The news business
Tossed by a gale
It isn’t just newspapers: much of the established news industry is being blown away. Yet news is thriving
PERHAPS the surest sign that newspapers are doomed is that politicians, so often their targets, are beginning to feel sorry for them. On May 9th Barack Obama ended an otherwise comic speech with an earnest defence of an embattled business. House and Senate committees have held hearings in the past month. John Kerry, the junior senator from Massachusetts, called the newspaper “an endangered species”.
Indeed it is. According to the American Society of News Editors, employment in the country’s newsrooms has fallen by 15% in the past two years. Paul Zwillenberg of OC&C, a firm of consultants, reckons that almost 70 British local newspapers have shut since the beginning of 2008. The Independent and the London Evening Standard depend on the largesse of foreign investors. The strain is not confined to English-speaking countries: French newspapers have avoided the same fate only by securing an increase in their already hefty government subsidies.
Broadcast television news is struggling too. Audiences have split and eroded: the share of Americans who watch the early evening news on the old “big three” broadcast networks (ABC, CBS and NBC) has fallen from about 30% in the early 1990s to about 16%. Local-news outfits are ailing as car dealers and shops trim their advertising. ITV, Britain’s biggest commercial broadcaster, is pleading to be excused from its obligation to produce local news.
All this has provoked much hand-wringing. Yet the plight of the news business does not presage the end of news. As large branches of the industry wither, new shoots are rising. The result is a business that is smaller and less profitable, but also more efficient and innovative.
The clearest picture of how news consumption is changing comes from surveys by the Pew Research Centre. Since 1994 the share of Americans saying they had listened to a radio news broadcast the previous day has fallen from 47% to 35%. The share reading a newspaper has dropped from 58% to 34%. Meanwhile cable and internet audiences have grown. In 2008, for the first time, more people said they got their national and international news from the internet than from newspapers (see chart 1).
Deeper but not broader
It is not only a matter of people switching from one medium to another. Nearly everybody who obtains news from the internet also commonly watches it on television or reads a newspaper. Only 5% of Americans regularly get their news from the internet alone. Technology has enabled well-informed people to become even better informed but has not broadened the audience for news. The Pew Centre’s most alarming finding, for anybody who works in the trade, is that the share of 18- to 24-year-olds who got no news at all the previous day has risen from 25% to 34% in the past ten years.
Those who do seek news obtain it in a different way. Rather than plodding through a morning paper and an evening broadcast, they increasingly seek the kind of information they want, when they want. Few pay. Robert Thomson, editor-in-chief of the Wall Street Journal, says many have come to view online news as “an all-you-can-eat buffet for which you pay a cable company the only charge.”
The main victim of this trend is not so much the newspaper (although it is certainly declining) as the conventional news package. Open almost any leading metropolitan newspaper, or look at its website, and you will find the same things. There will be a mixture of local, national, international, business and sports news. There will be weather forecasts. There will be display and classified advertisements. There will be leaders, letters from readers, and probably a crossword.
This package, which was emulated first by broadcasters and then by internet pioneers such as AOL.com and MSN.com, works rather like an old-fashioned department store. It provides a fair selection of useful information of dependable quality in a single place. And the fate of the news package is similar to that of the department store. Some customers have been lured away by discount chains; others have been drawn to boutiques.
The Wal-Marts of the news world are online portals like Yahoo! and Google News, which collect tens of thousands of stories. Some are licensed from wire services like Reuters and the Associated Press. But most consist simply of a headline, a sentence and a link to a newspaper or television website where the full story can be read. The aggregators make money by funnelling readers past advertisements, which may be tailored to their presumed interests. They are cheap to run: Google News does not even employ an editor.
Although they are convenient, these news warehouses can feel impersonal. So another kind of aggregator has emerged, which offers a selection of news and commentary. Some are eclectic, like the Daily Beast and the Drudge Report—the grandfather of the boutique aggregators. Others are more specific, like Perlentaucher, a German cultural website. The most successful of the lot, and the template for many newly unemployed journalists who have tried to launch websites of their own, is the Huffington Post.
HuffPo, as it is broadly known, employs just four reporters among a total staff of about 60. Much of its news is second-hand. But it boasts an unpaid army of some 3,000 mostly left-wing bloggers. The website feels like a cross between a university common room and a Beverly Hills restaurant (your attitude to HuffPo will depend largely on whether you find this prospect appealing). Arianna Huffington, who runs it, calls it a “community around news”. It now has 4.2m unique monthly visitors, according to comScore, an internet market-research company—almost twice as many as the New York Post.
Old-fashioned news folk increasingly complain that aggregators are “parasites” that profit from their work. They are, in a sense; but parasites can be useful. As the quality of journalism becomes more erratic, the job of sifting stories is increasingly vital. And aggregators drive readers, hence advertising, to original-news websites. Hitwise, another market-research firm, estimates that in March 22% of referrals to news sites came from search engines like Google, whereas 21% came from other news sites. “Reporters send us their stories all the time,” notes Tina Brown, a magazine veteran who runs the Daily Beast.
The rise of the aggregators reveals an uncomfortable fact about the news business. The standard system of reporting, in which a journalist files a story that is broadcast or printed once and then put on a single proprietary website, is inefficient. The marginal cost of distributing the story more widely is close to nil, but the marginal benefit can be considerable. Interest in a story about Iraq in, say, the Los Angeles Times extends far beyond that city. Before the aggregators appeared, a reader in Seville or even San Francisco probably would not have known it existed.
The inherent benefit of spreading stories around helps explain why some established news outfits are coming to resemble aggregators. The Associated Press has a popular iPhone application which combines national stories with local ones from 1,100 partner news outlets. News Corporation set up a website, Fox Nation, which mixes news stories with right-wing commentary. It is intended to become a conservative Huffington Post. Indeed, one of the great successes in both British and American news publishing is the Week, in effect an aggregator that is printed on paper.
With their stories roaming widely, English-language news outlets in particular are taking on broader identities. The Guardian’s website, visited by twice as many people outside Britain as inside, aims to become the international voice of liberal opinion. The Daily Mail has built a reputation for celebrity news. New contests are being joined. The BBC, which has set up a wire service and sells advertisements on its foreign websites, now competes with the Associated Press, which has moved beyond the business of supplying stories to American newspapers.
Up go the walls
General news is likely to remain free on the internet. The crush of similar stories is too great, the temptation of piracy is too strong and the aggregators are too good at sniffing out decent free reports. Yet it has become clear that online advertising alone cannot support good original journalism.
Until recently many print news executives believed that advertising revenues would follow their readers from print to the web. Between 2004 and 2007 online advertising revenues doubled from $1.5 billion to $3.2 billion, according to the Newspaper Association of America. But in the second quarter of 2008 they began to fall, just as the loss of print and classified advertisements accelerated (see chart 2). Worryingly, this cannot be blamed entirely on the recession. Online advertising money has moved to search—ie, Google—and excess supply has depressed prices of display advertisements. As a result, executives are looking hungrily at the few online outfits that dare ask readers for money.
One is the Financial Times (part-owner of The Economist) which demands registration of anybody wishing to view more than three articles per month and payment from anybody wanting to see more than ten. About 1m people are registered, of whom 109,000 pay. By going easy on casual readers, the Financial Times keeps a foot in what John Ridding, the company’s chief executive, calls the “giant wave machines” of the internet, such as Google and Yahoo!, which drive traffic to the site. Registered readers are served targeted advertisements, which are more lucrative. It is an attempt to fuse a subscription model with one supported by advertising.
The Wall Street Journal takes a shrewd route to a similar destination. Rather than charging certain types of user, it charges for certain types of news. Earlier this week, it offered for nothing a story about swine flu, a review of the new “Star Trek” film and a report on looming cuts at car dealerships. It charged for pieces on Cigna Corporation’s pension plan, Lockheed Martin’s quarterly lobbying expenditures and a lawsuit against a bottling company which alleges that a board meeting was held improperly. In short, the fun articles are free. The dry, obscure stuff costs money.
The thinking is that broadly appealing articles draw readers to the website, where they can be tempted by advertisers and by the Journal’s more selective wares. Most people do not care about pensions in a Philadelphia health-insurance company. But those who are interested in such information are very interested, so much so that they will probably pay a monthly subscription for it. Just over 1m do—even though the specialised articles can be read for nothing via Google. And those who cross the main pay wall may be persuaded to purchase more premium content. The paper is also exploring a “micro-payments” model for individual articles.
Financial news is not the only kind for which people appear prepared to pay. ESPN, a cable sports channel, has erected several pay walls on its website. They protect information that only the most rabid fan would want to know, adhering to the Wall Street Journal’s dictum that people’s willingness to pay for a story is inversely correlated with the size of its potential audience. The number of profitable news niches may grow as rivals close bureaus or go out of business altogether.
Newspapers and magazines are more likely to be rescued by a careful combination of free and paid-for content than by new technology. Portable news readers such as the Kindle DX, which some have hailed as potential saviours, will help only to the extent that they lure readers from the web, where news is mostly free. At the moment they seem to be doing something else. Ken Doctor of Outsell, a research firm, reckons that the Kindle appeals to baby-boomers who would otherwise read a paper magazine or newspaper. The young prefer their iPhones and their aggregators. Indeed, the top four magazines on Kindle, according to Amazon’s website, are the New Yorker, Newsweek, Time and Reader’s Digest. Not much of a youth market there.
King comment
On cable television, a different kind of niche product is cleaning up. The right-wing Fox News Channel has become by far the most popular specialist provider of news. This is not surprising. The channel’s newscasts and opinion shows are well-produced, and the crumbling of the Republican Party has left conservatives seeking a voice. Rather more surprising is that the left-wing MSNBC now draws more prime-time viewers aged 25 to 54 than the much more established CNN.
Fox and MSNBC provide a mixture of news, interviews and occasionally furious commentary. Phil Griffin, the chief executive of MSNBC, calls it “news-plus”. The aim is to complement and give meaning to the mass of disconnected information that viewers pick up during the day. Viewers know what they are getting; indeed, they rate cable shows as more reliable than newspapers. Against the common charge of partisanship, Mr Griffin offers what could be the slogan of the cable news industry: “We’re not trying to be all things to all people.”
Hot talk may be popular at the moment because Americans are politically polarised. The calmer CNN won the battle for cable viewers on election night and may well do so again in 2012. Yet, as in so much of the news business, a return to normal is improbable. The market for news is likely to remain unstable, favouring different providers at different points in political, economic and even sporting cycles.
Take Real Clear Politics, an American political website, which aggregates news, commentary and opinion polls. It became essential reading during last year’s presidential race. At its peak, shortly before the election, it attracted 1.4m unique visitors a month, according to comScore. Since then its popularity has plunged by 75%. Rivals like Fivethirtyeight.com and Talking Points Memo have lost many readers too. For newspapers, magazines and television programmes, with their high fixed costs, such fluctuations would be ruinous.
Not so long ago, news was a highly profitable business. Regional newspapers cultivated cosy monopolies and routinely enjoyed annual profit margins of more than 20%. In America local television stations sometimes had margins approaching 50%. Yet news does not always have to be profitable in order to survive.
Even in their diminished state, large newspapers attract rich men who seek political or business clout, or who believe that there is money to be made after all. Tony O’Reilly, who ran Independent News & Media until this year, used to describe the Independent newspaper as a calling card. He tolerated its losses, although the company’s shareholders have been less patient. Rupert Murdoch’s fondness for printer’s ink has sometimes baffled Wall Street analysts. Still, last month David Geffen, a media mogul, reportedly tried to buy a stake in the parent company of the New York Times.
Less glamorous outfits can also attract benefactors. San Diego has a small, scrappy news website that was paid for at first largely by a local businessman. The Voice of San Diego concentrates on nitty-gritty issues such as water, crime and health care—the sort of stories that local newspapers used to cover extensively. Indeed, America long ago proved that radio news can be supplied by non-profit organisations. In the absence of profitable alternatives, it may be that expensive, worthy journalism on subjects like the war in Iraq will increasingly be supported by charity.
The spread of digital cameras has also enabled ordinary people to file pictures and news reports directly. They are encouraged in this by established news outlets like CNN, which have come to view citizen journalists as a source of both content and page views. Citizens have proved excellent reporters of dramatic, obvious news, such as terrorist attacks and sightings of Britney Spears. Leonard Brody, the head of NowPublic, a large Canadian news-gatherer, believes that amateurs will eventually liberate journalists from the tedious business of reporting, leaving them free to concentrate on analysis. He means it kindly.
Just now journalists have less competition from crowds than from governments. In Britain local authorities have created newsletters that carry advertising. The annual budget for the websites of the (state-owned) BBC was recently raised to £145m ($220m). According to Mr Zwillenberg, the total online spending of the country’s national newspapers is only £100m.
America’s president has proved an especially prolific citizen journalist. People who let Barack Obama’s campaign team have their e-mail address last year still receive the occasional missive. The White House posts videos on YouTube that are often more polished than those produced by the news networks. In case the intention to bypass the news filter were not clear, during his second press conference on March 24th the president did not take a single question from a leading daily newspaper. Clearly, he knows where the future lies.
The decline of once-great newspapers and news programmes is not without cost. It means the end of a certain kind of civic sensibility that was built on broad agreement about what is important and what is not. But it was once difficult to imagine city centres without the unifying presence of department stores. Many of them went, yet people carried on shopping.
The euro-area economy
The euro-area economy
Into a deep hole
The euro-area economy is slumping faster than most had feared
THE euro area is falling into such a deep hole that the recovery, when it eventually comes, will be a long, hard journey. Figures released on Friday May 15th showed that GDP in the 16-country currency zone fell by 2.5% in the first quarter, an annualised rate of some 10%, far worse than many analysts had feared. Germany, the largest economy in the group, fell even harder: its GDP shrank by 3.8% in the three months to March and has plunged by almost 7% since its recession began a year ago. Italy’s GDP fell by 2.4% in the quarter; Spain’s by 1.8%. The 1.2% fall in France, large by any normal standards, almost counts as a boom.
The figures confirmed that the euro zone has been hit far harder by the global downturn than its rich-world peers (and largest export markets) in America and Britain. When spending in these countries dried up, because of scarce credit, they exported some of the pain to their suppliers. For that reason Germany has so far paid a higher price for its reliance on exports than the Anglo-Saxon countries have borne for their dependence on credit and rising house prices. Since the collapse of Lehman Brothers in September, export-led manufacturers have been hit hardest. For example Slovakia, the euro zone’s newest member (it joined in January), saw its GDP crash by 11.2% in the first quarter. Its economy leans heavily on carmaking and its loss has been far more severe even than in Germany.
One of the ironies of this downturn is that it was caused by global housing and credit busts, and yet the economies that have suffered most, such as Germany and Japan, sat out the credit boom. Even in Europe some sinners have faired better than saints, in GDP terms at least. As painful as Spain’s construction bust is, in terms of lost jobs and evaporating tax revenues, its economy has contracted less and more slowly than Germany’s.
Despite the carnage in continental Europe, the sense of crisis among the population is not yet as great as in America or Britain. That is because of another irony: Europe’s inflexible labour markets may hamper jobs growth, but they also work against rapid lay-offs in recession. The unemployment rate in Germany has scarcely budged in the past year. The bad news on euro-zone jobs has mostly been in Ireland and Spain, where jobless rates have roughly doubled in a year. Ireland is one of Europe’s most flexible economies. Spain has its rigidities, but at the peak of the boom as many as a third of its workers were on fixed-term contracts. Those jobs can be shed quickly and easily. In both countries, jobs are disappearing fast in the construction industry, because of collapsing house-building.
Things will not get much better soon. Business-activity indicators across the euro-zone are starting to pick up from record lows. That points not to a revival but rather to a slower rate of GDP decline in the present quarter (it could scarcely get worse). A meaningful recovery is a long way off. Firms cannot take losses forever without shedding jobs. Unemployment in Germany and elsewhere will begin to pick up quickly this year and carry on in 2010. Even where cutting jobs is costly, it is unavoidable given the scale of the fall in GDP. The European Central Bank seems to have hunkered down for a long recession. It is now prepared to offer banks unlimited loans for 1% for up to 12 months, and that horizon may even be extended. When you have fallen so far, it is a long way back out.
Antitrust Ruined the Movies
How Antitrust Ruined the Movies
Hollywood ain't what it used to be. For the most part — and with known exceptions — the quality and content of today's movies have plummeted when compared to the Golden Age. With the movies' parade of sex and violence, they're an easy target for cultural critics to say capitalism inflicts grave damage on the culture.
Let's take another look. It wasn't the free market, consumerism, or capitalism that killed the movies after World War II. It was antitrust regulation, as enforced by the Federal Trade Commission.
This government intervention in the 1940s radically altered the structure of the film industry for the worse. The direct and immediate result was a decline in acting, scripts, scores, content, and the cultural contribution of films.
From the turn of the century, when movies became marketable to the public, the industry realized the benefits of owning and controlling the whole production process, from the set to the theater. Economists call this vertical integration, a structure that is suitable and beneficial when quality control is the primary concern.
The movie industry used vertical integration to maintain quality, keep the competition at bay, and stabilize profits. This allowed moviemakers to pool their resources, make exclusive contracts and tying agreements, and maintain control over distribution and exhibition.
Although the Justice Department attacked this practice under the Sherman Antitrust Act as early as 1912, and later demonized it, vertical integration actually offered tremendous benefits to consumers. The "cartel" could only be held together so long as it functioned efficiently. Ticket prices had to be low and quality high.
For example, the first private film cartel — the Motion Picture Patents Company — lost its market power by not switching to longer feature films and by failing to grasp the power of the "star system." Dissident firms led by William Fox, Carl Laemmle, and Adolph Zukor saw the power of stars like Charlie Chaplin and Mary Pickford. They successfully bid for talent and developed their own vertically integrated companies.
So it went with every industry change through the teens and twenties, as Paramount displaced General Films, which then merged into Famous Players-Lasky Corp., which was outcompeted by First National Exhibitors, which went belly up only to be taken over again by Paramount. In each case, the industry tended towards the vertical pattern. Filmmakers, distributors, and exhibitors shared ownership or closely cooperated through tying agreements.
In the 1930s, this frenzied competition settled into the greatest means ever created for making movies: the studio system. Critics confirmed what I found in my own informal survey of adults. Movies made in this period are more highly regarded than those made after the late 1950s. In just the magical year of 1939, the studio system made "Gone With the Wind," "Stagecoach," "Mr. Smith Goes to Washington," "Wuthering Heights," and "The Wizard of Oz."
It's no coincidence that 1939 was the high-water mark of the studio system before it was broken up by government as an "oligopoly" — a small number of large, vertically integrated firms that controlled a majority of the business. At the same time, there were no legal restraints on entering the industry. Dozens of independent producers and theaters worked to compete and gain a market share.
The major studios — Fox, Lowe's, Paramount, RKO, Warner Brothers, Columbia, United Artists, and Universal — competed with each other while seeking tying agreements with everyone with whom they did business. This provided a competitive advantage over the upstarts and independents, and offered some measure of financial security; the system survived and even flourished in the midst of the Great Depression, for example.
To maintain market position, the studios learned the advantages of developing star talent and signing actors to long-term contracts. Studios invested in their actors the way companies invest in employees as versus contract workers. They cultivated them, trained them to act, provided voice lessons and dance lessons, and protected their public personas and, with morals clauses, their private lives as well.
Actors were not required to sign long-term contracts, but studios made sure they were well compensated when they did.
Despite Bette Davis's famous tirades about being a corporate slave, artists actually had considerable freedom to turn down roles, choose their own material, and provide input into the production process.
At the same time, the studios made sure their actors always appeared in the best light, and didn't play unsuitable roles.
Though actors were very well paid, wages were lower relative to today's standards. But this meant that casts could be larger and, more importantly, even bit parts were played by excellent character actors. Directors, producers, writers, and composers were also signed to long-term contracts.
There were sound business and artistic advantages in the assembling of a diverse group of specialists under a single corporate structure. These talented individuals were able to grow and learn and work together in ways that enriched them all, as well as the capitalistic organizations they served.
The studios owned the theaters where movies were shown, and did careful market research to ensure they contributed to the beauty of cities and inspired audience loyalty to the studio. This gave birth to ever more and nicer movie palaces (2,550 were built in 1928), with all the amenities (the average investment zoomed tenfold from 1920–1929) including low-price refreshments.
The studio took a strong interest in the employees at theaters around the country. They had to dress properly, put on the best face, and were trained to deal with any inappropriate conduct in the audience. Their services added to the overall happiness of movie goers.
Control so thorough was necessary because ownership of theaters comprised 95% of the studios' capital and the bulk of their profits. These profits were in turn used to subsidize their other operations. Theater ownership was also the key to quality control. If the studios couldn't control the way the films were distributed and exhibited, they would lose much of their incentive to keep up quality in every other area.
This free-market system encouraged just the right mix of tradition and innovation. To make long-term profits, theaters had to show films that met the general expectations and conventions of society. They also had to be creative within those guidelines or risk not making an impression on audiences.
The original guidelines on the content of the movies were established by the industry itself. In 1934, the Motion Picture Producers and Distributors of America (MPPDA) established a production code to review scripts and films. Projects that did not pass the code had to be reworked, dropped, or produced by independent studios and shown in risqué independent theaters. All this was enforced with internal fines as high as $25,000.
The code contributed to the lasting success of movies during this period. It forced everyone to do less with explicit words and actions and more with direction, eye contact, camera angle, and emotions. Films could not celebrate the destruction of property or life. They had to have literary and artistic merit, or at least not offend those standards.
All that came to an end in 1938, when, at the prodding of the Roosevelt administration and disgruntled independent theaters, the Federal Trade Commission began an investigation. The government charged five studios, the major defendants in the case (Paramount, Loew's, RKO, Warner, and 20th Century Fox), with conspiracy to restrain trade and monopolize the motion picture industry (even though they produced less than half of all movies).
Put on hold for the war, the suit was resumed in 1944. The government complained that: by owning the theaters, the studios monopolized the profitable first runs of the best movies; by having long-term contracts with actors and employees, they monopolized the best talent; and, by imposing the code, they unfairly discriminated against independent producers.
After a massive investigation and a frantic effort by the industry to falsify these charges with haphazard restructuring, only the third charge stuck. In 1949, the Supreme Court forced seven studios to divest themselves of their theaters. By 1957, the last of the divestitures was completed. The government had expropriated the studios' property and smashed their magnificent industrial creation.
Looking back at film history, it's clear that government's action demarcates the Golden Age from the New Hollywood. Movies in general haven't been the same since. By no longer controlling final output, studios could no longer profitably enforce the code or its quality standards. That's why nostalgia for the pre-1948 movies will always be so high.
At the time of the Court decision, everyone said the quality, consistency, and availability of movies would go up and prices would fall. Quite the opposite happened. By 1955, the number of produced films had fallen by 25 percent. More than 4,200 theaters (or 23 percent of the total) had shut their doors. More than half of those remaining were unable to earn a profit. They could not afford to rent and exhibit the best and most costly films, the ones most likely to compete with television.
Another strange result: drive-ins suddenly boomed, even with their notoriously grainy pictures and bad sound. The reason was clear: they could stuff 2,500 people into one showing, making it the most cost-effective way to exhibit (even if some of the consumers weren't there to watch the movie).
Gone are the days of beautiful theaters, quiet audiences, well-mannered employees, and reasonably priced refreshments. When indoor theaters finally made a comeback, they looked more like long garages with screens at the back, and the more that can be stuffed into a single building the better.
Not even the price of movies — one of the ostensible reasons for government intervention — has benefited the moviegoer. The studio system was said to gouge the consumer. But despite the advent of television, which itself should have driven ticket prices down, prices went up and continue to do so.
The end of the studio system meant "free agency" for actors and the higher monetary potential that such agency provides. Their salaries are bid ever higher as they shift from role to role, and producers can no longer afford many good actors. Wondrous technological feats have been the substitute.
Today, actresses get more money than ever, but they are cast in peculiar roles, a nun one movie, a prostitute the next, then a teacher, an alien, or drug addict. Hollywood doesn't develop characters like Bette Davis anymore. Technology is abundant, but discipline, efficiency, creativity, and quality control of the studio system are lost.
The FTC action also broke down the code. Gone were the community-friendly standards that were once the hallmark of the industry. Producers had no incentive to keep out rubbish that, in the old days, would have brought disgrace on the entire studio, including all theater employees.
Today, the system is so diffuse that no one suffers from offending the artistic sensibilities of the viewing public. In 1956, when the code was revised, its purpose was only the narrow one of regulating obscenity, profanity, and bloodshed. But broader thematic controls — the very core of the original code — were wiped out.
There have been attempts to revive something like the vertical integration of Hollywood's heyday. Alfred Hitchcock is the best example, and, again, his films have proven to be classics. But Hitchcock had his career undermined when his successful production team was broken up by antitrust actions in 1962.
The films of the Golden Age continue to inspire us, but thanks to the political class, it's all a memory. Today, every politician and cultural critic takes slaps at Hollywood's decadence. Better that they leave the movies alone, repeal Sherman, and abolish the FTC. Here and elsewhere, it's government intervention, not capitalism, that poses the threat to our economy and culture.
Extend Rothbard
I Wrote the Guide to Extend Rothbard
With all of the comparisons between President Obama and FDR, and especially all of the "lessons" we are told about the Great Depression, fans of the free market need a single volume to get up to speed as well as to educate their interventionist friends. I have written such a book in the newly released The Politically Incorrect Guide to the Great Depression and the New Deal.
In another venue I gave an infocommercial for the book for the general reader, but in the present essay I will explain the book's relevance for the Austrian reader.
Picking Up Where Rothbard Left Off
The first question that springs to mind — and many potential readers have indeed emailed me this — is to wonder, "What's in your book that's not in Rothbard's America's Great Depression?"
As with any economic history from an Austrian perspective, obviously I consulted Rothbard's scholarship for those topics that he had covered. In particular, my chapter on Herbert Hoover draws most of its statistics and quotes from Rothbard's work.
Unfortunately, as great as Rothbard's book is, he ends with the Hoover administration. So I extend the Austrian analysis to explain the failures of the New Deal. For example, the official unemployment rate in 1938 averaged 19 percent. Inasmuch as Roosevelt was sworn in five years earlier in 1933, this is a rather damning indictment of the New Deal as a recovery program. All previous US depressions (or "panics") had been long gone five years after the trough, and yet here we have the unemployment rate at 19 percent under the alleged savior of capitalism.
The next step in the argument is for the apologist for FDR to claim that Hoover handed over the worst economy in US history, and hence it's not surprising that things recovered more slowly under the New Deal.
Ah, not so fast. I dispose of that counterobjection by digging up Canadian unemployment statistics from the 1930s. Comparing them year by year with the official US figures, I discovered the following interesting factoid: From 1930 to 1933, the US unemployment rate averaged 3.9 points higher than the Canadian rate. Yet from 1934 to 1941, the US rate averaged 5.9 points higher. (Both rates tended to fall over time from their 1933 peaks, but Canada's fell faster.)
Why is this significant? It shows that not only did the US economy recover from depression under FDR more sluggishly than at any other point in US history, but it also recovered more sluggishly compared to Canada's experience during the Great Depression itself. What else do we need to do to show that the New Deal did not "get us out of the Depression"?
Damn Lies and Statistics?
The astute reader may have wondered why I kept using the odd term "official" in reference to US unemployment rates in the section above. The answer is that FDR's fans dispute the unemployment rates listed in, say, the Historical Statistics of the United States. In other words, in my book I use the government's own records as to what the unemployment rates were during the 1930s, mainly because I didn't want a skeptical reader to think I was relying on something from a Cato fellow's econometric model. No, my arguments about the awful "recovery" under FDR are based on the official numbers told by the same government that preaches the success of the New Deal.
Yet if you are going to use the numbers put out by the Bureau of Labor Statistics, you should be careful, because leftist economists and historians will say you are lying. The controversy centers around the status of workers who had "make-work" jobs (through the WPA, etc.) under the New Deal. The "official" government numbers do not count those people as truly being employed, whereas if you did count them, then obviously the unemployment rate would drop a lot more due to the New Deal. For example, the unemployment rate would get back into the high single digits by 1937 (before shooting up again) if you remove WPA workers from the ranks of the "unemployed."
So which unemployment series is correct? This is a somewhat philosophical question; Bob Higgs says that there is no objectively "right" answer, it rather depends what you are using the series for. If the issue is to assess the plight of Americans and gauge how bad the human suffering was during the 1930s, then it would be misleading to say that 19 percent of the workforce had no job during 1938. After all, these people weren't starving because they were getting government checks.
On the other hand, if you are trying to assess the ability of the New Deal to restore soundness to the American economy, then surely it is relevant that the private sector was incapable of finding useful employment for 19 percent of the workforce in 1938, five full years into the New Deal. That is also the "official" number that the BLS and other government websites will show you if you look up historical unemployment rates. It is perfectly fine to use that number as an indication of just how sluggish recovery was under FDR. After all, there wasn't a massive WPA program during prior depressions (or "panics").
Let's use an analogy to make the point: Imagine that in the last days of his presidency, George W. Bush declared a new policy. His spokespeople explained, "It is rather misleading to say that the unemployment rate in October 2008 was 6.6 percent, because that implies millions of Americans are destitute. But in fact they are all receiving generous assistance from the government in various forms. If we say that their 'job' is filling out the paperwork for unemployment claims, then the true unemployment rate is more like 0.4 percent. Those are the people who truly have no source of income, and need to be helped."
Would any left-liberal sign on to that rationale? Of course not. Now, there is no objectively hard and fast line between a "real" government-provided job versus a "phony" job such as "filling out unemployment forms." In fact, a purist could note that all government jobs are artificial and not indicative of true productive value for consumers, since their compensation is derived through involuntary taxation.
But even for more mainstream economists, who consider government-school teachers to have jobs just as legitimate as private-school teachers, it is still not an open-and-shut case how to classify Americans who were on make-work rolls during the 1930s. They weren't being "hired" because of a dire need to plant more trees or build more schools, but rather they were getting checks first, and then the "jobs" were invented as an afterthought.
Conclusion
Besides the application of Austrian economic analysis to the broad sweep of events during the Great Depression, my new book also draws on some of the truly shocking anecdotes that Burt Folsom and other historians have found. For example, there is a letter from a Democratic party boss telling a woman that if she wants to stay on the WPA rolls, she needs to make a campaign contribution. At the risk of sounding clichéd, I can honestly report that my book presents a side of the New Deal that Americans were not taught in school.
Mr. Mismeasure
Mr. Mismeasure
President Obama's census man plays the numberes game.
JOHN FUND
On Friday, Robert Groves, President Obama's choice to head the Census Bureau, will have his Senate confirmation hearing. His hearing is important because next year's Census has big political and economic ramifications, not only determining how House seats will be allocated among the states but also setting the formulas that will determine how huge amounts of federal dollars will flow.
That's why it's critical that Senators express clearly on the record concerns about the Census being politicized through questionable statistical manipulation. Recall the furor when GOP Senator Judd Gregg withdrew his nomination for Commerce Secretary after it became clear the White House would be exercising "oversight" over how the Census Bureau he would have supervised did its work. A continuing battle has concerned attempts to inject dubious statistical theories into the count. Mr. Groves, now a professor at the University of Michigan, himself unsuccessfully advocated statistically adjusting the Census when he was at the Census Bureau in 1990. He advised employing sampling techniques to create data for "missing" groups of people not picked up in the actual count.
The problem is that a 2003 study by the Census Bureau found that using "sampling" models to draw conclusions about "missing" people only subjected the Census to greater inaccuracy. Fears were raised that it would also encourage public distrust of the Census Bureau and its army of field examiners. The idea was scrapped, but many in the Democratic Party are keen to revive it. Mr. Groves should be vigorously questioned about his current views on the use of sampling.
In 1999, the Supreme Court determined that current law -- the 1980 Census Act -- prohibits use of sampling or statistical adjustment for reapportioning House seats among the states. However, the Court did not determine whether sampling is permitted under the Constitution, which it would be asked to do if Democrats amend the 1980 law, as many experts expect them to. Mr. Groves should be asked his opinion about changing existing law relating to the Census less than a year before it's scheduled to be taken.
Tiananmen
What Really Happened at Tiananmen
A leadership struggle in the Communist Party led to bloodshed.
BAO PU
Twenty years after Chinese troops crushed demonstrators in Tiananmen Square, new light has now been shed on the incident by the forthcoming memoirs of Zhao Ziyang. The former general secretary died in 2005, after living in forced seclusion for 16 years for supporting the pro-democracy movement. In those years of seclusion, he managed to record a testimony in audiotapes. His memoirs reveal that bloodshed could have been avoided in 1989.
China's economic reforms in the 1980s led to a rift in the top Chinese leadership between those who supported the reforms and those who opposed them. The students demonstrating in Tiananmen Square were calling for the deepening of reform, including democracy. Paramount Leader Deng Xiaoping, Premier Li Peng and other conservatives opposed them and were predisposed to respond harshly.
Zhao saw the student demonstrations differently. "I felt that if the student demonstrations could be resolved along the principles of democracy and law, through dialogue and an easing of tensions, it could possibly boost China's reform, including political reform," he wrote.
The tragic turning point toward violence came when Mr. Li maneuvered to publish Deng's harsh comments about the protestors in a People's Daily editorial on April 26. When Zhao first heard of Deng's remarks while on a state visit to North Korea, he wrote, "[M]y first thought was that another campaign against liberalism might begin."
But much to the government's surprise, the students were shocked and insulted by the defamation of their motives and responded with the April 27 demonstrations, the biggest spontaneous student protest ever in modern China's history. Zhao observed at this time that "even the symbol of the paramount leader had lost its effectiveness."
The stakes had now been raised. Mr. Li and his associates were not only gambling with their political agenda but their careers as well. Zhao says: "They were extremely worried that the April 26 editorial might be overturned. . . . Yan Mingfu [director of Liaison Department] reported to me that Li Peng had told him that if, upon my return [from North Korea], I did not support the April 26 editorial, Li would have no choice but to resign."
The Li faction's desire to avoid blame for provoking the students turned out to be the most important obstacle to a peaceful resolution. They resisted dialogue with the students, "merely paying lip service, in the same way they had always handled foreign reporters at press conference, presenting an image that would benefit themselves politically." Students naturally felt that the government was insincere in its professed desire to hear their grievances.
Zhao had to find another solution. On May 4, he delivered a more conciliatory speech at the annual meeting of the Asian Development Bank in Beijing. He insisted on resolving the conflict along the principles of "democracy and law" and focused on defusing tensions. He proposed follow-up measures to deal with corruption and allow more public scrutiny of government, such as a commission against corruption "with real authority."
His opponents would not be persuaded. The plan required critical political backing. The only remaining hope was to persuade Deng. Zhao said, "I hoped at the time that he could just relax things a little bit, for example, by saying something like 'It seems that when Li Peng gave his report on April 25, we overreacted to the situation. It now appears that the student demonstrations are not such an overwhelming problem.' With something like this to work with, I could turn the situation around without even putting any of the liability on Deng." But this would require Deng to take back his own words. Deng refused to budge. Fueled by passion and oblivious to the opaque inner-Party struggles, students launched a hunger strike on May 13, and widespread protests from all levels of society broke out in sympathy.
At this point, the benevolence of the regime was called into question. But the Li faction had gambled too much on the outcome to care. Mr. Li asked Zhao: "You're not going to continue to use soft measures to deal with the student demonstrations, are you? After so much time has elapsed, haven't they already been proven useless?"
With the world watching, what followed was the use of pure coercive power that showcased the malevolence of authoritarian rule. Zhao would have no part of it. "On the night of June 3rd, while sitting in the courtyard with my family, I heard intense gunfire. A tragedy to shock the world had not been averted, and was happening after all."
For his opponents' fears, Zhao paid with the freedom of all his remaining years.
Mr. Bao is one of the translators and editors of "Prisoner of the State: The Secret Journal of Premier Zhao Ziyang," to be released by Simon & Schuster on May 19.
Derivatives Trades
Derivatives Trades Should All Be Transparent
Disclosure would go a long way toward preventing future AIGs.
VIRAL V. ACHARYA ROBERT ENGLE
On Wednesday, Treasury Secretary Timothy Geithner proposed new regulations on derivatives trading. The administration's goal is to introduce greater transparency to these financial contracts in order to reduce the systemic risk they pose to financial markets and to the economy as a whole. The proposals are good as far as they go, but they don't go far enough.
Under the proposed reforms,standard derivative products such as credit default swaps (CDS) -- in which one party sells insurance to another party against the possibility of default by a firm or country -- will be traded on open, centralized exchanges. Trades will thus be recorded on a timely basis and regulators will gain unfettered access to information on prices, volumes and the risk exposures of all parties to these contracts. It has not yet been recommended that all such information be made available fully to the public. It should be.
Certain other financial derivatives -- such as collateralized debt and loan obligations (CDOs and CLOs), in which pools of bonds and loans are put together and their cash flows sliced up -- are not amenable to trading on a public exchange because of their nonstandard nature. But they too pose a systemic risk and need to meet minimum levels of transparency.
Most financial contracts are arrangements between two parties to deliver goods or cash in amounts and at times that depend upon uncertain future events. By their nature, they entail risk, but one kind of risk -- "counterparty risk" -- can be difficult to evaluate, because the information needed to evaluate it is generally not public. Put simply, a party to a financial contract might sign a second, similar financial contract with someone else -- increasing the risk that it may be unable to meet its obligations on the first contract. So the actual risk on one deal depends on what other deals are being done. But in over-the-counter (OTC) markets -- in which parties trade privately with each other rather than through a centralized exchange -- it is not at all transparent what other deals are being done.
This makes it likely that some institutions will build up excessively large positions in OTC derivatives without the full knowledge of other market participants. If these institutions were to default, their counterparties would also incur significant losses, creating a systemic risk.
For example, in September 2008 it became known that the liquidity of American International Group (AIG) was inadequate, given that it had written credit default swaps for many investors guaranteeing protection against default on mortgage-backed products. Each investor now realized that the value of AIG's protection was dramatically reduced. Investors demanded increased collateral -- essentially extra cash -- which AIG was unable to come up with. The Treasury had to take over the company. The counterparty risks were so widespread that a default by AIG would probably have spurred many other defaults, generating a downward spiral around the world. The AIG example illustrates well the cost that large OTC exposures can impose on the system.
When trading in such derivatives is moved to exchanges under the Treasury's proposals, the positions of counterparties will naturally be subject to capital requirements. But inadequately capitalized positions might still build up in derivatives such as collateralized debt obligations and collateralized loan obligations that continue to trade in opaque OTC markets. And this means continued systemic risk to the economy.
To prevent this from happening again in the future, we suggest that regulators make all derivatives transparent. In particular, derivative transactions in OTC markets should be public information.
Suppose every trade was posted on an Internet site within a reasonable time after execution -- as is now required by the National Association of Securities Dealers for all OTC trades in corporate bonds. Counterparties could then determine the volume of contracts of any form and by any other counterparty. Vendors would presumably make a profitable business compiling, analyzing and selling the complex data from this source.
Counterparty risk could be more accurately priced and collateral arrangements more safely based on this information. The sellers of risk in derivatives markets would have incentives to limit their exposures and to advertise this to other market participants. Investors, regulators and even the financial institutions themselves would have a much better way to analyze and hedge the true risk of their exposures. Systemic risks arising from derivatives traded OTC would be substantially reduced.
Large broker-dealers and banks will naturally resist such transparency legislation. But such resistance needs to be balanced against the risk of systemic losses when large players fail.
Centralized exchange trading of standard derivative products, which Mr. Geithner has proposed, is an important step forward. But regulators must look to fighting the next war, not just the last one. Transparency in OTC markets would discourage players from cloning standard derivative products to reduce capital requirements on centralized exchanges.
The huge losses announced by the Royal Bank of Scotland and State Street Corp. earlier this year suggest that we still don't know exactly what toxic assets are held by which banks. With our proposed transparency reforms, we eventually would.
Mr. Acharya teached at New York University's Stern School of Business and is affiliated with the London Business School. Mr. Engle also teaches at the Stern School and is the 2003 recipient of the Nobel Prize in Economics.
Health-Care Provider
What's Elevated, Health-Care Provider?
Economy of language would be good for the economy.
The indecipherable language of government has actually become dangerous to the well-being of the nation. As the federal government claims ever greater powers, its language has become vague to the point of meaningless and meaningless to the point of menacing.
The other day I was watching "Morning Joe" on MSNBC, and Kathleen Sebelius, the secretary of health and human services, came on from Washington to talk about health care. A reporter on the set, Andrew Ross Sorkin of the New York Times, asked a few clear and direct questions: What is President Obama's health care plan, how would it work, what would it look like? I leaned forward. Finally I will understand. Ms. Sebelius began to answer in that dead and deadening governmental language that does not reveal or clarify but instead wraps legitimate queries in clouds of words and sends them on their way. I think I heard "accessing affordable quality health care," "single payer plan vis-Ã -vis private multiparty insurers" and "key component of quality improvement." In any case, she didn't answer the question, which was a disappointment but not a surprise. No one answers the question anymore.
As she spoke, I attempted a sort of simultaneous translation, which is what most of us do now when we hear our political figures, translate from their language to ours. "Access health care" must mean "go to the doctor." But I gave up. Then a thought crossed my mind: Maybe we're supposed to give up! Maybe we're supposed to be struck dumb, hypnotized by words and phrases that are aimed not at making things clearer but making them more obscure and impenetrable. Maybe we're not supposed to understand.
I shouldn't pick too hard on Ms. Sebelius specifically. Most people in the administration, and many in government, speak as she speaks, and have for many years. In her case there's reason to believe it's a quirk. A New York Times profile recently had her recalling with self-deprecating charm the time her child ran a high fever and she caused a bit of confusion by forgetting to say, "We have to go to the hospital!" and announcing instead, "This unsustainable increase in body temperature requires immediate access to a local quality health-care facility!" I made that up, but it was believable, wasn't it?
New Class gobbledygook, which is more prevalent than ever, is also more destructive than ever because the government itself is doing more than ever. The Journal this week had a front page story reporting that the Obama administration is attempting to come up with ways, including federal regulations and "moral suasion," to change the way employees and executives are paid in the financial services industry "including at companies that did not receive federal bailout money." This is rather stunning, and is just one very small area of the new activism.
But back to language. Lately it is as if the American government, having decided in its programs, assumptions and philosophy to become more European, has at the same time decided it would be amusing to speak to the American people only in French.
Which would give rise to a simple and wholly understandable suspicion that the government doesn't speak clearly about what it's doing for the reason that they know that if people fully understood they would say, "Oh that's not a good idea," or, "The cost of that will kill us."
I think there are two major but not fully formed or fully articulated fears among thinking Americans right now, and the deliberate obscurity of official language only intensifies those fears.
The first is that Mr. Obama's government, in all its flurry of activism, may kill the goose that laid the golden egg. This is as dreadful and obvious a cliché as they come, but too bad, it's what people fear. They see the spending plans and tax plans, the regulation and reform hunger, the energy proposals and health-care ambitions, and they—we—wonder if the men and women doing all this, working in their separate and discrete areas, are being overseen by anyone saying, "By the way, don't kill the goose."
The goose of course is the big, messy, spirited, inspiring, and sometimes in some respects damaging but on the whole brilliant and productive wealth-generator known as the free-market capitalist system. People do want things cleaned up and needed regulations instituted, and they don't mind at all if the very wealthy are more heavily taxed, but they greatly fear a goose killing. Economic freedom in all its chaos and disorder has kept us rich for 200 years, and allowed us as a nation to be generous and strong at home and in the world. But the goose can be killed—by carelessness, hostility, incrementalism, paralysis, and by no one saying, "Don't kill the goose."
Complicating all this is the fact that so many of the Obama people seem to be extremely bright and pleasant academic types with no particular and personal knowledge of business in America. They are not messy businessmen with a love for the system that lifted them. Mr. Obama himself, like John McCain, has shown no particular interest in making money in his life, with the latter preferring military and then political glory, and the former preferring political power.
The second great fear is that the balance between those who pay taxes and those who need benefits will be left, after the great flurry, all out of whack. When this balance is deeply disturbed or distorted, when the number of those who need to take truly overwhelms those who need to make, a tipping point occurs. People become disheartened. Generations become resigned. Tiredness steps in. We will miss irrational exuberance.
Is anyone in the Obama administration watching this? If they are, they're not saying, certainly not clearly. I continue to be astounded by how much Mr. Obama reminds me in his first few months of George W. Bush in his first few years. There is a sense with both men that they always pushed too hard, were always revolutionizing and doing "the work of generations," as Mr. Bush put it. They appear to share an insensitivity to the delicacy of even so great a nation as ours, an inability to see limits, and to know at a certain point that what you do with a nation becomes what you do to it.
Do members of the administration speak obscurely because they can't help themselves, or do they speak the way they speak because they really aren't all that keen to have people understand them? Maybe they calculate that lack of clarity ensures maximum ability to maneuver. But maybe they should think less about maneuvering. They're not helping the prevailing sense of national anxiety by speaking in a special lingo all their own. After all, it's not their health-care system they're reforming, it is America's. It would be nice if America were allowed to know what exactly the plan is, and how it would work, and who would pay, and how.
As for the Republicans, the administration is giving them an opening. There could be gain in becoming the party that speaks with concrete honesty, and in a known human language, on the great issues of the day. The GOP could become the party that doesn't make you translate, and doesn't leave you giving up. I wonder if the party right now, for all the battering it's experienced the past few years, is still quick enough to see an opening like this.
Health Costs
Health Costs Are the Real Deficit Threat
That's why President Obama is making health-care reform a priority.
PETER R. ORSZAG
This week confirmed two important facts -- that health-care costs are the key to our fiscal future, and that even doctors and hospitals agree that substantial efficiency improvements are possible in how medicine is practiced.
![[Commentary]](http://s.wsj.net/public/resources/images/OB-DR389_oj_ors_DV_20090514220110.jpg)
David Gothard The numbers speak for themselves. The Medicare and Social Security trustees' reports released this week show that health-care costs drive our long-term entitlement problem. An example illustrates the point: If costs per enrollee in Medicare and Medicaid grow at the same rate over the next four decades as they have over the past four, those two programs will increase from 5% of GDP today to 20% by 2050. Despite the attention often paid to Social Security, spending on that program rises much more modestly -- from 5% to 6% of GDP -- over the same time period. Over the long run, the deficit impact of every other fiscal policy variable is swamped by the impact of health-care costs.
Spiraling health-care costs are not just some future abstraction, however. Right now, families across America who have health insurance are seeing their take-home pay reduced and their household budgets strained by high costs and spiraling premiums. State and local governments also are feeling this pinch. And the growing weight of health costs on state budgets translates into an inability to make investments in areas such as education, hindering our overall economic growth.
The good news is that there appear to be significant opportunities to reduce health-care costs over time without impairing the quality of care or outcomes. In health care, unlike in other sectors, higher quality currently seems to be associated with lower cost -- not the opposite.
For example, health-care costs vary substantially across regions of the United States and across hospitals and doctors within a region -- even for patients with a similar diagnosis. Medicare spending in 2006 varied more than threefold across U.S. regions, mostly due to variation in the volume and intensity of services provided for similar types of patients. The kicker is that Medicare enrollees in areas with higher spending do not appear to have better health outcomes on average than those in areas with lower spending. We don't seem to be getting anything in exchange for the extra costs except more intensive tests and procedures, and additional days in the hospital -- and who would want any of that if the additional tests and procedures do not actually help to promote health?
One study on inpatient knee replacements found three times as many were performed on Medicare beneficiaries in Milwaukee than in Manhattan. Expenditures in the last six months of life have been shown to be nearly twice as high for Medicare patients at certain leading academic medical centers than at others -- again, with no better medical outcomes. Uwe Reinhardt, the renowned Princeton economist, put it best: "How can it be that 'the best medical care in the world' costs twice as much as 'the best medical care in the world?'"
The answer is it shouldn't. If we can move our nation toward the proven and successful practices adopted by lower-cost areas and hospitals, some economists believe health-care costs could be reduced by 30% -- or about $700 billion a year -- without compromising the quality of care.
This may all seem academic, but this week a stunning thing happened: Representatives from some of the most important parts of the health-care sector -- doctors, pharmaceutical companies, hospitals, insurers and medical-device manufacturers -- confirmed that major efficiency improvements in health-care are possible. They met with the president and pledged to take aggressive steps to cut the currently projected growth rate of national health-care spending by an average of 1.5 percentage points in each of the next 10 years. By making this pledge, the providers and insurers made clear that they agreed the system could remove significant costs without harming quality.
Health-care costs are already so high and the power of compound interest so strong that reducing the growth rate by 1.5 percentage points per year would save substantial sums. It would reduce national health expenditures by more than $2 trillion over the next decade -- and could help to put roughly $2,500 in the pockets of the average American family every year. A slower growth rate in overall health-care spending would help to promote and sustain a slowdown in Medicare and Medicaid spending, too. If cost growth slowed by that much in the future, Medicare and Medicaid spending would reach only about 10% of GDP by 2050 -- half the level than if historical growth rates continued.
How can we move toward a high-quality, lower-cost system? There are four key steps: 1) health information technology, because we can't improve what we don't measure; 2) more research into what works and what doesn't, so doctors don't recommend treatments that don't improve health; 3) prevention and wellness, so that people do the things that keep them healthy and avoid costs associated with health risks such as smoking and obesity; and 4) changes in financial incentives for providers so that they are incentivized rather than penalized for delivering high-quality care.
Already, the administration has taken important steps in all four of these areas. In February, the president signed the American Recovery and Reinvestment Act, which is providing resources for electronic medical records, patient-centered health research, and prevention and wellness interventions so that we have the infrastructure in place to lower health spending in the long run. The president's budget also put forward a set of quality-enhancing changes in incentives in Medicare and Medicaid, such as paying hospitals less when they don't get patient treatment right the first time so we can reduce the number of patients who have to endure readmission to a hospital.
But more must be done. To transform our health-care system so that it improves efficiency and increases value, we need to undertake comprehensive health-care reform, and the president is committed to getting that done this year. Once we do, we will put the nation on a sustainable fiscal path and build a new foundation for our economy for generations to come.
Mr. Orszag is director of the White House Office of Management and Budget.
Gitmo's Virtues
Democrats Discover Gitmo's Virtues
Move the detainees? Not to my backyard
'We're not going to bring al Qaeda to Big Sky Country. No way, not on my watch," declared Montana Sen. Max Baucus. "I wouldn't want them and I wouldn't take them," insisted Nebraska's Ben Nelson. Not Quantico, piped up Virginia's Mark Warner. After all, it "is in a very populated area in the greater capital region." Look, "Alcatraz is a national park and a tourist attraction, not a functioning prison" for terrorists, said the office of California's Dianne Feinstein.
![[Potomac Watch]](http://s.wsj.net/public/resources/images/OB-DR369_oj_pw0_E_20090514190504.jpg)
Chad Crowe All Democrats in favor of standing with your president to shout out the evils of Guantanamo, shout aye! "Aye!" All Democrats in favor of doing what would be necessary to close Guantanamo, shout aye! . . . What, nobody?
On day two of his presidency, Barack Obama issued an executive order to shut down, within one year, the Gitmo prison that still houses 241 detainees. Four months later, he may be about to be handed his first defeat of a major campaign promise, and by his own party. Faced with the actual politics of bringing terrorists to U.S. soil, congressional Democrats are running for the exits.
President Bush never closed Gitmo because, put simply, the options were to transfer detainees to foreign countries or to transfer detainees here. Attorney General Eric Holder in April embarked on a "please take back your bad guys" road show through the very European countries that had sermonized about America's offshore prison. The Brits and Germans sent the president their regards and promised to think about it.
That leaves the U.S. as the destination for Gitmo inmates, and Republicans have slowly but consistently turned Gitmo into a debate over Democrats' ability to handle national security. Senate Minority Leader Mitch McConnell has been hitting on Guantanamo since February, warning that the administration's decision to put "symbolism" over "safety" might result in Khalid Sheik Mohammed, Abu Zubaydah and Ramzi bin al Shibh coming soon to a neighborhood near you. House Republicans last week released a chilling video showing footage of 9/ 11, mug shots of the aforementioned murderers, and the question "How does closing Guantanamo Bay make us safer?"
Public outrage has already inspired officials in Louisiana, California, Mississippi, Missouri and Virginia (for starters) to introduce or pass resolutions to stop terrorists from being sent to their communities. Playing off this, the House GOP introduced legislation that would prohibit the administration from transferring Gitmo detainees to a state without permission from that state's governor and legislature. They then dared Democrats to vote against this "Keep Terrorists Out of America Act."
Democrats don't dare. The House instead last week yanked from an appropriations bill the $81 million Mr. Obama wants as a down payment to begin the process of shuttering the prison. Worried that even this didn't provide enough cover, they also inserted language barring detainee transfers to the U.S. until at least October.
Appropriations chief David Obey explained that the only reason Congress didn't provide the money is that it first wants to see the administration's "plan." In truth, Democrats don't want to touch this debate -- certainly not now, in the middle of the what-Nancy-knew-and-when discussion. So they're kicking the can back to Mr. Obama.
The Senate is also set to deal with an appropriations bill, and Democrats are growing very wary that Republicans will introduce some awkward amendments that will force them to actually vote to bring terrorists to the U.S. Not surprisingly, Senate Majority Leader Harry Reid is now saying he, too, would first like to see some "specifics" from the administration.
This was not part of the Obama team's calculation. It figured it would get its bucks and make its calls. Releasing specific plans for where it intends to land these detainees will cause geographic uproars. But six weeks ago, Republican Sen. Jeff Sessions sent the first of two letters to Mr. Holder demanding to know the administration's legal authority for transfers, given that the federal Real ID Act prohibits admission to the U.S. of any alien who has engaged in a terrorist activity. The ranking member of the Judiciary Committee has yet to receive a response.
The administration might have the ability to shuffle some funds and do this unilaterally. But it is already four months into its one-year deadline, and transfers take time. The other option is for the administration to start triangulating, blaming Congress for not funding the program, and pushing back the deadline.
If so, Guantanamo will join the growing list of security tools that President Obama once criticized as out of keeping with American values but has since discovered are very in keeping with protecting the nation. Wiretapping, renditions, military tribunals, Gitmo -- it turns out the Bush people weren't a bunch of yahoos but often thoughtful defenders against terrorism. This is all progress, though America might wonder if it could have been spared the intervening drama.
Retail, Tech Stocks Climb
Retail, Tech Stocks Climb
Stocks moved higher on Friday as traders settled expiring options bets and digested data confirming that inflation isn't yet picking up.
Many traders and analysts say that remains a risk over the long haul, since the government is essentially printing money to bolster the economy. But for now, though, the more pressing concern for investors is how much more pain may be in store as the market consolidates its sharp rally from its March lows.
![[Markets Data]](http://s.wsj.net/public/resources/images/MDGpromo_D01222009151210.jpg)
At 10:45 a.m., the Dow Jones Industrial Average was higher by about 57 points. Alcoa was the best performer among the blue chips, jumping by nearly 6%. Hewlett-Packard, up 1.6%, and Home Depot, up 1.4%, also rose.
Markets could be choppy on Friday as traders wind down monthly options bets.
"It would surprise me if things got too out of hand today, since the market is in such good equilibrium," said options trader Richard Sparks, of Schaeffer's Investment Research in Cincinnati. "The mood has changed so much since March, but we also have a lot of skeptical people on the other side of the fence, which is healthy, in a way."
Mr. Sparks said traders seem to have been unwinding options bets the last few days, smoothing the settlement process. Expiration can add market volatility as participants buy or sell shares to deliver against their outstanding options positions.
The S&P 500 rose 0.3%, bolstered by gains in its basic-materials, tech and its consumer-discretionary sectors. The Nasdaq Composite Index was up 0.7%. The Russell 2000, which has outperformed other measures lately as investors have bet that the U.S. is overdue for a recovery that will help small companies, was up 0.6%.
In economic news Friday, the consumer-price index was unchanged in April from March, the Labor Department said, but the core CPI, which excludes food and energy prices, jumped 0.3% last month, the largest increase since June 2008 and well above economists' expectations for a 0.1% increase.
Consumer prices fell 0.7% compared to one year ago, the largest 12-month decline since June 1955. That is also significantly under the 2% annual rate of inflation that most Fed officials think is consistent with their dual mandate of price stability and maximum employment.
Other data suggested some moderation in the deterioration of the factory sector. Industrial production decreased by 0.5% in April compared to the prior month, the Federal Reserve said. Output fell 1.7% in March, revised from a previously estimated 1.5% decline. Capacity utilization shrank to 69.1%, the lowest since records began in 1967.
Also, the Federal Reserve Bank of New York's Empire State manufacturing index climbed 10 points to -4.55 from -14.65 in April and the record low of -38.23 in March. The May reading was the highest since August 2008.
Treasury prices were higher. The benchmark 10-year Treasury note was up by 16/32 in recent trading, pushing its yield down to 3.15%.
Stocks of life insurers were mixed after the Treasury Department said it's prepared to provide the companies with up to $22 billion under the Troubled Asset Relief Program. Hartford Financial Services said that it has preliminary approval to tap $3.4 billion in federal funds. A Treasury spokesman said that the government has agreed to provide funds to Hartford, Prudential Financial, Principal Financial Group and Lincoln National. Allstate also will receive aid.
In credit markets, three-month U.S. dollar Libor dropped to 0.82563% from Thursday's 0.85438%. The three-month BOR/OIS spread, a gauge of stress in the money markets, narrowed to 62.7 basis points from 65.5 on Thursday. The spread has tightened significantly from its widest point of 366 bps, seen on Oct. 10 when interbank market tensions peaked.
Thursday, May 14, 2009
Pelosi's Self-Torture
Pelosi's Self-Torture
The speaker is engulfed by her own game of political retribution.
Given House Speaker Nancy Pelosi's acknowledged skill at torturing the Bush Administration in recent years, it no doubt afforded her critics some pleasure yesterday to watch her twist in the wind in front of the press over what she knew and when about the CIA's terrorist interrogations. With mockery even from Jon Stewart on Comedy Central, Mrs. Pelosi has turned herself into a spectacle about a subject that she and fellow Democrats had themselves reduced to a spectacle of demagogic accusation and blame, repeatedly threatening to put Bush officials in the dock for "condoning torture."
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Getty Images Permit us, then, to reel in this travesty and attempt to put both Speaker Pelosi and her targets in the Bush Administration into perspective. No, better yet, let Speaker Pelosi's California colleague, Senator Dianne Feinstein, do it.
Asked this week about Mrs. Pelosi's variable recollections, Senator Feinstein, who chairs the Intelligence Committee, responded: "I think it's a tempest in a teapot really to say, Well, Speaker Pelosi should have known all of this, she should have stopped this, she should have done this or done that. I don't want to make an apology for anybody, but in 2002, it wasn't 2006, '07, '08 or '09. It was right after 9/11, and there were in fact discussions about a second wave of attacks."
Indeed there were discussions about a second wave of attacks in 2002. In an interview two years ago, former CIA Director George Tenet said of that post-attack period: "I've got reports of nuclear weapons in New York City, apartment buildings that are going to be blown up, planes that are going to fly into airports all over again."
It was precisely in this atmosphere, months after the initial, horrific attack on the World Trade Center and Pentagon, that the CIA asked the Justice Department for legal guidance on the now-famous "EITs," or enhanced interrogation techniques at the center of this current tempest.
Bush lawyers such as John Yoo and Jay Bybee produced memorandums carefully setting out the legal limits of what the CIA could do. Also in 2002, the CIA began the briefings of Congress on these interrogations that now haunt Speaker Pelosi.
If Washington were still able to conduct a national-security policy fitting the world's lone superpower, the Feinstein standard would apply to both Nancy Pelosi and the Bush officials. Instead, Congressional Democrats, unable to let go of their long Bush obsession, persist in calling for a Truth Commission, as did Ms. Pelosi herself yesterday in her prepared statement.
Amid her rope-a-dope session with a suddenly pugnacious press corps, Speaker Pelosi said one other thing that deserves attention by people still hoping to save Washington from itself. She suggested that we "must review" the National Security Act of 1947 with an eye toward giving "larger numbers of Congress" access to classified briefings. This in the interest of "proper oversight."
Is she serious? The mess that now engulfs her and other Democrats can be solved by giving more Congressfolk access to the nation's most sensitive secrets? Only a Member of Congress could conclude that you can enhance political accountability by making it more diffuse.
Back in the 1970s, Congress in the spectacle of the Church-Pike hearings pilloried the CIA for being what Senator Frank Church called a "rogue elephant on the rampage." That exercise, it is now widely acknowledged, damaged U.S. intelligence-gathering for a generation.
Speaker Pelosi, John Conyers, Carl Levin and their supporters are now close to repeating this destructive exercise with hearings intended to be little more than bear-baitings of the defeated Bush Administration. President Obama in his fashion tries to split the difference by asserting that the CIA interrogators will somehow be fenced off from any such exercise while leaving the door open to prosecution of those who wrote the legal opinions.
This Administration uses the word "responsibility" a lot, and it would improve the charged political atmosphere of Washington considerably if senior officials there took the idea more seriously. Speaker Pelosi and other senior Members of Congress were brought into the complex loop of the post-September 11 world with a long series of CIA briefings, as the law requires. Now, when disclosure of the details of those briefings undermines the Democrats' political game, Mrs. Pelosi tries to dump responsibility back onto the CIA. Yesterday she even said the agency "gave me inaccurate and incomplete information." So CIA officials now led by Obama appointee Leon Panetta are lying. No wonder this draws the ridicule of comedians.
Whatever one's politics may be, there has to be some recognition that Washington -- the U.S. government -- simply can't function if it is endlessly entangled in the exquisitely argued, one might say absurd, blame-games that she and some Democrats are running against former Bush officials, and that now threaten the political standing of the Speaker herself.
Barack Obama won the election and as President he now has a government to run. With that responsibility comes the necessity to make difficult decisions, as those he has made on prisoner photos and military tribunals attest. If he is to succeed, he needs a capital city of responsible partners, not a running circus with the Speaker of the House at the center, blaming everyone else as she flees from any responsibility for what she heard and did.
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