A Turnaround Strategy for the Federal Government
I think many, if not most, will agree that current market volatility may be attributed at least in part to the growing instability and lack of direction exhibited by the US federal government. One question that continues to come into my head is why policy wonks, administration leaders, and Congress don't look to the history of corporate turnarounds for some ideas to help kick-start the economy and clean-up the federal government's balance sheet. Sure it's not an apples-to-apples comparison, but I submit that the process would be a step in the right direction.
Corporate turnarounds are no rare beast in the financial world, so let's take a look at applying the philosphy to the federal government model. As I see it the problem is twofold: insufficient cash flow and an overlevered balance sheet. Let's first attack the problem of insufficient cash flow.
A corporation faced with the same scenario would work to adopt a strategy that raised revenue/sales, improved margins on those sale, and cut costs of SG&A (Selling, General, & Administrative Expenses) in order to improve its net margin and thus increase its operating cash flow. The corporation would also look to make only those capital investments which generated sizable ROI (thus improving its cash flow from investing activities) and would either elect not to increase or even decrease its dividend (improving its )cash flow from financing activities. Taking such measures would allow the company to retire the principal balance on its debts (again improving cash flow from financing activities by reducing interest service) and increase its total assets, which would increase tangible book value. If the company were to accomplish all of these activities without issuing new shares and thus increasing total shares outstanding, investors would see share price rise. If new shares were printed during this process then book value per share would not increase and thus shareholders would not benefit from the improved health of the company.
I think that such measures can be applied to a great degree to the federal government model in a productive manner. A slight rise in certain tax rates (like a partial repeal of the Bush-era tax cuts) coupled with targeted capital spending on domestic infrastructure improvements (think ROI from the payroll taxes, income taxes, and sales taxes from these projects) will raise additional revenues. Reducing spending in some of the largest departments of the government (Defense, Health & Human Services, Labor, Education, VA, and Agriculture) will improve the margin by reducing SG&A. Elimination of capital spending where ROI doesn't exceed the cost of capital (just use the 10 year Treasury as a benchmark) will reduce investing expenses. Freezing or even slightly reducing Social Security and Medicare/Medicaid ('dividends' if you will) will lower financing expenses. The net effect will be an improvement in the asset base (the infrastructure and businesses which comprise the economy) and increased cash flow to reduce the principal balance of total debt, which will in turn have a secondary benefit of reducing interest service. The 'book value' of the US can only rise in this scenario.
The only anxiety I have involves 'dilution of book value per share'. And in the context of the federal government I mean specifically the value of the dollar. It is entirely feasible for the government (and voters, for that matter) to forego the previous changes and opt to retire the national debt by printing money, which is akin to a company issuing additional shares of stock. When company's do this its the shareholders who lose, at least in the short-term. And shareholders in the USA will lose if the Treasury turns-on the presses, because inflation will be the byproduct.
Corporate turnarounds are difficult in the best of circumstances. A turnaround of the largest national government in history (and its balance sheet) in troubled times will be an order of magnitude greater in difficulty. But as a value investor at heart I opt for our country to accept and endure the short-term pain of such improvement in operations rather than the real possiblility long-term dilution of value as a shareholder.