Discovery

april 2010 THE QUARTERLY NEWSLETTER OF KOCH COMPANIES FHR: a vision for innovation Flint Hills Resources is not the only Given these challenges, FHR’s manage- FHR is one of the few Koch companies private refining and chemical company ment team believed the company needed of significant size without much of an in the United States with several decades an updated vision that would drive international presence. “We process of refining experience. innovation and emphasize flexibility for lots of imported feedstock, but our It is unique, however, in its commit- it to react quickly and profitably to this focus has been on optimizing and oper- ment to Market-Based Management® ever-changing landscape. ating assets in the United States. That needs to change,” Razook said. and its ability to succeed during dif- “Create, sustain and continuously improve ficult times. long-term competitively advantaged Thrive, not just survive In 2009, a year when many U.S. petro- businesses that generate superior returns.” Several FHR leaders, including chemical companies lost hundreds of Razook, have been hitting the road millions of dollars, Flint Hills Resources - From FHR’s vision statement (photo above) so they can speak remained profitable. directly to employees about the com- Thanks to its comparative and competi- “We needed to rethink our vision in a pany’s new vision. The essence of their tive advantages, FHR has been able to way that allowed us to have competitively message is simple and straightforward: grow and succeed despite the brutal advantaged businesses for the long term. “We need to sustain and boom-and-bust cycles of the petro- “At the same time, we would never continuously improve . change our commitment to our MBM® those businesses that have Even so, FHR is focused not on what it Guiding Principles, especially 10,000 a competitive advantage has accomplished in the past, but what it percent compliance.” and can do well over a must accomplish in the future. New vision long period of time, and Challenges we need to create new Flint Hills Resources’ vision, which business opportunities Brad Razook, president of FHR, believes focused on growth when last updated in that can do the same,” 2006, now adds an emphasis on innova- the company has entered one of the most Razook said. challenging periods in its history. tion and aggressively pursuing more “To achieve that, we need “There’s no doubt that our industry as global opportunities. to innovate more and think FHR has been recognized a whole is facing serious challenges,” “We want to innovate in at least two as one of the “World’s more globally, but never Razook said. “Markets are changing ways,” Razook explained. “The first is Most Ethical Companies” waver from our commit- and domestic demand for our products in optimizing traditional three years in a row. ment to integrity, compli- is down significantly. chemicals and refined products. But we ethisphere.com/wme2010 ance and our MBM® culture. “On top of that, there is a lot of political also need to look for new opportunities “That sounds easy, but I assure you, it and regulatory uncertainty. Any num- in new or emerging markets, such as ber of proposals – including emissions renewable fuels. requires considerable effort. trading systems, regula- “That will help us to protect and en- “Every one of our employees, myself tions, low-carbon or renewable fuel hance our competitive position while included, has an important role to play standards, and green chemistry – could also positioning us to take advantage of in building our future by making this dramatically reshape our business.” step-out opportunities,” he said. vision a reality,” he said. www.fhr.com

this issue… Koch goes global pg 3 Top product for 2009 pg 6 leaders pg 4 Perspective: Steve Feilmeier pg 8 Postal Pipeline

Letters may be edited for length or clarity I am ashamed that my former organi- zation [, which released a report criticizing KII on March 30] is harassing you in such an abusive manner. I long ago left Greenpeace when I real- ized I could no longer influence their science policy even though I was the only International Director with any formal science education. My small firm, Greenspirit Strategies, is Friends and family now have an easy way to access market-based perspectives on public policy issues important to dedicated to developing an alternative Koch companies and all of us as employees. Just visit www.kochind.com and click on Viewpoint. Employees will environmental policy platform based find even more information at http://kcief.khc.local/. on science and logic. Conservancy’s recent effort to bring in On behalf of WSU, I want to express We do not believe there is any cause for the bison from South Dakota. our gratitude for Koch companies’ alarmism about the earth’s climate and Thank you for all you and the Founda- recent contribution to support the we are skeptical about the assertion that tion have done to help the Tallgrass global warming is caused by human activity. Science Olympiad. Park. You are a tremendous asset for The generosity Koch has provided this We work with a wide range of compa- Kansas with the support you provide for nies and industry associations in energy, so many worthy projects and programs. program is greatly appreciated, and your agriculture, forestry, mining, fisheries and dedication to our young people and Dolph C. Simons, Jr., publisher chemicals. their future is beyond measure. Lawrence Journal-World Even though one of our aims is to reduce Lawrence, Kan. Again, thank you for all you do for the dependency on fossil fuels, we are well university and our students. aware of the important role they play, and will continue to play, in supporting our On behalf of the Mendota Heights and Donald L. Beggs, president civilization. West St. Paul Police Departments, we Wichita State University would like to thank you for giving your Wichita, Kan. Patrick Moore, Ph.D. time to make our Citizen’s Police Acad- Chairman and chief scientist emy a success. Greenspirit Strategies Ltd. We very much appreciate the Founda- Vancouver, British Columbia Our students really enjoyed their experi- tion’s grant of $76,000 to continue our ence at Flint Hills Resources. Your pas- education programs. sion for your work and the facility This grant will be allocated to two profes- really shines through. sional teacher seminars in spring and fall We look forward to coming to this year, a Saturday Academy, and a com- FHR again next year. munity forum with an eminent historian. Brian Convery We thank you for your confidence in us John Hinderscheid and your increased support. Citizen Police Academy Mary Caslin Ross, executive consultant West St. Paul, Minn. The Gilder Lehrman Institute of American History Thank you for your participation New York, N.Y. and for helping sponsor the Wild- life Habitat Council’s 21st Annual Symposium. Discovery April 2010 | Volume 16 | Number 2 Editorial Board Questions? Comments? I received a Christmas card from Koch Your support greatly contributed toward Philip Ellender Contact: Rod Learned with a great picture of several bison on the excitement and success of this Rich Fink 316.828.6136 Jeff Gentry [email protected] the front of the card. member-driven event. Dale Gibbens Mary Beth Jarvis Publication Design: I have been particularly interested in Jared Mott Deanna Bauman Jim Mahoney Koch Creative Group the Tallgrass Prairie National Preserve Wildlife Habitat Council Dave Robertson for many years, and in the Nature Silver Spring, Md. www.kochind.com ©2010, , Inc. Koch is an EOE. M/F/D/V 2 International News

Geelong - Koch Fertilizer has leased a large storage Ariake - This Japanese-built reactor was recently installed at Flint Hills Resources’ Corpus Christi, , refinery. FHR will soon facility at this Australian port. be able to upgrade high-sulfur diesel to ultra-low-sulfur diesel as well as handle additional feedstocks.

Australia – Koch Fertilizer’s global Across the equator in Brazil, Koch Japan – A Japanese-built reactor is now expansion plans have taken a major step Fertilizer and Rocha TOP are building part of a new diesel desulfurization unit at forward with the announcement of four a warehouse facility in Paranagua where FHR’s West Plant in Corpus Christi, Texas. new projects in Latin America, Europe Koch Fertilizer will have 57,000 metric The enormous reactor was built at the and Australia. tons of dedicated storage space for urea. Hitachi-Zosen Ariake Works. It weighs These projects follow on the heels of an Construction on that project should be about 347 metric tons and is 100 feet long. complete early next year. announcement earlier this year involving It was shipped from Ariake to Shimono- a Koch Fertilizer facility in Sète, . And in the U.K., Koch Fertilizer and the seki, Japan, where it was transferred onto “We’re assembling a truly global, deep- Bristol Port Co. have agreed to more a merchant vessel. water terminal network,” explained Steve than triple the storage space of an exist- ing fertilizer facility in Avonmouth. Getting the reactor across the Pacific Packebush, president of Koch Fertilizer. was a multi-national effort. The vessel “This will allow us to meet different kinds When completed later this year, that for this voyage, the Leopold Staff, is of demand throughout the year and expansion will include new blending co-owned by the Chinese and Polish greatly diversify our product offerings.” facilities, electronic weighbridge systems governments. and computerized product handling. Koch Fertilizer has traditionally focused It took five weeks to ship the reactor across on the North American market, where “Thanks to all of this,” Packebush said, the Pacific, through the Panama Canal and demand is highly seasonal and the range “we believe our terminal distribution up to the Gulf Coast. system will be one of the largest and of products is fairly narrow. Meanwhile, 13 different modules are most diverse in the world.” “Growing sugar cane or rice often being fitted together to complete a new requires a different kind of fertilizer United Kingdom – Koch Energy Europe 130-ton-per-day sulfur recovery unit at and distribution network than growing Limited is now trading , FHR’s West Plant. power and emissions in Europe. wheat or corn,” Packebush noted. The largest module in that project, part of “To become a truly global fertilizer com- The company, a Koch Supply & Trading an expansion costing more than $250 mil- pany, we had to broaden our horizons subsidiary, commenced trading the first lion, weighs 390 tons and measures 123 and embrace a lot of changes.” of March. feet long by 40 feet wide and 30 feet high. In Australia, Koch Fertilizer has leased a Irfan Mannan is director of the new These SRU components were built in 150,000-ton storage facility in Geelong company as well as Koch Beaumont, Texas, and sent to Corpus and opened an office in Melbourne. Europe, Ltd., which is the contracting Christi via barge. The company is also working with company and counterparty to all its trades. “We are pleased with how this project Graincorp, owner of the Geelong facil- “This is all about growth,” Mannan said. is coming together,” said Kurt Wart- ity, to develop dry fertilizer loading and “We will continue to work with our enbach, venture execution director for distribution facilities in Victoria and existing trading partners, but we’re also FHR. “Despite their enormous size, the New South Wales. looking forward to new relationships as modules are fitting together well.” In Topolobampo, Mexico, the company we expand this business.” This massive construction project began is expanding a 25,000-ton urea stor- KS&T has a long history of trading in last June. When completed later this age facility to better serve customers London. It also maintains offices in year, it will enable FHR’s Texas refinery in Northwest Mexico. Construction Geneva, Switzerland, and owns a refin- to produce much-needed ultra-low- should be completed this fall. ery in Rotterdam, the Netherlands. sulfur diesel fuel. 3 Energy leaders Energy costs are a concern for almost Fall ahead every household. Heating, cooling, Last March, the KII lighting, cooking, entertainment and energy best-practices transportation all require energy, and it group arranged a all comes at a price. knowledge-sharing Running a manufacturing plant or even session with represen- an office complex can require enor- tatives from several mous amounts of energy, and those Koch companies, energy costs can be staggering. including Flint Hills Last year, Koch companies spent a total Resources, Georgia- of about $2.4 billion on energy. That’s Pacific, , an average of $34,285 per employee. Koch Fertilizer and As big as that sounds, it was a huge Koch Pipeline. improvement from 2008. That year, At that meeting and some energy prices hit record levels in the months that Spartanburg, S.C. – This INVISTA facility, which manufactures polymer resins and Koch companies’ total energy bill followed, the energy such as PET, has progressively reduced its energy intensity during the past decade. was $4.3 billion. team began sharing best Building on a long history of caring about practices and visiting Koch company “Recent studies have shown that fewer sustainability and efficiency, Koch com- plant sites with track records of energy than 2 percent of all U.S. companies panies are taking a long, hard look at how efficiency improvements. have on-site energy managers, even to better optimize energy usage. The knowledge they though the efforts gained from these visits Improving Koch companies’ of those managers At stake are not just hundreds of mil- can result in energy lions in potential savings, but the future was then shared with energy efficiency by 10 other team members. savings of 20 to 30 growth of some businesses. percent could result in percent,” said Ernie Of the many best more than $250 million Schutt, global director Optionality practices recommended of energy for Koch Households that want to optimize for adoption by Koch a year in cost reductions Industries. energy costs have a range of options. companies, the standout and enormous amounts of Energy leaders Some choose to change thermostat set- suggestion was to estab- energy saved. manage the energy tings, power down devices or drive less. lish site energy leaders. efficiency initiatives at their respective Others install energy-efficient windows Having an energy leader at each site sites and benefit from the insights and or drive a different kind of car. not only created ownership for energy experiences shared among their peers. The options that save the most energy issues, it also provided much-needed “Now that we have more than 40 are not always the options that cost the focus for developing a sustainable pro- most to implement. gram at each site. energy leaders at various sites and Koch companies,” Schutt said, “we’ve The cumulative efficiency from several Koch Industries’ reached critical mass with this effort. small changes can add up to big savings. Sustainability Vision “We are starting to see all kinds of Improving the energy efficiency of great results, large and small, from a plant, pipeline system or 50-story We create value by using resources more interaction among our leaders.” building can be quite challenging. After all, you can’t just turn down the efficiently; protecting the environment Schutt begins by pointing to INVISTA’s thermostat on a refinery. and the safety and health of our workers Spartanburg, S.C., site, where the en- and others; consistently applying good ergy leader concept originated and has The best process for addressing these been in place for more than a decade. kinds of challenges begins with MBM® science; and, employing Market-Based Guiding Principle 6, Knowledge, which Management®. Together, these contribute “Since 2000, Spartanburg has proges- encourages all Koch company employ- to the overall quality of life. sively lowered its energy intensity year after year, creating enormous savings. ees to seek and proactively share the www.kochehs.com best knowledge. “I’m convinced INVISTA would never

4 have realized those savings in Spar- last year. That’s in spite of the fact that tanburg without a dedicated, on-site electricity usage was down more than energy leader.” 4,000 kilowatt hours per day compared Koch Pipeline Co. provides yet another to two years ago. example of energy efficiency. “We’ve seen several rate increases since “The MinnCan project, a 300-mile ex- 2007,” said Scott Rains, facilities services pansion of the Minnesota Pipeline sys- manager. “So our costs have been going tem, which KPL operates, has helped up even though our usage is going down. reduce energy costs on that system by “I’d hate to think what our energy bill 40 percent per year. would be if we were using more, not less.” “Much of that savings came from the KII’s Wichita campus has achieved pipeline’s redesign and new high- some dramatic improvements in energy efficiency pumps, but KPL also imple- efficiency. In 1997, the complex used mented a lot of smaller, low-cost changes more than 31 million kilowatt hours of that added more than $1 million per year electricity. Last year, the total was less to the savings total.” than 25 million, a 20 percent reduction. Georgia-Pacific’s energy leader at its Thanks to an extensive series of energy Savannah River Mill in Georgia, has efficiency improvements, the Koch helped their team eliminate more than tower, despite being almost 20 years old, The new MinnCan pipeline system, operated by Koch Pipeline, 1,000 compressed air leaks at that site. received the Energy Star label from the recently received a $543,869 rebate from Otter Tail Power That helped them save $160,000 a year U.S. Environmental Protection Agency. Co. because of its significantly lower energy usage. The “The EPA combines electricity and more-efficient MinnCan system saves the utility – and its many in rental costs for air compressors. customers – the high cost of building or buying additional natural gas usage to come up with what Watching the office electrical power production capacity. Shown are Mark Remer it calls a kBtu measurement,” explained (l), senior industrial services engineer for Otter Tail Power Co., In Wichita, where Koch Industries is Rains. (Each kBtu represents 1,000 and Kim Penner (r), president of Koch Pipeline. based, the company spent an average British thermal units.) of almost $4,000 per day for electricity “When we first received the Energy Star We’re doing the right things, right now, label in 2008, we averaged 231 because they make sense for everyone. kBtus per square foot of space, “Second, this makes great business compared to a national average sense, because energy costs account for of 308. almost half of total operating costs in “Last year, through improved many of our Koch businesses.” metering and utility sourcing between buildings, the tower “We’re doing the right things, right now, ended up with an average of because they make sense for everyone.” 169 kBtus per square foot. - Tim Go, KII managing director, That puts us among the top 10 percent across the United operations excellence States for energy efficiency.” Schutt is now planning the first-ever Next steps energy leaders conference for later “There are two things about this this year. It will include international that are exciting for all of us,” representatives. said Tim Go, managing director “As these best practices spread from of operations excellence for KII. site to site around the world, every “The first is the initiative we’re Koch company has the potential to see Wichita – Koch Industries’ headquarters tower is the largest building showing. When it comes to ener- significant efficiencies and savings,” in Kansas to be honored by the U.S. Environmental Protection Agency gy efficiency, we’re not waiting for Schutt said. “We’re really beginning to with its Energy Star certification. government to tell us what to do. build momentum.”

5 GP: new and number one A deep understanding of the premium “There were a lot of skeptics, both inside Funds were approved for final engineer- bath tissue consumer and a commit- the company and out, who questioned if ing for two paper machines that will ment to making the best, most consum- this was the right time,” Towle said. incorporate the technology and manu- er-preferred product possible paid off “But this recognition from IRI is proof facture premium tissue products for for GP recently. that we truly knew our consumer and the consumer market. Pending final site In March, the company’s Quilted her desire for affordable luxury.” selection, start-up is expected for 2012. Northern Ultra Plush® was named the “This new investment further reflects top non-food product launch of 2009 GP’s commitment to being an innova- by Information Resources, Inc. tion leader, not a follower,” Towle said, According to Thom Blischok, IRI’s “and to driving further growth in the president of global innovation and premium bath tissue segment.” strategy, Georgia-Pacific’s new three- GP’s proprietary technology will ply tissue enjoyed phenomenal popu- create softness and absorbency while larity following its introduction. reducing combinations of fiber use, “With $135 million in year-one sales, energy use or water use versus alterna- Georgia-Pacific is definitely meeting tive papermaking processes. the needs of smart and savvy shoppers,” All of this investment and innovation Blischok said. Andrew Towle (l), vice president and general has caused at least a few folks at GP to To qualify for IRI’s Pacesetter status, a manager - consumer bath tissue, and Patrick Davis (r), pause and reflect. new product must generate at least $7.5 senior marketing director for Quilted Northern, pose “Quilted Northern has sure come a million in sales its first year, a threshold with GP’s latest award-winning product. long way in its 100-year history,” said that three out of four product launches Patrick Davis, senior director – mar- never achieve. As another example of the company’s keting for Quilted Northern. Andrew Towle, vice president and commitment to being a leader in bath general manager of GP’s consumer tis- tissue, paper towel and tabletop products, “In the early 1900s, it was a big deal sue category, admits that launching an GP recently announced that it intends to when we offered bath tissue that was ultra-premium product during a reces- invest $500 million in an advanced, pro- splinter-free,” Davis said. sion was challenging. prietary tissue-papermaking technology. www.quiltednorthern.com INVISTA: traveling tough If you made a product famous for its When she was 50, she became the first Xtra Confidence For longer-lasting fit and better resistance from the harmful effects of rugged durability in arctic weather, woman and first American to circum- chlorine and sunscreen, look for the Xtra Life LYCRA® fiber hangtag on swimwear that will help you look and feel your best. It’s a powerful steaming jungles and even combat navigate the Magnetic North Pole, solo. combination of comfort and confidence. zones, you might not choose a 72-year- Much of the gear that Thayer uses on her old woman as your spokesperson. adventures – including backpacks, shirts, But Helen Thayer is no ordinary caps, gloves, boots, jackets and tents – is spokesperson, and ® fabric made from CORDURA® fabric. is no ordinary product. She has used products made with Thayer has CORDURA® fabric for more than 30 authored three years because of their light weight, books, including durability and dependability. one about living in the Yukon “When you’re out there alone,” she says, among wild wolves, and is an official “you can’t afford to have failures.” spokesperson for INVISTA’s popular What’s next for Thayer and CORDURA®? Gottex® Karla Colletto ViX Sauvage

CORDURA® brand fabric. She and her husband have planned styles available at: www.myLYCRA.com She and her husband recently com- a walk across Tibet and expeditions everythingbutwater.com LYCRA® is a trademark of INVISTA. © 2010 INVISTA. pleted a 500-mile hike across Tanzania along the Congo and Amazon rivers. This ad for INVISTA’s Xtra Life LYCRA® fiber is appearing in accompanied by Masai tribesmen. She See a recent interview of Helen Thayer many major fashion magazines, including Vogue and Elle. has also trekked 1,600 miles across the by Outdoor USA Magazine online at It was shot at Georgia-Pacific’s studio in Atlanta. The ad was Gobi desert. www.CORDURA.com. Click on News. designed and produced by Koch Creative Group in Wichita. 6 Looking Back

Noteworthy

Think Twice: Harnessing the Power of Counterintuition – by Michael J. Mauboussin You probably didn’t wake up this morn- ing and say to yourself: “I’m going to Claude R. Lambe The Lambes and Kochs out for dinner. make some really bad decisions today.” And yet, from time to time, we all do. Bad decision-making is as common Buffaloes and Lambes among doctors, lawyers, bankers and In the middle of the Great Depression, Among those who invested in Buffalo engineers as it is among the uneducated. Fred Koch and Lewis Winkler formed Oil was Claude Lambe, a successful real But there is an important difference: a company that few people have ever estate developer and insurance broker. when a professional botches a decision, heard of: The Buffalo Oil Corporation. Lambe and his wife, Pauline, became the costs can be extremely high. Although it existed for less than three close friends of Fred “Smart people,” writes Mauboussin, years, Buffalo Oil provides a vivid and Mary Koch. an adjunct professor at Columbia example of two familiar themes in Koch Claude and Fred often Business School and the chief invest- Industries’ history. travelled together and enjoyed the same pas- ment strategist for Legg Mason Capital The first involves dealing with adversity. times. Management, “make big, dumb and The second is the value of integrity. consequential mistakes.” Claude Lambe’s con- Partners in adversity fidence in Fred Koch’s All of us tend to overestimate our abili- Winkler and Koch were wrestling with integrity and principles ties and the probable positive outcomes more than just an economic downturn is evident from his of our decisions. when they formed Buffalo Oil. correspondence, such We also tend to The popularity of their thermal crack- as a 1935 letter to Fred underestimate the ing process, developed by Fred Koch in that included a check influence our situ- 1927, had prompted a series of lawsuits for Lambe’s share of drilling costs on a ation may have on alleging patent infringement. Buffalo Oil well. our decisions. As they fought (and eventually won) “I do not care to examine the copies of Mauboussin calls each of these lawsuits, they began look- your invoices,” wrote Lambe to Koch, “as I am confident that you have gone these the illusions ing at other business opportunities near over them carefully.” of superiority, opti- their home base in Wichita. mism and control. Lasting legacy Vision His three-step plan for better decision- Following Lambe’s death in 1981 (his Buffalo Oil Corporation was formed making involves mental preparation, wife died in 1976), his estate was left in Oct. 26, 1934, the week of Fred and Mary recognizing problems, and learning how the care of Charles Koch. A year later, the Koch’s second wedding anniversary. to apply a counterintuitive approach. Claude R. Lambe Charitable Foundation The new firm was essentially an indepen- “My personal goal,” Mauboussin says, was established. dent oil and gas company that purchased “Claude had a strong interest in both the “is to recognize when I enter a danger leases and then drilled for oil. zone while trying to make a decision free society and young people,” Charles and to slow down when I do.” Back then, drilling rig costs averaged $3 Koch noted, “and his foundation’s activi- or $4 per foot (compared to as much as ties reflect those priorities.” $120 per foot or more today). Since 1982, the Claude R. Lambe “You cannot spend your way out of recession Buffalo Oil drilled on several leaseholds Charitable Foundation has distributed or borrow your way out of debt.” in Kansas and later in Winkler County, True tens of millions of dollars to universities

- Daniel Hannan, Member of the European Texas, where the partners would eventu- and organizations supporting economic ally operate 33 wells. research and education. Too Parliament for South East England 7 Steve Feilmeier Perspective Executive vice president and CFO, Koch Industries, Inc.

Some analysts now say the Great Reces- education and the like) would save only its government could no longer sell most sion is over, that we’ve turned the corner 15 percent. of its bonds at below-market interest rates and better times are on the way. To solve this problem, most governments to its citizens. Unfortunately, I agree with those experts prefer to raise taxes, not spend less. During the five years ending in 2008, the who now realize that the recent econom- But if more money is siphoned off in interest – just the interest – on the U.S. ic upturn is probably unsustainable. taxes and government borrowing, less is debt went from $322 billion per year to To help you understand why I am so left to invest in opportunities that could $454 billion. That’s a 41 percent increase. concerned, and what you can do about actually create value, including jobs. Keep in mind those figures were before this situation, let’s consider three things. #2: Growing pains the government borrowed even more so it could spend trillions in “stimulus” dollars. #1: Debt-to-GDP One of the most optimistic ways to Although the United States still has the deal with a debt trap is to assume your When you want to borrow money, largest and most diverse economy in the income is going to go up, despite lower most lenders will look at your income world, it is becoming more and more vul- investment in new opportunities. and expenses before making a decision. nerable to its creditors, especially China, The higher your percentage of debt to This may not be realistic, but it sure which recently eclipsed Germany as the income, the riskier you are as a borrower. sounds good. world’s largest exporter. Similarly, the ratio of a nation’s debt to its Not surprisingly, many of the most Americans need to prepare themselves gross domestic product is a very strong optimistic government budget propos- for a new world in which the global financial indicator. als assume our economies will soon be economy is less and less dependent on The European growing at remarkable rates. the United States. Meanwhile, the debt Union set its debt It’s true that robust growth can mean clock keeps ticking. limit at 60 percent more jobs, more economic activity and What now? of GDP, but Greece – most important for the government – has already hit 125 more tax receipts. To correct these problems and prevent percent and econo- further deterioration, a wise path forward However, this “growth is inevitable” ap- would have to include important changes. mists are predicting proach to budgeting is a lot like spending an EU average of the winnings from your lottery ticket To start, our governments need statutory around 80 percent before you even know if it’s a winner. budget controls that eliminate deficit by 2012. (And the odds are, it isn’t.) spending. We simply must spend less. The European To-date, growth in the U.S. economy has Second, all spending items need to be a Central Bank’s chief been nowhere near recent projections. part of the fiscal budget process. economist predicts And to make matters worse, an aging This is an especially painful problem U.K. debt will hit 88 percent of GDP U.S. population will soon be paying less in the United States, where costly war next year, with the U.S. rising to 100 in taxes just when the government needs efforts don’t even show up on a federal percent and Japan at 200 percent. to pay out more in retirement benefits. budget that is already more than $1 tril- Some U.S. politicians have tried to calm Japan is already feeling this demographic lion overspent. our fears by saying the debt-to-GDP squeeze, as is much of western Europe. Perhaps the most difficult solution ratio was much higher at the end of involves reforming existing entitlement #3: Tipping point World War II. They fail to mention that programs or considering new ones. 90 percent of that debt was earmarked The third factor that should concern us Aging populations and declining birth- for military spending, which dropped all involves interest expenses. rates make real reform in this area neces- dramatically after the war. Many of the world’s leading economies sary and inevitable. Back then, federal entitlement programs, are approaching a tipping point where Complicating the challenge is not just interest expenses and discretionary there is little or no reasonable hope of agreeing on such difficult decisions, but spending amounted to just 10 percent of ever being able to repay all their debts. implementing them within a reasonable GDP. Today, more than half of U.S. debt In Britain, the national debt per child period of time. is tied to a rising tide of entitlements such born this year is estimated at £20,000. In We can help make that happen by sup- as Social Security and Medicare. Japan, it takes almost 60 percent of all tax porting leaders and policymakers who Cutting all the federal government’s receipts just to service the national debt. focus on fiscal discipline, smaller govern- discretionary spending (for roads, Japan’s situation would be even worse if ment and economic freedom. 8