James Hannan - "Overcoming Challenges to Economic Freedom"

Good morning. You know, every time I hear an introduction it reminds me that I've had a hard time holding down a job. Before I get started, I always like to get a feel for the room. So maybe a little participation by a show of hands: who watched the season premiere of American Idol last night? Wow, that's weak. I mean, a lot of people are afraid to raise their hands. I'm sure I have three daughters, I can assure you it was on at my house. Rich, thanks for the kind introduction. Thanks to the Terry College for having me. It's an honor to be here. When I look at the list of folks who have been at this podium, it is really a list of the movers and shakers in the state of Georgia and in our nation. It is a great privilege for me. It's a personal and professional privilege to speak with you here in the first month of the centennial year of the Terry College of Business. Clearly you've come a long way since being founded as the University School of Commerce back in 1912. So happy birthday on your first century of education. I understand Terry College has watched 55,000 alumni go from homework to building homes, to building Atlanta, to building prosperity, to creating jobs in Georgia, in our nation, and around the world. I'd like to be the first in this centennial year to lead a round of applause for the achievements of the Terry College. Well done! Here's to your first hundred years and into the future. Thank you. A hundred years as an institution, five generations stretching back to the time of our great-great-grandparents. You heard in my bio that I have been involved in the Atlanta History Center, in fact, I've been involved there since just a couple of months after I arrived in Atlanta. I'm involved because I find history fascinating for two reasons: one, we learn from it; second, it often repeats itself. I think that's an interesting point. So let's consider for a moment what the world was like when the Terry College was founded in 1912. A trip down Peachtree from Buckhead to downtown Atlanta and back was an all-day ride on a mule. Cars were a little more scarce in those days. Today in 2012, there's still plenty of drivers that act like mules on that drive, but it only seems to take the better part of the day. In 1912, Atlanta and Georgia were still coming into their own, recovering from a Civil War, coming to terms with a modern world. Just 20 years earlier, Asa Candler had created the Coca-Cola Company to bottle and sell Dr. Pemberton's mixture. Our own company, Georgia-Pacific, would be founded just 15 years later from a small Augusta lumberyard. In 1912, Great Britain dominated the world economy. When the Terry College was founded, the sun literally never set on the British Empire. British commercial might and force of arms, especially sea power, made that island nation the richest and most influential in the history of the planet up to that time. So mighty that even the language of the British Isles became the language for merchants and markets all over the globe. From the defeat of the Spanish Armada in 1588 and on through conquest, commercial and military, in Europe, North America, India, and China, the only setback for the British Empire came in the 1770s when Massachusetts farmers stood their ground and fired the shot heard around the world: the American Revolution. Things looked very rosy in 1912 for the British Empire, and I imagine many folks thought the sun would never set on the British Empire. But how soon change would come. The transforming event was, of course, World War I, a conflict that began in 1914 and cost the British Empire an entire generation of its best and brightest talent. That war's human and economic costs, coupled with an even more destructive World War just a generation later, were fatal blows to the underpinning of the British Empire. The treasure and vitality, the creativity and innovation, and sheer manpower bled away. Two colossal wars effectively ended British world domination. It happened in a twinkling, historically speaking. In a roughly 30-year span, Great Britain went from the greatest empire the world had ever seen to just another rebuilding nation. The United States, without a shot fired in the lower 48, stepped into that vacuum of power, and from 1945 on the 20th century became known as the American Century. Let's hope the 21st century is remembered by that name as well. But I have to wonder if it will. It seems to me today the United States faces its own transforming moment. For all our past generations, America has now arrived at a time and place when our next decisions promise a dramatic long-term impact on whether our nation can continue to prosper and lead. Unlike Britain, our decision won't be made on battlefields, and it likely won't be made by generals. Instead, it's far more likely that the folks in this room and the leaders we choose going forward are going to make the decisions about the future course of action for this nation. So what decisions do I talk about? Decisions about our free market system, decisions about whether free enterprise will guide our progress as it has for the past 236 years in this great nation, or whether we'll stand by and let out-of-control spending, over-regulation, political cronyism, and irresponsible politics jeopardize America's future. There are three things I'd like to cover today. First, the challenges to our economic system that all of us here in this room as business folks face in this troubled political and financial environment. Second, what I believe is necessary for our economic future, including making the right choices, choosing the right leaders, and taking the right path toward more, not less, economic freedom. Then finally, I'd like to hear your questions and have a dialogue about your thoughts. Our voices and our choices matter right now. So to begin, let me start with a short commercial about Georgia-Pacific. I know most of you are familiar with our company. We're a long-term corporate citizen of Atlanta. We operate in three primary businesses: consumer products, packaging, and building products. We employ about 40,000 people around the world, about 3,000 of those here in metro Atlanta. Georgia is our largest presence in a single state; we've got over 20 facilities and about 7,000 people. We've been part of this community for many years. We continue to believe Georgia and Atlanta is an excellent place for our headquarters thanks to a well-educated talent pool, a great international airport, and a city government committed to fiscal management. As you well know, the past several years have seen some pretty tough business conditions. In spite of this, Georgia-Pacific employees have kept their focus on staying true to our principles: creating value by manufacturing excellent products that meet the needs of our consumers and our customers every single day. This focus has allowed Georgia-Pacific, along with other Koch companies, to keep good, high-paying jobs for 50,000 Americans directly and another 200,000 indirectly all across this country. Financially, the last three years have been three of the best in Georgia-Pacific's history, and I'm proud of that performance. In particular, I'm proud of our people for that performance. When you think about the building products business being a big part of our business, think about the last three years being some of the toughest environment in our lifetimes for the construction industry. But perhaps what I'm most proud of is not just the financial performance in the face of that tough economy and tough building products environment; the last three years have also been the safest three years in the history of Georgia-Pacific, each year a record in terms of every lagging and leading measure we track for safety performance across the company. Koch companies typically reinvest 90% of their earnings back into the business, and Georgia-Pacific has been no exception. Since the beginning of 2006, we've reinvested about $7 billion back into Georgia-Pacific in the form of acquisitions, capital investments, innovation, and investments in improved efficiency, improved compliance, safety, and health across the organization. We've also at the same time paid down about $8 billion of debt. These facts have allowed all the major rating agencies to upgrade Georgia-Pacific to investment grade, and in some cases higher than that. All of that reflects strong performance in a very difficult time across our economy. Now I make this point not to brag about the performance of the company, but to tie it to something we believe firmly: the key to our success is tied to our management philosophy, a philosophy we call Market-Based Management, or MBM. Simply put, Market-Based Management is our best attempt to take the principles that make free market societies the most prosperous and apply those inside our firm, something we try to do every single day. A key to our MBM philosophy is creating a culture based on a set of ten guiding principles, a culture that allows us to use MBM to have that success. A goal in this environment is to have every employee act as a principled entrepreneur. When I say principled, for us that means every employee optimizing, maximizing long-term creation of real value while always acting lawfully and with integrity. That is what we think about every day in the organization. So the point here is we believe these free market principles work inside a company, and we think our track record proves it. We also think these same principles work in a nation, and the track record of the U.S. proves it. Entrepreneurship is at the heart of our company, and we owe our existence to the vision of an entrepreneur. Entrepreneurs are constantly striving to meet the needs or wants of customers and consumers in new and different ways. In other words, they innovate. As I said, I'm proud of our recent accomplishments, and it's great to celebrate those successes. But the reality is success is one of the most difficult things for us to overcome. What do I mean by this? A lot of you that know me have heard me say this before, and there are future faces in the room. It's easy for us to forget what got us our lead, what differentiates us from our competitors, why people believe in us and have done what they've done. It's easy to let the weight of that success make us complacent or stop doing what got us our lead and start trying to protect our lead. So we have to stay focused on continuing to improve faster than our competition. When a business improves faster than its competitors, it grows. When a business gets complacent and falls behind in innovation and continuous improvement, it lags behind and risks being the victim of what we call creative destruction. I like to say that internally a little more aggressively: we'll be dragged down from behind, have our throats slit, and be killed. Because that's how business works. Look at Borders — that was a great story 10 years ago. Look at Kodak. That's creative destruction at work. A country can suffer similarly when it starts to get complacent or stops doing what got it there and starts to try to protect its success. Improving and innovating are essential components of success and depend on economic freedom. Economic freedom is a key point for the discussion today. So let me tell you a little bit about what I mean by economic freedom. The Economic Freedom of the World Index is an annual study compiled by the Fraser Institute in partnership with SMU and Florida State University and a number of professors from those institutions. They do it with public information from the World Bank, the United Nations, and other sources — pretty objective data generally. The index measures economic freedom by looking at some 40 factors, roughly grouped into five buckets: first, the size of government, measured in part by both spending and taxes; second, the regulation of credit, labor, and business; third, access to sound money; fourth, freedom to trade; and fifth, the rule of law — protection of personal property rights and such. This study consistently shows that societies with greater economic freedom enjoy greater prosperity. So I'd like to show you a very short video that will make this point with data, show you the correlation, and help you understand a little better than I could in the time we have tonight. [Video plays: a comparison of high-freedom vs low-freedom countries, showing that freer countries have higher income, lower poverty, longer life expectancy, etc.] So, when I say people enjoy a better standard of living, I don't mean they were just wealthier; they've got access to better medical care, better food, they live longer, their air, water, and land are cleaner. You heard all of that. Now one important point I want to make, key to what you see happening today in our country: you heard about protecting personal property rights and equal treatment under the law. Important distinction: that doesn't mean equal result. We at Georgia-Pacific and all Koch companies believe that economic freedom leads to greater wealth creation, societal progress, and prosperity based largely on the measures you just heard. We also believe that our country's economic freedom faces a great test today. The competitiveness of U.S. businesses is under threat from increasing government spending, over-regulation, high corporate taxes, and in some cases from lower-cost competitors around the world. In the last few years, the U.S. fell from 3rd on that list to 6th, actually last year we dropped to 10th, and we're very close to dropping beyond that. It's not just that our competitors are improving faster than we are; we're actually moving backwards in those measures. The decline reflects in large part the increasing size and cost of government and increased regulation that's occurred over the last several decades. I say that to make sure you don't think this is a partisan set of comments; it's true under both political parties. During the Bush years, government overspending led to a doubling of our debt. Under the current president, we're on pace to do that again. If you add up current government spending, the cost of regulatory compliance, the U.S. debt — which by the way is now bigger than our economy (our economy is roughly $15 trillion, the U.S. debt is over $15 trillion) — and then add the promises of future outlays for entitlements like Social Security, Medicare, Medicaid, and state issues, you're talking about ten times the size of the private economy. Pretty scary. It isn't getting better. We're borrowing 40 cents of every dollar we spend. How long can you run your business or your personal balance sheet under a circumstance where you're borrowing 40 cents of every dollar? Not very long. I'm not saying all regulations are bad; there is a legitimate and productive role for government in society. Governments can and should establish the rule of law, protect private property rights, and provide for public goods like roads, dams, ports, national defense, etc. But our government's reach now extends way beyond the vision of our founders and our Constitution. For example, today regulatory compliance alone costs businesses about $1.75 trillion a year, about 12% of GDP, and that number over the last decade is up 70%. We could employ 43 million workers for $1.75 trillion a year — about a quarter of our employment. The Federal Register of Regulations is now 81,000 pages. I saw an anecdote the other day: if you look at the Constitution and its amendments, it's something under 10,000 words. If you look at the regulation of the sale of cabbage in this country, I understand that's 29,000 words. The reality is for everybody in business in this room, you all know the cost of dealing with regulation every day. All this growth in spending and regulation crowds out business and adds to the uncertainty every one of us faces about where and how to invest and whether to hire. [Second video plays: a humorous skit about a company that makes a profit but then faces regulatory uncertainty and decides not to expand.] So a little humor, but the underlying message reflects reality. If this isn't troubling enough, let me share another statistic. A decade ago, a Wall Street Journal survey found 80% of U.S. citizens believed the free market system was the best system. In 2010, that percentage dropped to 59%. More difficult to understand: in communist China, 68% of those polled believe the free market system is the best approach. So in communist China, there's now a stronger belief in free markets than in the U.S. Another poll in 2009 by Rasmussen found Americans under 30 roughly evenly divided on whether they prefer capitalism or socialism. Here's the challenge: people are losing faith in the free marketplace, especially our up-and-coming generations. The challenge is different than in history because it's not caused by world wars or natural disasters; it's structural and of our own making. The non-discretionary portions of our budget are close to 90%. Over the past 20 years, this crisis has been institutionalized: out-of-control spending, political cronyism, rampant government over-involvement in business and economic matters. It's totally embedded in our system. The next generation of business leaders will inherit a crisis built into the system. If you look at the economic freedom index, Argentina was ranked about 7th in the early 1900s; now they're 119th. They nationalized assets, grew government spending, increased tax rates — the kinds of things we're talking about in this country. So how do we right the ship? We've got to fix the faith of Americans on a North Star based on economic freedom and the economic system that made us prosperous, happy, and the envy of the world. We've got to make the right choices, choose the right leaders, and take the path toward more, not less, economic freedom. Our government is making it harder for entrepreneurs and companies to make decisions about investing in growth, adding employees, and innovating. How many articles have you read about the cash piled on corporate America's balance sheets? It's not because people don't want to invest and generate a greater return; it's because of the things we're talking about. They don't know what the rules are going to be.

We see the opportunity based on these factors. Too many businesses, government intervention often in the form of subsidies and mandates, picks winners and losers and causes greater uncertainty about what they are going to be in the future. I could spend hours telling you how this affects our business directly. Too many businesses have successfully lobbied for special favors and treatment, seeking mandates for their products, subsidies in the form of cash payments from the government, and regulations or tariffs that keep major competitors at bay. Cronyism is much easier than competing in the open market. That's just the reality. If you can get somebody to do it for you, you don't have to win. But it lowers our overall standard of living, stifles entrepreneurs by rewarding the politically favored rather than those who meet the needs of our consumers. Unfortunately, when government subsidies exist, as a company, once they exist you have to take advantage of them or find yourself competitively disadvantaged. So businesses have to stand up to other businesses on the front end at every turn to lobby and fight against these special political favors. The purpose of business is to efficiently convert resources into products and services that society values or makes people's lives better. Businesses that fail should be allowed to go bankrupt rather than being bailed out. People always say, 'What about the jobs that are lost?' Not all jobs are created equal. A real job profitably produces goods and services that people value more highly than their alternatives. Subsidized jobs, inefficient jobs, waste resources and lower our standard of living. They weaken our economy. We in this room, others in boardrooms, in business, mom and pop dream factories, everybody around this country, all of us in business now face tough decisions about our leadership and our political system going forward. Our task today is to move our business environment more toward what it was at the origins of our country: less government, less regulation, regulation that creates value, politicians who serve our interests and not their own. Our elected officials should remember that the most prosperous countries are those that allow consumers, not governments, to direct the use of their resources. We need to make sure that message is heard loud and clear. It's up to us to choose and demand accountability from our leaders and get the US back on track. If our elected leaders stop hindering business, American business and entrepreneurs can lead the economy like they always have. When business is free to compete, to reinvent, to adapt, to imagine what might be instead of what has to be based on regulations and guidelines, innovation happens. Innovation has been important in the past and it's going to be important going forward. Just as business has led in the past, it has to lead in the future. From Edison to the Wright brothers, Graham Bell, Gates and Allen, we've led in the US in innovation in the past century. The stories of Steve Jobs and how he changed the world through the power of innovation have helped us understand. How many of you remember when CDs were new? About eight tracks? Me too. How many people still buy CDs for their favorite music? How many iPhones are on silent in the room right now? How many aren't on silent? Who checks their email only on their desktop PC when they get home at night? All of these are changes that have occurred because of things that outdated old technology. All of us can remember when the things I just described didn't exist. A lot of that is already outdated old technology. We didn't even know we needed those new ways, but they've made our lives better. As we think about innovation's role in preserving the next American Century, let me share another statistic. In the US, there are about 4.8 million patents on file with the patent service. 2.7 million of those are held by US companies or persons, about 2.1 million by foreign holders. In 2008, for the first time, foreign awarded patents exceeded US awarded patents, and it's continued since. That trend should concern us. Rather than stifling innovation, we've got to urge our government to encourage it by letting market forces, not subsidies and mandates, drive it. Now more than ever, we need an increase in innovation to remain globally competitive. As the recent economy presented many challenges, the efforts and focus on innovation and value creation by Georgia-Pacific employees have generated good results and positioned us to be successful in the future. I want to leave you with a thought I express almost every chance I get when I talk to GP employees: we know that our competitors and potential competitors, whether local, regional, national, or global, are working hard every day to improve and better meet the needs of our customers, to make our products and services obsolete. So we have to improve faster than the competition. We have to make our products and services obsolete. We have to practice that creative destruction on ourselves before they do it to us. The US is in the same place. We're on the hinge of history here for the country. We've got to choose and demand accountability from our leaders now. The way has to be cleared of stumbling blocks for innovation to occur. We have to force that change to happen so that businesses aren't in a position of checking more boxes on a form than they are shipping to their customers. We've got to throw our voices and our votes behind economic freedom and get the US back on track. It was said a hundred years ago that the sun never set on the British Empire. Ronald Reagan said back in the 80s that it was morning in America again. If that's true, it's time for business leaders to wake up. It's time for business leaders to lead and for our government to be put on the side of progress, fiscal responsibility, and accountability. It's time we rise to the challenge that endangers our economic freedom and revive our economy. Let me close with one last video.

Ok, so with that I'll open it up for questions.

Well, you've sort of answered the question to some degree, I think. It's a little bit of all the above, without question. But in this country, we've had a view that the American Dream is a house. I think that's a fine dream, but for the longest time that meant you saved, positioned yourself to take on the responsibility and accountability of home ownership, and you made your own bed. If you borrowed money to buy a house, you lived with the consequences. We started, by the mid-90s, putting in place policies to make it affordable for everyone to own a home. We put government-sponsored entities in business to support that activity, and we presented a structure where anybody could buy a home with five percent down. Lots of policies supported that. Then, like any market, it started to take advantage of those things. Banks and lenders created tools to create a capital pool for those opportunities because they were supported by these agencies. Then people made lots of bad decisions, and I'm sure there was fraud. All those things came together. If you look at home ownership rates, for 40 years they hovered between 64 and 66 percent. From 1995 through about 2007, they went from about 64.5 to almost 69 percent. At the same time, we had stimulative interest rate policies. Money became less costly, so people borrowed more, and asset values appreciated. Underlying is a set of policies intended to stimulate homeownership, and it did that. If you look at real valuations of homes over a long time series, they hover in a narrow band until that time frame, then they double. The same set of factors drove that. The policies created an incentive for things to happen that were different from historically, and it drove an excess. Just like any stimulative behavior, you can look at Cash for Clunkers or the $8,000 first home mortgage opportunity. Each created a bubble, short-lived because the policies were short-lived. But each created bubbles and industries based on that change in capital structure and resources. Other questions?

Well, that's a huge set of questions. I would say we have to find and elect people who believe these free market principles, and then we have to hold them accountable. We have to find people who are committed to it in a way that they will behave consistently even if it means they won't get reelected. There are lots of things that could be changed in terms of the process, like term limits, but that's not my expertise. Ultimately, if we can't get folks in power with the political will and the stomach, and they have the support of enough of us and businesses, then we don't have a chance. Businesses are lining up at the trough to take advantage of subsidies and mandates. We have folks from Georgia Power and Southern Company here; they are fighting this at every turn. We are competing with people who want to burn wood instead of making paper out of it because it will be subsidized or mandated, and that ends up in our utility rates. If we can't find people who commit to that and support them, I don't think we have a chance. The staggering change in the economic freedom index over ten years is alarming. We should learn from what's happening in Europe, especially in the south. Many of the policies we are driving toward have created the situation there over a longer period. In the US, we have demographic benefits; our population is growing, while southern European countries are shrinking. That makes it difficult when you have future bets and burdens with a smaller population to carry the water. It has to change. We still have the issue but not to the same degree because of growing population and immigration. If that were to change, this would be a tougher discussion.

You might find it interesting that organizations like the Fraser Institute and Heritage do state rankings of economic freedom. I'm not as familiar with the state rankings, but my experience in Atlanta and Georgia has been good. I'm more familiar with Atlanta than Georgia. What I see in the city of Atlanta to create more confidence in fiscal leadership and make changes to structural issues at the local level makes me feel pretty good. For the long-term competitiveness of Atlanta, you can sell that effectively. The city government is trying to do that. States and cities have an advantage because they have to balance their budgets. They can't borrow 40 cents on the dollar indefinitely. So they have to deal with it, and the political will is easier to gather. The work has to be done. I think what's happening in Atlanta is positive. There's a national spotlight on some of it, which should give confidence.

I don't know that I can be exhaustive in that list. But certainly the Chamber has been vocal, and a lot of its members have become more vocal. There are companies in Atlanta and Georgia that we find ourselves in a similar position with on many of these issues. Southern Company is one. There are lots of small companies we do business with. Menards is another example. I'm probably not the best person to give you a list, but they might want to do that themselves.

Without knowing specifically how it was in the past because I wasn't there, I would say that with market-based management and the set of guiding principles we use, that is how we approach our business every day. We think about what makes the free market society work and apply those principles inside the firm. We have a philosophy we call virtue and talents, and we cultivate a culture based on ten principles. We talk about it all the time, not just on the wall. In interviews, we think about how people fit this culture. In 360 evaluations, we ask for feedback based on those principles. We try to drive a culture that creates an environment of spontaneous order of entrepreneurs, so that knowledge and decisions are tied together. People with the best knowledge make decisions that create value. I often say, just because I'm the boss doesn't mean I'm right. If you're not willing to tell me that, we have no chance. That seems different from the past. Being private, people know less about what we do. We don't have to have a vision that Wall Street agrees with. We base our vision on our capabilities and competitive advantages, not just the industries we're in. We look at our capabilities and find the best opportunities to create value, not necessarily only in our current spaces. That's a different approach. It's hard to explain to an analyst on Wall Street who has 15 minutes. We're fortunate not to have to do that. We can try things and experiment, and we accept that some will fail. That's difficult for a public company. We also don't have the cost and burden of public activity. I spend a lot less time on Wall Street than my peers in public companies. Those are some examples.

That's a structural issue that has to be addressed. If we are not in places like Terry College, Florida State, SMU, and universities across this country, if we don't have a balance in the leadership and culture of economics departments of people who study and understand free markets and teach about them, then we will continue to see that happen. Somewhere along the way, government became about solving our problems. The Constitution was written for the people to restrain government, not the other way around. We've switched that, and expectations are different. It's structural in the way we learn. We've done things to pull students, but it's surprising how few people have heard the connections that once you get into business you see. We have to make structural changes so there is balance in education. Then we have to commit to getting the right leaders and hold them accountable.

I'm not aware of a single source for that. What we try to do is think about the principles I described and apply them to regulation. Regulation has a place, government has a place, but it's in creating and supporting productive policies that allow the marketplace to do its thing. If you think about those principles and apply them to regulation, everyone is different, so there's no simple answer. We try to apply those principles and ask: is this productive or not? Sometimes it's productive or redistributive, sometimes productive or destructive. It depends on the type of regulation. You mentioned subsidies. Generally, if the market valued something highly enough, resources would flow to it, except for things government has to do like roads, ports, dams, national defense. If jobs were creating real value, capital and resources would flow to that opportunity. The subsidy question often comes up in the name of progress, but you can look behind those things and find a sponsor who benefits. That's cronyism. It always sounds good, like clean energy, but at what cost? We have to force that dialogue. We could do it, but you probably wouldn't like your power bills. By the way, you don't have to because free trade and the market work. If the price of oil tripled, we would find alternatives because it would be profitable. There is a balance. Regulation and government have a role. If I measure it against the principles, I can usually come to a conclusion. Sometimes you have to look underneath to see who is driving.

One for what I haven't dropped yet. Thank you very much.