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USA Inc. - Slideshow & Commentary

USA Inc. - Slideshow & Commentary

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The new summary presentation of the USA Inc. report is more visual in nature, and is accompanied by an extensive audio commentary (available at kpcb.com/usainc) from the author that offers fresh perspective.
The new summary presentation of the USA Inc. report is more visual in nature, and is accompanied by an extensive audio commentary (available at kpcb.com/usainc) from the author that offers fresh perspective.

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Published by: Kleiner Perkins Caufield & Byers on Jul 20, 2011
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I'm Mary Meeker. I'm a financial analyst, an investor and an American citizen.

Our country's budget is a complicated subject, and one that can cause emotional reactions for many people. It's my belief that a transparent and fact-based financial framework can help all of us have more productive discussions about America's budget chalilenges that, in turn, can help lead to constructive solutions. I.worked with a lot of thoughtful and dedicated people to compile thts presentation called "USA Inc." In it, we take a non-partisan look at the financials of the U.S, federal government as if it were a company. Of course, the government is not a "company," but like any entity,. it must manage its money so it doesn't spend more than it brings in. We look at our current and historical government collections and spending, and describe how we got where we are and where it looks like we're going. Our report does not make policy recommendations. And all observations are based on publicly available data. What! will share with you today is a summary of the basic observations from a longer report we published in February. This presentation (and the longer report) are just starting points ....let's call this version an overview and introduction to the country's financial challenges. To dig deeper into the data, you can view the full "USA Inc." report at kpcb.com or order a printed copy from Amazon.com. Feedback since we published the report has been positive=the report has been viewed more than 70,000 times on the Web. I.encourage you to read the report and use it in your own discussions ..And feel free to share this presentation. Improve on the content. Engage in the debate. Help educate others. Help find solutions. Make America's founding fathers proud ...


We have a serious financial cballengein

our country today-our

country spends more money than it collects.

Just as a business brings in money, also known as revenue, from the goods it sells, the U.S. brings in revenue in the form of individual, corporate, and payroll taxes collected by the lnternal Revenue Service as well as tariffs from imported goods. A company also has to spend some of its revenue to pay for its costs of doing business. These include the likes of rent, salaries, materials, manufacturing and marketing. Together these make up a company's expenses. Similarly, the U.S. or, if we are using business terms, "USA Inc.", has expenses ..These include, but are not Hmited to, spending on defense, transportation, education, law enforcement,. Social Security, Medicare and Medicaid programs, as well as interest on our national debt.


1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010



When you look at the revenue and expenses of USA Inc., you will see that expenses have been greater than revenue for a long time. In fact, for every year except for five of the past forty-five years, USA Inc. has spent more than it has collected in taxes. This means the "budget crisis" that is being discussed in the House, the Senate, in the media and at lots of dinner tables these days has been building for more than four decades.



Unfortunately, budget deficits are not simply canceled out the next year when the country draws up a new budget. No, we have to borrow to overspend. The amount by which we overspend each year is added to our national debt. Our national debt is the total. value of everything that USA Inc. owes: outstanding bills, notes, bonds, and other debt instruments issued by the Treasury and other federal. agencies. Clearly, we have some critical financial challenges that we must solve. Simply put, we are overspending. l.f USA Inc. really were a company, a "turnaround expert" would approach these problems by asking questions like these: How How Why And, long can USA Inc. continue to lose money? long can USA Inc. keep borrowing to overspend? are USA .Inc.'s expenses growing faster than revenue? can we isolate and fix the key drivers of revenue and spending?


A financial obligation of the Federal Government to a person, group of people, business, or unit of government, or a similar entity that meets specific eligibility criteria.

While a sing.le factor can't explain the bulk of America's financial challenges, there is one area of expenses that is the larqest by tar: government entitlement spending. An entitlement is a financial obUgation of the Federal Government to a person, group of people, business, unit of government, or a similar entity that meets specific eligibility criteria. USA Inc.'s major entitlement programs are Social Security, Medicare and Medicaid.


In 2010, entitlement expenses accounted for nearly $2 trillion, or 57% of total USA Inc. expenses, up from 25% of expenses forty years ago. Before we get into the details, we'll provide a quick review of these programs.



In response to the Great Depression, the U.S. Government created Social Security in 1935 to provide retirement income for elderly Americans and disabled workers. Employee and employer payroll taxes are used to pay for Social Security. Medicare, created in 1965, is the federal health insurance proqrarn for people at or over the age of 65, financed by payroll taxes, insurance premiums, and interest earned on trust fund investments. Finally, Medicaid, created alongside Medicare in 1965, provides healthcare insurance for low-income individuals and is paid for jointly by state and federal income taxes. These three programs add up to 73% of USA Inc.'s entitlement expenses, and these entitlements, most notably Medicare and Medicaid costs, are growing exponentiall.y.


For perspective, a decade ago, in the year 2000, individual income taxes collected by USA Inc. were $1 trillion, about 2x higher than entitlement spending (excl'uding Social Security, which has been self-tunded through payroll. taxes). Yet in 2010, entitlement spending (excluding Social Security) grew to $1.3 trillion but individual income taxes were only $900 billion. . So, while USA Inc.'sindividual income taxes have fallen slightly over the past ten years, our entitlement spending (exclud.ing Social Security) has more than doubled,


In fact, the Congressional Budget Office or CBO, a nonpartisan congressional agency, forecast that the cost of Social Security, Medicare, Medicaid and interest expenses wiHexceed America's total revenue fifteen years from now (in the year 2025),. or perhaps even earlier, These expenses-in effect-are like runaway trains. In 2025, the point where the two lines on this chart intersect, is when-according to the US govemmen1-USAlnc ..will have nothing left over to spend on What we think of as ongoing operating expenses: education, infrastructure, disaster relief, defense, energy policy, national parks, and medical research, just for starters. In effect, we've mm1gaged our future with entitlement spending. Is this what's best for American citizens over the long term? Are we effectively balancing our short-term wants and needs with our long-term wants and needs?


I.f a corporation's expenses perpetually exceeded revenue, the company would eventually go out of business, Of course, our country is not a business. Its mission, according to the United States Constitution (adopted by our country in 1787 as the framework for our government), is ''10 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."


In other words, the U.S,'s ultimate goal is not generating a profit. However, it is hard to believe that maintaining a "perfect" union and providing liberty and prosperity for all citizens would be possible if the government couldn't afford any expenses beyond entitlements and servicing the national debt.


Considering this situation, American citizens should support our elected officials in ending our country's practice of spending far more than it brings in. Already, Americans are worried about the country's financial woes. In an NBC News/Wall Street Journal pan, 80% of respondents said they were concerned about the growing federal deficit and the national debt. But, more than 60% were concerned about the impact of major cuts by Congress on their lives and their families. Strnilarly, according to a Washington Post/ABC News PoU, 69% of Americans opposed cutting spending on Medicaid and 78"/0 opposed cutting Medicare .. Our challenge, in effect, is we want to have our cake and eat it too.


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Who is wil.ling to speak the truth about these issues and offer solutions? We need more of our elected officials to get off their soapboxes, stop promoting their ideologies, and start focusing on the undeniable facts about our situation. But if we want our elected officials to take action without fear of losing their jobs, the public must be educated about the depth of America's financial challenges. It's critical that we all learn the facts about the numbers so that each of us-in address them. our own way-can take action to

The bottom line? To point our country (and our financials) in the right direction, we need credible short, medium and long-term financial. plans that point to a slow and steady reduction in our budget deficit And the reality is nearly all Americans will need to make some sacrifices to ensure that our country is an even better place to live in five, ten and twenty-five years.


Perhaps it would be easier to understand the scope of our challenges if we considered the country's financial situation in a personal context. For instance, what if an American family overspent to the degree that the U.S. does? That family would find itself in a state of financial distress that might look llka this: This family, let's call them the Smiths, have been spending more than they earn for a long time ..They have accumulated debt from their school loans, a home mortgage, and aline of credit remodeling their home. In fact, the Smiths' net worth-the difference between what they own and what they owe-is negative and has been tor many years. They want to be able to pay for their children's college and save for retirement. But, given the financial downturn, their assets are worth less than before. The value of their 401 K retirement plans have been cut in half and their house dipped into negative equity value as rea! estate values plummeted. After being denied a loan to refinance their home, they realize that if they don't cut their spending,. they'!Ieventua!ly declare bankruptcy. Instead, they go on a spending diet. However, even cutting any non-essentialsisn't enough. The Smiths' debt is so large that they can't pay it off by only trimming expenses; they also have to increase their revenue. Both parents take on a second job. The Smiths also realize they can do more with less: they move into a smaller house, and hold a garage sale to get rid of nonessential possessions. Thanks to sacrifice and prudence, they turn their financial situation around.


While it sounds extreme, the Smiths' story should actually be familiar to us because it 'is the financial reality of the United States. As a result of our country's overspending and future obligations to our citizens, it would take more than twenty years of USA lnc.ts current revenue just to payoff our debt. The $47 trillion that USA Inc. owes today equals $395,.000 per household, owing .Iarge.lyto entitlement obliqations,



REVENUE ($ Billions)
Individual Income Taxes Social Insurance Taxes
Corporate Income Taxes Other

5899 5865 5191 5208

EXPENSE ($ Billions)
Entitlem ent/Man datory Defense Non-Defense Discretionary One Time Items Net Interest on Public Debt

Sl,984 S694 5431 S152 S196

Net Margin (%)


Before we dig deeper into USA Inc.'s current financial. situation, let's take a closer look at Federal spending to understand exactly how America's financials got to where they are today ... In 2010, USA Inc. brought in revenue of $2.2 trilllon in the form of individual,. social insurance (payroll) and corporate taxes. In the same year, USA Inc. had $3.5 trillion in expenses. These included entitlements, non-defense discretionary expenses (such as education, law enforcement, and transportation), defense spending, and interest on the national. debt. That means that USA lnc, spent over $1 trillion dollars (or $11.,000 per household) more than it brought in from taxes, or, in financial terms, the country operated at a negative 60% net margin in 2010.


What is one trillion dollars? For perspective, for a trillion doUars-the amount of our overspending in 201Q-we could buy a McDonald's grilled chicken sandwich and salad for every American, every day, tor more than two years.


We could buy an Apple iPad for every American and upgrade them with a new model, every year, for seven years.


Or, we could invest in education and match California's public school teaching salary and benefits of $113,000 annually to pay the salary and benefits of every K~12 public school teacher in the U.S. for almost three years.


USA Inc. didn't always spend in this manner. From 1790 to 1930, Federal spending averaged only 3% of the country's GOP, which is our gross domestic product or the goods and services that the country produces. However, spendinq has grown remarkably since then; today, USA Inc.'s annual spending is closer to 24% of GDPAmerica's founding fathers would like.ly be stunned by this math.













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What changed over time? How did USA Inc. get here? First, let's look at how revenue and expense growth compare to the growth of entitlement spending. Over the past forty years, USA Inc.'s revenue has grown by 2.9% annually and total expenses have gmwn by 3.1%. Entitlement expenses grew at 6% per year-2x faster than revenue growth and 6x faster than defense spending growth.


While the 0.2 percentage points difference in growth rate may seem trivial, the compounding effect over forty years has resulted in expenses that are 50% higher than revenue. This was not caused' by the currentadministration or the previous administration. No, all of our legislators and presidents-Democrats and Republi.cans-and the citizens of the U.S., can take credit for this problem.



Entitlements, the biggest of wh.ich are the cost of Medicaid plus unfunded costs for Medicare and increasingly, unfunded Social Security costs, are the main drivers of our growing expenses. While USA Inc.'s budget problem may be complicated by the country's size, commitments, economy and politics, figuring out where to focus our budget reform conversations is relatively simple: we must rethink entitlement spend'ing if we want to make real progress with our budget crisis,


The total dollar amount of entitlement expenses, adjusted for inflation, has increased nearly 11x over the past forty-five years while, by comparison, the country's GOP grew only2.7x and USA Inc/s total expenses grew 3.3x during the same period,


In effect, this overspending was paid for by increasing our debt. Just as the Smiths had to borrow to maintain their spending levels, USA lnc.s extra borrowing became the country's current debt-up to $9 trillion, or 62°/..,· GOP in 2010, compared with 30% of GOP forty years ago. The current debt of leve.1is projected by the government to increase 3x over the next two decades. In addition, off-balance sheet liabiilties such as USA Inc.'s promise to pay future Social Security and Medicare benefits without sufficient funding bring the total debt of USA Inc. to $47 trillion, That's an increase of 5x since 1996.


That $47 trillion would be enough to run the Federal government for thirteen years at its current spending levels!


Of course, these most recent numbers occurred during one of the worst economic downturns in our country's history.


However, even if we adjust for the cyclical impact of the recent recession-for instance, if we take out the government's financial bailouts including TARP (Troubled Asset Relief Program), plus the economic stimulus package--we still would have an $817 billion operating loss in 2010 compared to a loss of $78 billion just fifteen years ago, USA .Inc.'s financial problems are not simply a result of a recession or partisan decisions. Whether we are lawmakers or ordinary citizens, we are all guilty of perpetuating our spending problem. It's time that all of us-private citizens and elected officials alike--step up and take responsibiltty.


Any way you cut it, Medicare and Medicaid are the major stressors on our budget, and the scale and scope plus the financial burden they place on our system has dramatically increased since those programs were originally created. In 1965, 1 in 50 Americans received Medicaid. Today, 1 in 6 Americans collects Medicaid benefits.


Medicaid spending growth is propelled by rising medical costs and a growing number of people becoming eligible for benefits. Since 1966, enroHment in Medi'caid is up 12x from 4 million to 49 million in .201.0,and annual payments per beneficiary have increased 4x to $5,000, even after accounting for inflation.


Note that while Medicaid enrollment rose 12x since 1966, America's population rose only 1.6x.


Rising healthcare costs are also playing a major role. Government healthcare expenses (including Medicare, Medicaid, and other programs such as government employee and veteran health benefits) are now 8.2% of GDPthey were 1.2% fifty years ago.



l.fyou look at the 34 developed and emerging countries known as OEeD (Organization for Economic Cooperation and Development) countries, you see that USA. Inc.'s healthcare spending equals that of all of the other countries combined. What makes this fact even more alarming is that USA Iinc. has only 35% of their combined population.


To make matters worse, by many measures, we get a relatively poor return on our investment in healthcare, We may have more MAl. machines than any other country but we rank among the highest in incidence of obesity and number of heart attacks. We spend more than OUT peers on medical care and technology but-by people lags that of most of our peer countries .. almost every measure-the health of


And our population is aging. This means that all of the programs that were set up after the Great Depression in the 1930s to provide a safety net to our poor and elderly are now Gaming due. Our workers aren't supporting the same size population as they did in the past. This budget bubble will grow as the baby boomer generation retires in the coming ten to twenty years. Soon, they will begin to collect Social Security and require increased medical care. But fewer workers wi.11 e available to support them. b Social Security benefit increases have surpassed the rate of inflation, making them even more expensive to maintain. Add that to skyrocketing health expenses along with our ineffective efforts to contain hoalthcare costs-and we have a perfect storm of spending.


It aU sounds pretty bad, but it could be worse. Federal debt has been rising steadily since 1981. But since the Federal Reserve has been holding down interest rates, we've g.otten a break and USA Inc.'s cost of borrowing money has-in effect-been artificially low, Rather than ilts thirty-year average of 6% (from 1980 to 2009), the cost of borrowing was only 2°/" in 2010. In fact, if interest rates were at this historical averaqe, in 2009, we would have paid $3708 more than we did just to se rvics OUf debt and an additional $2906 in 201 0, 188% higher than was actually paid. So far, we really haven't had to pay the price for our riSing debt. But if interest rates rise, our penalty for years of overspending will rise.


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In terms of debt levels, the U.S. is certainly not leading the rest of the world. Think about the current European debt crisis. Greece, Portugal, Ireland, Italy and Spain are in deep trouble and their economies have teetered on the verge of collapse. How far off is the U.S .. When you compare our gross debt as a percent of GOP, the USA is not an outlier. ? But if a corporation were in this situation, it would likely be difficult to keep borrowing indefinitely without showing signs of progress.


When companies overspend and the markets lose faith in their outlooks, they often file for bankruptcy. lockheed went bankrupt in the 1970s; Chrysler went bankrupt in the 1980s; many savings and loan institutions tailed in the 19805; financial institutions (including Citiqroup, Bank of America, AIG, Fannie Mae and Freddie Mac), and the U.S. auto industry almost collapsed in 2008. And the U.S. government helped bail them all out.


But who will bailout USA Inc ..jf it fails? We can't simply continue to finance our debt 'by printing more money unless we want to devalue our currency, destabilize our economy, and make our debt even less attractive to foreign ownership. China, our biggest foreign lender, already owns over $1 trillion (or 13%) of our debt. China has lent the u..S. more money than any other country. In order to continue to be able to sell our debt to them, USA Inc. must be able to prove that investor money is safe. If prospective lenders like China don't believe USA Inc. can pay back its loans, USA lnc.'s funding will dry up and the country won't be able to pay its expenses and continue to 'borrow easily. Is this a risk that USA Inc. can take?


Just as the Smiths started to spend less and earn more in order to preserve their financial health and maintain their ability to borrow money, USA Inc. also needs to start tightening its belt. Our country must find ways to spend less and save more. We must heed the advice of one of our great leaders, President Theodore Roosevelt, who said: "In any moment of decision the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can dais n.othing." Doing nothing isn't a strategy. In fact, doing nothing is actually worse than doing something to try to solve these problems.


Alexis De Tocqueville and Thomas Jefferson maintained optimism about the American people. They felt that-armed with the right information-the people will make the best decisions for the country .. As Jefferson explained, "Educate and inform the whole mass of the people ...they are the only sure reliance for the preservation of our liberty." Now is the time for each of us to delve into our financial crisis and get engaged in this issue so that we can preserve our liberty and sustain our prosperity ..Our budget crisis isn't something we can choose to ignore; it is our "duty" to be involved. Armed with the facts, we can begin to solve OUf problems.


We also have a duty to those who came before us; we must continue their work. Our grandparents built a ladder for our advancement They invested in the Federal Highway System, established Pell grants for poor Americans to attend universities, and funded research labs where some of the world's great inventions were bam: the ,light bulb, artificial. heart, personal computer and th.e Internet, just to name a few. Both new immigrants and 8th generation Americans have ascended the rungs of this ladder. It has lifted people out of poverty and created prosperity for more than two-hundred years.


But we have not maintained that ladder ... as an example, in 2010, USA, Inc, spent $724 billlon on healthcare but only $97 billlon on education.


Are we investing in the right things to keep America competitive in an increasingly competitive world? How can we continue to attract and develop great minds when we don't preserve and grow our resources for these minds? As an example,in 1965, the Federal government spent approximately 1.7% of GOP on technology research and development In 2010, we spent less than 1%. The good news here is that many companies (both public and private) have invested aggressively in research and development.


We are becoming so compromised by our financial situation that it's increasingly difficult to be the America that we once were and still hope to be. Relative to other countries, our students rank well below average on mathematics, science, and reading but we top the group in selt-contidanca. We are losing share to other countries, but selt-contidsnce alone isn't enough to help us catch up. When a company wants to ensure it will be able to sustain its competitive advantage,. it invests in the development of new products or services. We need to invest in our education system, research and development and our chi.ldren if we plan to remain a leader in the world. Are we prioritizing our spending proper.ly? Are we ensuring that, in the future, we will tackle the big, audacious goals that propelled America to greatness in the past?


How would a corporate turnaround expert tackle America's problems? At a high level, he or she would look at two options: trim expenses and increase revenue. We can learn a lot from successful corporate turnarounds ..For instance, Apple Computer was almost bankrupt a decade ago but, after its turnaround, is now one of the most valuable companies in the world.


More recently, GM filed for bankruptcy in 2009, Its products had become increasingly uncompetitive and pension plan costs rose to 4,8% of its annual expenses, GM's net worth went negative in 2006 when it began to owe more than it



In fact, when you purchased a GM carin the past five years, $1,600 or 6% of the purchase price, on average, went to employee pension expenses.



In 2010, GM's gross debt as a percent of revenue was 82% and in the United States, GM's retired workers dependent on the company outnumbered current employees by 10x!



After declaring bankruptcy, GMinitiated a turnaround in 2009. It focused on both eliminating expenses and increasing revenue, It cut many of its legacy entitlements by swapping employee healthcare for equity ownership in the company-thus more effectively aligning employee incentives with company performance. GM improved its operating efficiency so dramatically that it was able to run at breakeven coming out of the recession and turn cash flow positive dur.ing the next upswing in its business cycle, On the revenue side, GM moved away from a business model that emphasized costs to one that focused on vehicle quality, engineering, and styling. In 2010, the first full year after its public offering, GM reported earnings of $4.7 billion.


USA Inc. needs to beg.in a turnaround too. Just as a normal business or family would do, our country needs to deal with its debt and liabilities-national debt of over $9 trillion and liabilities of over $47 trillion. Let's review our current deficit (defined as 2010 overspending) of $1.3 trillion.


Earlier this year (in April 2011), our elected officials passed legislation to reduce $38 billion in 2011 annual spending after an intense debate that almost shut down the Federal government Note that $38 billion in spending cuts accounts for only 2.5% of our annual overspending in 2010 ...


· ..And budget month deficit,

in our earlier example of the Smiths who are spending $90,000 per year with $60,000 income, the stopgap cut would be equivalent of the Smiths cutting $750 of spending per year (or $62 of premium cable TV per for an entire year). While it is a step in the r.ight direction, for our country to make progress with our budget we need to pursue more aggressive moves.


A turnaround expert looking at USA Inc.'s finances would throw a one-two punch; he or she would focus on the big changes necessary to fix (reduce) our expenses first and then drive growth second.


Few people seem to want to touch entitlement spending but the financial "loss levels" from these programs are so big that we can't ignore them. For comparison, it's notable that USA Inc.'s entitlement spending in 2010 equaled the entire GOP of India. That's a staggering number, given that according to the IMF,..lndiais the ninth largest economy in the world based on 2010 GOP. USA Inc. must review these important programs and restructure them so they make economic sense.


Let's apply some simple, but illustrative, math to Social Security, Medicare, Medicaid and non-defense and defense spending. Then we'll. do the same for GOP growth and tax increases.
I.f we look at Social Security, Americans are living .26% longer but the retirement age has increased only 3% since the program was created in 1935. The last time the Social Security program had financial chal.lenges-in 198G--the Government chose to raise the retirement age by two years (from 65 to 67 in 2027) and reduce benefits by 5%.


Back-of-the-envelope math based on current data suggests we can restore Social Security to long-term break-even by either increasing the retirement age by 9% to 73, Of increasing payroll tax rates from 12.4% to 14,2%" or reducing benefits by 12%, or via some combination of the thres,


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Medicare and Medicaid must also be restructured to address the funding shortfall. However,. the four percentage points of payroll tax rate hike or 53% benefit cuts required to balance the Medi.care shortfall would be Draconian and extreme. And Medicaid does not even have dedicated funding,. so it's even more difficult to manage financially. Another way to help balance Social Security and Medicare is to introduce means testing, which translates to paying out full benefits only to those who really need them, and cutting back on payments to everybody else.


Reality is that an effective restructuring of Medicare and' Medicaid requires a comprehensive review of USA lncs healthcare system to isolate and address factors that have been driving up healthcare costs. These factors range from social (a growing and aging population plus increasing obesity lsvsls) to economic (misaligned incentives among consumers, healthcare providers and payers) .. The bottom fine is that more and more consumers demand healthcare services with less regard for the full economic impact of those services in part because they pay only a fraction of the cost oul of pocket. Healthcare service providers are generally rewarded for providing more services, largely with relatively less regard for cost effectiveness. This is a mismatch!



Aside from entitlements, USA Inc. could also tackle "low-hanging fruit" in other defense and non-defense discretionary categories. This could include outsourcing non-"core" competencies, efficient spending. restructuring underperforming agendes, and pursuing more

Speaking' of Defense, with budget deficits rising, some advocate cutting back on defense spending, the second-largest expense item (at 20'Yo of spending) after entitlements (at 57'% of spending).


Defense spending has risen in recent years due to the wars in Afghanistan and Iraq, and other costs related to the Global War on Terror.


That said', it's important to highlight that as a percentage of GOP, defense spending in the U.S. remains well below its sixty year trend line.


Some of the most strident supporters of America's defense efforts concede that cuts designed to root out inefficiencies could be targeted at the $80 billion spent on tens of thousands of "pet projects" over the past decade. Programs facing cuts might include: the $485 million spent on an extra F-35 Joint Strike Fighter engine that the Pentagon doesn't want, or long-in-the-tooth Cold War defense efforts like the $225 million spent annually to station aircraft in Iceland to monitor Soviet 'bombers and submarines that haven't been around for years, or cuts in some spending related to military personnel, The Esquire Commission to Balance the Federal Budget, a group of four former senators representing both parties, found over $300 billion in potential defense restructuring opportunities.


And. in non-defense discretionary spending (which totals 20% of USAlnc.'s spending)., the Government Accountability Office (GAO) identified opportunities to save billions of dollars by eliminating over 100 redundant federal agencies and programs including 18 programs for food and nutrition assistance, and 44 overlapping job-training programs.


Bottom line, USA Inc. must review ALL of its programs or businesses and figure out if they are run efficiently and, if they're not, how to run them more eftidently and cost-effectlvely,


On the other side of the equation, USA Inc ..can attempt to increase our sources of revenue ..To approach this problem, we need to look at the history of revenue growth. Over the past forty years, our average annual GOP growth was 3%. USA Inc.'s tax receipts have been closely correlated with GOP growth-in order to grow our way out of our spending problem, without increasing tax rates-we'd have to increase GOP growth to 6-7% from 2012 to 2014 and to 4-5% from 2015 to 2020. This would be far above the country's forty year average of 3% annual GOP growth, practically an lrnpossible mission.


However thoughtful investments in technology, labor, and education could help-investment drove 90% of labor productivity growth from 1977 to 2000.

in these three areas

Unfort.unately, the Federal government's investment in these areas has been decl.ining, though as mentioned earlier, corporate spending an technology R&D has been encouraging.





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Chang:ing tax policies can also increase revenue. First, we need to look at who pays taxes now. In 2009, only 49% of American households paid federal income taxes, down from 67'10 in .2005, per the Joint Committee on Taxation. And, the percentage of Americans that pay 50% of taxes has fallen by 60% from 1965 to 2005. In addittion, more and more Americans are on the government payroll or receive government subsidies for retirement income, medical care, housinq, and foad-this has risen to 36% af Americans, up from 20% in 1966.


We could consider raising taxes ..It's notable that tax hikes required to attempt to bring the budget into fiscal balance would likely mean doubl.ing individual income tax rates, at a minimum. That's extreme and impractical, but it's the math. In addition, revenue could be raised by reducing various tax credits and deductions. For example, this could include gradually reducing the mortgag.e interest tax deduction or limiting the tax benefits of other deductions such as employer contribution to health insurance ..When considering changing tax credits or deductions, it's key to ensure that we incentivize behavior that is aligned with the most important medlum-to-long term needs of our country-with economic and job growth at the top of the list. I.ncreasing tax rates could be self-defeating as it could reduce already low savings and investment levels and slow consumer spending and negatively impact jab growth and employment I.evels.


Through many tax credits and deductions, USA Inc. has createdincentives to encourage Americans to spend on housing, healthcare and current consumption ..Meanwhile, savings levels have declined (of which the personal savings rate has declined from 1.0"/"of disposable income in the 19708 to 6% today) and investment in prod uctive capital, education and technology-the very tools needed to compete in the global mar.ketplace-has stagnated.


Our financial problems are large and complicated, However, they are not unsolvable. We have solved issues this bi.g (and .bigge.r)throughout our evolution as a country including: the American Revolution, the Civil War,. the Great Depression and civil rights.


We've achieved a man on the moon, the digital revolution and a system of higher education that is coveted around the world.


Things have changed. When you look at the U.S. using several different "attractiveness" indicators, you find that USA Inc. has declined over the past ten years on measurements such as business environment, availability of high quality labor, and transportation and telecommunications infrastructure. We have fallen behind our peers and are faUingeven further behind, on a relative basis.


We must restore America's competitive edge. Michael Spence, a Nobel Prize laureate, has said: "Globalization is the process by which markets integrate worldwide ....the world now finds itself just past the midpoint in a century-lonq process in which income levels in developing countries have been converging toward those in developing countries. Now, the emerging economies' impact on the global economy and the advanced economies is r,ising rapidly. The major emerging economies llke China, Brazil, lndia and Russia are becoming more competitive in areas in which the US economy has historically been dominant, such as the design and manufacture of semiconductors, pharmaceuticals, and information technology services ... "The US g'Overnment must urgently develop a lone-term policy to address these distributionaleHects and their structural underpinnings and restore competitiveness and growth to the US economy ... restoring rewarding employment opportunities for a full spectrum of Americans should be a fundamental goal ... education should be boosted ... the tax structure also needs to be reformed-it should be sirnolitied and reconfigured to promote competitiveness, investment and employment. The United States will not be able to deduce its way toward the solutions; it will have to experiment its way forward." Michael Spence, "The Impact of Globalization on Income and Employment" Foreign Affairs, July/August 2011


Many American leaders have been expressing concerns about America's financial situation and entitlement spending imbalance for some time. "The country faces a fundamental disconnect between the services the people expect the government to provide ... particularly in the form of benefits for older Americans ... and the tax revenues that people are willing to send to the government to finance those services. That fundamental disconnect will have to be addressed in some way if the budget is to be placed on a sustainable course:' Douglas Elmendorf, Director of U.S. Congressional Budget Office, November 2009


"There are serious questions, most immediately about the sustainabi.lity of our commitment to growing entitlement programs."

Paul Volcker, Former Chairman of the Federal Reserve and Chairman of Economic Recovery Advisory Board, Speech at Stanford University, May 201.0


"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 201 0


"The United States needs to accelerate the adoption of credible measures to reduce debt ratios." International Monetary Fund,"Fiscal Monitor," April 2011.


"America has gone from the world's leading creditor nation to the world's largest debtor nation." David Walker, Former Comptroller General. of the United States, May 2011


"It is no exaggeration to say that ... the United States' standing in the world depends on its success in constraining this healthcara cost explosion, Unless it does, the country will eventually face a severe fiscal crisis or crippling inabillty to invest in other areas ... The United States must make a fundamental change to its healthcare system, transforming it into one that emphasizes evidence and quality, one in which providers have better tools ana much stronger incentives to deliver vaIH8." Peter Orszag,. Former Director of White House Office of Management & Budget, "How Health Care Costs Can Save or Sink America" Foreign Affairs, July/August 2011


This isn't the time to voice concern about the Federal deficit but be silent about spending cuts. The data and facts imply that our deficit is a very real problem. We need to take the steps to solve this problem, The reality 'is each of us should consider what we might sacrifica for the future health of our country. We realize there is a disconnect=apalrr 80% of us are concerned about the grow:ing federal deficit and the national debt. This is a good first step but meaningless if we are unwill.ing to act. Remember, more than 60% of us are concerned that major cuts could impact our lives and families. We all own a part of USA Ilnc.~bothits assets and its liabilities. As shareholders, we have a responsibility to ensure our taxes are used wise.ly and that we get a return on our investment in the form of mutual prosperity.


In life, things are often darkest before dawn ... We need to get back to the business of buildinq, of sustaining, and of contributing to a country that continues to reinvent itself. We need to reclaim our position as the number one destination for people who dream about a higher quality of life ..This job will take everyone, each one of us has a role to play. Our country has enormous strengths-in wealth, human capital and resilience.


A nation on the decline is not the kind of country our grandparents left to us. Let it not be the kind of country we leave to our children, We believe that Americans would like to think that our country has a "business plan" for the future. The Smith family would have found ways to reduce expenses even if it meant taking in a renter, the family postponing their vacations for ten years, or halting all non-essential expenses. They would have tried to increase their income by taking second jobs.



What are your thoughts? Should we implement a bonum-to-top and top-to-bottom review of America's operations with a focus on the objectives of our constitution? Should America run more efficiently (like a business) with clear goals? What incentives should be given for performance against those goals? Which government inefficiencies have you observed and how would you improve them? I.f you were borrowing $50 for every $100 in income to meet your spending obl.igations, what would you do? Are you willing to sacritice your personal financial interest (by receiving fewer benefits or paying higher taxes or retiring at a later age) to help make America more competitive? Would these things change the way you vote?


Now that you perhaps have more clarity on how USA Inc. spends its money (also known as your tax dollars), would you do it differently if you were in control? If you could choose how you could allocate the income taxes you pay, would you be align.ed with USAlnc.'s F2010 allocation or would you change it? 57% to entitlement programs; 20% to defense; 16% to basic government functions (law enforcement/education/transportation); 6% to interest payments? This is a time to stand up and make your voice heard.







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The data and facts imply that we must let our elected officials know that they have our permission to make the tough decisions, .including making the type of spending reductions that can help bring about the country's prosperity again. Poli.cymakers, businesses and citizens need to share responsibility for past failures and develop a plan for future successes. Our challenges are solvable, but only with collective sacrifice and hard work. Are you ready to rise to the occasion?



This presentation has been compiled by Mary Meeker and her co-contributors (collectively referred to below as the "Contributors") for informational purposes only. It is not intended to serve as the basis for investment, legal, political, tax or any other advice. Furthermore, this presentation is not to be construed as a solicitation or an offer to buy or sell securities in any entity, including any entity that is associated with the Contributors. The information contained in this presentation has been compiled from public sources that the Contributors believe to be reliable. While the Contributors find no reason to believe that the data relied upon and presented in this report are factually incorrect, they have made no separate investigation or otherwise independently verified the accuracy of such data. As such, the Contributors cannot guarantee the accuracy of any of the data (raw or interpreted) and accordingly the Contributors make no warranties (express, implied or statutory) as to the information in this presentation. This presentation summarizes a significant amount of publicly available data, and is not intended to be allinclusive. The Contributors have complied this presentation based on selected sources that they believe to be most pertinent to the presented subject matter. Furthermore, the graphic illustrations are based on generalized calculations and are provided for illustrative purposes. Readers are encouraged to conduct their own analysis of the data underlying this report, as well as data from other sources, so as to come to their own conclusions. The information presented in this presentation represents the view of the Contributors, and does not necessarily reflect the views of Kleiner Perkins Caufield & Byers or any of its associated management personnel, investment vehicles, investors, portfolio companies or any affiliates or associates of the foregoing. Most of the information from this presentation can be found in a larger report called 'USA, Inc.,' published in February 2011. The presentation and report can be found at kpcb.com/usainc.



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