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Drilldown on USA Inc. Financials... e 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’ 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 worth2 is negative $44 trillion (or -$371,000 per household). e 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 $71 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*® — 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. 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) www.kpcb.com USA Inc. | Introduction 15 ...Drilldown on USA Inc. Financials... e 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. e 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). e 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). KP a USA Inc. | Introduction 16 HOUSE_OVERSIGHT_020849