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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-F2014E 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%

CBO's Baseline Real GDP Growth vs. Required Real GDP Growth for a Balanced Budget Between F2011E and F2020E

8%
6%
4%
2%
0%
-2%
-4%
Real GDP Y/Y Growth (%)
2009
2011E
2013E
2015E
2017E
2019E

— Real GDP Annual Growth (CBO Baseline Forecast)
— Real GDP Annual Growth Needed to Eliminate Fiscal Deficit
— - 1970-2009 Average Real GDP Growth

KP
CB www.kpcb.com
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.

KP
CB www.kpcb.com
USA Inc. xvi

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