What Might a Turnaround Expert—
Empowered to Improve USA Inc.’s Financials—Consider?
Pau bs www.kpcb.com USA Inc. | What Might a Turnaround Expert Consider? 221
First, Examine USA Inc. Key Drivers of Revenue & Expenses...
e USA Inc.'s Revenue = Highly Correlated (83%) with GDP Growth*
— 90% of USA Inc.'s 2010 revenue derived from taxing individual and corporate income, which depends on GDP growth and changes to tax rates / composition.
e USA Inc.'s Expenses = Less (73%) Correlated with GDP Growth* — Entitlement Programs = 57% of USA Inc.'s expenses in 2010 e driven by government policy + demographic changes ~ Defense Programs = 20% of expenses e driven by external threat levels and policy — Net Interest Payments = 6% of expenses e driven by net debt level + interest rates + composition of debt maturity
Observation: while revenue is highly correlated with GDP growth, expenses are less so.
Note: *Historical inflation-adjusted correlation between GDP and revenue / expense Y/Y growth rates from 1940 to 2010, GDP / revenue
adjusted using GDP deflator; expenses adjusted using White House OMB’s composite outlay deflator. Nominal revenue / GDP correlation
K P| over the same period is 84%; expense / GDP correlation is 71%. Data source: White House Office of Management & Budget, CBO. CB www.kpcb.com USA Inc. | What Might a Turnaround Expert Consider? 222
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