Putting It All Together
If you look at the model of the simple economy we presented earlier, you should now understand that the only way for the economy to be in equilibrium is when government spending and investment (the two faucets at the top) are equal to taxes and savings (the two drains on the bottom). Any variation from this will either result in inflation or unemployment. We have been saying all along that economics is about tradeoffs and this is the tradeoff the government and Fed are facing. Just as a government must sacrifice some cars in order to produce a fighter plane, the Fed must accept a little inflation if it wants to reduce unemployment and it must accept a little unemployment if it wants to reduce inflation.
It is important to keep this relationship in mind:
Government Spending + Investment = Taxes + Savings
In a sense, this is Say's Law all over again. For any given amount of money that is being supplied through taxes and savings, people can place equal demands on government spending and investment. If the demand is higher, then a shortage of goods results; prices (including interest rates) go up, which is inflation. However, if less demand is present, then an oversupply of cash results, prices (including interest rates) fall and people are laid off of work until the excess inventory is sold or until demands rise again; this is the unemployment side. When the two sides of the equation are equal, there is no upward or downward pressure on prices and nearly everyone who wants a job will have one.
Of course, it is nearly impossible to have both sides of the equation being exactly equal, which is why we always have a little inflation or a little higher unemployment than desired. Understanding why this occurs is the essence of the business cycle.
We said earlier that the economy tends to grow at a rate of about 3% per year. This overall growth rate is the "big picture" trend and is called a secular growth rate. However, around that secular trend, there are fluctuations that occur, which are known as the phases of the business cycle. The business cycle is nothing new to anybody who has been investing for any length of time. When an economy's output (GDP) is increasing, that is an expansionary phase. If it an exceptional expansion, it is called a boom. Eventually the output peaks and the economy starts to slow down; it is in the downturn phase. If it slows down significantly, it’s called a recession. While “significant” is purely arbitrary, most economists define a recession when GDP decreases for two consecutive quarters. A severe recession is called a depression; although there is no clearly defined line where a recession becomes a depression. (There is, however, an old economics joke that says a recession is when your neighbor is out of work while a depression is when you’re out of work!) After a recession, the economy will eventually head into an expansionary phase again. Figure 6 shows these main phases of the business cycle:
Figure 6
Business activity is always either expanding or contracting along this secular trend. Although this phenomenon has been observed in all capitalistic societies, there is still no single accepted theory as to why they occur. While there are many differing theories, most would agree with the following overview of the economic cycles.
- Supply and demand are behind every phase of the cycle. We learned earlier through Say's law that supply creates its own demand. As long as people are supplying more goods, they will have the incomes to demand more goods. As long as there is sufficient demand, people will continue to supply (the law of supply) and the expansion phase will continue.
- Expansion phases peak and then contract. As long as the economic outlook is good, businesses will continue to invest and expand production. Likewise, consumers will expand their purchases if they feel their incomes will justify it. We saw in our simple economic model that businesses have the incentive to invest and consumers have the incentive to spend if interest rates are low. But what causes the expansion in the first place?
Modern business cycle theory focuses on the effectiveness of workers. For example, a manufacturer may find a more efficient way of production, usually through new technology, and thus get more output for the same amount of input. In other words, they figure out a way to make a bigger pie from the same amount of ingredients. If so, the value-added will be higher and it is the total of all value added to goods that makes up GDP. Economists call this change in efficiency a change in total factor productivity, or TFP.
These changes in efficiency cause TFP to be above the secular trend (average growth rate), which means firms have more money to spend on investments, including additional labor. Say's law tells us that the additional output will be accompanied by additional spending by consumers and the economic expansion has begun.
However, with each additional factory that is built, the output must decrease through the diminishing law of marginal productivity. That's just an economic phrase to describe the fact that as more and more inputs are added to a fixed input, then the output must eventually decrease.
For example, if you add more workers to an existing factory, the output will eventually fall. One of the reasons is that as the factory hires additional workers, they hire the ones with the least productivity last. In a simple economy that employs only farmers or machinists and produces either military goods or food, the military factory will hire the very best machinist first; they are not interested in the very best farmer.
However as demand increases, they will be forced to hire more workers.Of course, they will hire all of the machinists first, with each machinist being less productive than the one before. If demand stays sufficiently high, the military factory will eventually hire farmers, whose productivity will be far less than the machinists. If the demand still stays high, the factory may become very interested in hiring the very best farmer to put to work as a machinist. The point being that each additional worker adds less and less to the productivity, even though total output is expanding.The diminishing law of marginal productivity is sometimes called the flowerpot law because, if it weren’t true, the world's entire food supply could be grown in one flowerpot. But as more and more seeds are added to a single flowerpot, the total output will eventually decrease with each additional seed.
During this late expansionary phase, unemployment is very low (a lot of people are working) and prices are rising. Among those rising prices are wages that must be paid to workers. Eventually, businesses discover that the additional output will not cover costs and start to scale back production. Workers are laid off and do not spend. The supply of goods exceeds demand and spending and profits will drop. The economy has begun to contract.
- During contractions, the battle between supply of goods and the demand by consumers will eventually reach equilibrium. In order for the excess supply to reach equilibrium, prices must fall. As prices fall, suppliers are eventually able to sell the excess goods. Consumers pay down debt and firms do the same by purchasing bonds, which raises their price and drops their yields. Remember, prices are falling and the interest rate is the price of money for current consumption. Once the interest rates fall sufficiently, firms will find it profitable to produce and will start the expansionary phase once again.
There is no way to accurately predict when the turning points of the business cycle will occur or how long any phase will last. However, it is a goal of the Fed to smooth out the business cycles and make the peaks and valleys closer to the secular trend. In other words, the Fed's actions will be countertrend of the cycle. They will try to slow down investment and spending during expansionary phases and attempt to encourage spending during contractions. We have shown that the major cause of inflation is an excess supply of cash. Because the Fed can control the supply of money and therefore inflation, they should be able to smooth out the cycles rather well. How have they done in the past?
The Fed in Action
The tools of the Fed work well in controlling prices, at least theoretically. Using these tools to get the economy to operate efficiently is another story. The reason is that so much of the purchasing decisions by consumers and investment decisions by firms are based on expectations. Whenever you are dealing with investor expectations, you immediately open the door for the unexpected. The Fed has had numerous times since their creation to try and stabilize the economy either from inflation or recession. Some of these attempts have worked great and some, well, not so good. However, in all cases, the government gains insights into the markets and adds reforms to reduce similar economic occurrences in the future. We'll take a look at some major financial episodes in U.S. history, how the Fed reacted and reforms that were put in place as a result.
Although the Fed was created in 1913, its first big challenge didn't occur until 1929 during the Great Depression. The events leading up to the depression were numerous and it is impossible to say definitively the exact cause. It is not our intention to list or debate the possible causes as an entire book could be written on that subject alone. Rather, we will highlight the activity that led up to it and then take a look at the Fed's actions and results.
First, the 1920s experienced a true economic boom, hence the nickname "the Roaring Twenties." From 1925 on, the country was over-producing in anticipation of eventually selling the surplus. Businesses plowed their profits back into factories, machinery, and more workers, which led to even greater overproduction. The main reasons for the crash are often cited as follows:
- High Speculation
The increased investment and production gave Americans the encouragement they needed to buy more stock. The Dow Jones Industrial Average rose from a low of around 190 in 1928 to a peak of 381 in September 1929. The economic outlook was strong although some investors started to believe that stocks were overpriced. Speculation on the continued prosperity, in addition to rising stock dividends, caused many people to buy stocks on margin (borrowed funds). This turned the stock market into a speculative pyramid game rather than its intended purpose as a source for investment capital.
- Limited Enforcement of Securities Offerings
Before the 1929 Crash, few regulations regarding financial reporting were enforced. Investors were not protected from fraudulent stock offering or advertising claims. The law of supply tells us that under high demand, suppliers will increase supply. In fact, this is exactly what happened with an estimated $50 billion in securities being offered during the 1920s – of which half became worthless. Probably the greatest reforms from this crash came in 1934 when Congress established the Securities and Exchange Commission (SEC) to prevent, or greatly reduce, such fraud and prosecute violators.
- Unequal Distribution of Income Among Americans
While the Roaring Twenties created great wealth, that wealth was not distributed equally. According to the Brookings Institute, in 1929 the top 0.1% of Americans had a combined income equal to the bottom 42%. However, those at the top also controlled 34% of all savings, while 80% of Americans had no savings at all. Those fortunate enough to be at the top were not interested in investing. Instead, they were saving, which created less money in the economy.
- Bear Raids
A "bear raid" is when a stock is sold short in order to reduce its price by creating more supply than demand. Although there are "uptick" rules in place today (SEC rule 10a-1), they were not implemented until January 1988 after the crash of 1987, which is discussed later. Under the uptick rule, a stock can only be sold short if the sale price is at a price higher than the previous trade. For instance, if the last trade on a stock is $50, you cannot sell it short at $49.99 or lower. This rule prevents speculators from selling into a downdraft thereby depressing prices further. Again, these rules were not in place during the 1929 or 1987 crashes! To learn more about short selling, click here.
The borrowed money and false optimism created a very shaky stock market. Once investors lost confidence, the market quickly collapsed. Once the market opened for trading on October 29, prices fell so fast in the first few hours that the entire gains for the previous year were erased. The Dow closed at 230, down nearly 24%. This sent waves of pessimism through investors and the Dow bottomed out at a level of 190 on November 13 wiping out $30 billion from the economy. Among those lost fortunes were many that belonged to the banks. Once investors feared their banks might not be able to pay back their money on deposit with them, many "runs on the bank" caused a near collapse in the banking system as well.
Adolph Miller, the President of the Federal Reserve Board at that time, initially tightened the money supply during the stock market boom from 1928 and 1929, causing interest rates to rise. His reasoning was that speculation was the prime suspect in the high stock prices so raising rates would keep investors from speculating.
The Fed continued to reduce its securities purchases until 1932. Although interest rates were reduced between March 1930 and September 1931, they were raised twice later that same year. You should now that this makes people less likely to spend, which is exactly the opposite of what should be done. Between the initial crash of 1929 and 1933, the money supply dropped by 31%, pushing the economy further into the depression. In fact, nearly half of the stock market value had been recovered within six months of the initial crash and would probably turned out to be a normal recession had the Fed not raised rates.
The loss of nearly one-third of the banks also added to the problem. Economics tells us the people with the most incentive to borrow are the ones with the most to gain. In other words, the people with the riskiest propositions are the ones most willing to take out a loan. Consequently, they are the majority of those applying for loans and the most likely to be selected. This is called the principle of adverse selection – the ones most likely to be selected will most likely have adverse effects. During such an extreme economic crisis, adverse selection is exaggerated, which greatly reduces the banks ability to channel funds toward the most productive investments. Bank loans decreased by 50% between 1929 and 1933 and investment spending was down 90% from 1929.
There is a lot of criticism of the Fed's actions after the crash. However, the initial tightening of credit may have been appropriate based on their belief that speculation was the main culprit of the crash. But the subsequent rate hikes in an environment of decreased money supply was a perfect formula to send the economy into a great depression.
Inflation of the 70s and 80s
Once you understand the tools and functions of the Fed, it is easy to understand the high inflationary periods of the 70s and 80s. An inflationary boom was started in the early 70s and, as expected, the Fed wanted to combat that trend by tightening monetary policy. By selling bonds, they took cash out of the hands of the banks and started to raise interest rates. The rise in rates brought the economy to an abrupt halt causing a recession in late '74. During the recession, the Fed reversed its policy and started to ease monetary policy. By 1977, the economy started to pick back up but the Fed hit the brakes once again for fear of overheating. Under the tight money policy, the U.S. was experiencing even worse inflation that that just three years earlier.
The Fed was criticized by many economists for this tight monetary policy near the peak of a cycle. They reasoned that the normal business cycle would head the economy into a downturn. But the tight monetary policy only worsened the effect and inflation went out of control. Likewise, these same economists argued that the monetary easing at the bottom of they cycle in the early 70s is what added to the higher inflation later. Economists who make such arguments are from the monetarist school of economics and claim that a constant rate of growth in the money supply is the only way to combat the business cycle. In other words, increase the money supply by about 3% per year, which is the overall growth rate of the economy, rather than making larger increases or decreases during the cycles.
In 1979, President Carter appointed Paul Volcker as the Federal Reserve Chairman who took a firm stance against inflation. The Fed even accommodated the monetarists view and set goals for limited, low rates of monetary growth. However, the 1980 recession was severe and the Fed once again allowed an expansionary policy. As the economy started to recover, the Fed did not continue to increase the money supply for fear of the inflation it had seen before. Instead the Fed maintained a tight monetary policy during the upturn in late 1980, which only led to some of the nation's highest interest rates with the prime rate breaking 21 percent! In 1982, after yet another recession, the Fed finally eased monetary policy and the economy recovered quite well.
The Fed can only use its tools to guide people and their decisions. Remember the economic analogy used before that monetary policy is much like pulling and pushing on a string; it's easy to pull money out and throw the economy into a recession but much harder to push money in and start a recovery. The Fed cannot necessarily be held responsible for the outcomes of the economy, as there are too many variables to control. However, you can be sure they have learned from the mistakes of the 70s and 80s that the "stop - go" policies can actually worsen the effects of the cycle. A steady rate of growth in the money supply will almost certainly dampen the effects of future cycles.
Black Monday was another market crash with many striking similarities to that of the 1929 crash. First, both crashes took place in October just ten days apart. Second, the Dow fell about equally in both crashes, 23% in 1987 versus 24% in 1929. The 1987 crash, though, occurred for vastly different reasons. While it is difficult to pin any single reason as the culprit of a crash, the following are often cited as the most likely that resulted in Black Monday:
- Computer Trading and Derivative Securities
Many analysts blame "computerized trading" and derivative securities for the crash. Computerized trading is simply arbitrage trading that takes place between the futures markets and equity markets with the trades being initiated by computer programs when the prices get "out of line" enough to make a guaranteed profit. While many of the analysts have since found program trading to not be the major culprit, there is some truth to it. Trading curbs put in place in the equity markets caused nearly an 18% discrepancy between the "fair value" between the equities and futures, which caused further buying of the futures and selling of the stocks.
- Overvaluation of Securities
There are numerous analysts that cite securities overvaluation as the major cause. Similar to the 1929 crash, the 1987 crash experienced a strong rally in the financial markets for the prior year. In fact, the markets were nearing the end of a five-year bull market whereby the Dow rose from 776 in 1982 to 2,722 in August of 1987. However, it is impossible to say whether or not this was the cause of the crash as there have been numerous other times in the markets exhibiting similar price-earnings ratios or similar valuation methods where no crash occurred.
- Bear Raids
Bear raids, as partly blamed for the crash of 1929, were also another source of volatility. Remember, the uptick rule was not implemented until 1988.
The Fed immediately responded and reassured investors that they would provide liquidity as necessary to support the financial system. This is most often a standard announcement by the Fed in times of panic. The Fed followed up with purchases of government securities adding just over $2 billion in liquidity to the economy. The additional cash created in the hands of banks (or equally, the buying pressure on the bonds) dropped the interest rates. The 90-day T-bill rates dropped from 6.75% in mid October to 5.27% on October 30th, the day after the crash. In addition, the fed funds rate was lowered 179 basis points (1.79%) during this same time. Because of these actions, the 1987 crash was much shorter lived than in 1929. In fact, The Dow set a record gain of 102 points the day after the crash and another record of 186 points two days later. More importantly, every point the Dow lost during this crash was fully recovered by September 1989, which was less than two years later as compared to nearly 25 years taken for the crash of 1929.
In addition, banks helped brokerage firms by increasing the lending to help brokerages finance the large positions they acquired during their customers' panic sales.
Because of these actions, the 1987 crash owes part of its swift recovery to the Federal Reserve and banks.
Some of the reforms that took place after the 1987 crash were the use of mandatory trading halts if the Dow falls (or rises) too far too fast. These trading halts act as a "circuit breaker" and give investors time to settle down and rethink the situation. The original curbs were that trading would halt for one hour if the Dow fell more than 250 points in a day (or two hours if it fell more than 400 points). Most exchanges follow the NYSE trading curbs. After all, if they are shut down, most of the other stock and option exchanges could not trade either. Currently the trading curbs are reviewed every calendar quarter and adjustments are made based on the levels of the Dow at that time.
A more uniform margin requirement for stocks and futures was introduced as well. Prior to the crash, margin requirements varied greatly between assets and markets, which can cause excess volatility.
Another reform came through the exchanges with many of them implementing faster computer systems with modern software. In addition, many added electronic order handling systems to increase productivity and order handling effectiveness.
The Fed has faced numerous difficult challenges and will face many more. Keep in mind the information we've covered as you follow the many challenges of the Fed. The insights they gain from each episode can easily be used to further your understanding of investing and to anticipate their future actions.
Using Economics for Better Investing
There is a large universe of investment selections – stocks, bonds, mutual funds, gold, coins, art, antiques, real estate and many others. However, to make things simple, all of these investments can be basically categorized as either inflation friendly or not.
Most of your "intangible" assets such as stocks, bonds, mutual funds and other financial assets do not perform well under inflationary environments for reasons we've discussed throughout.
Other choices of investments include the hard assets or "tangibles" such as gold, coins, art, real estate and other physical assets. When inflation is rising, these assets have their price bid higher, a reflection of the inflation, which maintains your purchasing power. We saw an example of this earlier when we talked about hyperinflations and how the purchase of a home would protect purchasing power versus leaving it in cash.
The question to ask now is why does one group of assets perform well under inflation while the other does not? In other words, why will gold rise during inflationary times yet stocks will fall?
If you're investing in "intangible" assets such as stocks and bonds, it is important to understand how inflation and interest rates affect their prices. We saw earlier how interest rates affected bonds. That was an inverse relationship meaning that as interest rates rise, bond prices fall and vice versa. Although it is a little harder to understand, the same relationship exists for stocks and most other intangibles as well. We said earlier that high interest rates keep firms from investing. The fewer investments they have, the lower their earnings will be. Remember that a share of stock represents ownership in the company. As the earnings outlook falls, so will the price of the stock.
The important point to remember is that stocks and bonds have an inverse relationship to interest rates. With all else constant, as interest rates rise, the prices of stocks and bonds will fall.
Tangible assets, on the other hand, such as gold and real estate will thrive during inflationary times. This is because investors have an increased demand (they are willing to bid higher) for these assets as a way to protect purchasing power. Yet sellers do not want to sell today for fear of getting a higher price tomorrow. This causes a demand imbalance and the prices of these assets generally rise much faster than the rate of inflation.
We can even break down tangible assets into different categories. Some tangible assets are "finished goods" such as houses, while others are "raw materials," or "intermediate materials" such as wood. A finished good has been through far more steps to complete than a raw material just by the very definition.
For example, say a farmer cuts down a tree and sells it to a mill for $10, which has added $10 of value to the wood. The mill strips the bark and finishes the wood and sells it for $15 to a furniture manufacturer. The mill has added $5 worth of value to the wood. The furniture manufacturer sands, shapes, and paints the wood and sells it as a table for $25, which adds another $15 value to the initial piece of wood. Now assume there is a spike in demand for the tables and they are now selling for $50 instead of $25.
The farmer who cuts down the tree may be able to command an additional $10 and sell each tree for $20 – a 100% increase in price. The mill will now have additional costs. One, the $10 increase in trees plus the additional labor (assume an additional $2) they must hire to meet the new demand. The mill will try to pass these increases over to the manufacturer and charge $32 for their product instead of the $15 it had previously sold for. Whether it will be able to is beyond our scope but assume the best case for now and say that it can. If so, the will pay $20 and receive $32 – a 60% increase. However, on a relative scale, the mill is only 10% better off under the new prices since it used to pay $10 and sell for $15 for a 50% profit.
This same thing will happen with the furniture manufacturer. They will now pay $42 and sell for the market price of $50, which is a 19% profit. They used to pay $15 and sell for $25 for a 66% gain. Notice that all three players are making money but at a progressively smaller rate as the production process moves forward. It is the raw material (trees) at the bottom of the process that jumped the most in price percentage. This will be true for any price increase of the raw material. That's because, as that cost gets passed on, the total cost is growing because each firm adds some additional value along the way and the price keeps getting higher. As the price rises, that additional cost of the raw material gets absorbed, on a percentage basis, during the process.
The bottom line is that, in most cases during inflationary times, it is the raw materials whose prices jump the most on a percentage basis. Each step of the production process acts as a cushion and dampens the effect of the rising prices. This is why diamond prices will rise faster than the prices of diamond jewelry, sugar prices faster than soft drinks prices, and cattle prices faster than hamburger prices during inflationary periods.
The reverse condition is also true. If prices are falling, it is the raw commodities that will get hit the hardest. In our example, if the demand for tables falls, there may only be a 10% fall in their price, while the tree prices may be cut in half.
Because of this behavior in the tangible raw materials, investors will do well during inflationary times investing in raw commodities. Now it should be apparent why gold does so well under high inflation – it is the financial investment choice of raw commodities. While many raw materials will hedge inflation well, it is gold whose price will jump the most on a percentage basis and why investors flock to it if there is any sign of upcoming inflation.
This effect on gold prices can be seen in the following chart, which depicts the Dow Jones Index compared to gold prices during the high inflationary periods between 1975 and 1985. It is easy to see the effects that inflation had on gold prices! Likewise, near the middle of 1983 when inflation was getting under control, Figure 7 shows where the Dow started to rally while gold prices fell.
Figure 7
These patterns should now make financial sense to you. Between 1975 and 1985, the money supply grew at a much faster rate than production, which caused inflation. Investors flocked to gold to protect their purchasing power.
So one of the most critical aspects about investing is to understand where you are in the business cycle and, more importantly, where the expected direction of interest rates is heading. Once you have a grasp of that, you will understand why certain types of investments do better than others. This is why it is so important to pay attention to the economic indicators published frequently as well as statements by the Fed, which typically meets eight times per year.
If inflation is imminent, it is time to move away from stocks and bonds and get into gold or other commodities that will rise in value along with the inflation. If unemployment is on the rise, get out of stocks and into bonds. If interest rates are falling and consumer demand is strengthening, you can expect stocks to rise, and bonds and gold to fall.
We have seen how self-serving natures provide powerful incentives for market participants to provide the most competitive prices, as well as insights as to where people will invest during times of inflation or unemployment. Many think that investing would be so much easier if we just had a clue as to where and when the herd was moving. Once you understand the economics behind investing, along with the self-serving nature of investors, you should realize that we do have clues. Because the Federal Reserve acts to counterbalance the market, they can provide the necessary clues for where the market will be heading.
Tracking the Economy
The Fed used to make most of its monetary policy based on the supply of money, namely M2 since it most closely matches GDP growth. Today those supply figures are still published but not met with much fanfare by investors. That's because after October 1979, the Fed focused on bigger pictures, such as the overall economic outlook, ease of credit, the value of the dollar and interest rates. The Federal Reserve Board publishes their outlook in the "beige book," which is released eight times per year after each Fed meeting. You can find this report on the web at www.federalreserve.gov/policy.htm.
As we said earlier, the Fed attempts to mask their intentions to keep people from unfairly profiting from it. But remember that the Fed bases their monetary policies on market conditions, which is something the average investor can learn to detect quite well too. Learn to follow the barrage of economic indicators that are released as well as the Fed Chairman's speeches, which is required to be presented before Congress twice each year (usually in February and July).
Figure 8 below is a chart of the federal funds rate and it shows where the Fed's concerns are. When the fed funds rate is rising, the concern is inflation. When it is falling, the concern is recession or unemployment. If you compare this chart to the previous one showing gold prices and the value of the Dow during the same time period, you can see the fed funds rate is directly tied to gold prices and inversely related to stock prices – exactly as the economics of it would predict. Also notice that the trends stay constant for quite some time indicating the lag time in policies. If you can anticipate these trends, you're one step up on the investment game.
Figure 8
Other sites that will help you interpret the economy and where the Fed may be heading are as follows:
In addition, the following web address is a great search tool, which searches more than 70 government agencies based on keywords you enter: www.fedstats.gov/search.html
The Governors of the FOMC are truly modern day money wizards. They provide a type of magic to the market by altering the supply and demand for money thus allowing for stable growth without inflation. If you learn to understand their thinking and methods for controlling that supply and demand, you can gain one more edge in the increasingly complex world of investing. The science side will be fairly easy to learn. What happens when the Fed buys or sells bonds? What happens when they change the discount rate? While these answers are fairly straightforward, the art side will be much harder to translate. Is the economy heading into a recession? Should I invest in stocks or gold?
You will make some mistakes along the way, but don't let that discourage you. Even the Fed, as we have seen, made mistakes. Try to gain insights into the art side of economics through the eyes of the Federal Reserve. Will their actions provide the necessary incentives? Will the economy rebound? Or will there be unintended consequences? It will take some time to learn the economics of it all, but nothing comes for free. After all, economics is about tradeoffs. But for those willing to invest the time, the benefits are far greater than the cost.