Private-equity solutions for USA Inc.

By Farah Stockman

Last week, my friend Andy, a hedge-fund guru, sent me a memo titled "Three Steps to Fiscal Solvency." It was based on the premise that if America were a company, it would be in pretty bad shape. We spend far more than we take in. Our liabilities are mounting. Our assets are pretty much flat.

Andy got rich thinking outside the box. So I wasn't entirely surprised to see his list of things that Republican presidential candidate Mitt Romney - who made his fortune in private equity - might do to improve America's bottom line.

"Private equity increases value by having companies get rid of their money-losing divisions," he explained. "So Step One is: Give Puerto Rico independence. Measured on a per capita basis, only New Mexico loses us more money than Puerto Rico. So why not spin off San Juan? Sure, some Puerto Ricans might complain. ... But so what? A business can't fall in love with its assets.

"Step Two: Let the Confederacy secede. Southern states get far more than they contribute in taxes. They already asked to secede. We are just agreeing. Of course, they would still be liable for their share of the national debt.

"Step Three: Sell Alaska. It would fetch an excellent price. China or Russia, who don't have to put up with pesky environmentalists, would pay top dollar."

Andy's modest proposal was funny. But it was also thought-provoking. How bad would America's ledgers look if we really were a company? And what could a CEO do to turn it around?

Mary Meeker, a legendary venture capitalist, studied that question. Her 2011 report "USA Inc." crunched balance sheets spanning a century. The result is alarming.

Although USA Inc. constitutes the world's biggest business - with excellent brand recognition - we have only posted a profit in four of the last 42 years, at the end of the Clinton era. And we have lots of new competitors who invest far more than we do per capita on infrastructure and research and development.

It may be tempting to blame our finances on Bush's tax cuts and his war in Iraq, or Obama's stimulus. But the problems facing USA Inc. go back to 1965. That was when Congress created Medicare to give health care to the elderly and Medicaid for the poor and disabled, Meeker writes.

These programs began small, but they were politically popular, so they kept expanding. Yet no one wanted to fund them. Spending on Medicare has more than doubled over the last decade, to $450 billion in 2010, while revenues only rose to $180 billion. Medicaid spending nearly tripled, to $273 billion. But Congress never bothered to dedicate an income stream to it.

Now these two programs take up 22 percent of the federal budget, about the same as defense. Without them, USA Inc. would pretty much break even.

It would be one thing if all this investment actually bought us health. It hasn't. We still get mediocre grades on obesity, life expectancy, and infant mortality. A third of Medicare spending is on the final year of life.

Only time will tell whether Obama's health-care law will get spending under control or push it to more dizzying heights. Politics might dictate that the unpopular taxes created to fund it be stripped away, leaving only popular, unfunded benefits.

A good CEO would have to stop that and find ways to encourage everyone in the system to tame costs. A good CEO would examine every line item for ways to cut costs and raise revenue. He or she would not take anything that could help - like higher taxes - off the table.

I called up Andy and asked: "Seriously, what would you do if you were CEO of USA Inc.?"

"Well, you could sell the interstate highway system."

I waited for the punch line. But he went on.

"Highways are a lot easier to regulate than health care," he said. "And they are worth a lot of money."