Summary and Critical Overview of Mary Meeker’s

“USA, Inc.: America’s Financial Statements”[1]

Executive Summary and Analysis

This is a summary and overview of the USA, Inc. presentation by Mary Meeker (former Managing Director and Research Analyst for Morgan Stanley, now a General Partner with Venture Capital firm Kleiner, Perkins, Caufield and Buyers).

The USA, Inc. presentation is one of the most comprehensive analyses of its type  -at over 400 pages – and it deserves additional critiques in order to balance some of the inferences and assertions made in Mary Meeker’s analysis.  Ms. Meeker created this presentation by looking at the United States financial situation as if the Government were a business.

While this is incredibly useful for understanding the current financial situation, it is necessary to keep in mind that because the United States Government is not a business, it does not have the same tools available for solving financial problems.  However, this summary explains in a simple manner the serious financial problems currently confronting the United States Government.  As a precursor to the summary, please find the following listed as the primary findings and interpretations of the presentation:

  • Core United States revenue ($2.2 trillion) needs to break even with government expenditure ($3.5 trillion), but government expenditure is currently climbing higher and higher due to war spending ($694 billion) and healthcare and retirement entitlements ($1.98 trillion) that do not seem to be reaching a stopping point.
  • Current defense spending is $694 billion, but in light of recent events, there may be several opportunities to reduce this expenditure.  The recent assassination of Osama bin Laden could lead to a reduced scope in the United States involvement in Afghanistan and Iraq.  In addition, there may be a way to limit the scope of the global war on terrorism.  Likewise, there may be an incentive to research more cost effective ways to continue to participate in the global war on terror.   
  • The healthcare sector desperately needs to be restructured to including funding for the Medicare and Medicaid programs, specifically to account for the baby boomer generation and the increase in the average life span.  That said, Obama Care has great intentions for improving the lives of American citizens, but will most likely worsen the financial problems already wreaking havoc in the health care sector.  By expanding Medicaid eligibility up to 133% of poverty level (while very important), this will only increase spending.[2]  However, the aspects of the plan that will ease the financial situation are the fines that will be administered to citizens who neglect to purchase health insurance plans and the increase in taxes and fees.[3]  The revenue from these fines, taxes, and fees will help to decrease the deficit – the expected income from the taxes and fees is estimated to be approximately $409.2 billion over the next 10 years.[4] While Obama Care was not directly addressed in the presentation, it is important to consider the provisions of the Act when deciding how to restructure the healthcare sector, as the provisions of the Act will invariably cause many changes, both positive and negative, to healthcare finances.
  • Mary Meeker emphasizes that political compromise is the only way to decrease the deficit and cause spending and revenue to break even.  If the United States Government continues to refuse compromise and stay in a deadlock over these issues no progress will be made and the financial situation will only grow worse.  This may be the most important take-away from this presentation.

(Summary written by Emily A. Sollars, a senior Government Major, Economics Minor at Connecticut College who is currently interning in Washington, DC at a leading bi-partisan political consulting firm).

Presentation Summary

  • Income Statement:
    • Cash Flow $1.3 trillion, Net worth $44 trillion with a negative trend line over last 15 years
    • Revenues: $2.2 trillion
      • Individual income tax: $899 billion
      • Social insurance tax: $865 billion
      • Corporate income tax: $191 billion
      • Other: $208 billion
  • Spending: $3.5 trillion
    • Entitlement programs
      • Social Security: $707 billion
      • Medicare and Federal Medicaid: $724 billion
      • Unemployment insurance & other entitlements: $553 billion
    • Defense: $694 billion
    • Non-Defense Discretionary: $431 billion
    • Discretionary One-Time Items: $152 billion
    • Net Interest Payments: $196 billion
  • The government’s spending on healthcare was just 1.2% of GDP 50 years ago, today it is 8.2%
  • The government could afford to increase spending by 4% in the following areas, because they are 4% below revenue: defense, education, law enforcement, transportation, infrastructure and energy
  • Defense is the second largest expenditure, following entitlement spending
    • Current defense spending is 5% of GDP, still below 1948-2000 average of 7%
    • 950 billion is the current defense expenditure of Iraq, Afghanistan, & Global War on Terror Operations since 9/11
    • Entitlement Spending:
      • Expenses up to 169%, while dedicated funding is only up 70%
      • Some entitlement spending has worked better than others:
        • Better working programs: Unemployment insurance & social security (both have operated close to break-even)
        • Poorly working programs: Medicaid & Medicare (annual losses at $160 billion and $123 billion respectively)
  • 76% of Entitlement spending is directed to Social Security, Medicare and Medicaid
  • Entitlement spending exceeded entitlement revenue by 169% in F2010:
    • Entitlement spending: $1.98 trillion
    • Entitlement revenue: $0.87 trillion
  • Unfunded: meaning the present value of future expenditure to exceed dedicated future revenue, social security & Medicare are considered partially unfunded.
    • Medicaid is an unfunded liability because there is no dedicated revenue source to match expected expenses
    • These liabilities, if left unchanged, represent a major claim on the country’s future economic resources; they are not considered debt because laws can be changed to reduce their claim
  • Medicare and Medicaid payments per beneficiary have risen faster than social security payments due to rising healthcare costs and expanded coverage; Program beneficiaries have grown faster than population due to aging population and expanded coverages
  • Beneficiaries from aging population rose 2x from 1966 to 2009, but beneficiaries from expanded eligibility rose 10x
  • Entitlement income increases as personal savings decrease, causing the generalization that people seem to feel that they do not need to worry about saving money because they feel they can rely on the government to take care of them after retirement
  • Medicaid:
    • Expenses have increased 2x in the past 10 years:
      • Rising health care costs
      • Growing beneficiary & benefits
      • Moral hazard
  • Underfunded by $3.7 trillion over 45 years with no dedicated funding
  • Enrollment and annual payment per beneficiary have both increased
  • Medicare:
    • Half of Medicare is unfunded; Medicare is underfunded by $1.9 trillion over 45 years
    • Just like in Medicaid, enrollment and annual payments per beneficiary are increasing
    • General Health Care Payment Information:
      • Government healthcare spending up 7x as % of GDP over 5 decades
      • Medicare and Medicaid are 35% of total government Healthcare spending
      • USA per capita spending on healthcare is 3x the OECD’s average; USA spending on healthcare as % of GDP is 2x that of OECD average
      • Congressional Budget Office expects the most recent healthcare reform to reduce the budget deficit by $143 billion between 2010-2019
        • There are some problems with this estimate:
          • Excise taxes on sectors of the healthcare industry could be passed on to consumers as higher prices
          • Taxation of high premium employment-based health insurance plans in 2018
          • Relies on lawmakers to implement reimbursement reductions and Medicare savings
    • Opportunities for cost saving to consider:
      • Increased access to preventative health care, this is not captured in CBO scoring
      • Investments in information technology & new provider & consumer incentives can drive better and more efficient care
  • In 1965 the official estimate of Medicare costs per year was $500 million, the actual cost is currently 10x that
  • Unemployment benefits:
    • Cyclical, 29 of 49 years the Unemployment Insurance Trust Fund has had surpluses, but it hit a deficit in 2010
    • Benefits paid have high correlation with unemployment rate (70%)
    • Unemployment change has inverse relationship with GDP change, so an increase in GDP should decrease the unemployment rate
    • Structural problems in Labor force may lead to increased unemployment/prolonged duration
      • Healthcare costs could be a barrier to hiring for employers
      • A lot of long-term unemployed people lack requisite skills
      • Labor immobility because of housing bust could be a barrier to hiring
      • Social Security:
        • 1983 Reform caused sound financial statement from social security, but in 2009 resumed ‘operating loss’
        • Annual enrollment up 5x while annual payment per capita up 2x
        • When Social Security created in early 20th century, 1 in 127 Americans received payments, now 1 in 6 receive payments
        • The American population is aging and workers are required to support 5x more beneficiaries (this number is continuing to rise)
        • Basically, if left alone, unemployment insurance funding should improve as economic growth resumes, social security will no longer be self funded in 5-10 years, and Medicare and Medicaid underfunding will just get worse
        • Rising Debt Level and Interest Payments:
          • 3 determinants of interest payments:
            • Debt: 62% of GDP in 2010
            • Effective interest rates @ historic low of 2.2% in 2010
            • Maturity: shorter debt maturities imply less leverage to reduce future interest payments via inflation
            • Debt Level: highest (as % of GDP) since WWII
              • Why the debt level has risen:
                • Increased expenses (entitlement and one-time) that outgrew GDP à 11x to 3x
                • Revenue fell below GDP growth
                • Recessions and corporate tax accounting changes lead to revenue underperformance
                • Past social security surpluses have masked the debt & borrowing needs
  • Projected to rise 3x over next 2 decades
  • Why the debt level will continue to rise:
    • Social security trust fund surplus, Medicare trust fund surplus will turn into deficits with the aging population
    • Potential losses on guarantees on Fannie Mae/Freddie Mac originations could rise
    • Effective Interest Rates:
      • While the debt has risen, interest rates have fallen, so the cost of debt has been artificially low; while net debt has risen, net interest payments have fallen
      • USA Inc forecasts that entitlement spending and interest payments will exceed revenue by 2025; 10 years ago, CBO forecasted that the same wouldn’t happen until 2060, 35 years later than is now currently forecasted
      • Periodic Large One-Time Charges:
        • Because of the financial crisis, one-time charges were unusually high in F2009 and F2010
        • Recipients (F2008-F2011): Consumers, Government-Sponsored Enterprises (GSEs), Insurers/Other Financial Institutions, Automakers, Banks, Other
        • Real-Estate Bubble: government home-ownership push + declining interest & savings rates + aggressive borrowing and lending lead to 10+ years of increasing home ownership à home prices rose 2x in 10 years
          • Banks & other mortgage originators created lower quality mortgages; Alt-A and Subprime mortgages increased dramatically; investors reached for yield without considering AAA ratings of subprime-backed investments
            • Investors struggled with the ~4% risk-free rate when they need ~8% in order to fulfill promised payouts à therefore turn to riskier investments
            • TARP: Troubled Asset Relief Program (one-time charge)
              • Insurance Companies (AIG), Homeowners, Consumers & Small Businesses, Toxic Asset Holders, Banks, Automakers
              • Most banks have paid back their loans, most non-bank recipients have not
              • Fannie Mae/Freddie Mac (one-time charge) (GSEs)
                • Accounted for majority of total residential mortgage-backed securities
                • ARRA: American Recovery and Reinvestment Act (one-time charge)
                  • To create jobs and promote investment and consumer spending by cutting taxes, expanding unemployment insurance, and increasing spending in education, healthcare, infrastructure and industry
                  • Balance Sheet Drilldown:
                    • USA Inc net worth: $-44 trillion
                    • USA Inc total liabilities: $47 trillion, up 5x since 1995, driven by healthcare liabilities
                    • Unfunded promise of future entitlement spending up 6x
                    • Federal net debt outstanding more than doubled to $9 trillion due to chronic budget deficits, two major recessions in 2001 and 2008 and growing entitlement spending
                    • What Might a Turnaround Expert Consider:
                      • USA Inc’s revenue is highly correlated with GDP growth while USA Inc’s expenses are less correlated with GDP growth
                        • Expenses driven by government policy and demographic changes (entitlement programs), external threat levels and policy (defense programs), net debt level, interest rates and composition of debt maturity (net interest payments)
  • Total USA Inc revenue (collected via taxes) has grown at an average 3% rate
  • Social insurance taxes have risen to 37% of revenue
  • Entitlement spending has risen to 51% of total spending, while defense and non-defense discretionary spending and net interest payments (despite higher debt) are all falling
  • High-Level Thoughts on How to Turn Around USA Inc’s Financial Outlook:
    • Fundamental problem: negative cash flow
    • Three principles from Louis Gerstner:
      • 1. Do not impose “across the board” cost reductions: incremental investments in programs that drive innovation and higher productivity
      • 2. Focus on programs, not costs: restructure, cut, introduce programs
      • 3. Allow no exceptions: every unit of an organization needs to be rethought, although not every unit needs its costs cut
  • Unfunded entitlements and underfunded entitlement expenditures account for the largest long-term liabilities
  • Focus on Expenses:
    • Reform Entitlement Programs:
      • Restructure social security
        • Mathematically: increase retirement age from 67 to 73; decrease expenses permanently; increase social security tax rate (highlights of 1983 Social Security Reform)
        • Policy Options: changing tax codes; changing benefit formula; raise retirement age/lower cost –of-living adjustment
    • Medicare and Medicaid
      • Mathematically: reduce Medicare benefits or increase Medicare tax rate
      • Policy Options: combination of reducing Medicare benefits and increasing Medicare tax rate; isolate and address the drivers of rising healthcare costs
      • *powerful forces encourage spending related to social/economic/legal issues throughout the healthcare system
        • Social: growing and aging population and unhealthy lifestyles
          • *need to emphasize disease prevention and wellness and discourage unhealthy behavior and consumption
          • Economic: healthcare providers have financial incentives to perform more services and drive revenues while consumers have little incentive to manage incremental cost
          • Legal: rising overhead from defensive medicine (to avoid lawsuits) and from regulatory compliance costs
            • *Tort reform could save USA Inc  $54 billion over next 10 years
    • Economic Factors of Restructuring Medicare and Medicaid:
      • Cost-sharing – create incentives for consumers to shop for most cost-effective treatments
      • Reimbursement Reform to shift drivers of payment from quantity of care to quality
      • Improving cost and quality transparency so doctors and patients can make more informed decisions
      • Deploy cost-benefit analysis for medical technology spending
      • Focus on Operating Efficiency:
        • Government Cost Structure:
        • Review Wages & Benefits: a review should occur to analyze differences in private and public compensation
        • Review Government Pension Plans: most government employees enjoy guaranteed pension plans while this is increasingly rare in the private sector
        • Review Role of Unions: private sector union membership is lower than public sector
        • Review Cost Structure & Headcount: Federal government headcount grew while private sector headcount shrank; federal headcount is above trend-line level
          • government spending per household has risen steadily; federal spending per household has remained flat while entitlement programs, interest payments and one-time items rose 3x
            • Federal entitlement spending per household is half of all federal spending per household
  • Review Non-Core ‘Business’ for Out-Sourcing
    • Automate processes that would increase efficiency
    • Consolidate and/or locally outsource for scale efficiencies
    • Local outsourcing enables temporary agencies, which would be more cost effective because hiring full-time workers is costly and unnecessary
    • Focus on Revenues:
      • GDP growth is biggest supplier of federal revenue growth
      • High federal expenses can be covered by high federal revenue
      • Up until 2007, consumers were the biggest drivers for GDP growth – in 2007, wealth destruction and high unemployment
      • Drive Sustainable Economic Growth: productivity and employment growth
        • Invest in Technology/Infrastructure/Education, but even though these are the biggest drivers of labor productivity growth, USA Inc has decreased investments in these sectors and have increased investments in entitlement spending
        • Technology: improves communication efficiency and lowers the cost of providing goods and services à also drives significant wealth and job creation
        • Infrastructure: reduces transportation costs for input and output materials; public investment in infrastructure has helped drive GDP growth BUT USA Inc’s investment in infrastructure has slowly been declining which is leading to deteriorating infrastructure
        • Education: improves general labor quality and enables specialization for more efficiency; government spending on education has increased steadily, but government spending on healthcare has always been greater; education levels are falling behind
        • Increase/Improve Employment:
          • The deficit problem is exacerbated by the business cycle
            • A stagnant or declining job market means lower income (via tax revenue) and higher outlays (via entitlement expenses) for USA Inc (unemployment = decrease tax revenues + increase entitlement spending)
  • There are short term and medium/long term policy options, examples of which include employment tax credit and  reduce employer health care costs respectively
  • Structural problems preventing an increase in employment:
    • Healthcare costs are a barrier to hiring for employers
    • Skills mismatch are a barrier to hiring for employers
    • Labor immobility resulting from the housing bust is a barrier to hiring for employers
  • *Immigration does not take away jobs in the US, and can lead to a higher income per worker and higher productivity
  • Improve Competitiveness – US is losing its competitive edge because of decreasing investments in technology, infrastructure, education and employment
    • USA’s share in global GDP decreasing
    • Consider Changing Tax Policies:
      • Across-the-board tax rate increases would be need to potentially generate meaningful revenue improvements
      • Review Tax Rates
        • There are both pros and cons to hiking tax rates, while the cons seem to be more important than the pros
        • Reduce Subsidies/Tax Expenditures/Broaden Tax Base:
          • There are important trade-offs that need to be considered
          • Despite adjustment costs, reducing subsidies and ‘tax expenditures’ could broaden the tax base and collect more revenue, while allowing income tax rates to stay low or go lower.
            • There are several options to consider, including a carbon tax, which would increase environmentally sustainable economic development
            • Subsidies and tax expenditures account for 70% of USA Inc’s cash flow deficit
  • Negative national savings, increased personal consumption
  • Consequences of Inaction:
    • USA Inc’s finances are challenged and we need to increase investments in productive sectors as opposed to less-productive sectors
    • Short Term, No Immediate Problems Yet: Global bond investors, in part, have looked past USA Inc’s deteriorating financials because growth, inflation and Fed purchases matter more and because USA Inc is doing better than other developed countries (Greece, Spain, Portugal and Ireland)
      • USA is in middle of the pack with debt as % of GDP and in terms of net worth.
      • Because the US dollar has high status with global foreign exchange reserves, investors will, for now, still prefer USA’s debt.
  • Long Term, Problems will arise: if rising unfunded entitlement spending continues to be ignored, investors could eventually demand a higher return to lend money to the US, leading to rising bond yields and higher borrowing costs for the country.  In addition, the dollar could weaken significantly.
  • It is now cheaper for some private firms to borrow than for the US government to borrow


[1] Kleiner, Perkins, Caufield and Buyers: http://www.kpcb.com/usainc/

[2] Title II, Subtitle A, Sec. 2001 of H.R. 3590, the “Patient Protection Affordable Care Act.”

[3] Title IX, Subtitle A, Sec. 9001-9017 of H.R. 3590, the “Patient Protection and Affordable Care Act.”

[4] Joint Committee on Taxation. “Estimated Revenue Effects of the Amendment in the Nature of a Substitute to H.R. 4872, The “Reconciliation Act of 2010,” As Amended and in Combination with the Revenue Effects of H.R. 3590, The “Patient Protection and Affordable Care Act”

 

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