I had the opportunity to give my Building an iPhone Business presentation to a group of graduate entrepreneurship students a few weeks ago. It was a lot of fun and they are a bunch of smart people. They quickly understood the problems and formulated solutions. There was a lot blue sky there, which I expected, but they didn’t miss anything major either.

In the middle of class the professors and I deserted the class and went out to dinner. It was a pretty heavy hitting group. Melissa Appleyard is well published and was taught by some outstanding Economics professors at Berkley; Wilf Pinfold is director of Extreme Scale Programs at Intel and has been chair of the Supercomputer Conference; and Bill Newman, an MIT graduate and a very well respected local venture capitalist. We got into a fascinating conversation about U.S. world dominance, economic success and the future.

I constantly find that my opinion is contrarian when it comes to long-term economics and I thought it might spark a conversation here. It seems like the main opinion in the United States is that US economic dominance is a thing of the past, soon to be surplanted by China and India.

The problems are well documented: too much debt, too little investment in education, corrupt or incompetitent leadership, foreign students going home after graduate school, relatively small population. I’m sure I missed a dozen reasons why we have reached our economic peak and falling off that I haven’t mentioned.

It’s fairly clear how we became dominant. After World War II we were pretty much the only market-oriented country standing. Europe was a mess. The Soviet Union was focused on communism. China was focused inward. We had all the money to lend and the industrial complex to support it.

But our advantage has disintegrated as outlined above. And most seem to think that that deterioration is about to escalate. I’m not convinced.

There are a number of world events that are working in our favor:

• We are a resource-rich nation. In the future I think it will be important for us to supply our own natural resources, whether for power and transportation or for building and construction. Few countries in the world have the same advantages.
• We have a reasonable number of mouth’s to feed. I’d hate to be China or India, trying to figure out how to handle 4.5 billion people. I think this will dampen growth over time.
• As costs to transport goods becomes a major factor with increasing oil costs, I believe more manufacturing will come back to the US. The price gap between manufacturing in China and paying transportation costs and manufacturing in the US with none will close.
• If we can figure out how to manage costs through the baby boomer retirement years — not a given — we will come out the other side with a younger and more balanced work force.

Do we have major problems? Of course. But everyone does. In my opinion, the biggest problem is managing the triple whammy of health care costs, social security insolvency, and mounting debt.

But if we can find our way through that problem, I think we’ll be in pretty good shape.

And as I said at that dinner to conclude my comments… what do I know? I’m an entrepreneur and by nature entrepreneurs are optimists. On the other hand, when everyone says the sky is falling, it’s most definitely not.

As I head out the door for a week and a half away, I thought I would espouse in short bursts on the macro economic issues facing all of us. (My grandparents are celebrating their 70th wedding anniversary next weekend so thought it would be a good chance to spend a week with family.)

• Interesting piece of data: the financial sector of the economy now entails 8% of GDP, up from 4% in 1960. Scary thought, actually, that something that creates nothing is almost 1/10 of the entire U.S. economy.
• Do I know if Secretary Geithner’s plan for these toxic assets will work? No. I have no clue. It seems like the latest gambit in a long list of “the last thing didn’t work, so let’s try something new.”
• Of course, this isn’t new at all. From what I’ve read, it’s pretty close to the same way the Savings and Loan situation was handled almost two decades ago.
• There’s been a lot of consternation over regulation. It’s a giant pendulum, isn’t it? First we have too much regulation so we de-regulate. Then we have too little regulation so we regulate. The pendulum is swinging back the other way now, from too little.
• I’m no fan of big government and I’m no fan of regulation. But it strikes me that the ONLY thing that makes a capitalist society work is regulation. What happens when the banks lie about their holdings? What happens when investments tell tall tails about their potential returns? What happens when big companies can hide assets “off the books”? Regulation is the only thing that keeps these companies honest. If Balance Sheet for Company A is built different than for Company B, then how can we make smart investment decisions?
• I’m a big fan of regulation when it ensures competition and transparency. Enron and Worldcom were huge breakdowns in transparency. The same is true of today’s crisis. A major problem with these securitized debt instruments is that no one can tell how they were built. Not very transparent.
• And as for hedge funds and the like whining about being regulated. Shut up. You shouldn’t be above the law either.

One final thought: there are an awful lot of people who are saying the U.S. will never be the same. I’m counting on it. The beauty of this country is that we evolve, we become stronger for what we have learned rather than tearing down and starting over.

We’ll recover, just as we did in the 1890s and 1930s and 1960s and 1982 and in 2002.

The economy stinks everywhere (unless you sell Big Mac’s). The U.S.’ GDP shrank by over 6% last quarter, getting worse. Unemployment is spiking, 10% here in Oregon. Pretty much every state government is looking to make massive services cuts and our federal government is spending money like it grows on trees, almost $2 trillion dollars in debt this year alone, which just makes me quizzy.

So… ya…. this is a pep talk.

We need to see the forest through the trees. We will see the other end of this mess.

When things are at their worst, that’s the easiest time to be down. It’s the easiest time to give up.

And I want to remind you (and me) that ALL businesses fail  — that’s 100%, folks — because the founders/owners/managers stopped.

Keep fighting. Keep moving forward, even when you get knocked back. Keep experimenting. And keep coming back to work the next day.

I know my articles have been vaguely political lately, or at least it is political issues inspiring me to write. I have this odd personal mix of social libertarianism and fiscal conservatism that I find fits poorly into our two party system. So I keep trying to make sense of the issues facing our country and struggle with a decision about who is right to run our country at what feels like a very critical juncture.

Pertaining to the economy, I finally got it, partly from the debate last night and partly from a Fareed Zakaria Newsweek article. If we think of the government as a business, then we need to think in terms of total revenues and cash flow. Total revenues is the same as GDP; cash flow is our budget deficit. As in any business, there are two ways to grow a business: we either cut costs or grow revenues. The idea behind cutting costs is that we can trim fat from the budget and thus make the business more profitable. The idea behind growing revenues is that if we invest in the business we can grow revenues faster than expenses and thus become more profitable.

GDP (Revenue) Growth
1993-2000: grew $2,280B (that’s $2.3 trillion dollars, 29.7% total)
2001-2008: grew $1,930B (18.8% total,estimated 2008 numbers)

Budget Deficit (Cash Flow) Growth
1993-2000: grew -$320B
2001-2008: grew -$2,000B

So why did 2001-8 explode the national debt? Our economy grew slower (we took in less revenues) and we spent more. And why did 1993-2000 work out well for our country’s cash flow? Because our economy grew while we cut expenses. 2001-8’s spending spree would be fine if we were investing in the future, but I don’t think anyone feels that way these days (with the possible exception of the “War on Terror,”  which can be viewed as an investment in our future).

As all of us who run businesses know, there is a time for cutting costs and a time for growing revenues (hopefully you are doing both at the same time but I don’t think that generally happens. The goal should actually be to increase revenues faster than we increase expenses). Senators McCain and Obama are presenting opposite approaches to this fundamental question. Senator McCain has a ‘cut fat to control costs’ perspective: spending freeze, move education and health care off the federal books, investment in US energy production. Senator Obama has an ‘invest to grow revenue’ perspective: invest in education, US energy production and health care (a competitive issue for US businesses and a sap of potential better uses of our revenue dollars), using a scalple instead of a hatchet on costs.

There is no doubt that investment has worked at times. Our economic success in the 1960s to 1990s (I try to forget about the 70s) has been built on the backs of huge government outlays in the 1930s (electricity) and 1950s (roads) coupled with private investment in technology (1980s-1990s). The question for election day: is it time to invest to grow revenues or is it time to cut expenses?