FHR is one of the few Koch companies of significant size without much of an international presence. “We process lots of imported feedstock, but our focus has been on optimizing and oper-ating assets in the United States. That

needs to change,” Razook said.

Thrive, not just surviveSeveral FHR leaders, including Razook, have been hitting the road (photo above) so they can speak

directly to employees about the com-pany’s new vision. The essence of their message is simple and straightforward:“We need to sustain and continuously improve those businesses that have a competitive advantage and can do well over a long period of time, and we need to create new business opportunities that can do the same,” Razook said.“To achieve that, we need to innovate more and think more globally, but never waver from our commit-ment to integrity, compli-ance and our MBM® culture. “That sounds easy, but I assure you, it requires considerable effort. “Every one of our employees, myself included, has an important role to play in building our future by making this vision a reality,” he said.

THE QUARTERLY NEWSLETTER OF KOCH COMPANIES

Discovery

Flint Hills Resources is not the only private refining and chemical company in the United States with several decades of refining experience. It is unique, however, in its commit-ment to Market-Based Management® and its ability to succeed during dif-ficult times. In 2009, a year when many U.S. petro-chemical companies lost hundreds of millions of dollars, Flint Hills Resources remained profitable.Thanks to its comparative and competi-tive advantages, FHR has been able to grow and succeed despite the brutal boom-and-bust cycles of the petro-chemical industry.Even so, FHR is focused not on what it has accomplished in the past, but what it must accomplish in the future.

Challenges Brad Razook, president of FHR, believes the company has entered one of the most challenging periods in its history. “There’s no doubt that our industry as a whole is facing serious challenges,” Razook said. “Markets are changing and domestic demand for our products is down significantly.“On top of that, there is a lot of political and regulatory uncertainty. Any num-ber of proposals – including emissions trading systems, greenhouse gas regula-tions, low-carbon or renewable fuel standards, and green chemistry – could dramatically reshape our business.”

Given these challenges, FHR’s manage-ment team believed the company needed an updated vision that would drive innovation and emphasize flexibility for it to react quickly and profitably to this ever-changing landscape.

“We needed to rethink our vision in a way that allowed us to have competitively advantaged businesses for the long term.“At the same time, we would never change our commitment to our MBM® Guiding Principles, especially 10,000 percent compliance.”

New vision Flint Hills Resources’ vision, which focused on growth when last updated in 2006, now adds an emphasis on innova-tion and aggressively pursuing more global opportunities.“We want to innovate in at least two ways,” Razook explained. “The first is in optimizing traditional commodity chemicals and refined products. But we also need to look for new opportunities in new or emerging markets, such as renewable fuels.“That will help us to protect and en-hance our competitive position while also positioning us to take advantage of step-out opportunities,” he said.

april 2010

FHR: a vision for innovation

KochFertilizergoesglobalpg3 Topproductfor2009 pg6 Energyleaders pg4 Perspective:SteveFeilmeierpg8

thisissue…

FHR has been recognized as one of the “World’s Most Ethical Companies” three years in a row. ethisphere.com/wme2010

“Create, sustain and continuously improve long-term competitively advantaged businesses that generate superior returns.”

- From FHR’s vision statement

www.fhr.com

2

Friends and family now have an easy way to access market-based perspectives on public policy issues important to Koch companies and all of us as employees. Just visit www.kochind.com and click on Viewpoint. Employees will find even more information at http://kcief.khc.local/.

On behalf of WSU, I want to express our gratitude for Koch companies’ recent contribution to support the Kansas Science Olympiad.

The generosity Koch has provided this program is greatly appreciated, and your dedication to our young people and their future is beyond measure.

Again, thank you for all you do for the university and our students.

Donald L. Beggs, president Wichita State University

Wichita, Kan.

We very much appreciate the Founda-tion’s grant of $76,000 to continue our education programs. This grant will be allocated to two profes-sional teacher seminars in spring and fall this year, a Saturday Academy, and a com-munity forum with an eminent historian.We thank you for your confidence in us and your increased support.

Mary Caslin Ross, executive consultant The Gilder Lehrman Institute of

American History New York, N.Y.

Editorial BoardPhilipEllenderRichFinkJeffGentryDaleGibbensMaryBethJarvisCharlesKochJimMahoneyDaveRobertson

I am ashamed that my former organi-zation [Greenpeace, 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 dedicated to developing an alternative environmental policy platform based on science and logic.We do not believe there is any cause for alarmism about the earth’s climate and we are skeptical about the assertion that global warming is caused by human activity.We work with a wide range of compa-nies and industry associations in energy, agriculture, forestry, mining, fisheries and chemicals.Even though one of our aims is to reduce dependency on fossil fuels, we are well aware of the important role they play, and will continue to play, in supporting our civilization.

  Patrick Moore, Ph.D.Chairman and chief scientist

Greenspirit Strategies Ltd.Vancouver, British Columbia

I received a Christmas card from Koch with a great picture of several bison on the front of the card.I have been particularly interested in the Tallgrass Prairie National Preserve for many years, and in the Nature

Conservancy’s recent effort to bring in the bison from South Dakota.Thank you for all you and the Founda-tion have done to help the Tallgrass Park. You are a tremendous asset for Kansas with the support you provide for so many worthy projects and programs.

Dolph C. Simons, Jr., publisher Lawrence Journal-World

Lawrence, Kan.

On behalf of the Mendota Heights and West St. Paul Police Departments, we would like to thank you for giving your time to make our Citizen’s Police Acad-emy a success.Our students really enjoyed their experi-ence at Flint Hills Resources. Your pas-

sion for your work and the facility really shines through.We look forward to coming to FHR again next year.

 Brian Convery John Hinderscheid

Citizen Police Academy West St. Paul, Minn.

Thank you for your participation and for helping sponsor the Wild-life Habitat Council’s 21st Annual Symposium.

Your support greatly contributed toward the excitement and success of this member-driven event.

Jared Mott Wildlife Habitat Council

Silver Spring, Md.

April2010|Volume16|Number2

Questions? Comments? Contact:RodLearned316.828.6136rod.learned@kochps.com

Publication Design: DeannaBaumanKochCreativeGroup

Letters may be edited for length or clarity

www.kochind.com ©2010,KochIndustries,Inc.KochisanEOE.M/F/D/V

Discovery

PostalPipeline

3

Japan – A Japanese-built reactor is now part of a new diesel desulfurization unit at FHR’s West Plant in Corpus Christi, Texas. The enormous reactor was built at the Hitachi-Zosen Ariake Works. It weighs about 347 metric tons and is 100 feet long. It was shipped from Ariake to Shimono-seki, Japan, where it was transferred onto a merchant vessel.Getting the reactor across the Pacific was a multi-national effort. The vessel for this voyage, the Leopold Staff, is co-owned by the Chinese and Polish governments.It took five weeks to ship the reactor across the Pacific, through the Panama Canal and up to the Gulf Coast. Meanwhile, 13 different modules are being fitted together to complete a new 130-ton-per-day sulfur recovery unit at FHR’s West Plant. The largest module in that project, part of an expansion costing more than $250 mil-lion, weighs 390 tons and measures 123 feet long by 40 feet wide and 30 feet high.These SRU components were built in Beaumont, Texas, and sent to Corpus Christi via barge. “We are pleased with how this project is coming together,” said Kurt Wart-enbach, venture execution director for FHR. “Despite their enormous size, the modules are fitting together well.”This massive construction project began last June. When completed later this year, it will enable FHR’s Texas refinery to produce much-needed ultra-low-sulfur diesel fuel.

Australia – Koch Fertilizer’s global expansion plans have taken a major step forward with the announcement of four new projects in Latin America, Europe and Australia.These projects follow on the heels of an announcement earlier this year involving a Koch Fertilizer facility in Sète, France.“We’re assembling a truly global, deep-water terminal network,” explained Steve Packebush, president of Koch Fertilizer. “This will allow us to meet different kinds of demand throughout the year and greatly diversify our product offerings.” Koch Fertilizer has traditionally focused on the North American market, where demand is highly seasonal and the range of products is fairly narrow.“Growing sugar cane or rice often requires a different kind of fertilizer and distribution network than growing wheat or corn,” Packebush noted. “To become a truly global fertilizer com-pany, we had to broaden our horizons and embrace a lot of changes.” In Australia, Koch Fertilizer has leased a 150,000-ton storage facility in Geelong and opened an office in Melbourne. The company is also working with Graincorp, owner of the Geelong facil-ity, to develop dry fertilizer loading and distribution facilities in Victoria and New South Wales.In Topolobampo, Mexico, the company is expanding a 25,000-ton urea stor-age facility to better serve customers in Northwest Mexico. Construction should be completed this fall.

Across the equator in Brazil, Koch Fertilizer and Rocha TOP are building a warehouse facility in Paranagua where Koch Fertilizer will have 57,000 metric tons of dedicated storage space for urea. Construction on that project should be complete early next year.And in the U.K., Koch Fertilizer and the Bristol Port Co. have agreed to more than triple the storage space of an exist-ing fertilizer facility in Avonmouth. When completed later this year, that expansion will include new blending facilities, electronic weighbridge systems and computerized product handling.“Thanks to all of this,” Packebush said, “we believe our terminal distribution system will be one of the largest and most diverse in the world.”United Kingdom – Koch Energy Europe Limited is now trading natural gas, power and emissions in Europe. The company, a Koch Supply & Trading subsidiary, commenced trading the first of March.Irfan Mannan is director of the new company as well as Koch Commodities Europe, Ltd., which is the contracting company and counterparty to all its trades.“This is all about growth,” Mannan said. “We will continue to work with our existing trading partners, but we’re also looking forward to new relationships as we expand this business.”KS&T has a long history of trading in London. It also maintains offices in Geneva, Switzerland, and owns a refin-ery in Rotterdam, the Netherlands.

Geelong - Koch Fertilizer has leased a large storage facility at this Australian port.

Ariake - This Japanese-built reactor was recently installed at Flint Hills Resources’ Corpus Christi, Texas, refinery. FHR will soon be able to upgrade high-sulfur diesel to ultra-low-sulfur diesel as well as handle additional feedstocks.

InternationalNews

4

Energy leaders

“Recent studies have shown that fewer than 2 percent of all U.S. companies have on-site energy managers, even

though the efforts of those managers can result in energy savings of 20 to 30 percent,” said Ernie Schutt, global director of energy for Koch Industries. Energy leaders manage the energy

efficiency initiatives at their respective sites and benefit from the insights and experiences shared among their peers.“Now that we have more than 40 energy leaders at various sites and Koch companies,” Schutt said, “we’ve reached critical mass with this effort. “We are starting to see all kinds of great results, large and small, from interaction among our leaders.” Schutt begins by pointing to INVISTA’s Spartanburg, S.C., site, where the en-ergy leader concept originated and has been in place for more than a decade. “Since 2000, Spartanburg has proges-sively lowered its energy intensity year after year, creating enormous savings. “I’m convinced INVISTA would never

Energy costs are a concern for almostevery household. Heating, cooling,lighting, cooking, entertainment andtransportation all require energy, and itall comes at a price. Running a manufacturing plant or even an office complex can require enor-mous amounts of energy, and those energy costs can be staggering.Last year, Koch companies spent a total of about $2.4 billion on energy. That’s an average of $34,285 per employee. As big as that sounds, it was a huge improvement from 2008. That year, some energy prices hit record levels and Koch companies’ total energy bill was $4.3 billion. Building on a long history of caring about sustainability and efficiency, Koch com-panies are taking a long, hard look at how to better optimize energy usage.At stake are not just hundreds of mil-lions in potential savings, but the future growth of some businesses.

Optionality Households that want to optimize energy costs have a range of options. Some choose to change thermostat set-tings, power down devices or drive less. Others install energy-efficient windows or drive a different kind of car. The options that save the most energy are not always the options that cost the most to implement. The cumulative efficiency from several small changes can add up to big savings.Improving the energy efficiency of a plant, pipeline system or 50-story building can be quite challenging. After all, you can’t just turn down the thermostat on a refinery.The best process for addressing these kinds of challenges begins with MBM® Guiding Principle 6, Knowledge, which encourages all Koch company employ-ees to seek and proactively share the best knowledge.

Fall ahead Last March, the KII energy best-practices group arranged a knowledge-sharing session with represen-tatives from several Koch companies, including Flint Hills Resources, Georgia- Pacific, INVISTA, Koch Fertilizer and Koch Pipeline. At that meeting and in the months that followed, the energy team began sharing best practices and visiting Koch company plant sites with track records of energy efficiency improvements. The knowledge they gained from these visits was then shared with other team members.Of the many best practices recommended for adoption by Koch companies, the standout suggestion was to estab-lish site energy leaders. Having an energy leader at each site not only created ownership for energy issues, it also provided much-needed focus for developing a sustainable pro-gram at each site.

Spartanburg, S.C. – This INVISTA facility, which manufactures polymer resins such as PET, has progressively reduced its energy intensity during the past decade.

Improving Koch companies’ energy efficiency by 10 percent could result in more than $250 million a year in cost reductions and enormous amounts of energy saved.

We create value by using resources more efficiently; protecting the environment and the safety and health of our workers and others; consistently applying good science; and, employing Market-Based Management®. Together, these contribute to the overall quality of life.

Koch Industries’ Sustainability Vision

www.kochehs.com

5

have realized those savings in Spar-tanburg without a dedicated, on-site energy leader.” Koch Pipeline Co. provides yet another example of energy efficiency. “The MinnCan project, a 300-mile ex-pansion of the Minnesota Pipeline sys-tem, which KPL operates, has helped reduce energy costs on that system by 40 percent per year.“Much of that savings came from the pipeline’s redesign and new high-efficiency pumps, but KPL also imple-mented a lot of smaller, low-cost changes that added more than $1 million per year to the savings total.”Georgia-Pacific’s energy leader at its Savannah River Mill in Georgia, has helped their team eliminate more than 1,000 compressed air leaks at that site. That helped them save $160,000 a year in rental costs for air compressors.

Watching the office In Wichita, where Koch Industries is based, the company spent an average of almost $4,000 per day for electricity

last year. That’s in spite of the fact that electricity usage was down more than 4,000 kilowatt hours per day compared to two years ago. “We’ve seen several rate increases since 2007,” said Scott Rains, facilities services manager. “So our costs have been going up even though our usage is going down. “I’d hate to think what our energy bill would be if we were using more, not less.” KII’s Wichita campus has achieved some dramatic improvements in energy efficiency. In 1997, the complex used more than 31 million kilowatt hours of electricity. Last year, the total was less than 25 million, a 20 percent reduction.Thanks to an extensive series of energy efficiency improvements, the Koch tower, despite being almost 20 years old, received the Energy Star label from the U.S. Environmental Protection Agency. “The EPA combines electricity and natural gas usage to come up with what it calls a kBtu measurement,” explained Rains. (Each kBtu represents 1,000 British thermal units.)“When we first received the Energy Star

label in 2008, we averaged 231 kBtus per square foot of space, compared to a national average of 308.“Last year, through improved metering and utility sourcing between buildings, the tower ended up with an average of 169 kBtus per square foot. That puts us among the top 10 percent across the United States for energy efficiency.”

Next steps “There are two things about this that are exciting for all of us,” said Tim Go, managing director of operations excellence for KII.“The first is the initiative we’re showing. When it comes to ener-gy efficiency, we’re not waiting for government to tell us what to do.

We’re doing the right things, right now, because they make sense for everyone.“Second, this makes great business sense, because energy costs account for almost half of total operating costs in many of our Koch businesses.”

Schutt is now planning the first-ever energy leaders conference for later this year. It will include international representatives. “As these best practices spread from site to site around the world, every Koch company has the potential to see significant efficiencies and savings,” Schutt said. “We’re really beginning to build momentum.”

Wichita – Koch Industries’ headquarters tower is the largest building in Kansas to be honored by the U.S. Environmental Protection Agency with its Energy Star certification.

The new MinnCan pipeline system, operated by Koch Pipeline, recently received a $543,869 rebate from Otter Tail Power Co. because of its significantly lower energy usage. The more-efficient MinnCan system saves the utility – and its many customers – the high cost of building or buying additional electrical power production capacity. Shown are Mark Remer (l), senior industrial services engineer for Otter Tail Power Co., and Kim Penner (r), president of Koch Pipeline.

“We’re doing the right things, right now, because they make sense for everyone.”

- Tim Go, KII managing director, operations excellence

6

“There were a lot of skeptics, both inside the company and out, who questioned if this was the right time,” Towle said.“But this recognition from IRI is proof that we truly knew our consumer and her desire for affordable luxury.”

As another example of the company’s commitment to being a leader in bath tissue, paper towel and tabletop products, GP recently announced that it intends to invest $500 million in an advanced, pro-prietary tissue-papermaking technology.

When she was 50, she became the first woman and first American to circum-navigate the Magnetic North Pole, solo. Much of the gear that Thayer uses on her adventures – including backpacks, shirts, caps, gloves, boots, jackets and tents – is made from CORDURA® fabric.She has used products made with CORDURA® fabric for more than 30 years because of their light weight, durability and dependability.“When you’re out there alone,” she says, “you can’t afford to have failures.” What’s next for Thayer and CORDURA®? She and her husband have planned a walk across Tibet and expeditions along the Congo and Amazon rivers.See a recent interview of Helen Thayer by Outdoor USA Magazine online atwww.CORDURA.com. Click on News.

GP: new and number one

INVISTA: traveling tough

A deep understanding of the premium bath tissue consumer and a commit-ment to making the best, most consum-er-preferred product possible paid off for GP recently. In March, the company’s Quilted Northern Ultra Plush® was named the top non-food product launch of 2009 by Information Resources, Inc.According to Thom Blischok, IRI’s president of global innovation and strategy, Georgia-Pacific’s new three-ply tissue enjoyed phenomenal popu-larity following its introduction.“With $135 million in year-one sales, Georgia-Pacific is definitely meeting the needs of smart and savvy shoppers,” Blischok said.To qualify for IRI’s Pacesetter status, a new product must generate at least $7.5 million in sales its first year, a threshold that three out of four product launches never achieve.Andrew Towle, vice president and general manager of GP’s consumer tis-sue category, admits that launching an ultra-premium product during a reces-sion was challenging.

If you made a product famous for its rugged durability in arctic weather, steaming jungles and even combat zones, you might not choose a 72-year-old woman as your spokesperson.But Helen Thayer is no ordinary spokesperson, and CORDURA® fabric is no ordinary product.

Thayer has authored three books, including one about living in the Yukon

among wild wolves, and is an official spokesperson for INVISTA’s popular CORDURA® brand fabric. She and her husband recently com-pleted a 500-mile hike across Tanzania accompanied by Masai tribesmen. She has also trekked 1,600 miles across the Gobi desert.

Funds were approved for final engineer-ing for two paper machines that will incorporate the technology and manu-facture premium tissue products for the consumer market. Pending final site selection, start-up is expected for 2012. “This new investment further reflects GP’s commitment to being an innova-tion leader, not a follower,” Towle said, “and to driving further growth in the premium bath tissue segment.”GP’s proprietary technology will create softness and absorbency while reducing combinations of fiber use, energy use or water use versus alterna-tive papermaking processes.All of this investment and innovation has caused at least a few folks at GP to pause and reflect. “Quilted Northern has sure come a long way in its 100-year history,” said Patrick Davis, senior director – mar-keting for Quilted Northern. “In the early 1900s, it was a big deal when we offered bath tissue that was splinter-free,” Davis said.

Xtra Confidence

ViX

For longer-lasting fit and better resistance from the harmful effects of 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 combination of comfort and confidence.

Karla Colletto SauvageGottex®

s t y l e s a v a i l a b l e a t :

everythingbutwater.com

www.myLYCRA.comLYCRA® is a trademark of INVISTA. © 2010 INVISTA.

This ad for INVISTA’s Xtra Life LYCRA® fiber is appearing in many major fashion magazines, including Vogue and Elle. It was shot at Georgia-Pacific’s studio in Atlanta. The ad was designed and produced by Koch Creative Group in Wichita.

Andrew Towle (l), vice president and general manager - consumer bath tissue, and Patrick Davis (r), senior marketing director for Quilted Northern, pose with GP’s latest award-winning product.

www.quiltednorthern.com

7

Buffaloes and LambesIn the middle of the Great Depression, Fred Koch and Lewis Winkler formed a company that few people have ever heard of: The Buffalo Oil Corporation.Although it existed for less than three years, Buffalo Oil provides a vivid example of two familiar themes in Koch Industries’ history. The first involves dealing with adversity. The second is the value of integrity.

Partners in adversity Winkler and Koch were wrestling with more than just an economic downturn when they formed Buffalo Oil.The popularity of their thermal crack-ing process, developed by Fred Koch in 1927, had prompted a series of lawsuits alleging patent infringement. As they fought (and eventually won) each of these lawsuits, they began look-ing at other business opportunities near their home base in Wichita.

Vision

Buffalo Oil Corporation was formed Oct. 26, 1934, the week of Fred and Mary Koch’s second wedding anniversary. The new firm was essentially an indepen-dent oil and gas company that purchased leases and then drilled for oil. Back then, drilling rig costs averaged $3 or $4 per foot (compared to as much as $120 per foot or more today). Buffalo Oil drilled on several leaseholds in Kansas and later in Winkler County, Texas, where the partners would eventu-ally operate 33 wells.

Claude R. Lambe The Lambes and Kochs out for dinner.

Among those who invested in Buffalo Oil was Claude Lambe, a successful real estate developer and insurance broker. Lambe and his wife, Pauline, became close friends of Fred and Mary Koch. Claude and Fred often travelled together and enjoyed the same pas-times. Claude Lambe’s con-fidence in Fred Koch’s integrity and principles is evident from his correspondence, such as a 1935 letter to Fred that included a check for Lambe’s share of drilling costs on a Buffalo Oil well. “I do not care to examine the copies of your invoices,” wrote Lambe to Koch, “as I am confident that you have gone over them carefully.”

Lasting legacy Following Lambe’s death in 1981 (his wife died in 1976), his estate was left in the care of Charles Koch. A year later, the Claude R. Lambe Charitable Foundation was established.“Claude had a strong interest in both the free society and young people,” Charles Koch noted, “and his foundation’s activi-ties reflect those priorities.”Since 1982, the Claude R. Lambe Charitable Foundation has distributed tens of millions of dollars to universities and organizations supporting economic research and education. To

oTrue

NoteworthyThink 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 make some really bad decisions today.” And yet, from time to time, we all do.

Bad decision-making is as common among doctors, lawyers, bankers and engineers as it is among the uneducated.

But there is an important difference: when a professional botches a decision, the costs can be extremely high.

“Smart people,” writes Mauboussin, an adjunct professor at Columbia Business School and the chief invest-ment strategist for Legg Mason Capital Management, “make big, dumb and consequential mistakes.”

All of us tend to overestimate our abili-ties and the probable positive outcomes of our decisions.

We also tend to underestimate the influence our situ-ation may have on our decisions.

Mauboussin calls these the illusions of superiority, opti-mism and control.

His three-step plan for better decision-making involves mental preparation, recognizing problems, and learning how to apply a counterintuitive approach.

“My personal goal,” Mauboussin says, “is to recognize when I enter a danger zone while trying to make a decision and to slow down when I do.”

“You cannot spend your way out of recession or borrow your way out of debt.”

- Daniel Hannan, Member of the European Parliament for South East England

LookingBack

8

Executive vice president and CFO, Koch Industries, Inc.

its government could no longer sell most of its bonds at below-market interest rates to its citizens.During the five years ending in 2008, the interest – just the interest – on the U.S. debt went from $322 billion per year to $454 billion. That’s a 41 percent increase. Keep in mind those figures were before the government borrowed even more so it could spend trillions in “stimulus” dollars.Although the United States still has the largest and most diverse economy in the world, it is becoming more and more vul-nerable to its creditors, especially China, which recently eclipsed Germany as the world’s largest exporter.Americans need to prepare themselves for a new world in which the global economy is less and less dependent on the United States. Meanwhile, the debt clock keeps ticking.

What now? To correct these problems and prevent further deterioration, a wise path forward would have to include important changes. To start, our governments need statutory budget controls that eliminate deficit spending. We simply must spend less. Second, all spending items need to be a part of the fiscal budget process. This is an especially painful problem in the United States, where costly war efforts don’t even show up on a federal budget that is already more than $1 tril-lion overspent.Perhaps the most difficult solution involves reforming existing entitlement programs or considering new ones. Aging populations and declining birth-rates make real reform in this area neces-sary and inevitable. Complicating the challenge is not just agreeing on such difficult decisions, but implementing them within a reasonable period of time.We can help make that happen by sup-porting leaders and policymakers who focus on fiscal discipline, smaller govern-ment and economic freedom.

Some analysts now say the Great Reces-sion is over, that we’ve turned the corner and better times are on the way. Unfortunately, I agree with those experts who now realize that the recent econom-ic upturn is probably unsustainable.To help you understand why I am so concerned, and what you can do about this situation, let’s consider three things.

#1: Debt-to-GDP When you want to borrow money, most lenders will look at your income and expenses before making a decision. The higher your percentage of debt to income, the riskier you are as a borrower.Similarly, the ratio of a nation’s debt to its gross domestic product is a very strong financial indicator.

The European Union set its debt limit at 60 percent of GDP, but Greece has already hit 125 percent and econo-mists are predicting an EU average of around 80 percent by 2012.The European Central Bank’s chief economist predicts

U.K. debt will hit 88 percent of GDP next year, with the U.S. rising to 100 percent and Japan at 200 percent. Some U.S. politicians have tried to calm our fears by saying the debt-to-GDP ratio was much higher at the end of World War II. They fail to mention that 90 percent of that debt was earmarked for military spending, which dropped dramatically after the war. Back then, federal entitlement programs, interest expenses and discretionary spending amounted to just 10 percent of GDP. Today, more than half of U.S. debt is tied to a rising tide of entitlements such as Social Security and Medicare. Cutting all the federal government’s discretionary spending (for roads,

education and the like) would save only 15 percent.To solve this problem, most governments prefer to raise taxes, not spend less. But if more money is siphoned off in taxes and government borrowing, less is left to invest in opportunities that could actually create value, including jobs.

#2: Growing pains One of the most optimistic ways to deal with a debt trap is to assume your income is going to go up, despite lower investment in new opportunities.This may not be realistic, but it sure sounds good. Not surprisingly, many of the most optimistic government budget propos-als assume our economies will soon be growing at remarkable rates. It’s true that robust growth can mean more jobs, more economic activity and – most important for the government – more tax receipts.However, this “growth is inevitable” ap-proach to budgeting is a lot like spending the winnings from your lottery ticket before you even know if it’s a winner. (And the odds are, it isn’t.) To-date, growth in the U.S. economy has been nowhere near recent projections. And to make matters worse, an aging U.S. population will soon be paying less in taxes just when the government needs to pay out more in retirement benefits.Japan is already feeling this demographic squeeze, as is much of western Europe.

#3: Tipping point The third factor that should concern us all involves interest expenses. Many of the world’s leading economies are approaching a tipping point where there is little or no reasonable hope of ever being able to repay all their debts.In Britain, the national debt per child born this year is estimated at £20,000. In Japan, it takes almost 60 percent of all tax receipts just to service the national debt. Japan’s situation would be even worse if

Steve Feilmeier Perspective