae & Freddie Mac. F2010 net worth improved dramatically owing to revised actuarial
estimates for Medicare program resulted from the Healthcare reform legislation. For more definitions, see next slide. Source: cash flow per White House Office
of Management and Budget; net worth per Dept. of Treasury, “2010 Financial Report of the U.S. Government.”
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USA Inc. | High Level Thoughts
27
Think About That…
The previous chart is in
TRILLIONS of dollars. Just
because million, billion and
trillion rhyme, doesn’t mean
that they are even close
to the same quantity.
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USA Inc. | High Level Thoughts
28
Only Politicians Work in Trillions of Dollars—
Here’s How Much That Is
1 Pallet
1 Football Field
$1 Million (MM)
217 Football Fields
$1 Billion (B)
$1 Trillion (T)
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USA Inc. | High Level Thoughts
29
Net Worth Qualifier
• The balance sheet / net worth calculation does not include the power to tax
– the net present value of the sovereign power to tax and the ability to print the
world’s reserve currency would clearly bolster USA Inc.’s assets – if they could be
accurately calculated.
• Plant, Property & Equipment (PP&E) on USA Inc.’s balance sheet is valued
at $829B 1 (or 29% of USA Inc.’s total stated assets) – this includes tangible
assets such as buildings, internal use software and civilian and military
equipment.
• The PP&E calculation DOES NOT include the value of USA Inc.’s holdings in
the likes of public land (estimated to be worth $408B per OMB) 1 , highways,
natural gas, oil reserves, mineral rights (estimated to be worth $345B per OMB),
forest, air space, radio frequency spectrum, national parks and other heritage and
stewardship assets which USA Inc. does not anticipate to use for general
government operations. The good news for USA Inc. is that the aggregate value
of these heritage and stewardship assets could be significant.
Note: 1) USA Inc.’s holding of land is measured in non-financial units such as acres of land and lakes, and number of National Parks and National Marine
Sanctuaries. Land under USA Inc.’s stewardship accounts for 28% of the total U.S. landmass as of 9/10. Dept. of Interior reported 552 national wildlife refuges, 378
park units, 134 geographic management areas, 67 fish hatcheries under their management as of 9/10. Dept. of Defense reported 203,000 acres of public land and
16,140,000 acres withdrawn public land, the USDA’s Forest Service managed an estimated 155 national forests, while the Dept. of Commerce had 13 National
Marine Sanctuaries, which included near–shore coral reefs and open ocean, as of 9/10. Dept. of Treasury, “2010 Financial Report of the U.S. Government.”
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USA Inc. | High Level Thoughts
30
A Word of Warning About Comparing
Corporate & Government Accounting…
� Government accounting standards do not report the present value of future
entitlement payments (such as Social Security or Medicare) as liabilities.
Instead, entitlement payments are recognized only when they are paid.
� Our analysis takes a different view: governments create liabilities when they
enact entitlements and do not provide for revenues adequate to fund them.
� We measure the entitlement liability as the present value of estimated
entitlement payments in excess of expected revenues for citizens of working age
based on Social Security and Medicare Trust Funds’ actuarial analysis.
� Government accounting standards also do not recognize the value of internallygenerated
intangible assets (such as the sovereign power to tax). We do not
recognize those assets either, as we have no basis to measure them. But the
US government has substantial intangible assets that should provide future
economic benefits.
Note: For more discussion on alternatives to corporate and official government accounting methods, see Laurence J. Kotlikoff, Alan J. Auerbach, and Jagadeesh
Gokhale, “Generational Accounting: A Meaningful Way to Assess Generational Policy,” published on 12/94 in The Journal of Economic Perspectives.
Source: Greg Jonas, Morgan Stanley Research.
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USA Inc. | High Level Thoughts
31
…and About Government Budgeting
� Federal government budgeting follows arcane practices that are very different
from corporate budgeting – and can neglect solutions to structural problems in
favor of short-term expediency.
� Federal government does not distinguish capital budget (for long-term
investment) from operating budget (for day-to-day operations). As a result, when
funding is limited, government may choose to reduce investments for the future
to preserve resources for day-to-day operations.
� Budget “scoring” rules give Congress incentives to hide the true costs...and help
Congressional committees defend their turf.*
Note: *For more detail, refer to slide 116 on congressional budget scoring rules related to recent Healthcare reform.
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USA Inc. | High Level Thoughts
32
Metric Definitions & Qualifiers
� Cash Flow = ‘Cash In’ Minus ‘Cash Out’
� Calculated on a cash basis (which excludes changes in non-cash accrual of
future liabilities) for simplicity.
� One-Time Expenses = ‘Spending Minus Repayments’ for Non-Recurring
Programs
� Net costs of programs such as TARP, ARRA, and GSE bailouts.
� Net Worth = Assets Minus Liabilities Minus Unfunded Entitlement Liabilities
� Assets include cash & investments, taxes receivable, property, plant &
equipment (as defined by Department of Treasury).
� Liabilities include accounts payable, accrued payroll & benefits, federal
debt, federal employee & veteran benefits payable…
� Unfunded Entitlement Liabilities include the present value of future
expenditures in excess of dedicated future revenues in Medicare and Social
Security over the next 75 years.
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Note: USA Inc. accounts do not follow the same GAAP as corporations.
USA Inc. | High Level Thoughts
33
Common Financial Metrics Applied to USA Inc. in F2010
� Cash Flow Per Share = -$4,171
� USA Inc.’s F2010 cash flow -$1.3 trillion, divided by population of ~310
million (assuming each citizen holds one share of USA Inc.).
� Net Debt to EBITDA Ratio = -8x
� USA Inc. net debt held by public ($9.1 trillion) divided by USA Inc.
F2010 EBITDA (-$1.1 trillion). It’s notable that the ratio compares with
S&P500 average of 1.4x in 2010.
Note: USA Inc. accounts do not follow the same GAAP as corporations. Refer to slide 31 for a word of warning about comparing
corporate and government accounting. EBITDA is Earnings Before Interest, Tax, Depreciation & Amortization. Source: Dept. of
Treasury, White House Office of Management and Budget, Congressional Budget Office, BEA, BLS.
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USA Inc. | High Level Thoughts
34
Even Adjusting For Cyclical Impact of Recessions, USA Inc.’s 2010
Structural Operating Loss = -$817 Billion vs. -$78 Billion 15 Years Ago
Annual Federal Government Surplus / Deficit ($ Billion)
-$1,200
-$1,600
USA Inc. Annual Operating Surplus / Deficit, Structural vs. Cyclical 1 , F1996 – F2010
$400
$0
-$400
-$800
Structural
Cyclical
F1996 F1998 F2000 F2002 F2004 F2006 F2008 F2010
Note: 1) Congressional Budget Office defines a structural surplus or deficit as the budget surplus or deficit that would occur under current law if the influences of
the business cycle on the budget – the automatic stabilizers – were removed, and cyclical surplus or deficit as the automatic net changes in revenues and outlays
that are attributable to cyclical movements in real (inflation-adjusted) output and unemployment. CBO compiled this data from Dept. of Commerce’s Bureau of
Economic Analysis (BEA), which maintains the national income and product accounts (NIPA). An important difference between the official budget deficit and the
NIPA measure of net federal government saving is that the latter excludes such purely financial transactions as the sale of government assets, and most
transactions under the Troubled Asset Relief Program, because those transactions do not help to measure current production and income. In addition, historical
NIPA data are subject to significant revision; historical budget data, by contrast, are rarely revised significantly. Source: 1996-2006 data per CBO, “The Effects of
Automatic Stabilizers on the Federal Budget,” 5/10, 2007-2010 data per White House OMB F2012 Budget Analytical Perspective.
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USA Inc. | High Level Thoughts
35
Understanding Differences Between
Economist Language vs. Equity Investor Translation
Economist Language
� Budget Deficit – The amount by which a
government's expenditures exceed its
receipts over a particular period of time.
� Structural Deficit – The portion of the
budget deficit that results from a
fundamental imbalance in government
receipts and expenditures, as opposed to
one based on the business cycle or onetime
factors.
� Cyclical Deficit – The portion of the
budget deficit that results from cyclical
factors such as economic recessions
rather than from underlying fiscal policy.
Equity Investor Approximate Translation*
� Cash Flow – ‘Cash in’ minus ‘cash out.’
� Cash Flow (ex. One-Time Items)* –
‘Cash in’ minus ‘cash out’ excluding
expenditures that are one-time in nature
(such as economic stimulus spending).
� One-Time Expenses* – TARP / GSE /
stimulus spending related to economic
recession.
� Federal Debt Held By the Public – The
accumulation of all previous fiscal years’
deficits.
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� Debt – Cumulative negative cash flow
financed by borrowing.
Note: *We acknowledge that while the concept of ‘cash flow ex. one-time items’ and ‘one-time expenses’ is similar to ‘structural deficit’ and
‘cyclical deficit,’ respectively, these terms are not interchangeable and have different definitions. Congressional Budget Office defines a
structural surplus or deficit as the budget surplus or deficit that would occur under current law if the influences of the business cycle on the
budget – the automatic stabilizers – were removed, and cyclical surplus or deficit as the automatic net changes in revenues and outlays that
are attributable to cyclical movements in real (inflation-adjusted) output and unemployment.
USA Inc. | High Level Thoughts
36
How Did USA Inc.'s Financial Reality
Get to this Difficult Point?
USA Inc. Has Not Adequately Funded Its Entitlement Programs
Recessions come and go (and affect USA’s revenue), but future claims
(related to entitlement program commitments) on USA Inc. now
meaningfully exceed its projected cash flows.
For the last 40 years, management (the government) has committed
more long-term benefits through ‘entitlement’ programs like Medicaid /
Medicare / Social Security…without developing a sound plan to pay for
them.
Many of these programs provide important services to low-income,
unemployed, and disabled Americans in great need for help. But without
proper financing, support may dwindle.
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USA Inc. | High Level Thoughts
37
USA Inc. Has Substantially Expanded
Its “Business Lines” Over Past 80 Years
From 1789 to 1930, 41% 1 of USA Inc.’s cumulative
budget was dedicated to defense spending (compared
with 20% 1 in F2010), per the Census Bureau.
This began to change in the 1930s, when the federal
government substantially expanded its role (in effect,
expanded its “business lines”) in response to the Great
Depression.
Note: 1) 41% is the cumulative defense spending (excluding veterans’ benefits and services) as % of cumulative total federal
spending from 1789 to 1930. Including veterans’ benefits and services, defense spending would have been 49% of cumulative
annual budget from 1789 to 1930 and would have been 22% in F2009. Source: Census Bureau, “Historical Statistics of the
United States, Colonial Times to 1970,” Data series Y 457-465.
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USA Inc. | High Level Thoughts
38
USA Inc. “Business Lines” Have Expanded
From Defense to Insurance & Other Areas
USA Inc. Major ‘Business Line’ Spending as % of GDP, F1800 vs. F1900 vs. F2000
F1800
2.2%
F1900
2.5%
F2000
18.2%
Other
0.3%
Interest
Payment
0.7%
Defense
1.3%
Other
1.4%
Defense
0.9%
Other
5.1%
Defense
3.0%
Interest
Payment
2.3%
Interest
Payment
0.2%
Health
Insurance*
3.6%
Retirement +
Disability
Insurance*
4.2%
Note: Fiscal year 1800 / 1900 ended in June. Fiscal year 2000 ended in September. *Health insurance includes Medicare, Medicaid (federal portion)
and other federal health programs, retirement and disability insurance is Social Security. Other spending includes public sector employee and veteran
pension & benefits cost and spending on community development, law enforcement / education / public infrastructure / energy, etc. Source: 1800 /
1900 data per Census Bureau, 2000 per White House OMB.
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USA Inc. | High Level Thoughts
39
USA Inc. First 155 Years (1776-1930) = Era of Defense
Dept. of Army + Navy = 41% 1 of Cumulative Spending From 1789-1930
USA Inc.’s Budget Outlays For the First 155 Years (1776-1930) 2
1789-1791 … 1800 … 1850 … 1900 … 1930
1789-1930
Cumulative
Total Federal Government Outlays ($MM) $4 $11 $40 $521 $3,320 $98,747
Defense $1 $6 $17 $191 $839 $40,332
% of Total Outlays 15% 56% 44% 37% 25% 41%
Dept. of the Army $1 $3 $9 $135 $465 $28,831
% of Total Outlays 15% 24% 24% 26% 14% 29%
Dept. of the Navy $0 $3 $8 $56 $374 $11,500
% of Total Outlays -- 32% 20% 11% 11% 12%
Interest on the Public Debt $2 $3 $4 $40 $659 $13,790
% of Total Outlays 55% 31% 10% 8% 20% 14%
Other* $1 $1 $18 $290 $1,822 $44,626
% of Total Outlays 30% 13% 47% 56% 55% 45%
Veteran Compensation and Pensions $0 $0 $2 $141 $221 $8,273
% of Total Outlays 4% 1% 5% 27% 7% 8%
Note: Data is rounded and not adjusted for inflation. 1) 41% is the cumulative defense spending (excluding veterans’ benefits and services) as % of
cumulative total federal spending from 1789 to 1930. Including veterans’ benefits and services, defense spending would have been 49% of cumulative
annual budget from 1789 to 1930. 2) Data not available from 1776 to 1789. * Other includes various spending on administration, legislation and veteran
compensation and pensions. Source: Census Bureau, “Historical Statistics of the United States, Colonial Times to 1970,” Data series Y 457-465.
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USA Inc. | High Level Thoughts
40
USA Inc. Next 80 Years (1931-2010) = Era of Expansion
Defense Down to 20% of Spending; Social Security + Healthcare Up to 44% in F2010
USA Inc.’s Budget Outlays For the Next 78 Years (1931-2010) 2
… … … … … … … …
1931 1940 1950 1960 1970 1980 1990 2000 2010
Total Federal Government Outlays ($B) $4 $9 $43 $92 $196 $591 $1,253 $1,789 $3,456
Defense $1 $2 $14 $48 $82 $134 $299 $294 $694
% of Total Outlays 23% 20% 32% 52% 42% 23% 24% 16% 20%
Interest on the Public Debt $1 $1 $5 $7 $14 $53 $184 $223 $196
% of Total Outlays 17% 11% 11% 8% 7% 9% 15% 12% 6%
Retirement & Disability Insurance $0 $0 $1 $12 $30 $119 $249 $409 $707
% of Total Outlays 0% 0% 2% 13% 15% 20% 20% 23% 20%
Healthcare $0 $0 $0 $1 $12 $55 $156 $352 $821
% of Total Outlays 0% 1% 1% 1% 6% 9% 12% 20% 24%
Physical Resources (Energy / Housing…) $0 $2 $4 $8 $16 $66 $126 $85 $89
% of Total Outlays 5% 26% 9% 9% 8% 11% 10% 5% 3%
Other $2 $4 $19 $17 $42 $165 $239 $426 $950
% of Total Outlays 55% 42% 45% 18% 21% 28% 19% 24% 27%
Note: Data is rounded and not adjusted for inflation. Physical resources include energy, natural resources, commerce & housing credit, transportation
infrastructure, community and regional development. Other includes international affairs, agriculture, administration of justice, general government, education
and veterans’ benefits and services. Source: 1931-1939 data per Census Bureau, “Historical Statistics of the United States, Colonial Times to 1970.” 1940-
2010 data per White House OMB.
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USA Inc. | High Level Thoughts
41
USA Inc. “Business Line” Extensions: 1930 – 2010
1970’s
1960’s
1950’s
1940’s
1930’s
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“Business Line”
Extensions
F2010
Expense ($B)
Energy Policy $12
Community
Development
13
Healthcare 724
Education 97
Housing 36
Welfare 28
Agencies / Programs
Created (Year)
Department of Energy
(1977)
Community
Development Block
Grant* (1974)
Medicare / Medicaid
(1965)
Federal Subsidies for
K-12 & Higher
Education (1965)
Federal Housing
Administration (1937)
/ Fannie Mae (1938)
Aid to Dependent
Children (1935)
Goals
Establish the Strategic Petroleum Reserve /
mandate automobile fuel efficiency standards &
temporary oil price control
Provide federal grants to local governments for
projects like parking lots / museums / street repairs
Provide medical insurance program for the elderly
(Medicare) and welfare program for low-income
population (Medicaid)
Provide federal subsidies for student loans / school
libraries / teacher training / research / textbooks and
other items.
Reduce cost of mortgages and spur home building /
purchasing by offering federal mortgage insurance
and create secondary market for mortgage loans.
Provide cash assistance to low-income families with
children. Replaced by Temporary Assistance for
Needy Families program in 1996
Retirement 584** Social Security (1935) Provide retirement income to the elderly
TOTAL $1.5 Trillion Or 10% of F2010 GDP / 69% of USA Inc.’s Revenue / 43 of Expense
Note: *Community Development Block Grant was an effort to consolidate various pre-existing categorical community development
programs that started with "urban renewal" in the 1950’s. **Social Security’s F2010 expense excludes ~$123B payments to
disabled workers via Disability Insurance program (created in 1956). Source: CATO Institute, White House OMB.
USA Inc. | High Level Thoughts 42
Entitlement Programs Are the Largest & Growing Expense Items
on USA Inc.'s Income Statement in Peace Time
USA Inc. Spending as % of GDP, 1795 – 2010
45%
40%
All Other Spending Social Security Medicare + Medicaid
35%
World War II
Federal Spending As % of GDP
30%
25%
20%
15%
10%
War of 1812
Civil War
Great Depression
World War I
5%
0%
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1795 1820 1845 1870 1895 1920 1945 1970 1995
Note: Medicaid spending only includes federal (not state) portion of spending.
Source: John Cogan, Stanford University.
USA Inc. | High Level Thoughts
43
Perspective –
USA Entitlement Spending = India’s GDP
• With a population of 1.2 billion (vs. USA’s 310 million) and
2010 GDP growth of 10% (vs. USA’s 3%), India is a wellrecognized
emerging country on the global stage.
• It’s notable that India’s 2010 nominal GDP* of $1.43
trillion was equal to USA’s $1.43 trillion in federal
government spending on Social Security, Medicare, and
Medicaid.
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Note: *Nominal GDP is not adjusted for purchasing power parity (PPP). Population and GDP data per IMF.
USA Inc. | High Level Thoughts
44
The Original Estimates of Medicare’s Costs
Were Vastly Underestimated
• In 1965, the official estimate of Medicare’s costs was $500 million per year,
roughly $3 billion in 2005 dollars.*
• The actual cost of Medicare has turned out to be 10x that estimate.
• Medicare’s actual net loss (tax receipts + trust fund interest – expenditures)
has exceeded $3 billion (adjusted for inflation) every year since 1976 and
was $146 billion in 2008 alone. In other words, had the original estimate been
accurate, the cumulative 43-year cost since Medicare was created would
have been $129 billion, adjusted for inflation.
• In fact, the actual cumulative spending has been $1.4 trillion** (adjusted for
inflation)...in effect, 10x over budget.
• While calculations have been flawed from the beginning for some of USA Inc.’s
entitlement programs, little has been done to correct the problems.
� An accurate economic forecast might have sunk Medicare.
David Blumenthal and James Morone
“The Lessons of Success – Revisiting the Medicare Story”, November 2008
www.kpcb.com
Sources: * Lyndon B. Johnson Library & Museum. Medicare spending data per White House OMB.
**Dept. of Health & Human Services, CMS, data adjusted for inflation based on BEA’s GDP price index.
USA Inc. | High Level Thoughts
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Many Leaders Have Voiced Concerns About
Entitlement Program Math / Spending
� The entitlement programs are not self-funded…they are unfunded
liabilities. They are the single biggest component of spending going
forward.
� -- Ben Bernanke, Chairman of the Federal Reserve
� Testimony before House Budget Committee, June 9, 2010
� The time we have is growing short…there are serious questions, most
immediately about the sustainability of our commitment to growing
entitlement programs.
� -- Paul Volcker, Former Chairman of the Federal Reserve
� Chairman of President Obama’s Economic Recovery Advisory Board
� Speech at Stanford University, May 18, 2010
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USA Inc. | High Level Thoughts
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40-Year USA Inc. Data Points and Trends
1965 2005
‘65-’05
Change
National 1 Healthcare Spending as % of GDP 6% � 16% 167%
Federal 2 Healthcare Spending as % of GDP 1 � 5 --
Out-of-Pocket Healthcare Spending as % of GDP 3 � 2 --
% of Adult Population Considered Obese 13 � 32 146
% of Americans Receiving Govt. Subsidy 3 20 � 35 75
% of Americans that Pay No Federal Income Tax 20 � 33 65
National 1 Education Spending as % of GDP 5 � 7 48
Federal Education Spending as % of GDP 0 � 1 --
Gross Debt as % of GDP 47 � 64 36
Interest Payments as % of GDP 1.2 � 1.5 25
Gini Index of Income Inequality 4 0.34 4 � 0.41 20
Net Debt 5 as % of GDP 38 � 37 -3
People Below Poverty Level as % of Population 17 � 13 -26
Defense Spending as % of GDP 7 � 4 -33
% of Americans that Pay 50% of All Income Tax 10 6 � 4 -60
Federal Budget Surplus / Deficit as % of GDP -0.2 � -3 --
Note: 1) Includes all government and private spending. 2) Includes federal spending on Medicare, Medicaid and other healthcare programs, excludes state spending on Medicaid.
3) % of Americans receiving government subsidy include all recipients of Social Security, Medicare and Medicaid, as well as government employees (incl. federal / state / local /
military). Data excludes our estimated duplicates. 4) A Gini index of 0 implies perfect income equality and an index of 1 implies complete inequality, the higher the index, the more
inequality there is. Earliest data for USA was measured in 1967. 5) Net debt is federal debt held by the public. 6) Earliest data available in 1980. Source: White House Office of
Management and Budget, Department of Health & Human Services, Centers for Disease Control, Internal Revenue Service, Census Bureau.
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USA Inc. | High Level Thoughts
47
Summary: 40-Year USA, Inc. Trends*
� America is spending beyond its means, and the problem – with mounting
losses & increasing debt – is getting worse, not better
� Healthcare spending and obesity are rising dramatically.
� Education spending is growing slower than healthcare spending.
� Defense spending is declining on relative basis.
� More and more Americans are on the government payroll or receive
government subsidies for retirement income, medical care, housing, and
food.
� Inequality of income and wealth is rising, and fewer Americans pay income
taxes to support USA Inc.
� Government increasingly resorts to borrowing to fund rising spending
levels (primarily for entitlement programs)…
Note: *We chose a 40-year period from 1965 to 2005 to examine ‘normal’ levels of data points and trends. We did not
choose the most recent 40-year period (1969 to 2009) as USA was in deep recession in 2008 / 2009 and underwent
significant tax policy fluctuations in 1968 /1969 and subsequently many metrics (like individual income and corporate
profit as well as federal budget surplus / deficit and debt levels) were significantly off their ‘normal’ levels.
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USA Inc. | High Level Thoughts
48
What’s the Proper Level of This and That? What’s Normal?
We begin with the premise that for an enterprise (even a country
that can ‘print money’ and tax) to be sustainable, it cannot lose
money on an ongoing basis.
Successful businesses (and households) typically base their
expenses on their ability to generate present and future revenue
– in other words, they don’t spend unless they can pay.
We analyze the data and present scenarios and options for solving
the math and financial challenges facing USA Inc.
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Income Statement Drilldown
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USA Inc. | Income Statement Drilldown
53
Income Statement –
USA Inc. Shows -8% Median Net Margin Over 15 Years
USA Inc. Annual Net Income & Median Net Margin, F1996 – F2010
$400
40%
$0
0%
USA Inc. Net Income ($B)
-$400
-$800
-$1,200
Net Income ($B)
15-Year Median Net Margin (%)
-40%
-80%
-120%
Net Margin (%)
-$1,600
F1996 F1998 F2000 F2002 F2004 F2006 F2008 F2010
-160%
www.kpcb.com
Note: USA federal fiscal year ends in September. Source: White House Office of Management and Budget.
USA Inc. | Income Statement Drilldown
54
Income Statement –
F2010 USA Inc. Revenues + Expenses at a Glance
Corporate
Income Tax
$191B
F2010 Revenue =
$2.2 Trillion
Other
$208B
10%
9%
Individual
Income Tax
$899B
Non-Defense
Discretionary
$431B
Discretionary
One-Time Items
$152B
F2010 USA Inc. Expenses =
12%
$3.5 Trillion
Net Interest
Payment
$196B
6%
4%
20%
Entitlement
Programs
Social
Security
$707B
41%
20%
22%
Social
Insurance Tax
$865B
www.kpcb.com
40%
Defense
$694B
16%
Medicare +
Federal
Medicaid
$724B
Unemployment Insurance
+ Other Entitlements
$553B
Note: USA federal fiscal year ends in September; *individual & corporate income taxes include capital gains taxes. Nondefense
discretionary includes federal spending on education, infrastructure, law enforcement, judiciary functions…
Source: White House Office of Management and Budget.
USA Inc. | Income Statement Drilldown
55
Income Statement –
USA Inc. Supported -60% Net Margin in F2010
USA Inc. Profit & Loss Statement, F1995 / F2000 / F2005 / F2010
F1995 … F2000 … F2005 … F2010 Comments
Revenue ($B) $1,352 $2,026 $2,154 $2,163 On average, revenue grew 3% Y/Y
Y/Y Growth -- 11% 15% 3% over past 15 years
Individual Income Taxes* $590 $1,005 $927 $899 Largest driver of revenue
% of Revenue 44% 50% 43% 42%
Social Insurance Taxes $484 $653 $794 $865 Payroll tax on Social Security +
% of Revenue 36% 32% 37% 40% Medicare
Corporate Income Taxes*
% of Revenue
$157
12%
$207
10%
$278
13%
$191
9%
Fluctuates significantly with
economic conditions
Other
% of Revenue
$120
9%
$161
8%
$154
7%
$208
10%
Includes estate & gift taxes / duties &
fees; relatively stable
Expense ($B) $1,516 $1,789 $2,472 $3,456 On average, expense grew 6% Y/Y
Y/Y Growth -- 5% 8% -2% over past 15 years
Entitlement / Mandatory
% of Expense
$788
52%
$937
52%
$1,295
52%
$1,984
57%
Significant increase owing to aging
population + rising healthcare cost
Non-Defense Discretionary
% of Expense
$223
15%
$335
19%
$497
20%
$431
12%
Includes education / law enforcement
/ transportation…
"One-Time" Items
% of Expense
Defense
% of Expense
--
--
$272
18%
--
--
$294
16%
--
--
$495
20%
$152
4%
$694
20%
Includes discretionary spending on
TARP, GSEs, and economic stimulus
Significant increase owing to ongoing
War on Terror
Net Interest on Public Debt
% of Expense
$232
15%
$223
12%
$184
7%
$196
6%
Decreased owing to historic low
interest rates
Surplus / Deficit ($B) -$164 $237 -$318 -$1,293 USA Inc. median net margin
Net Margin (%) -12% 12% -15% -60% between 1995 & 2010 = -8%
www.kpcb.com
Note: USA federal fiscal year ends in September; *individual & corporate income taxes include capital gains taxes. Nondefense
discretionary includes federal spending on education, infrastructure, law enforcement, judiciary functions…
Source: White House Office of Management and Budget.
USA Inc. | Income Statement Drilldown 56
Income Statement – Excluding ‘Underfunded’ Medicare / Medicaid 1 + One-Time
Charges, USA Inc. Shows 4% Median Net Margin Over 15 Years
USA Inc. Annual Net Income & Median Net Margin
(Excluding Medicare / Medicaid & One-Time Charges), F1996 – F2010
$600
60%
$400
40%
USA Inc. Net Income ($B)
$200
$0
-$200
-$400
-$600
Net Income (ex. Medicare / Medicaid / One-Time Charges) ($B)
15-Year Median Net Margin (%)
20%
0%
-20%
-40%
-60%
Net Margin (%)
-$800
F1996 F1998 F2000 F2002 F2004 F2006 F2008 F2010
-80%
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Note: 1) Excludes both ‘dedicated’ revenue and spending for Medicare and Medicaid. USA federal fiscal year ends in
September. Source: White House Office of Management and Budget.
USA Inc. | Income Statement Drilldown
57
Income Statement: USA Inc. Profit & Loss Statement Is Solid, Excluding
‘Underfunded’ Medicare / Medicaid Revenue and Spending + One-Time Charges
USA Inc. Profit & Loss Statement (ex. Medicare / Medicaid / One-Time Expense), F1995 / F2000 / F2005 / F2010
F1995 … F2000 … F2005 … F2010 Comments
Revenue ($B) $1,256 $1,890 $1,988 $1,983
Y/Y Growth -- 11% 15% 4%
Individual Income Taxes* $590 $1,005 $927 $899
% of Revenue 47% 53% 47% 45%
Social Insurance Taxes (ex. Medicare) $388 $517 $628 $685
% of Revenue 31% 27% 32% 35%
Corporate Income Taxes* $157 $207 $278 $191
% of Revenue 13% 11% 14% 10%
Other $120 $161 $154 $208
% of Revenue 10% 9% 8% 10%
Expense ($B) $1,248 $1,474 $1,992 $2,580
Y/Y Growth 5% 8% 7%
Entitlement (ex. Medicare / Medicaid) $520 $622 $815 $1,259
% of Expense 42% 42% 41% 49%
Non-Defense Discretionary $223 $335 $497 $431
% of Expense 18% 23% 25% 17%
Defense $272 $294 $495 $694
% of Expense 22% 20% 25% 27%
Net Interest on Public Debt $232 $223 $184 $196
% of Expense 19% 15% 9% 8%
Surplus / Deficit ($B) $8 $416 -$4 -$597
Net Margin (%) 1% 22% 0% -30%
On average, revenue (ex. Medicare)
grew 3% Y/Y over past 15 years
Largest driver of core revenue
Payroll tax on Social Security
Fluctuates significantly with
economic conditions
Includes estate & gift taxes / duties &
fees; relatively stable
Expenses(ex. Medicare Medicaid)
grew 5% Y/Y over past 15 years
Significant increase owing to aging
population
Includes education / law enforcement
/ transportation…
Significant increase owing to ongoing
War on Terror
Decreased owing to historic low
interest rates
USA Inc. core operations were in
surplus 9 out of the past 15 years
Note: USA federal fiscal year ends in September; *individual & corporate income taxes include capital gains taxes. Non-defense discretionary includes
federal spending on education, infrastructure, law enforcement, judiciary functions… Source: White House Office of Management and Budget.
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USA Inc. | Income Statement Drilldown
58
100-Year Review of USA Inc.’s Basic Income Statement
Including Revenue & Expense Drivers as Percent of GDP
… … … … … … … … … …
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2008 2009 2010
Revenue ($B) $0.7 $7 $4 $7 $41 $92 $193 $517 $1,032 $2,025 $2,524 $2,105 $2,163
% of GDP 2% 8% 4% 7% 15% 18% 19% 19% 18% 21% 18% 15% 15%
Individual Income Taxes -- $1 $1 $1 $16 $41 $90 $244 $467 $1,004 $1,146 $915 $899
% of GDP -- 1% 1% 1% 6% 8% 9% 9% 8% 10% 8% 6% 6%
Social Insurance Taxes -- -- -- $2 $4 $15 $45 $158 $380 $653 $900 $891 $865
% of GDP -- -- -- 2% 2% 3% 4% 6% 7% 7% 6% 6% 6%
Corporate Income Taxes -- -- $1 $1 $10 $21 $33 $65 $94 $207 $304 $138 $191
% of GDP -- -- 1% 1% 4% 4% 3% 2% 2% 2% 2% 1% 1%
Other* $0.7 $6 $3 $3 $10 $16 $24 $51 $92 $161 $174 $161 $208
% of GDP 2% 6% 3% 3% 4% 3% 2% 2% 2% 2% 1% 1% 1%
Expense ($B) $0.7 $6 $3 $9 $43 $92 $196 $591 $1,253 $1,789 $2,983 $3,518 $3,456
% of GDP 2% 7% 4% 9% 16% 18% 19% 22% 22% 18% 21% 25% 24%
Defense $0.3 $2 $1 $2 $14 $48 $82 $134 $299 $294 $616 $661 $694
% of GDP 1% 3% 1% 2% 5% 9% 8% 5% 5% 3% 4% 5% 5%
Interest on the Debt $0 $1 $1 $1 $5 $7 $14 $53 $184 $223 $253 $187 $196
% of GDP 0% 1% 1% 1% 2% 1% 1% 2% 3% 2% 2% 1% 1%
Social Security -- -- -- $0 $1 $12 $30 $119 $249 $409 $617 $683 $707
% of GDP -- -- -- 0% 0% 2% 3% 4% 4% 4% 4% 5% 5%
Healthcare -- -- -- $0 $0 $1 $12 $55 $156 $352 $671 $764 $821
% of GDP -- -- -- 0% 0% 0% 1% 2% 3% 4% 5% 5% 6%
Other** $0 $3 $2 $6 $23 $25 $57 $231 $365 $511 $825 $1,222 $1,039
% of GDP -- -- -- 6% 8% 5% 6% 8% 6% 5% 6% 9% 7%
Surplus / Deficit ($B) -$0 $0 $1 -$2 -$2 $0 -$3 -$74 -$221 $236 -$459 -$1,413 -$1,293
% of GDP 0% 0% 1% -2% -1% 0% 0% -3% -4% 2% -3% -10% -9%
Note: Data are not adjusted for inflation. *Other revenue includes customs and excise / estate taxes. **Other expenses include spending on law enforcement
/ education / public infrastructure / energy, etc. Source: 1910 – 1930 per Census Bureau, 1940-2010 per White House OMB.
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USA Inc. | Income Statement Drilldown
59
100-Year Review of USA Inc.’s Basic Income Statement
Including Revenue & Expense Drivers as Percent of Revenue & Expenses
… … … … … … … … … …
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2008 2009 2010
Revenue ($B) $0.7 $7 $4 $7 $41 $92 $193 $517 $1,032 $2,025 $2,524 $2,105 $2,163
% of GDP 2% 8% 4% 7% 15% 18% 19% 19% 18% 21% 18% 15% 15%
Individual Income Taxes -- $1 $1 $1 $16 $41 $90 $244 $467 $1,004 $1,146 $915 $899
% of Revenue -- 16% 28% 16% 38% 44% 47% 47% 45% 50% 45% 43% 42%
Social Insurance Taxes -- -- -- $2 $4 $15 $45 $158 $380 $653 $900 $891 $865
% of Revenue -- -- -- 25% 11% 16% 23% 31% 37% 32% 36% 42% 40%