cc  >> This program is presented  by the Wisconsin Bankers  Association in conjunction with  the Wisconsin Realtors  Association, and the Greater  Madison Chamber of Commerce.  Happy New Year everybody, I'm  Jeff Mayers, I'm the president  of WisPolitics.com  and WisBusiness.com and  I'm going to be your host today.  My job is to keep the trains  running on time so I think we're  off to a good start so far.  Please finish your lunch if  haven't done so, but we're going  to get started with our speaker  real soon so that we keep on  time.  And just to let you know, each  speaker after his presentation  will answer some questions, and  the WBA staff members will come  find you with a microphone so  that everybody can hear your  question including the speaker.  Now before I introduce that  first speaker, let me recognize  our presenters and sponsors for  today's event which is another  record-setting attendance for  today's event.  So thank you.  The sponsors and organizers  include the Wisconsin Bankers  Association, the Greater Madison  Chamber of Commerce, the  Wisconsin Realtors Association,  the Boardman Law Firm,  News Talk 1310 WIBA, the Federal  Home Loan Bank of Chicago,  the Capital Region Business  Journal, RSM McGladrey,  the Wisconsin Technology Council  and MG&E.  So thank you to all our  sponsors.  Let's give them a round of  applause. 

 [APPLAUSE]  Now our first speaker  today is Michael Knetter.  He's the dean of the Wisconsin  School of Business.  You may have seen that big  building down on campus,  Grainger Hall, and Dean Knetter  has been instrumental in making  that a focal point of the  business community both here in  Madison and in the state of  Wisconsin.  He joined the Wisconsin School  of Business as its dean in 2002.  As dean, he has directed  the $85 million Wisconsin naming  gift, the expansion of Grainger  Hall, the improved national  standing of the full MBA program  and the restructuring of  the enterprise MBA program.  He is published widely in the  areas of international and macro  economics.  He has served as the senior  staff economist for the  President's Council of Economic  Advisers for former presidents  George Herbert Walker Bush  and Bill Clinton.  And Dean Knetter is also a  member of the Wisconsin Business  Council Advisory Board.  Please welcome, everybody,  Dean Michael Knetter.  [APPLAUSE]  >> Michael Knetter: Thank you. 

 It's a pleasure to be here with  this group today.  It's a wonderful audience for me  and I have to say I've been in  Madison now for about seven and  a half years and had a chance to  get to know a lot of you in this  room, and I can say that at the  university we really appreciate  the engagement that we have with  the community and all the  support we get from all of you  both as taxpayers and also as  donors to the university and  friends.  So thank you all very much.  It's really an honor to be here  and speak to you today.  So it's an honor to speak to you  but it's also a challenge.  As we all know the economy  hasn't really played out in the  last two years the way any of us  would have hoped.  We invited Nouriel Roubini out  to speak in June.  Many of you know, I'm sure, know  who Dr. Roubini is.  He's a quite notorious professor  now at NYU Stern School of  Business and has probably been a  little bit more accurate than  most in predicting the financial  crisis that we find ourselves  kind of emerging from hopefully  today.    When Roubini came out he said  something that kind of stuck  with me. 

 He said, yeah, you know, it's a  bad time to be a citizen, but  it's a great time to be an  economist.  He said, no one's ever wanted to  listen to me this much before.  [LAUGHTER]  I feel a little bit that way  myself.  I'm no Dr. Doom like Dr. Roubini  has come to be known.  And I don't get around the globe  talking about the economy the  way he does, but I think this  will probably be one of six  talks I'll give on the economy  in the next two weeks.  It's kind of economic outlook  season for many groups.  So I'm excited to be here and  share my thoughts with you.  I'm going to really talk about  three different aspects of the  economy and the relationship to  Wisconsin.  So there's a cyclical component  and that's the US recession and  recovery, it's really a global  recession and recovery.  And that provides certain  context for where we are. 

 Separate from that business  cycle, there are some long run  economic trends that are shaping  our economy and other economies  around the globe that are very  important to consider.  They're like the forces of  gravity.  This one's a little bit like a  tsunami or an earthquake, not to  make light of those kind of  catastrophic natural disasters,  but this business cycle has been  a economic disaster for sure,  the scale of which we have not  seen in the post World War II  period.  The second piece though, these  trends in the economy are a  little bit like the pull of  gravity or the tides.  They're always there and they're  kind of shaping what our  opportunities are as a country  and as a state and as a region.  So they're very important to  take into account.  And then finally I'll say a few  things about what Wisconsin's  opportunity is in this  landscape.  Along the way I'll give you a  national forecast, and my  Wisconsin forecast is really  pretty much in line with what I  think is going to happen with  the country as a whole.  So I won't bore you for long  with the details of where we've  been these last two years, I  think we all know that all too  well.  People think of it as a housing  bubble and bust that did a lot  of collateral damage because of  the complex way our financial  institutions and housing sector  had financed the housing boom. 

 There was also a lot of other  asset classes that had probably  reached inflated prices for many  of the same reasons.  We developed a lot of exotic  financial instruments.  We can think of that as  financial innovation.  Much like with the Internet  bubble, not everyone really  understood the complexity of  these products.  We had a hard time valuing them  accurately.  As it turned out, we didn't  value them very well.  Unfortunately, unlike the  Internet sector, when this  sector imploded it caused  incredible collateral damage all  around the economy.  So that's what led us to this  really deep recession.  Now, we've had a massive  government response in terms of  monetary policy.  Really unprecedented in scale,  in other words how much the fed  has expanded its balance sheet,  and scope, the types of assets  the fed has chosen to hold to  prop up certain markets. 

 The fed is well on its way to  cleaning up that balance sheet,  getting out of some of the more  exotic asset categories, exotic  at least relative to its  historic investments.  But still the balance sheet is  much bigger than it was when we  entered this recession and that  probably can't last.  And so that's one of the  challenges we face coming out of  this recession and into the  recovery.  We've also had a massive fiscal  response.  Taxes are light, spending is  heavy, deficit is really  unprecedented, at least in the  modern period.  So that doesn't give us much  margin for error in the course  of this recovery.  So the question is, how is the  recovery going to be sustained.  Because I don't think we can  maintain the level of government  stimulus that we've had in place  to get things moving again and  now we've got to hope that we  get some traction in the private  sector.  A quick recap.  The stock market bottomed out in  March of 2009. 

 Since then we've had a nice snap  back but we're still well off  previous highs.  The S&P index is still down 400  points roughly from where it  peaked out at around 1500.  We see a turn around in the  economy in production that  happened a little bit after the  turn around in the stock market,  and that's pretty normal for a  recovery.  You can see the deep contraction  kind of hitting its peak in the  first quarter 2009.  The second quarter the economy  was still contracting but not  nearly as much.  The third quarter we finally saw  some positive growth.  But again, that's off an  economic base that was greatly  diminished by the steep  contraction that really began in  the first quarter of 2008, it  was a little choppy and then  really gathered momentum in the  second half of last year and the  first quarter of 2009.  Unemployment, of course as you  all know, is at near all time  highs in the post World War II  period.  We've had more job loss in this  recession, both in absolute  numbers of jobs lost and in  percentage terms, than any  recession in post World War II  history.  We aren't yet reaching the  unemployment rates we reached in  the early '80s because that  recession started in an already  weakened economy. 

 And I'm going to come back to  that in a minute.  Finally, just to scale how bad  the labor market is, this is a  picture, across the horizontal  axis it's the number of months  that we've been in this  recession and the vertical axis  shows the percentage of jobs  we've lost relative to our peak  employment at the beginning of  the recession.  And you see the red line  charting the current recession  was a little bit more moderate  than the 1981 to '83 recession  up until November-December of  2008, and that's when things  really came under pressure.  And you can see now we've lost  about 5.3% of total employment,  payroll employment, from the  economic peak, and in that  '81-'83 recession, as bad  as it was, we only lost about  3.3% of total jobs.  So when people say this is the  mother of all recessions, yeah,  I would say it is.  The good news is it looks like,  you see kind of the normal  distribution chart here of job  loss, it reaches a peak  hopefully when the recession is  at its worst and now we're  finding our way back closer to  having some positive news and  hopefully in the next month or  two we'll actually see payroll  employment back in positive  territory on a sustained basis.  But I'm still not taking that  for granted.  It's still a very touchy  situation.  We're kind of one natural  disaster away from big problems,  and, as I said, I think we're  extended so much in fiscal and  monetary policy that our margin  for error is greatly diminished.  That said, I'm just going to  give you my forecast so that you  can't say I didn't put myself on  the line. 

 I think the stock market has  really priced in the moderate  recovery I expect we're going to  see.  So I suspect most of the gains  in the stock market have been  reaped, at least the outsized  gains, above normal gains.  And I would look for this to be  back, the distribution of what  equities would do this year for  me is going to have kind of the  normal distribution around about  an 8% average rate of return.  I'd be happy if we could do  that.  There's still downside risks, as  I said.  GDP growth, 3%, maybe a little  bit higher which in a normal  you'd say that's about the rate  of growth in the economy that we  could expect.  But we're so far below our  potential right now, normally in  an early recovery you'd see much  juicier growth rates than 3%.  I think the headwinds we're  going to create by removing  stimulus means 3% will be about  all we can hope for.  And that's means unemployment is  going to be pretty sluggish.  I'd say we'd be lucky if we end  the year down around 9% as a  country. 

 Where does Wisconsin fit into  this?  I think from a cyclical  standpoint, we're a pretty  typical state right now.  We weren't the epicenter of the  problems that caused this  recession, by any stretch.  We did not have the kind of  overbuilding you see in other  parts of the country.  We did not have the kind of  exposure to a lot of the exotic  financial instruments that you  saw in other parts of the  country.  But we're suffering the  collateral damage about as badly  as anyone else.  So I think our economy is  roughly going to track these  national trends.  I don't see anything real  special about us, and I don't  think there's anything special  that we can do.  I think one thing we've probably  done is competed reasonably well  for stimulus dollars, which  Wisconsin I'd say historically  hasn't always been good at going  to the feds with our hands out  but I think we did a decent job  this time and maybe got our  share.  So the cyclical impact on  Wisconsin is really, I view us  as a bystander with respect to  the factors causing the crisis,  but we are affected by that  collateral damage, the decline  in national income and spending  hurts all of our manufacturers  and our agricultural companies.  Wisconsin faired reasonably well  in the competition for stimulus  but really we need to ride this  out like anyone else, we need to  make smart decisions, we need to  tighten our belts where it makes  sense, we have to do more with  less. 

 There's really no magic there.  There's no magic bullet that's  going to solve this problem.  I think the more important thing  that we have to keep our eye on  as a state are these long-term  trends, these forces of gravity  that are way outside of our  control in Wisconsin.  They're global forces, they're  national forces, and they shape  the opportunities that are there  for us.  To some degree we can  self-determine where we go, but  to be smart about it we have to  appreciate what these trends and  forces are so that we pick the  right spots to try to compete.  And I want to walk you through  those trends because I think  partly I hope they'll make you  feel a little better about where  we are as a country and then  maybe partly they will inform  what might be a good direction  for our state policy and the  direction that we might want to  go.  So first I'm going to set up a  little bit of a straw man.  If you get absorbed by the  media, I think you'd be, and  it's understandable given what's  happened in the last two years,  I'm not blaming the media, but I  think what gets reported on most  today makes you feel pretty bad  about our economy.  I think one interpretation of  what's happened in the last two  years is that this is something  that's been brewing for a long  time, 10, 20 years, 25 years,  and that our economy has looked  good over this period but really  it's been driven by easy credit,  irresponsible households that  are spending too much and saving  too little, they're consuming  too much, our government is  spending more than it's taxing  and the only thing that's kind  of truing all this up is our  current account deficit.  We're taking in goods and  services from foreign countries  beyond what we're exporting so  we're able to sustain a higher  level of living standards but at  what cost?  Many people would lead us to  believe we're mortgaging our  future, that's the cost, and our  children will be left paying the  bill. 

 There's a possibility that  that's how things play out, but  it's not quite that simple.  Here's the picture of the  savings rate as a share of  disposable income going back to  1960.  And what you'll see is indeed  beginning in the mid-'80s, after  we emerge from that nasty  recession, savings rate up until  that point had hovered really  between, almost always between  8% and 12%, maybe between 6% and  12%, for about 25 years.  And then there was kind of a  steady sustained decline in the  rate of saving relative to  disposable income.  And for many people that's a red  flag that says households were  irresponsible, they stopped  planning for the future, of  course we had a current account  deficit, right?  And this is a picture of the  current account deficit, and you  see that indeed since 1982  almost every year that account  has been in deficit, we have  imported more than we have  exported in goods and services.  The one year where we had a  surplus was really kind of an  artifact of some negotiation by  the first Bush administration to  get our allies in Gulf War I to  transfer some funds to us to  essentially compensate us for  playing a leading role in that  war.  So were it not for that  transfer, we would have had a  deficit in this account ever  year since 1982.  And that's a red flag for a lot  of people.  And rightly so.  But there are a lot of factors  that go into that, and I want to  come back and talk about those  in a second. 

 Now, the other way to look at  what's happened in the last 30  or so years since that really  nasty recession of '81 to '83, I  think if you go back and try to,  if you're old enough like me,  put yourself in the shoes of  people at that time, and I was  just graduating from college in  1983, and I often tell people  the economy was so bad then  I decided to get a Ph D.  [LAUGHTER]  If that's not a warning sign,  what is?  I decided to just stay in  shelter in higher education, and  I still haven't found my way  out.  [LAUGHTER]  But I think the remarkable  thing, if you go back and read  the popular press of that time,  you would have a hard time  finding any stories that  had anything positive to say  about the United States and any  optimism about where we'd find  our way in the future.  The common themes were we're no  longer competitive in the high  value sectors, heavy  manufacturing, autos, steel,  other heavy equipment.  And all people could see at the  time is we were being run out of  those sectors mainly by firms  from Germany and Japan, and the  common policy theme of the time  was we had to develop our  economic institutions more along  the lines of theirs, be less  about competition and short-term  performance of companies and  more about collaboration and  long-term relationships.  It's interesting you don't  really hear anyone say that  anymore.  No one wishes over these last 25  years we'd been more like  Germany and Japan because things  actually didn't pan out for them  in quite the same way.  And almost nobody talks about  them as our main rivals anymore,  we talk about China and India.  So it's important to file that  away.  What we've experienced in the  last 25 years up until this  downturn is remarkably high  growth rates in real GDP,  underlying that very high growth  rates historically for us in  productivity, that is our GDP  growth wasn't simply more people  in the labor force, it was the  people in the labor force doing  things smarter, producing more  with less. 

 We had successfully lower  unemployment rates with each  business cycle until the last  one, and we had a very strong  equity market over this period  and a rapid rise in the stock of  wealth, both financial asset  wealth, real estate wealth and  other tangible real forms of  wealth in our households.  How did that all happen?  The important long-term trend  here is that US firms  collectively capitalized on the  opportunities that were created  by two very disruptive forces.  One was the opening up of many  markets to commerce.  People talk about globalization,  I think to put a finer point on  it I would say the marketization  of eastern and central Europe  and many parts of Asia,  including China and India, was a  huge disruptive force in the  economy.  As they moved to market systems  and began to engage with the  rest of the world, it was going  to change supply and demand  dramatically for those countries  that were engaged with global  commerce.  And you have to adjust to that.  The other big disruptive force  was technological change of a  scope we haven't seen in a long  time, probably on the order of  the combustion engine or  electricity, and that is the  fusion of telecommunications,  information technology and  connectivity through the  Internet.  That provided a means for many  companies to do things  differently.  To share information better, to  make decisions differently, to  have people located differently,  to just build a better mouse  trap in all kinds of  organizations, manufacturing,  services, you name it.  So not only did we build the  companies that power the  knowledge economy, we have been  a little bit more effective at  deploying those technologies in  other sectors to boost  productivity. 

 That's been the success story of  the United States over the last  25 to 30 years.  And in 1983 I guarantee you  you won't find any popular press  articles predicting that.  But it happened and it happened  through the magic of the  marketplace.  Now it's not all a rosy story.  There are many people that have  been left behind.  People with a college degree can  benefit from these changes in  the US economy much more than  people without a college degree.  And parts of the country that  have a high density of college  graduates and are  well-positioned to be the  drivers of the knowledge  economy, those regions have  benefited a lot, other regions  have faced a bit of a headwind.  To really drive home the point  about how careful you have to be  with data, this is a picture of  the S&P 500 average going back  to 1970 adjusted for inflation.  If the S&P goes up by 10% but  there's 10% inflation, who  cares, right?  A dollar invested isn't buying  you anymore a year later.  Notice in this picture, and I  started in 1970 for no  particular reason, I didn't look  at the data, I just asked, you  know, let's produce a chart back  to there. 

 What you see is from 1970 to  1983 kind of near the bottom of  that recession, if you put a  dollar in the S&P in 1970 it was  worth 50-cents in purchasing  power in 1983.  So when we look back at those  savings rates of 8% to 10%,  savings rates don't happen in a  vacuum, those are decisions made  by people trying to provide for  their retirement.  And if the money I set aside in  1970 is worth half of what it  was when I saved it, I'm going  to have a pretty high savings  rate in 1983.  So when you look at high savings  rates just remember it's not  happening in a vacuum, people  are trying to hit some target  goal with their retirement  accounts, and if you're not  getting a positive return, you  got to save a lot of your  disposable income.  What happened in that chart  after the mid-'80s.  Remember that chart, the savings  rate started to go down.  Why?  Well, maybe people had put aside  quite a bit of money because  they were very pessimistic about  the future and now look what  happens on the real rate of  return on equities after the  mid-'80s.  What you see is even up to the  Internet boom we went from about  42, which was the trough on this  chart, all the way up to about  120 in a period of 12 years.  So that's like a tripling of  what my nest egg turned out to  be.  So while I wasn't doing very  well in the '70s and early '80s,  all the sudden I'm doing pretty  well. 

 And I'm thinking, well, maybe I  don't need to save quite as high  a fraction.  I've got more money than I  thought I would have here.  So I think we should give  households a little more credit  than they are given in a lot of  media accounts today.  Obviously, given what's happened  in the last two years we might  have some regrets about some of  the spending we've done over the  last five years.  We couldn't forecast that  turning point any more than Alan  Greenspan was able to.  But there was a reason the  savings rates came down.  And I'm just making the case  that the reason they came down  is people's wealth position,  which is this picture going back  to 1952, household net worth and  the aggregate relative to  disposable income.  What you see is the '60s we're  up there kind of high about five  times income, and then in that  period when investment returns  were so bad, in spite of a high  savings rate, it fell down to  just a little over four times  our disposable income in the  aggregate, and then because the  markets performed better and  people had saved enough, little  by little this grew outside of  its normal range.  It hovered between four and five  times income all the way back to  1952, all the sudden it's up to  six times income in the late  '90s.  Well, no wonder people were  spending more and saving less. 

 You would expect that this is a  ratio that has some normal level  to it that reflects what people  think they need in retirement  relative to their current cash  flow.  So this I would argue is  something that ought to be in  some normal range, and savings  behavior adjusts when it gets  outside the normal range for any  given household.  So where do we stand today after  this big market crash.  Well, actually our household net  worth in the aggregate relative  to disposable income even  post-crash is about where it was  in the mid-'90s.  Which, at that time, I don't  think anyone that we had a huge  saving crisis.  So I think we want to be  cautious about selling  everything short about our  economy.  Yes, we probably regret some of  the spending we did over the  last decade, but maybe we're not  in as bad as a condition as we  believe.  So my story of the last 30  years, not the last two years,  is that income in investment  returns grew much faster than  people expected after 1983, it  wasn't evenly shared, as I've  noted, but it's been a good  economy on average.  And that's because financial and  real estate investments did well  and higher productivity meant  higher labor income.  So people, especially with  college degrees, have  experienced better evolution in  their incomes than any of us  when I graduated in 1983 had any  reason to believe could happen. 

 I think we all feel, my  classmates at UW Eau Claire feel  very lucky for how things turned  out in this economy.  Well, households with higher  than expected wealth coming from  both those higher than expected  incomes and higher than expected  return on saving are going to  spend more, and save less and  that's what we see in the saving  data.  And then the current account  deficit is the foreign capital  coming in, buying US assets  because they want to participate  in the returns that can be  reaped in this knowledge  economy, investing in those  companies, investing in our  government because we have run  on balance a pretty good  monetary policy.  US Treasury is still viewed as a  good asset, it's the thick dense  market in a debt security.  And also people want to invest  in our real estate.  There are plenty of foreign  nationals that buy vacation  properties in the US.  I still haven't met the person  that's buying the vacation  property in Germany or Japan,  from the US.  There's not a lot of flows going  that other direction.  So if we're not willing to hold  their assets to the degree they  want to hold ours, what are we  going to accept from them in  exchange for the assets of ours  they want?  Goods and services.  So I would argue it's not so  much that we've completely  mortgaged our future, but our  generation has had the good  fortune of owning the wealth in  the period of time when we've  really opened up our economy to  international capital flows. 

 And not surprisingly, what many  households have elected to do  with this sort of windfall is  consume more.  We could have not consumed more  and passed this down to our  children, and there's probably  some of that that will go on.  But that's what happened.  So there's no other way to  really reconcile this long  period of current account  deficits in my mind other than  to acknowledge that when we  opened up to the rest of the  world for trade and capital  flows, not only did it have an  impact on what our  specialization would be and our  comparative advantage, but we  had a pretty strong balance  sheet of hard assets coming into  that period and there is more  foreign ownership of that today.  So the creation of the knowledge  economy was real, and it powered  the US economy over this period.  And as bad as things are right  now, we have to remember that at  least today we know that our  economy has sectors in which we  are the world market leader.  And we are not facing severe  threats from Germany and Japan  in those sectors at the moment.  And I think we need to keep our  eye on the big ball which is  promoting competition, promoting  innovation, promoting  risk-taking and investing in  knowledge and human capital is  the key to the future.  It's not turning back and saying  we have to be more like we were  in the 1960s.  That is not going to be a path  for prosperity for Wisconsin or  the nation. 

 So in summary, I'm talking a lot  about the national scene because  it shapes what's available to  Wisconsin.  But if you remember anything I  would try to impress this upon  you: The '70s and early '80s  were a terrible period in  economic history and it wasn't  just the nasty recession of  '81-'83, it was the oil shock in  '74, it was the oil shock in '79  and those things that  accumulated and we were in a  very weakened state.  The mid-'80s and '90s were  clearly and economic renaissance  for us where we built some of  the key companies that powered  the knowledge economy and  distributed that technology  throughout our economy to boost  productivity.  Savings rates fell but there was  rapid, although uneven, growth  in the stock of the wealth.  The 2000s are more complicated,  and I think smart people  disagree on when did we cross  the line from this healthy new  economy to an economy that maybe  was powered by too much debt.  And I would say maybe the four  or five years we probably had  some add-on to our growth rate  from leverage, debt and other  credit creation that was going  on outside the scope of  regulation.  So what are the structural  implications for Wisconsin?  The US position in the world has  clearly shifted from being this  manufacturing powerhouse, we are  still that but it's more  balanced now with this growing  knowledge and service economy.  And many of these service sector  jobs are high paying jobs, I  don't need to tell that to  people that are in the financial  sector.  The shift has been, I would say  on average, beneficial to the  nation.  The last thing we could afford  to be is trapped in the same  industries that Germany and  Japan were pressuring us on in  the 1980s because they're still  there and now they've got new  competitors like Korea breathing  down their necks making life  difficult for them. 

 That's not the place you want to  be.  So we've kind of migrated to a  higher point on the value chain,  and I think that's been right  for the country, it hasn't  really helped Wisconsin because  we are not a big player in that  space yet.  Wisconsin is still relatively  heavy in manufacturing and  agricultural, and I want to be  clear, those are great  industries, they're important  industries and we need to  continue to promote them where  it makes sense.  But we also need to find our way  into this knowledge economy and  recognize that that is going to  become more important in the  future, and if we're not playing  in it, I don't really see how  Wisconsin is going to catch up  and resume growing at or above  the national average growth rate  if we're not in that space as  well.  So we need to promote this kind  of healthy balance.  So when I look at our state, and  I grew up in Rhinelander and I  went to college in Eau Claire,  was away for 20 years, moved  back here, now I live in the  southern part of the state,  obviously.  There's a part of our state  where we should really be going  gangbusters in manufacturing,  and we are but I think we could  do better if we really put more  emphasis on it.  And that's that southeastern  corridor up into the Fox Cities.  It's got proximity to major  metropolitan markets.  It's got great transportation  networks. 

 It's got all the kinds of things  you need to get stuff in and out  effectively.  And I think we've got multimodal  transportation in and out of  there and that's important  because no matter how prices  change and opportunities to move  things around change, we've got  a lot of options there.  So being right on the lake helps  a lot.  I think agriculture, that's  coming back in a lot of ways.  It's not going to be a large  employer perhaps because  agriculture has become more  automated just like  manufacturing has as we've tried  to improve ourselves, but there  is more of an emphasis on  natural products and there's  more high-end agriculture where  I think it's a little bit more  R&D intensive and I think  Wisconsin, through concerted  effort, could do a better job  there.  I think we could promote more  knowledge and high-end service  economy performance both in Dane  County around life sciences, in  southeastern Wisconsin around  finance, also around life  sciences particularly water  resources is an area that's  getting a lot of attention and a  lot of traction and I think has  a lot of promise for us in  southeastern Wisconsin in  Milwaukee in particular.  And I think we need to sort of  focus those areas on that  activity.  And then finally, I think the  north is an area for tourism and  don't poo-poo tourism.  Let me tell you.  As a guy who graduated from  Rhinelander High School, there's  one thing I can say and that is  in 1978 we didn't play Lakeland  High School from Minocqua in any  sports because we would  annihilate them. 

 I'm sorry if there are Lakeland  graduates here, that's just how  it was.  [LAUGHTER]  And no wonder, right?  Because Rhinelander is a paper  mill town.  We had a big paper mill, 800  guys worked in the mill, guys  and gals but mostly guys.  What did they have in Minocqua?  A bunch of cabins.  Right?  How are you ever going to have  an economy based on cabins?  Well, guess what?  Rhinelander doesn't play  Lakeland High School in sports  now either, and it's because  they would annihilate us.  That's interesting.  That's something that when you  go away for 25 years and come  back and you see something that  stark, it tells you kind of  everything you need to know  about how viable tourism is as  an industry.  It's very viable.  But we've got to understand  we're in competition for  high-end tourist dollars.  People can go to upper Michigan,  they can go to upper Minnesota  and if we don't pay attention to  the resources up there and take  good care of them and make that  an area that's attractive to  high dollar tourism, we're  leaving something on the table. 

 And it's hard to do all of these  things equally in every part of  the state.  That's the real challenge.  And I think a strategy that  promotes business but makes  tough choices about where things  make sense is going to require  great leadership, but I think  that leadership is around this  state, I think we need people to  come together and think about  it.  There's got to be something for  everyone, but not every region  can be all things to all people.  You've got to start to make  choices.  All these industries are  important but the odds of  creating the knowledge economy  in the northern tier of the  state are too long, it's just  too expensive.  It's not that it couldn't happen  but how much do we have to throw  at that.  So I think we have to reckon  with that reality.  And if we don't start to make  those choices, our state doesn't  have enough money to be good at  everything.  Not be good at everything  everywhere. 

 So that's my pitch about  Wisconsin.  I would be happy to take your  questions.  [APPLAUSE]