Sunday, May 3, 2009

Demographics & Depression

Demographics & Depression, by David P. Goldman
First Things, May 2009

Three generations of economists immersed themselves in study of the Great Depression, determined to prevent a recurrence of the awful events of the 1930s. And as our current financial crisis began to unfold in 2008, policymakers did everything that those economists prescribed. Following John Maynard Keynes, President Bush and President Obama each offered a fiscal stimulus. The Federal Reserve maintained confidence in the financial system, increased the money supply, and lowered interest rates. The major industrial nations worked together, rather than at cross purposes as they had in the early 1930s.

In other words, the government tried to do everything right, but everything continues to go wrong. We labored hard and traveled long to avoid a new depression, but one seems to have found us, nonetheless.

So is this something outside the lesson book of the Great Depression? Most officials and economists argue that, until home prices stabilize, necrosis will continue to spread through the assets of the financial system, and consumers will continue to restrict spending. The sources of the present crisis reach into the capillary system of the economy: the most basic decisions and requirements of American households. All the apparatus of financial engineering is helpless beside the simple issue of household decisions about shelter. We are in the most democratic of economic crises, and it stems directly from the character of our people.

Part of the problem in seeing this may be that we are transfixed by the dense technicalities of credit flow, the new varieties of toxic assets, and the endless iterations of financial restructuring. Sometimes it helps to look at the world with a kind of simplicity. Think of it this way: Credit markets derive from the cycle of human life. Young people need to borrow capital to start families and businesses; old people need to earn income on the capital they have saved. We invest our retirement savings in the formation of new households. All the armamentarium of modern capital markets boils down to investing in a new generation so that they will provide for us when we are old.

To understand the bleeding in the housing market, then, we need to examine the population of prospective homebuyers whose millions of individual decisions determine whether the economy will recover. Families with children are the fulcrum of the housing market. Because single-parent families tend to be poor, the buying power is concentrated in two-parent families with children.

Now, consider this fact: America’s population has risen from 200 million to 300 million since 1970, while the total number of two-parent families with children is the same today as it was when Richard Nixon took office, at 25 million. In 1973, the United States had 36 million housing units with three or more bedrooms, not many more than the number of two-parent families with children—which means that the supply of family homes was roughly in line with the number of families. By 2005, the number of housing units with three or more bedrooms had doubled to 72 million, though America had the same number of two-parent families with children.

The number of two-parent families with children, the kind of household that requires and can afford a large home, has remained essentially stagnant since 1963, according to the Census Bureau. Between 1963 and 2005, to be sure, the total number of what the Census Bureau categorizes as families grew from 47 million to 77 million. But most of the increase is due to families without children, including what are sometimes rather strangely called “one-person families.”

In place of traditional two-parent families with children, America has seen enormous growth in one-parent families and childless families. The number of one-parent families with children has tripled. Dependent children formed half the U.S. population in 1960, and they add up to only 30 percent today. The dependent elderly doubled as a proportion of the population, from 15 percent in 1960 to 30 percent today.

If capital markets derive from the cycle of human life, what happens if the cycle goes wrong? Investors may be unreasonably panicked about the future, and governments can allay this panic by guaranteeing bank deposits, increasing incentives to invest, and so forth. But something different is in play when investors are reasonably panicked. What if there really is something wrong with our future—if the next generation fails to appear in sufficient numbers? The answer is that we get poorer.

The declining demographics of the traditional American family raise a dismal possibility: Perhaps the world is poorer now because the present generation did not bother to rear a new generation. All else is bookkeeping and ultimately trivial. This unwelcome and unprecedented change underlies the present global economic crisis. We are grayer, and less fecund, and as a result we are poorer, and will get poorer still—no matter what economic policies we put in place.

We could put this another way: America’s housing market collapsed because conservatives lost the culture wars even back while they were prevailing in electoral politics. During the past half century America has changed from a nation in which most households had two parents with young children. We are now a mélange of alternative arrangements in which the nuclear family is merely a niche phenomenon. By 2025, single-person households may outnumber families with children.

The collapse of home prices and the knock-on effects on the banking system stem from the shrinking count of families that require houses. It is no accident that the housing market—the economic sector most sensitive to demographics—was the epicenter of the economic crisis. In fact, demographers have been predicting a housing crash for years due to the demographics of diminishing demand. Wall Street and Washington merely succeeded in prolonging the housing bubble for a few additional years. The adverse demographics arising from cultural decay, though, portend far graver consequences for the funding of health and retirement systems.

Conservatives have indulged in self-congratulation over the quarter-century run of growth that began in 1984 with the Reagan administration’s tax reforms. A prosperity that fails to rear a new generation in sufficient number is hollow, as we have learned to our detriment during the past year. Compared to Japan and most European countries, which face demographic catastrophe, America’s position seems relatively strong, but that strength is only postponing the reckoning by keeping the world’s capital flowing into the U.S. mortgage market right up until the crash at the end of 2007.

As long as conservative leaders delivered economic growth, family issues were relegated to Sunday rhetoric. Of course, conservative thinkers never actually proposed to measure the movement’s success solely in units of gross domestic product, or square feet per home, or cubic displacement of the average automobile engine. But delivering consumer goods was what conservatives seemed to do well, and they rode the momentum of the Reagan boom.

Until now. Our children are our wealth. Too few of them are seated around America’s common table, and it is their absence that makes us poor. Not only the absolute count of children, to be sure, but also the shrinking proportion of children raised with the moral material advantages of two-parent families diminishes our prospects. The capital markets have reduced the value of homeowners’ equity by $8 trillion and of stocks by $7 trillion. Households with a provider aged 45 to 54 have lost half their net worth between 2004 and 2009, according to Dean Baker of the Center for Economic and Policy Research. There are ways to ameliorate the financial crisis, but none of them will replace the lives that should have been part of America and now are missed.

[Population by Age in Advanced Countries graph]

This suggests that nothing economic policy can do will entirely reverse the great wave of wealth destruction. President Obama made hope the watchword of his campaign, but there is less for which to hope, largely because of the economic impact of the lifestyle choices favored by the same young people who were so enthusiastic for Obama. The Reagan reforms created new markets and financing techniques and put enormous amounts of leverage at the disposal of businesses and households. The 1980s saw the creation of a mortgage-backed securities market that turned the American home into a ready source of capital, the emergence of a high-yield bond market that allowed new companies to issue debt, and the expansion of private equity. These financing techniques contributed mightily to the great expansion of 1984–2008, and they were the same instruments that would wreak ruin on the financial system. During the 1980s the baby boomers were in their twenties and thirties, when families are supposed to take on debt; twenty years later, the baby boomers were in their fifties and sixties, when families are supposed to save for retirement. The elixir of youth turned toxic for the aging.

Unless we restore the traditional family to a central position in American life, we cannot expect to return to the kind of wealth accumulation that characterized the 1980s and 1990s. Theoretically, we might recruit immigrants to replace the children we did not rear, or we might invest capital overseas with the children of other countries. From the standpoint of economic policy, neither of those possibilities can be dismissed. But the contributions of immigration or capital export will be marginal at best compared to the central issue of whether the demographics of America reverts to health.

Life is sacred for its own sake. It is not an instrument to provide us with fatter IRAs or better real-estate values. But it is fair to point out that wealth depends ultimately on the natural order of human life. Failing to rear a new generation in sufficient numbers to replace the present one violates that order, and it has consequences for wealth, among many other things. Americans who rejected the mild yoke of family responsibility in pursuit of atavistic enjoyment will find at last that this is not to be theirs, either.

It will be painful for conservatives to admit that things were not well with America under the Republican watch, at least not at the family level. From 1954 to 1970, for example, half or more of households contained two parents and one or more children under the age of eighteen. In fact as well as in popular culture, the two-parent nuclear family formed the normative American household. By 1981, when Ronald Reagan took office, two-parent households had fallen to just over two-fifths of the total. Today, less than a third of American households constitute a two-parent nuclear family with children.

Housing prices are collapsing in part because single-person households are replacing families with children. The Virginia Tech economist Arthur C. Nelson has noted that households with children would fall from half to a quarter of all households by 2025. The demand of Americans will then be urban apartments for empty nesters. Demand for large-lot single family homes, Nelson calculated, will slump from 56 million today to 34 million in 2025—a reduction of 40 percent. There never will be a housing price recovery in many parts of the country. Huge tracts will become uninhabited except by vandals and rodents.

All of these trends were evident for years, and duly noted by housing economists. Why did it take until 2007 for home prices to collapse? If America were a closed economy, the housing market would have crashed years ago. The paradox is that the rest of the industrial world, and much of the developing world, are aging faster than the United States.

In the industrial world, there are more than 400 million people in their peak savings years, 40 to 64 years of age, and the number is growing. There are fewer than 350 million young earners in the 19-to-40-year bracket, and their number is shrinking. If savers in Japan can’t find enough young people to lend to, they will lend to the young people of other countries. Japan’s median age will rise above 60 by mid-century, and Europe’s will rise to the mid-50s.

America is slightly better off. Countries with aging and shrinking populations must export and invest the proceeds. Japan’s households have hoarded $14 trillion in savings, which they will spend on geriatric care provided by Indonesian and Filipino nurses, as the country’s population falls to just 90 million in 2050 from 127 million today.

The graying of the industrial world creates an inexhaustible supply of savings and demand for assets in which to invest them—which is to say, for young people able to borrow and pay loans with interest. The tragedy is that most of the world’s young people live in countries without capital markets, enforcement of property rights, or reliable governments. Japanese investors will not buy mortgages from Africa or Latin America, or even China. A rich Chinese won’t lend money to a poor Chinese unless, of course, the poor Chinese first moves to the United States.

Until recently, that left the United States the main destination for the aging savers of the industrial world. America became the magnet for savings accumulated by aging Europeans and Japanese. To this must be added the rainy-day savings of the Chinese government, whose desire to accumulate large amounts of foreign-exchange reserves is more than justified in retrospect by the present crisis.

America has roughly 120 million adults in the 19-to-44 age bracket, the prime borrowing years. That is not a large number against the 420 million prospective savers in the aging developed world as a whole. There simply aren’t enough young Americans to absorb the savings of the rest of the world. In demographic terms, America is only the leper with the most fingers.

The rest of the world lent the United States vast sums, rising to almost $1 trillion in 2007. As the rest of the world thrust its savings on the United States, interest rates fell and home prices rose. To feed the inexhaustible demand for American assets, Wall Street connived with the ratings agencies to turn the sow’s ear of subprime mortgages into silk purses, in the form of supposedly default-proof securities with high credit ratings. Americans thought themselves charmed and came to expect indefinitely continuing rates of 10 percent annual appreciation of home prices (and correspondingly higher returns to homeowners with a great deal of leverage).

The baby boomers evidently concluded that one day they all would sell their houses to each other at exorbitant prices and retire on the proceeds. The national household savings rate fell to zero by 2007, as Americans came to believe that capital gains on residential real estate would substitute for savings.

After a $15 trillion reduction in asset values, Americans are now saving as much as they can. Of course, if everyone saves and no one spends, the economy shuts down, which is precisely what is happening. The trouble is not that aging baby boomers need to save. The problem is that the families with children who need to spend never were formed in sufficient numbers to sustain growth.

In emphasizing the demographics, I do not mean to give Wall Street a free pass for prolonging the bubble. Without financial engineering, the crisis would have come sooner and in a milder form. But we would have been just as poor in consequence. The origin of the crisis is demographic, and its solution can only be demographic.

America needs to find productive young people to whom to lend. The world abounds in young people, of course, but not young people who can productively use capital and are thus good credit risks. The trouble is to locate young people who are reared to the skill sets, work ethic, and social values required for a modern economy.

In theory, it is possible to match American capital to the requirements of young people in venues capable of great productivity growth. East Asia, for example, has almost 500 million people in the 19-to-40-year-old bracket, 50 percent more than that of the entire industrial world. The prospect of raising the productivity of Chinese, Indians, and other Asians opens up an entirely different horizon for the American economy. In theory, the opportunities for investment in Asia are limitless, but political trust, capital markets, regulatory institutions, and other preconditions for such investment have been inadequate. For aging Americans to trust their savings to young Asians, a generation’s worth of institutional reforms would be required.

It is also possible to improve America’s demographic profile through immigration, as Reuven Brenner of McGill University has proposed. Some years ago Cardinal Baffi of Bologna suggested that Europe seek Catholic immigrants from Latin America. In a small way, something like this is happening. Europe’s alternative is to accept more immigrants from the Middle East and Africa, with the attendant risks of cultural hollowing out and eventual Islamicization. America’s problem is more difficult, for what America requires are highly skilled immigrants.

Even so, efforts to export capital and import workers will at best mitigate America’s economic problems in a small way. We are going to be poorer for a generation and perhaps longer. We will drive smaller cars and live in smaller homes, vacation in cabins by the lake rather than at Disney World, and send our children to public universities rather than private liberal-arts colleges. The baby boomers on average will work five or ten years longer before retiring on less income than they had planned, and young people will work for less money at duller jobs than they had hoped.

In traditional societies, each extended family relied on its own children to care for its own elderly. The resources the community devoted to the destitute—gleaning the fields after harvest, for example—were quite limited. Modern society does not require every family to fund its retirement by rearing children; we may contribute to a pension fund and draw on the labor of the children of others. But if everyone were to retire on the same day, the pension fund would go bankrupt instantly, and we all would starve.

The distribution of rewards and penalties is manifestly unfair. The current crisis is particularly unfair to those who brought up children and contributed monthly to their pension fund, only to watch the value of their savings evaporate in the crisis. Tax and social-insurance policy should reflect the effort and cost of rearing children and require those who avoid such effort and cost to pay their fair share.

Numerous proposals for family-friendly tax policy are in circulation, including recent suggestions by Ramesh Ponnuru, Ross Douthat, and Reihan Salam. The core of a family-oriented economic program might include the following measures:

• Cut taxes on families. The personal exemption introduced with the Second World War’s Victory Tax was $624, reflecting the cost of “food and a little more.” In today’s dollars that would be about $7,600, while the current personal exemption stands at only $3,650. The personal exemption should be raised to $8,000 simply to restore the real value of the deduction, and the full personal exemption should apply to children.
• Shift part of the burden of social insurance to the childless. For most taxpayers, social-insurance deductions are almost as great a burden as income tax. Families that bring up children contribute to the future tax base; families that do not get a free ride. The base rate for social security and Medicare deductions should rise, with a significant exemption for families with children, so that a disproportionate share of the burden falls on the childless.
• Make child-related expenses tax deductible. Tuition and health care are the key expenses here with which parents need help.
• Change the immigration laws. The United States needs highly skilled, productive individuals in their prime years for earning and family formation.

We delude ourselves when we imagine that a few hundred dollars of tax incentives will persuade individuals to form families or keep them together. A generation of Americans has grown up with the belief that the traditional family is merely one lifestyle choice among many.

But it is among the young that such a conservative message could reverberate the loudest. The young know that the promise of sexual freedom has brought them nothing but emptiness and anomie. They suffer more than anyone from the breakup of families. They know that abortion has wrought psychic damage that never can be repaired. And they see that their own future was compromised by the poor choices of their parents.

It was always morally wrong for conservatives to attempt to segregate the emotionally charged issues of public morals from the conservative growth agenda. We know now that it was also incompetent from a purely economic point of view. Without life, there is no wealth; without families, there is no economic future. The value of future income streams traded in capital markets will fall in accordance with our impoverished demography. We cannot pursue the acquisition of wealth and the provision of upward mobility except through the reconquest of the American polity on behalf of the American family.

The conservative movement today seems weaker than at any time since Lyndon Johnson defeated Barry Goldwater. There are no free-marketeers in the foxholes, and it is hard to find an economist of any stripe who does not believe that the government must provide some kind of economic stimulus and rescue the financial system.

But the present crisis also might present the conservative movement with the greatest opportunity it has had since Ronald Reagan took office. The Obama administration will certainly face backlash when its promise to fix the economy through the antiquated tools of Keynesian stimulus comes to nothing. And as a result, American voters may be more disposed to consider fundamental problems than they have been for several generations. The message that our children are our wealth, and that families are its custodian, might resonate all the more strongly for the manifest failure of the alternatives.

Terrorists and Pirates: An Alliance of Convenience

Terrorists and Pirates: An Alliance of Convenience. By Ryan Mauro
Friday, May 01, 2009

In his article titled “Our Misguided Fight Against Somali Pirates,” John Feffer from the Institute for Policy Studies asks “Those teenage high-seas renegades are not about to team up with terrorists, so why is the U.S. military devoting so much attention to them?” While Freer is correct in pointing out that the pirates and terrorists are not ideological allies, it is a mistake to assume that the pirates are not willing to become valued business partners of radical Islamic terrorist groups including those linked to Al-Qaeda.

Al-Shabaab, the Al-Qaeda affiliate labeled by the State Department as a terrorist organization, currently controls southern Somalia. The recent media attention given to the taking of an American cargo ship captain hostage and subsequent rescue will no doubt motivate this group to partner with pirates, if for no other reason than to try to steal some of the spotlight. Indeed, shortly following the incident, al-Shabaab claimed credit for firing mortars near a visiting U.S. congressman.

Already, senior Al-Qaeda member Sa’id Ali Jabir Al-Khathim al-Shihri, has instructed his Somali allies to “increase your strikes against the crusaders at sea and in Djibouti.” Earlier in April, an al-Shabaab spokesperson praised the pirates, saying they were “protecting the coast against the enemies of Allah.” The leader of the Ras Kamboni Brigades, another radical Islamic group said to be linked to Al-Qaeda, said the pirates were “part of the Mujahideen” despite being “money-seekers.” Those that dismiss the possibility of a link between pirates and terrorists underestimate the forces of radical Islam’s ability to establish relationships of convenience, and underestimate the greed of pirates with a clear will to bypass principles for the sake of profit.

At the Somali Piracy Conference on April 7, Ambassador David H. Shinn conceded there was “no evidence that piracy is directly linked to international terrorism, although many Somali groups get a cut of the ransom money.” Citing Jane’s Intelligence Review, Shinn explained that the two forces cooperate on arms smuggling, and the pirates are reportedly helping al-Shabaab develop maritime capabilities.

While the relationship is based on business and not ideology, it doesn’t make it any less beneficial to al-Shabaab. He says that they sometimes receive a “protection fee of 5 to 10 percent of the ransom money. If al-Shabab helps to train the pirates, it might receive 20 percent and up to 50 percent if it finances the piracy operation.”

Andrew Mwangura, the head of the East African Seafarers’ Assistance Programme, has also said such a link exists. He told Reuters in August that “According to our information, the money they make from piracy and ransoms goes to support al-Shabaab activities onshore.”

Nor is al-Shabaab the only radical Islamic group utilizing piracy. According to The Long War Journal, “Al Qaeda’s regional affiliate, Jeemah Islamiyah, is often engaged in piracy, as are the Philippine affiliates Moro Islamic Liberation Front (MILF), Moro National Liberation Front (MNLF) and the Abu Sayyaf Group. The pirates and terrorists are often one in the same, or if not, are in close cooperation.”

This isn’t to say that they don’t sometimes fight one another, as all criminal and terrorist groups sometimes do. Ambassador Shinn accurately described the relationship as “fragile.” As a marriage of convenience, this relationship will fracture and subsequently heal depending on the interests of each party.

Three incidents in 2008 demonstrate this dynamic.

In April 2008, Somali pirates were paid a $1.2 million ransom to release a Spanish fishing boat and its 26 crewmembers. Al-Shabaab reportedly received five percent of the ransom, which local residents said was smaller than what the terrorist group demanded. In this case, they were business partners.

In September 2008, pirates hijacked a Ukrainian vessel which contained arms, including grenade launchers and 33 Russian T-72 tanks destined for Kenya. Al-Shabaab’s requests to receive some of the weapons from the ship were rebuffed by the pirates, who opted to take a $3.2 million ransom and released the ship and crew. Although no reports indicate that a portion of the ransom was given to terrorists, the possibility can not be ruled out. Here, al-Shabaab was rejected, but they did not declare armed conflict on the pirates, ending future deals.

These examples contrast with when pirates seized a Saudi supertanker. Sheikh Abdirahim Isse Adow, a spokesperson for the Islamic Courts Union which was allied with al-Shabaab, condemned the act saying “Saudi Arabia is a Muslim country and hijacking its ship is a bigger crime than other ships…we shall do something about that ship.” Radical Islamic militants then raided a port in an attempt to locate the pirates and the ship. In this case, pirates became the enemies of the terrorists. Despite this clash, the wounds were ultimately healed as Al-Qaeda has praised the recent pirate attacks on non-Muslim ships.

Some experts, such as John Feffer, mistake this on-again off-again relationship as meaning radical Islamic forces in Somalia won’t team up with pirates that do not attack Muslim ships. In fact, even this standard may not be consistently held, as Al-Qaeda has repeatedly attacked Muslims. Feffer describes the Islamic Courts Union, the former al-Shabaab ally from which Somalia’s current “moderate” president comes from, as a force against pirates, and even gives credit to Al-Shabaab’s condemnation of piracy as un-Islamic.

While leaders of the current Somali government may be against piracy, al-Shabaab’s condemnation is meaningless as the above information shows, and that group controls southern Somalia. When terrorist attacks can be carried out for thousands of dollars, the effect of a business relationship between some pirates and terrorists should not be downplayed.

Ryan Mauro is the founder of and the Assistant-Director of Intelligence at C2I. He’s also the National Security Researcher for the Christian Action Network and a published author. He can be contacted at

Why did the candidate of hope and change use workers paid less than half of the minimum wage?

I Was a High-Tech Sweatshop Worker for the Obama Campaign. By Dan Mage
Why did the candidate of hope and change use workers paid less than half of the minimum wage?
Reason, May 1, 2009

Middletown, New York—I wake up at 3:00 AM and I'm already late for work. Fortunately I don't have far to go. Taking care not to wake my wife, I remove the laptop from the bedroom desk and move it into the main computer room on the other side of the apartment. I don't want to use my aging desktop with the big monitor; it can't handle the traffic as fast as I need it to if I want to maximize my earnings.

As an expeditor for ChaCha Search Inc., a business that specializes in answering questions sent by text message, email, and voice mail, my job is to take the queries as they come in, make them readable, categorize them, and forward them to a "guide" who finds the answer—ideally within 2-3 minutes—and relays it back to the customer. It's a free service, with revenue generated by advertisements sent via text message or attached to the answer itself.

So I boot up, log in, and start processing the queries. The faster I work the more money I make. The shift passes with a few bursts of frenetic activity breaking up long stretches where the queries come in every one or two minutes. At 6:30 AM, I calculate my earnings. I've made about $5 in three hours.

For every query I expedite, I make three cents. If traffic is heavy, and when I'm in top form, I can average four queries per minute, or $7.20 an hour—but these high volume periods are rare. I calculate my career average to be approximately $2.85 per hour. That's less than half of the federal minimum wage. ChaCha Search Inc., in other words, is a high-tech 21st century sweatshop.

Headquartered in Carmel, Indiana, ChaCha has approximately 55,000 home-working guides and expeditors under contract. The expeditors are all paid the piece rate described above; the guides receive 10 or 20 cents per query, depending on the quality of their answers and their level of expertise. It's a young, hip company whose advertisers have included AT&T, McDonald's, and the Barack Obama presidential campaign.

The Obama campaign's use of ChaCha was simple and brilliant. Messages would go out advising customers to vote early for Obama and to text back the keyword OBAMA for more information. That would direct them to pro-Obama websites such as If the keyword failed to trigger the automatic response, an expeditor like me would route it to a guide.

Here's the question: Did Obama have personal knowledge of ChaCha's employment practices? His campaign's use of the company was certainly no secret. ChaCha proudly displays an article on its website from USA Today describing their partnership—though the article makes no mention of the compensation received by expeditors and guides.

For its part, ChaCha exemplifies the best and worst of today's Internet economy. The company was more than willing to profit from Obama's candidacy, yet if federal minimum wage laws applied to its home-working contractors, ChaCha wouldn't stay in business for long.

Does Obama's relationship with ChaCha matter? Consider his own words, first spoken during a March 2008 campaign appearance in Lancaster County, Pennsylvania, and later incorporated into his campaign infomercial (transcribed here by Time's Mark Halperin): "If they're able and willing to work, they should be able to find a job that pays a living wage." Obama also favors raising the minimum wage to $9.50 per hour by 2011. But despite all of that lofty talk, his campaign still employed ChaCha's high-tech sweatshop labor.Think about it like this. Obama sold the ideas of hope and change to America's desperate working and lower-middle classes. But it was only a campaign tactic. The Democrats continue to enable and reward the same incompetence, corruption, and corporate welfare that characterized the Bush administration. A stimulus check of $2000 to every American without regard to age, income, or assets would have been less expensive (and probably more effective) than the Bush-Obama bailouts. Give money to the original owners—the taxpayers—and send those corporate losers to the back of the line.

Better yet, what about a truly free market, one that actually lets economic dinosaurs go extinct, rather than keeping them alive via the life support of statist policies and practices. Conversely, if workers stopped expecting help from the state, they might begin to protect their interests as vigorously as the elite promote their own agenda.

Of course none of that will be happening anytime soon. But when it comes to holding the president accountable to his own flowery rhetoric, the time is ripe for some change we can finally believe in.

Dan Mage is a writer living in Middletown, New York. A two-time dropout of Naropa University, he is the owner and creator of

How to Make Better Vaccines--Quickly

How to Make Better Vaccines--Quickly. By Scott Gottlieb, M.D., April 30, 2009

So far the swine flu infections in the U.S. have been mostly mild. But if the virus should continue to spread, or the infections worsen, rapid development of a vaccine could be our best protection.
The ability to make a vaccine quickly isn't easy, but we're better able to do it today than just five years ago. This is because we've taken steps to improve our ability to thwart biological threats: both the naturally occurring kind, like swine flu, and even the ones that could be used deliberately as weapons.

It's especially true in the vaccine industry, which has undergone a renaissance in recent years partly as a result of government incentives and improvements in how vaccines are regulated. These policy steps have improved our medical footing and are worth bearing in mind as we deal with swine flu.

But we still face a lot of vulnerabilities. These come not only from nature, but also from Washington, where some of these steps to build our vaccine capacity remain deeply unfashionable.

Vaccines were long seen as commodity products, marked by little new investment. The sector made vaccines that reflected little innovation and sold them cheaply, mostly to government agencies that valued low price--enabling wider use--over advances in how vaccines worked or were manufactured.

The end result was a skeleton industry with few reliable suppliers. Flu vaccines, in particular, were made by the same process used for 50 years--by being grown inside chicken eggs--despite advances in science that enable ordinary animal cells to be turned into more reliable incubators.

The chicken egg process is dirty, slow and expensive; it costs more than $300 million to build a new plant and requires about five years to bring it on line. Using eggs, simply creating a novel production run to target a new strain like swine flu can take four to six months. (First the "wild" virus needs to be converted into a weaker "seed" strain, which can grow inside the eggs without killing them.)

This is a rate-limiting step we are still mastering when it comes to swine flu. By comparison, using the cell-based technology, a vaccine could theoretically be produced in a matter of weeks.
Over the last five years, the vaccine market has re-emerged as a key industry and a growing business for the large drug firms, which have invested heavily in better ways to make these products.

These investments are a result of both rising profit margins for these products and the success of several consumer vaccines. But it's also a consequence of legislation that created new incentives to develop these products and practical regulatory changes at the Food and Drug Administration (FDA) that lowered development risks by applying better scientific tools to how vaccines are evaluated.

This includes a series of key "guidance" documents the FDA's biologics center issued, mapping out a streamlined development process for the approval of flu vaccines. It relied on more rapid measures of benefit from tests against biological markers that gauge immune response to the vaccine. These measures reduced the cost of developing the vaccine and created more predictability for new vaccine developers.

Among other steps, the FDA put in place an express inspection process for certifying new vaccine manufacturing facilities. The agency also worked with manufacturers to help them develop the new cell-based vaccine technology. This process could be especially important for making vaccines against a potentially virulent form of pandemic flu that might not be efficient or even possible to manufacture using older, egg-based production methods.

Taken together, these regulatory steps gave rise to new vaccine products that give today's policymakers many more options for responding to the swine flu problem.

The Department of Health and Human Services also established a process for making and contracting government grants for vaccines (under its BioShield program) for medical products that could protect against biological weapons and other threats. One contract, for $487 million, was awarded three months ago for construction of the first U.S. facility to manufacture cell-based flu vaccines.

If we had to widely distribute a vaccine against a pandemic flu, the cell-based process could be used in a pinch. But so few of these worldwide facilities are operational--and, thus far, none are approved by the FDA. So right now, we'll need to rely on the egg-based process that takes four to six months.

But today there are three times as many manufacturers licensed to make flu vaccines as there were just four years ago. This means we could make swine flu vaccines with the egg process without using up too much of the egg stock reserved for making next year's seasonal flu vaccines.

Another option to boost supply is to use an adjuvant, which is basically a vaccine additive that makes a smaller amount of vaccine more effective. It lets you stretch your vaccine supply.

Right now, there are adjuvants approved in Europe that could be used in a swine flu vaccine, but none are approved in the U.S. There's reason to believe this adjuvant--already used in Europe for a vaccine against avian flu as well as human papilloma virus (HPV)--could boost supply of a swine flu vaccine as much as five-fold. The FDA needs to rapidly assess this vaccine additive and make a decision if it will use it in this case. There is ample experience in Europe to draw from.

Our improved preparedness is not a sure thing, nor are continued advances in vaccines that can reduce risks. One reason is diminishing incentives for investment in the industrial capacity to make these things.

As a result of legislative endeavors favoring generics and lower drug costs, the average patent life on big new drugs has been reduced to as little as 10 years from more than 12 just nine years ago. These measures improve access to the drugs but reduce incentives to invest in new plants and technology. There's legislation right now on Capitol Hill, sponsored by Congressman Henry Waxman, D-Calif., that would reduce the effective patent life on "biologics" like vaccines to as little as five years.

In addition, there's political pressure on the FDA to increase regulatory hurdles to "promote drug safety." Some of these efforts undermine steps the FDA has taken to modernize regulation of vaccines. There's still work to be done to improve regulation further and enhance our preparedness for pandemic. The cell-based manufacturing processes, for example, as well as the approval of adjuvants, should become regulatory priorities for the FDA.

Preparing for future threats requires a broad armamentarium and the residual capacity to create new things quickly. We are better prepared to respond to swine flu as a consequence of these lessons. But this strategic capacity doesn't come cheap, and we need to strike a careful balance between policies that enable better access to today's medicines and incentives that invest in tomorrow's. As the biology of threats like swine flu grow more complex, it's not a sure thing our medical industry will be robust enough to keep pace with it.

Scott Gottlieb, M.D., is a resident fellow at AEI.

He Fought the Tort Bar -- and Won

He Fought the Tort Bar -- and Won. By Kimberley A Strassel
Thanks to a CEO's persistence, a federal judge discovers massive lawsuit fraud.
WSJ, May 2, 2009

Berkeley Springs, W. Va.

Officially, John A. Ulizio is the CEO of U.S. Silica, one of the nation's largest producers of industrial sand. Unofficially, he's the man who fought the tort bar -- and won. It's a singular distinction in the world of runaway lawsuits.

Clad in a hardhat and boots, standing in a quarry in which giant haul trucks carry Flintstone-sized boulders, the 53-year-old Mr. Ulizio seems an unlikely foe of today's slick plaintiffs' bar. The son of a Pennsylvania steel worker, he is blunt-spoken, works in a little-noticed industry, and likes to point out he's a Democrat ("probably the only one in the building.") What a cursory observation of Mr. Ulizio misses is his own law degree, and his steely sense of right and wrong.

In 2003 alone -- the year he took the company's top job -- U.S. Silica was served with nearly 20,000 lawsuits claiming it had caused silicosis -- a serious, if rare, lung disease. The tort bar saw silica as the "new asbestos," says Mr. Ulizio, and he had visions of his century-old concern going bankrupt, along with dozens of others.

Instead what ensued was a legal thriller, in which the defendants not only beat the suits, but exposed a mob of lawyers and doctors who were fabricating cases, and who are now under investigation. This year his company has been hit by only one silicosis claim. "We hoped the truth would prevail eventually," he says, back in the conference room of the company's modest headquarters. The realist adds: "It worked, but it didn't have to."

And that might be the most disturbing part of Mr. Ulizio's tale. "When you have an entire system that condones these lawsuits, that does nothing to police its own, where there are no consequences, right or wrong has nothing to do with it. It's a coin flip."

In June of 2005, Texas federal Judge Janice Graham Jack -- who was overseeing 9,000 silicosis lawsuits aggregated in her court -- issued an opinion that shook the tort bar to its core. During depositions, the handful of doctors who provided nearly all these diagnoses began to crack, admitting they'd never seen patients, that their secretaries had filled out forms, and that lawyers had told them what to write. It came out that two-thirds of those claiming to have silicosis had previously claimed to asbestosis -- a near medical impossibility.

Judge Jack's 249-page scathing opinion unraveled a scam of giant proportions. She accused the doctors and lawyers of "diagnoses that were manufactured for money," provided evidence of fraud, required a Houston plaintiff's firm to pay defense legal costs, and issued sanctions.

Within a few months, Congress and a federal grand jury were investigating. For U.S. Silica, named in nearly every suit, it was a fairy tale end to a nightmare. Even Mr. Ulizio was shocked. "It was like, 'Oh my God, finally, after all these years, somebody is seeing the truth.'"

Years being the operative word. Mr. Ulizio is a humble guy, and gruffly waves off suggestions that he or his company played any special role in this victory. He ascribes the Texas success to all the defendants equally, as well as the willingness of insurers to join the battle, and to enlist top-notch attorneys. But that is to ignore the knowledge and the backbone Mr. Ulizio and U.S. Silica brought to this fight.

Silicosis litigation isn't new. Silica is one of those products that has been around forever and is used in just about everything, though nobody knows it. The West Virginia factory is a grinding operation: The company mills sand into different sizes, which is then used in everything from glass, to Kevlar, to paint, to the molds used to create steel forms. With silica comes silica dust, which has been health concern since well before 1936, when Labor Secretary Frances Perkins first held a conference on silicosis.

U.S. Silica has always been a prime target of these suits. Within its own factory, safety is intense. Workers aren't allowed on the floor without respirators (nor me, for that matter). Much of the plant has been automated to minimize contact with dust, and vacuums suck up particles. Plastered on every door leading into the plant, and on every bag of silica going out, are giant, neon warnings about the dangers of dust.

The company has nonetheless been militant in defending against lawsuits. This is Mr. Ulizio's history and specialty, having represented silica defendants prior to joining the company in 1991, and then handling U.S. Silica's litigation as its counsel. Says Mr. Ulizio: "There was a decision made here early on, and it was the right decision, that as a sand seller we have no duty to warn, say, the people who work in a foundry. Why? Because foundries . . . know all about silicosis -- there are documents showing that going back to the teens and '20s -- and foundries are the ones who create silica dust or control silica dust, and we have no control over that operation."

Over decades of litigation, the company picked its suits carefully, with an eye to setting broad legal precedents in key jurisdictions. It fought off successive waves of litigation -- in the 1980s from workers at a foundry in Lynchburg, Va., and later from steelworkers in Pennsylvania. Another of Mr. Ulizio's rules was "to treat cases like real cases," a tactic that would prove important in the later Texas litigation. "There is temptation amongst defendants to treat these as a claims process. We tried not to do that, even in cases we settled. We tried to treat each as a real case, where you take depositions, you have people who know what they are doing asking the questions, you demand real medical evidence," he says.

There were losses, some of which made Mr. Ulizio despair. "The first time we ever lost a case in trial, it was 2001. We tried it in Beaumont, Texas, and lost $7.5 million. . . . The judge sat there through the trial reading a newspaper. At one point an objection was made, the bailiff taps him on the shoulder and says 'judge, objection is being made.' He looks at our lawyer and says 'overruled.' The plaintiffs' lawyer raises his hand and says 'no, judge, it was me.' He says 'sustained' and goes back to reading the paper."

As it happens, the industry as a whole lost some big ones around that time, kicking off the tidal wave. "Understand, silica litigation isn't about whether people have silicosis; it's about whether the lawyers can use the legal system to make money. When there is no history of big verdicts, when the legal industry has been losing cases, then it has a limited desire to pursue a big model. But once you had a few settlements and verdicts . . . people got interested," says Mr. Ulizio.

Plaintiffs lawyer firms began sending out direct mailings, running ads, and going through their inventory -- all to gin up big numbers of claims, which they filed against dozens of companies. In 1998, U.S. Silica fielded 198 silicosis claims. In 2001: 1,356. In 2002: 5,277. In 2003: 19,865. The tort lawyers were smart, and filed in former judicial hell-holes like Mississippi, where U.S. Silica hadn't established legal precedents.

Mr. Ulizio painfully remembers those days. The cost of his litigation at one point equaled about 50 cents out of every ton of sand he sold. Credit-rating agencies fretted. Potential hires expressed concern about the company's future, and workers worried they'd lose their pensions. Workers' compensation rates soared. "It was doom-and-gloom bad," he says.

The company was also now a victim of a "mass" tort, designed to force settlements. Mr. Ulizio shares a memo that plaintiffs' lawyer Joe Gibson sent to silica defendants in 2004 with a blunt offer: Settle our 9,000 cases for $900 million, or pay $1.5 billion in pretrial discovery alone, plus an even bigger verdict. "That's the genius of the economics of litigation from the plaintiffs' perspective. Sue a lot of people, sue on behalf of a lot of plaintiffs, get into an adverse jurisdiction, and then don't make too big of a demand, so you can settle it for a relatively small percentage of the cost of defending the case," Mr. Ulizio says.

He didn't settle: He went public. Private companies tend not to air their litigation laundry, but the silica CEO talked to the media, detailed his lawsuit figures, ginned up coverage of the lawyers' tactics. The growing story emboldened other defendants to fight back. U.S. Silica also pushed hard, behind the scenes, to depose, investigate and fight.

The defendants had already made one bold move, receiving permission to aggregate the suits in front of Judge Jack. It raised the stakes, but in retrospect it was what also allowed defendants to connect the nefarious doctor-lawyer dots. "It was very important to the effort, because it allowed us to see the pattern, and present that pattern to the judge," he says.

Mr. Ulizio nonetheless credits a lot of the victory to luck, and mistakes by the other side. "The real advantage was simply that asbestos had preceded us, and the plaintiffs' side overreached. They had asbestos plaintiffs who were diagnosed with asbestosis but not silicosis, rediagnosed with silicosis but not asbestosis, by the same doctor, with the same X-ray. They laid the seeds for their own destruction."

Even with all that, Mr. Ulizio feared they'd lose. "There was no reason to believe Judge Jack would be as good as she was before she was as good as she was," he says. "One of the dirty little secrets of this litigation is that it didn't have to turn out the way it did. All's well that end's well is the cliché, right? First it's got to end well."

The lawsuits are over, but Mr. Ulizio remains furious that no one has been held responsible for the Texas mess. I note that some of the doctors lost their medical licenses. "That's fine," he says. "But at the end of the day, the lawyers are driving this. The lawyers are the ones who make the money. And nobody, absolutely nobody, does anything about it."

So what's the answer? Legislation reining in the tort bar? More Judge Jacks? "The court is part of the system, and its part of the problem. You can say, 'we should have more judicial supervision.' But hey, the judge in Beaumont, Texas, he supervised his court -- he just supervised it the wrong way. I'd also like to think you don't need to legislate everything."

He instead points to legal associations. "It starts with the organized bar. The American Bar Association, the state bar associations, they are supposed to be the self-governing bodies that govern lawyer behavior. Or, state disciplinary boards. If you are creating out of thin air a set of facts that leads you to file litigation, I would like to think that violates some state disciplinary rule," he says. "And look, too, you've got to prosecute crimes. There has to be something that results in a consequence for this behavior," adds Mr. Ulizio.

At times, Mr. Ulizio finds it all a bit surreal. "We mine and sell sand. Sand. That's all we do. We aren't the evil empire. We aren't manufacturing some exotic chemical that we're unleashing on the world. We're taking sand out of the ground. We don't even process it, except to clean it up a little and size it. And we are selling something that has been around forever, the dangers from which have been known since well before anybody involved in this litigation was even born," he says.

He looks at me as if to say, "Can you believe it?" I wish I could tell the tort warrior I couldn't.

Ms. Strassel writes the Journal's Potomac Watch column.

Does Your Electricity Come From “Congress-approved” Renewables?

Does Your Electricity Come From “Congress-approved” Renewables?
IER, May 2, 2009

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