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How to Grow USA, Inc...
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October 14, 2016
How to Grow USA, Inc.
Election fears dragged markets lower on the week.  While the markets had already conceded the White House to Hillary, it had not contemplated handing her Congress as well.  Trump’s latest political spasm and resultant conflict with Paul Ryan led to legislative “what if” trading on Wall Street.  Healthcare, industrials, banks and natural resource names suffered most while consumer names suffered least.  To date, markets had largely resisted politicized trading as gridlock seemed assured.  With gridlock now unassured (but still largely probable) election events will become market events until the madness ends on November 8th.    
Since I am losing my taste for democracy by the minute, based upon campaign shenanigans, let’s walk through a thought experiment where we devise a business plan for the country as if it were a corporation.  Referring back to my favorite business quote “once you have all the facts, the strategies will pop out at you,” lets drop the rhetoric and dive into the data:
Demographics:
Good news.  Unlike many countries losing population and/or labor force, the United States is blessed with a rising population and a growing labor force.  Since people are the pistons in economic engines, the faster a labor force grows, the faster an economy grows.  Unfortunately, within the US, our indigenous population growth has largely stagnated.  Therefore, our immigration rate highly influences our population and labor force growth rate.  As with any corporation, the growth of USA, Inc. requires recruiting a growing and productive workforce.  Simplistically, recapturing a 1% labor force growth rate would require welcoming well over 1 million new Americans annually.
Economic Drivers:
Bad news.  After growing near 3% for decades, the US economy has structurally downshifted to about 1.5%.  In fact, nominal growth (non-inflation adjusted) sits at levels neighboring recessions.  Since economic growth simply combines people and their productivity let’s investigate our productivity trends.  
Productivity growth in the USA has collapsed from a post-war average growth rate of 2% to just .5% today.  Since growth in fixed investment (property, plant and equipment) powers growth in productivity, perhaps Americans are underinvesting.  Isolating business investment as a percentage of GDP validates this concern (see lead graphic).  In fact, compared with other developed nations, we have the lowest rate of new investment per unit of GDP.  Business investment, as a percentage of GDP, fluctuated above and below 5% between WWII and the year 2000.  Since then, investment has struggled to retain 3%, falling recently below 2%.  With investment in relative decline, slippage in productivity makes sense.  But with population, investment and productivity languishing, how do we grow?
Clearly, from the current data above, household consumption increasingly powers our economy.  During our economic growth heydays of the 1950s and 1960s, household consumption comprised about 60% of our economy.  Today, consumption accounts for more than 70% of GDP, enhanced by decreased savings, consumer credit vehicles and tax incentives.  In fact, across the developed world only Greece has a higher consumption rate than we do.  Combine our over-consumption with our under-investment, and the USA actually ranks last in the developed world with a consumption to investment ratio of 4.5 to 1. 
However, it’s not just the consumer crowding out investment, as the government has been gaining economic share as well.  In 1950, total government spending across Federal, State and Municipal entities approximated 20% of the economy.  Today, that number has bulged toward 40%.  By rule, as consumer spending and government spending increase economic share, economic share for trade and investment declines.  Unfortunately, without trade and investment to finance the expansion of consumer and government spending, the economy relies too heavily on debt.   
You Get What You Tax For
Based upon the numbers, the USA economy needs to rebalance away from consumption and government dependency towards productivity and trade-enhancing investments.  Setting budget priorities around these objectives requires incentivizing desirable attributes and dis-incentivizing undesirable ones.  
According to developed country comparisons, the USA derives 18% of revenue from consumption taxes versus an average of 33%.  Alternatively, personal and business income taxes account for 38% of US tax receipts versus 24.5% for our peer group.  Clearly, in comparison, the US tax structure tilts in favor of consumption.  Unfortunately, tax research shows that business and capital gains taxes are much more punitive for economic growth than consumption taxes.   As such, a rotation away from taxing income and investment would better align our tax structure with our desired outcomes.  Importantly, and fortunately, at 26% overall, US tax burdens…while climbing…are still about 8% lower than our developed world peers.  Obviously, lowering the level and reducing burdens on income and investment would be most stimulative, while raising the burdens on income and investment would be the least stimulative.  
More Markets mean More Opportunity
Opening boarders to trade and investment allows for greater mobility of goods, services, people and ideas worldwide.  While there are 320 million people in the United States, there are about 7 billion people outside the United States.  Apple, the largest company in the US by far, derives 63% of its revenues offshore.  Conversations around trade restrictions, tariffs and subsidies simply lead to less trade, less prosperity and more political balkanization.  As a company, America would never restrict market access.  Trying to manage our economic competitiveness through erecting gates, turnstiles, and tunnels to world markets only hurts the US consumer, delays industry rationalization, and delays our national economic evolution.   
Bottom Line:  By incorporating the USA and doing away with the political process, a data-driven CEO would welcome productive immigration, promote frictionless trade, and rebalance the tax code towards stimulating investment activities rather than consumption activities.   Unlocking economic growth would boost government tax receipts and provide capacity to rationalize, and more fully fund, health and pension commitments.  Furthermore, a twist toward investment might revive government R&D and infrastructure spending.  Would fixing the economy fix America?  No, but as one of my favorite business school professors famously preached…”more sales usually means fewer problems.” 
Have a Great Weekend! 
David S. Waddell
CEO, Chief Investment Strategist

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This communication and its content are for informational and educational purposes only and should not be used as the basis for any investment decision. The information contained herein is based on publicly available sources believed to be reliable but not a representation, expressed or implied, as to its accuracy, completeness or correctness.

Sources include Bank of Japan, US Federal Reserve, Bespoke, Bloomberg
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