Henes: The Restructuring of the U.S. — Failure is Not an Option(4)

For all intents and purposes, the deficit reduction committee failed. This weekend, the committee emerged from its closed door sessions and made it abundantly clear that nothing has changed since this summer. Rather than developing a true restructuring plan for the U.S. to leave it poised for long-term economic growth, the committee continued to point fingers and demonstrate a lack of seriousness in tackling the real economic issues we face.

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The U.S. needs a massive restructuring, but thus far the restructuring process has failed. It’s time for our political leaders to stop playing games and focus on the task at hand – restructuring the U.S.

The problems we face are not hugely complex. And we’ve already seen a workable plan (Simpson-Bowles). Let's simplify and break down the problems.

To begin, the U.S. spends more than it collects in taxes. This creates a deficit. To fill the hole, we borrow. When the financial crisis hit, we borrowed even more. Currently, we have too much debt  . In addition to the deficit and too much debt, our entitlement system is unsustainable. One of the most important entitlements, social security, is on the verge of insolvency.

We know the problems. We also know the solutions. If we take politics out of the process, we can consummate a successful restructuring plan. In doing so, we should establish four rules:

1. Government spending is not bad, but wasteful spending is bad for the economy;
2. Taxes are not bad, but over-taxation is bad for the economy;
3. Debt is not bad, but too much debt is bad for the economy; and
4. Social security and medicare are not bad, but failing to reform them is bad for the economy.

To consummate a restructuring plan, we need to be honest -- the government will continue to spend, citizens will continue to pay taxes, the U.S. will continue to issue treasury bonds and social security and medicare need to be maintained. With these four rules in mind, the real issues are how much should the U.S. spend, how should the U.S. raise revenue through taxation or tax reform, how much money should the U.S. borrow and how should social security and medicare be reformed and saved? Of course there are other issues, but these are the big four.

Jonathan HenesKirkland & Ellis LLP

The process to make these decisions is similar to the process employed by distressed companies. When faced with financial distress, companies analyze their costs and determine which costs are necessary and which are wasteful. They analyze their businesses – separating core from non-core - and their revenue generating ability. Based on these analyses, they project future revenue growth and projected free cash flow. With projected free cash flow, they are able to determine their capacity for debt. To complete the picture, they analyze their legacy liabilities, including unfunded employee and retiree obligations, to determine their sustainability and needed reforms. After completing this work, they prepare, a business plan and, with the business plan in hand, they negotiate a restructuring plan with their stakeholders.

If their businesses need additional money, they may ask stakeholders or others to make an investment. With the business plan prepared and restructuring plan ready to be implemented, stakeholders can determine whether an investment makes economic sense. Once the restructuring plan is consummated, corporations with their reduced costs, restructured balance sheets, focused efforts on their core businesses and reformed entitlement programs are ready to grow and compete.