Tuesday, July 7, 2009

We Must Address Oil-Market Volatility

We Must Address Oil-Market Volatility. By GORDON BROWN and NICOLAS SARKOZY
Erratic price movements in such an important commodity are cause for alarm.
WSJ, Jul 08, 2009

For two years the price of oil has been dangerously volatile, seemingly defying the accepted rules of economics. First it rose by more than $80 a barrel, then fell rapidly by more than $100, before doubling to its current level of around $70. In that time, however, there has been no serious interruption of supply. Despite ongoing conflict in the Middle East, oil has continued to flow. And although the recession and price rises have had some effect on consumption, medium-term forecasts for demand are robust.

The oil market is complex, but such erratic price movement in one of the world's most crucial commodities is a growing cause for alarm. The surge in prices last year gravely damaged the global economy and contributed to the downturn. The risk now is that a new period of instability could undermine confidence just as we are pushing for recovery.

Governments can no longer stand idle. Volatility damages both consumers and producers. Those who rely on oil and have no substitutes readily available have been the victims of extreme price fluctuations beyond their control -- and apparently beyond reason. Importing countries, especially in the developing world, find themselves committed to big subsidies to shield domestic consumers from potentially devastating price shifts.

In Britain and France we also know how the price of crude dictates the price of petrol at filling stations and the effect on families and businesses. For countries heavily reliant on income from oil exports, the windfalls from brief price surges are offset by the consequent difficulties of planning national budgets and investment strategies.

Extreme fluctuations in price are encouraging energy users to reconsider their reliance on oil. The International Energy Agency, for instance, has cut its long-term forecast of oil consumption by almost a quarter. Producers are in danger of finding that their key national resource loses both its market and its long-term value.

More immediately, we as consumers must recognize that abnormally low oil prices, while giving short-term benefits, do long-term damage. They diminish incentives to invest, not only in oil production but also, in our own countries, in energy savings and carbon-free alternatives. As such, future problems are stored up in the form of shortages, greater dependence and an acceleration of global warming. Upstream investment worldwide is already down by 20% over the past year. And with some sources of supply in decline, such as Alaska and the North Sea, the resource we will all need as the economy recovers is being developed in neither an adequate nor a timely way.

There are no easy solutions and any progress must be made with the full co-operation of the world community and the oil industry. On Monday we used the U.K.-France summit in Evian to explore a way forward. We hope our ideas inform meetings both today, at the Group of Eight Summit in Italy, and in future talks between world leaders.

We are committed to intensifying the ongoing dialogue between producers and consumers through the International Energy Forum. Saudi Arabia and OPEC have expressed interest in this and we believe producers and consumers are closer now than at any time in the past 30 years to recognizing the huge common interest in giving clear and stable perspectives to long-term investment.

At the London Energy Meeting last December, all participants agreed that still closer co-ordination between the IEA, OPEC and the IEF was necessary to develop a shared analysis of future demand and supply trends. The Expert Group of the IEF should use this work to arrive at a common long-term view on what price range would be consistent with the fundamentals.

The experts should also consider any measures that could be put in place to reduce volatility. Discussions should look again into the question of whether trading activity is amplifying erratic price movements.

We therefore call upon the International Organization of Securities Regulators to consider improving transparency and supervision of the oil futures markets to reduce damaging speculation and to take forward the recommendations already made by its taskforce in March. This would serve the interests of orderly and adequate investment in future supplies. Volatility and opacity are the enemies of growth. In the absence of transparency, consumers and importing nations are losing confidence in oil. Climate change is also altering government attitudes to energy.

The world's economy is still reliant on secure supplies at prices that are not so high as to destroy the prospects of economic growth but not so low as to lead to a slump in investment, as happened in the 1990s.

It is a thorny issue, but complex markets need not be volatile or damaging to the wider global economy. We are convinced that producers and consumers alike would benefit from greater transparency, greater stability and greater consensus on the market fundamentals. After two years of destructive volatility the time has come for both sides to work together to build on this common interest.

Mr. Brown is prime minister of the United Kingdom. Mr. Sarkozy is president of France.

"New START": The Chinese and Iranians must like what they see; not so Japan

A Troubling START. WSJ Editorial
The Chinese and Iranians must like what they see; not so Japan.
WSJ, Jul 08, 2009

President Obama leaves Moscow today happy to tout a breakthrough on arms control. The "joint understanding" with Russia pledges to replace the 1991 Strategic Arms Reduction Treaty with a new agreement -- the niftily named "New START" -- by year's end. This "moral" example, we are supposed to believe, will eventually lead to the nuclear-free world the President first promised this spring in Prague.

Before Nirvana renders the American nuclear umbrella obsolete, however, the Administration could clarify some details for us mere mortals. For starters, at what point do the reductions in the nuclear arsenal make the U.S. and our allies less safe? Why make such deep cuts in the number of strategic bombers and submarines that we're likely to need in any future conventional conflict? And, as long as we're talking details, shouldn't the Senate get a long look at a deal being rushed together to meet the artificial deadline of START's expiration in December?

The Administration's soaring rhetoric about denuclearization seems intended to blind everyone to these questions. In his comments in Moscow, Mr. Obama emphasized that Russia and the U.S. will set an example that the rest of world will follow.

"It's naïve for us to think . . . that we can grow our nuclear stockpiles," he said, "and that in that environment we're going to be able to pressure countries like Iran and North Korea not to pursue nuclear weapons themselves." Call us realists or even cynics, but we doubt Mr. Obama's performance in Moscow will matter at all to Iranian and North Korean nuclear ambitions. These and other rogues want the bomb to project their own power, not to defend against ours.

Some argue that this deal-making is nothing much because both sides will retain huge arsenals. Neither country actually has any desire, or in the Russian case ability, to grow its stockpile, so the new START treaty is said to be mostly for diplomatic show. But the Russians, though greatly diminished in global status, remain savvy negotiators, and Vladimir Putin has tried for most of this decade to cut the U.S. down to his size. "New START" could help him do it.

Monday's understanding gives negotiators the mandate to reduce the number of strategic warheads to between 1,500-1,675, down from the maximum allowable today of 2,200. More important are the strategic delivery vehicles, which will fall to a range of 500-1100. The current START treaty, which the Obama Administration chose to replace rather than simply extend, puts the ceiling at 1,600.

The Russians are already phasing out some of their delivery hardware, such as missiles and bombers, and they wouldn't mind getting double credit for it in a new treaty. The wide range noted in the "understanding" was inserted after Russia demanded steeper cuts than initially envisioned by Washington. Russian officials cite worries the U.S. could more easily retrofit missiles with new warheads, if necessary. As of January, America said it had about 1,200 delivery systems and Russia reported about 800.

Mr. Obama's negotiators would be wise to be wary. The odds that America will take part in a nuclear war are low. But the long-range bombers, submarines and missiles under discussion are an important part of the far superior American conventional arsenal. No wonder the Russians are so eager to have America reduce those numbers.

China, too, must be rooting for a lower floor. As delivery vehicle and warhead numbers go down, the U.S. will at some point approach strategic parity with rising powers such as China, which have a smaller nuclear arsenal and weaker army. A reduced U.S. posture may also give our allies -- Japan and South Korea in Asia, or Turkey in NATO -- cause to doubt America's commitment to a large and credible enough nuclear arsenal able to protect them. They will then seek to develop their own atomic bombs, however quietly. The Obama Administration's flagging commitment to missile defense, which is being cut in the 2010 budget, further undermines America's ability to defend itself and its allies from nuclear attack.

It is especially strange that the Administration has taken these steps before completing the review of nuclear strategy mandated by Congress. But then, the Administration may also do a run around the Senate (and the Constitution) with the new START treaty -- naturally, for the higher cause of peace in our time. The White House Coordinator for Weapons of Mass Destruction, Security and Arms Control, Gary Samore, said on Sunday that the Administration may have to enact certain provisions of the treaty by executive order and on "a provisional basis" to meet the December deadline.

Considering all of the other unanswered questions about the Administration's nuclear posture, an agreement with Russia that would lock the U.S. into steep cuts in its defenses needs far more public and Senate scrutiny than it is receiving.

McNamara and the Liberals' War

McNamara and the Liberals' War. WSJ Editorial
He deserves better from his liberal critics, since his real misfortune was to be the architect of their failed visions.
WSJ, Jul 08, 2009

Robert McNamara died on Monday at age 93 like he lived most of the latter half of his life, scorned and derided by his former liberal allies for refusing to turn against the Vietnam War as early as they did. As the New York Times put it in a page-one obituary headline, McNamara was the "Architect of Futile War."

In historical fact, Vietnam was the liberals' war, begun by JFK, escalated by LBJ, and cheered on for years by giants of the American left before they turned against it. In his 1995 memoir, McNamara apologized for the war. But he probably sealed his reputation on the left by also quoting the New York Times and liberal antiwar reporter David Halberstam for having opposed U.S. withdrawal as late as 1965. "To be fair to Halberstam," McNamara wrote dryly, "the hawkish views he was expressing reflected the opinion of the majority of journalists at the time."

Like JFK and Averell Harriman, Halberstam also supported the 1963 coup against South Vietnamese President Ngo Dinh Diem, a misguided foray into Vietnamese politics that led to deeper U.S. involvement. Only later as the war dragged on did these liberals lose their nerve, and they never forgave McNamara for fighting on -- even years later after he finally agreed they were right.

As with Vietnam, American liberals also turned against the Iraq war after first supporting it. The crucial difference is that President Bush never lost his nerve. Despite the difficulties after the 2003 invasion and the terrible setbacks of 2006, he replaced his generals, sent more troops and embraced a new counterinsurgency strategy. The insurgency was defeated, and Mr. Bush left office with Iraq as a united, self-governing ally.

Despite the fall of Saigon in 1975, Vietnam was not a "futile" conflict. The U.S. effort bought time for Thailand and other nations in East and Southeast Asia to develop in relative peace. Their prosperity, in turn, showed the world the difference between the fruits of capitalism and the poverty of socialism. Like the Korean War, Vietnam needs to be understood as an honorable battle fought to a draw in America's longer and victorious Cold War.

McNamara was a patriot whose faith in rationalism and bureaucratic planning led him to overconfidence both in the war on poverty during his years at the World Bank and at the Pentagon during Vietnam. But he deserves better from his liberal critics, since his real misfortune was to be the architect of their failed visions.

Ethanol and biofuels get 190 times as much subsidies as natural gas and petroleum liquids

So Much for 'Energy Independence.' By ROBERT BRYCE
The Wall Street Journal, Jul 07, 2009, p A15

Whenever you read about ethanol, remember these numbers: 98 and 190.

They offer an essential insight into U.S. energy politics and the debate over cap-and-trade legislation that recently passed the House. Here is what the numbers mean: The U.S. gets about 98 times as much energy from natural gas and oil as it does from ethanol and biofuels. And measured on a per-unit-of-energy basis, Congress lavishes ethanol and biofuels with subsidies that are 190 times as large as those given to oil and gas.

Those numbers come from an April 2008 report by the Energy Information Administration: "Federal Financial Interventions and Subsidies in Energy Markets 2007." Table ES6 lists domestic energy sources that get subsidies. In 2007, the U.S. consumed nearly 55.8 quadrillion British Thermal Units (BTUs), or about 9.6 billion barrels of oil equivalent, in natural gas and oil. That's about 98 times as much energy as the U.S. consumed in ethanol and biofuels, which totaled 98 million barrels of oil equivalent.

Meanwhile, ethanol and biofuels are getting subsidies of $5.72 per million BTU. That's 190 times as much as natural gas and petroleum liquids, which get subsidies of $0.03 per million BTU.
The report also shows that the ethanol and biofuels industry are more heavily subsidized -- in total dollar terms -- than the oil and gas industry. In 2007, the ethanol and biofuels industries got $3.25 billion in subsidies. The oil and gas industry got $1.92 billion.

Despite these subsidies, the ethanol lobby is queuing up for more favors. And they are doing so at the very same time that the Obama administration and Congress are pushing to eliminate the relatively modest subsidies for domestic oil and gas producers. Democrats want to cut drilling subsidies while simultaneously trumpeting their desire for "energy independence."

The cap-and-trade bill passed by the House aims to "create energy jobs" and "achieve energy independence." Meanwhile, Democrats are calling to eliminate drilling subsidies that have encouraged advances in technology that have opened up vast new U.S. energy sources. These advances have made it profitable to extract natural gas from the Barnett Shale deposit in Texas and the Marcellus in Pennsylvania -- deposits once thought too expensive to tap.

President Barack Obama's 2010 budget calls for the elimination of two tax breaks: the expensing of "intangible drilling costs" (such as wages, fuel and pipe), which allows energy companies to deduct the bulk of their expenses for drilling new wells; and the allowance for percentage depletion, which allows well owners to deduct a portion of the value of the production from their wells. Those breaks provide the bulk of the $1.92 billion in oil and gas subsidies.

In May, Mr. Obama called the tax breaks for the oil and gas industry "unjustifiable loopholes" that do "little to incentivize production or reduce energy prices."

That's flat not true. The deduction for intangible drilling costs encourages energy companies to plow huge amounts of capital into more drilling. And that drilling has resulted in unprecedented increases in natural gas production and potential.

An April Department of Energy report estimated that the newly available shale resources total 649 trillion cubic feet of gas. That's the energy equivalent of 118.3 billion barrels of oil, or slightly more than the proven oil reserves of Iraq.

Eliminating the tax breaks for drilling will make natural gas more expensive. Tudor, Pickering, Holt & Co., a Houston-based investment-banking firm, estimates that eliminating the intangible drilling cost provision could increase U.S. natural gas prices by 50 cents per thousand cubic feet. Why? Because without the tax break, fewer wells will be drilled and less gas will be produced. The U.S. consumes about 23 trillion cubic feet of gas per year. Simple arithmetic shows that eliminating the drilling subsidies that cost taxpayers less than $2 billion per year could result in an increased cost to consumers of $11.5 billion per year in the form of higher natural gas prices.

Amid all this, Growth Energy, an ethanol industry front-group, is pushing the Environmental Protection Agency to adopt a proposal that would increase the amount of ethanol blended into gasoline from the current maximum of 10% to as much as 15%.

That increase would be a gift to corn ethanol producers who have never been able to make a go of it despite decades of federal subsidies and mandates. Growth Energy is also pushing the change even though only about seven million of the 250 million motor vehicles now on U.S. roads are designed to run on fuel containing more than 10% ethanol.

There is plenty of evidence to suggest that gasoline with 10% ethanol is already doing real harm. In January, Toyota announced that it was recalling 214,570 Lexus vehicles. The reason: The company found that "ethanol fuels with a low moisture content will corrode the internal surface of the fuel rails." (The rails carry fuel to the engine injectors.) Furthermore, there have been numerous media reports that ethanol-blended gasoline is fouling engines in lawn mowers, weed whackers and boats.

Lawyers in Florida have already sued a group of oil companies for damage allegedly done to boat fuel tanks and engines from ethanol fuel. They are claiming that consumers should be warned about the risk of using the fuel in their boats.

There is also corn ethanol's effect on food prices. Over the past two years at least a dozen studies have linked subsidies that have increased the production of corn ethanol with higher food prices.

Mr. Obama has been pro-ethanol and anti-oil for years. But he and his allies on Capitol Hill should understand that removing drilling incentives will mean less drilling, which will mean less domestic production and more imports of both oil and natural gas.
That's hardly a recipe for "energy independence."

Mr. Bryce is the managing editor of Energy Tribune. His latest book is "Gusher of Lies: The Dangerous Delusions of 'Energy Independence'" (PublicAffairs, 2008).

The new talks with Moscow could put the U.S. nuclear deterrent in jeopardy

Arms Control Amnesia. By KEITH B. PAYNE
The new talks with Moscow could put the U.S. nuclear deterrent in jeopardy. Here are the facts.
The Wall Street Journal, p A15

Three hours after arriving at the Kremlin yesterday, President Barack Obama signed a preliminary agreement on a new nuclear arms-control treaty with Russian President Dmitry Medvedev. The agreement -- a clear road map for a new Strategic Arms Reduction Treaty (START) -- commits the U.S. and Russia to cut their nuclear weapons to the lowest levels since the early years of the Cold War.

Mr. Obama praised the agreement as a step forward, away from the "suspicion and rivalry of the past," while Mr. Medvedev hailed it as a "reasonable compromise." In fact, given the range of force levels it permits, this agreement has the potential to compromise U.S. security -- depending on what happens next.

In the first place, locking in specific reductions for U.S. forces prior to the conclusion of the ongoing Nuclear Posture Review is putting the cart before the horse. The Obama administration's team at the Pentagon is currently examining U.S. strategic force requirements. Before specific limits are set on U.S. forces, it should complete the review. Strategic requirements should drive force numbers; arms-control numbers should not dictate strategy.

Second, the new agreement not only calls for reductions in the number of nuclear warheads (to between 1,500 and 1,675), but for cuts in the number of strategic force launchers. Under the 1991 START I Treaty, each side was limited to 1,600 launchers. Yesterday's agreement calls for each side to be limited to between 500 and 1,100 launchers each.

According to open Russian sources, it was Russia that pushed for the lower limit of 500 launchers in negotiations. In the weeks leading up to this summit, it also has been openly stated that Moscow would like the number of deployed intercontinental ballistic missiles (ICBMs), submarine-launched missiles (SLBMS), and strategic bombers to be reduced "several times" below the current limit of 1,600. Moving toward very low numbers of launchers is a smart position for Russia, but not for the U.S.

Why? Because the number of deployed Russian strategic ICBMs, SLBMs, and bombers will drop dramatically simply as a result of their aging. In other words, a large number of Russian launchers will be removed from service with or without a new arms-control agreement.

The Obama administration will undoubtedly come under heavy pressure to move to the low end of the 500-1,100 limit on launchers in order to match Russian reductions. But it need not and should not do so. Based solely on open Russian sources, by 2017-2018 Russia will likely have fewer than half of the approximately 680 operational launchers it has today. With a gross domestic product less than that of California, Russia is confronting the dilemma of how to maintain parity with the U.S. while retiring its many aged strategic forces.

Mr. Medvedev's solution is to negotiate, inviting the U.S. to make real cuts, while Russia eliminates nothing that it wouldn't retire in any event.

This isn't just my conclusion -- it's the conclusion of many Russian officials and commentators. Russian Gen. Nikolay Solovtsov, commander of the Strategic Missile Troops, was recently quoted by Moscow Interfax-AVN Online as saying that "not a single Russian launcher" with "remaining service life" will be withdrawn under a new agreement. Noted Russian journalist Pavel Felgengauer observed in Novaya Gazeta that Russian leaders "have demanded of the Americans unilateral concessions on all points, offering practically nothing in exchange." Precisely.

Beyond the bad negotiating principle of giving up something for nothing, there will be serious downsides if the U.S. actually reduces its strategic launchers as much as Moscow wishes. The bipartisan Congressional Strategic Posture Commission -- headed by former secretaries of defense William J. Perry and James R. Schlesinger -- concluded that the U.S. could make reductions "if this were done while also preserving the resilience and survivability of U.S. forces." Having very low numbers of launchers would make the U.S. more vulnerable to destabilizing first-strike dangers, and would reduce or eliminate the U.S. ability to adapt its nuclear deterrent to an increasingly diverse set of post-Cold War nuclear and biological weapons threats.

Accepting low launcher numbers would also encourage placing more warheads on the remaining ICBMs -- i.e., "MIRVing," or adding multiple independently targeted warheads on a single missile. This is what the Russians openly say they are planning to do. Yet the U.S. has long sought to move away from MIRVed ICBMs as part of START, because heavy MIRVing can make each ICBM a more tempting target. One measure of U.S. success will be in resisting the Russian claim that severely reducing launcher numbers is somehow necessary and "stabilizing." It would be neither.

Third, the new agreement appears to defer the matter of so-called tactical nuclear weapons. Russia has some 4,000 tactical nuclear weapons and many thousands more in reserve; U.S. officials have said that Russia has an astounding 10 to 1 numerical advantage. These weapons are of greatest concern with regard to the potential for nuclear war, and they should be our focus for arms reduction. The Perry-Schlesinger commission report identified Russian tactical nuclear weapons as an "urgent" problem. Yet at this point, they appear to be off the table.

The administration may hope to negotiate reductions in tactical nuclear weapons later. But Russia has rejected this in the past, and nothing seems to have changed. As Gen. Vladimir Dvorkin of the Russian Academy of Sciences said recently in Moscow Interfax-AVN Online, "A treaty on the limitation and reduction of tactical nuclear weapons looks absolutely unrealistic." If the U.S. hopes to address this real problem, it must maintain negotiating leverage in the form of strategic launchers and weapons.

Fourth, Mr. Medvedev was quoted recently in RIA Novosti as saying that strategic reductions are possible only if the U.S. alleviates Russian concerns about "U.S. plans to create a global missile defense." There will surely be domestic and international pressure on the U.S. to limit missile defense to facilitate Russian reductions under the new treaty. But the U.S. need for missile defense has little to do with Russia. And the value of missile defense could not be clearer given recent North Korean belligerence. The Russians are demanding this linkage, at least in part to kill our missile defense site in Europe intended to defend against Iranian missiles. Another measure of U.S. success will be to avoid such linkages.

In short, Russian leaders hope to control or eliminate many elements of U.S. military power in exchange for strategic force reductions they will have to make anyway. U.S. leaders should not agree to pay Russia many times over for essentially an empty box.

Finally, Russian violations of its existing arms-control commitments must be addressed along with any new commitments. According to an August 2005 State Department report, Russia has violated START verification and other arms-control commitments in multiple ways. One significant violation has even been discussed openly in Russian publications -- the testing of the SS-27 ICBM with MIRVs in direct violation of START I.

President Obama should recall Winston Churchill's warning: "Be careful above all things not to let go of the atomic weapon until you are sure and more than sure that other means of preserving peace are in your hands." There is no need for the U.S. to accept Russian demands for missile-defense linkage, or deep reductions in the number of our ICBMs, SLBMs and bombers, to realize much lower numbers of Russian strategic systems. There is also no basis for expecting Russian goodwill if we do so.

Mr. Payne, a professor of defense and strategic studies at Missouri State University, is a member of the Perry-Schlesinger Commission, which was established by Congress to assess U.S. nuclear weapons capabilities. This op-ed is adapted from testimony given before the House Committee on Foreign Affairs on June 24.

From McNamara to Obama

From McNamara to Obama. WSJ Editorial
This too is an era of soaring rhetoric, big plans and boundless self-regard.
The Wall Street Journal, Jul 07, 2009, p A13

Dwight D. Eisenhower famously said that "in preparing for battle I have always found that plans are useless but planning is indispensable." Robert S. McNamara, who spent many years thinking about the Vietnam War, first as an architect and then as a critic (and getting it wrong on both ends), was a man who believed mainly in plans.

McNamara, who died yesterday at 93, will go down as a cautionary tale for the ages, and perhaps none more than for the Age of Obama. Whatever else distinguishes JFK's New Frontier or LBJ's Great Society from Barack Obama's "New Foundation," this too is an era of soaring rhetoric, big plans and boundless self-regard, issued by an administration convinced it can apply technocratic, top-down solutions to huge and unpredictable systems -- the banking, auto and health-care industries, for instance, or the climate. These are people deeply impressed by their own smarts, the ones for whom the phrase "the best and the brightest" has been scrubbed of its intended irony.

When McNamara -- the "Whiz Kid" from Ford -- was first named defense secretary, in December 1960, Time magazine gushed that he "reads widely and well (current choices: The Phenomenon of Man, W.W. Rostow's The Stages of Growth). . . . His mind, says a friend who has seen him in Ann Arbor discussions, 'is a beautiful instrument, free from leanings and adhesions, calm and analytical.'" Nearly 50 years later, the Associated Press would lead its obituary by describing McNamara as "the cerebral secretary of defense." In between, David Halberstam -- who was for the Vietnam War before he was against it, but that's another story -- wrote that McNamara "symbolized the idea that [the Kennedy administration] could manage and control events, in an intelligent, rational way. Taking on a guerrilla war was like buying a sick foreign company; you brought your systems to it."

Of course it did not end well. Nor did it end well for McNamara with his next assignment as president of the World Bank, where he hugely increased lending on the theory that more inputs (money, "expertise") meant better outputs ("development"). Instead, McNamara's stewardship of the bank helped create the Third World debt crisis, fueled Africa's descent into chaos, swelled Mobutu's Swiss bank accounts, and backed the cruel and misbegotten campaign for population control.

A recurring pattern played itself out over the 20 years McNamara spent at the Pentagon and the Bank. Giant troves of quantitative data were collected, analyzed, disaggregated and reassembled. Plans -- typically on a five-year timetable -- were conceived and then, presumably, executed. He once called the Bank "an innovative, problem-solving mechanism . . . to help fashion a better life for mankind."

Nobel Prizes in economics would later be awarded for disproving this mechanistic notion of institutions. But no Nobel was required to understand that rationalism isn't a synonym for reason, much less common sense, or that a planned solution was a workable or desirable solution, or that war or poverty were "problems" in the same sense as, say, a deficit. There was also a human element, which -- depending on whom you believe -- McNamara either didn't get or didn't have.

None of this is to say that Vietnam was "unwinnable," the liberal nostrum in which the late McNamara took comfort, or that poverty is unbeatable. On the contrary, hundreds of millions of people have worked their way out of poverty -- no thanks to the World Bank -- while a war that only three years ago was deemed unwinnable now looks very nearly won.

But all that happened only after the Planners gave way to what development economist William Easterly has called the "Searchers." As Mr. Easterly writes in his book "The White Man's Burden," "a Planner thinks he already knows the answers; he thinks of poverty as a technical engineering problem that his answers will solve. A Searcher admits he doesn't know the answers in advance; he believes that poverty is a complicated tangle of political, social, historical, institutional, and technological factors. A Searcher hopes to find answers to individual problems only by trial and error experimentation. A Planner believes outsiders know enough to impose solutions."

So, from Chile to Taiwan, economic progress only came about when national governments junked the whole idea of the planned economy. So, too, in Iraq, America's fortunes only changed when the Bush administration went from sticking to a concept ("light footprint"), to searching, and finding, an answer in the surge, which combined new counterinsurgency tactics with sensitivity to local conditions. The U.S. might have won in Vietnam, too, if it had sooner discarded McNamara's concept of gradualism and gone after North Vietnam's center of gravity -- its dependence, via Haiphong harbor, on the resupply of Soviet arms.

Now that's old history. But the mentality of the planner remains alive and well in Washington today, along with the aura of cool intellectual certainty. Barack Obama might take a close look at McNamara's obituaries and note that he, too, is the whiz kid of his day.

"Exclusivity deals" between wireless carriers and handset makers to bring new devices to markets

Cellphone Politics. WSJ Editorial
The Wall Street Journal, Jul 07, 2009, p A14

One of the few bright spots in the current economic gloom has been the telecommunications industry, where competition is robust, innovation forges ahead and consumer prices continue to fall. Leave it to Congress and Beltway planners to mess with this success.

Yesterday, the Journal reported that the Justice Department has begun an informal investigation "to determine whether large U.S. telecom companies such as AT&T Inc. and Verizon Communications Inc. have abused the market power they've amassed in recent years." And last month the Senate Commerce Committee held a hearing on so-called "exclusivity deals" between wireless carriers and handset makers to bring new devices to market.

What's going on? Well, AT&T is the exclusive U.S. distributor of the Apple iPhone, and other big carriers like Sprint (Palm Pre) and Verizon (BlackBerry Storm) have cut similar distribution deals. Device makers like such arrangements because they can share the financial risks of developing and marketing new products. The partnerships lead to more choices and lower prices.

Nevertheless, some smaller carriers that lack the scale and resources to cut similar deals want Congress to ban them for everyone. To advance their argument, these carriers claim today's wireless markets are increasingly uncompetitive and underserving rural areas. Hu Meena of Cellular South, a Mississippi-based carrier with about 750,000 subscribers, told Congress that "the industry is trending back towards consolidation and the days of Ma Bell." Regional and rural carriers, he said, can't gain access to the latest gadgets because larger carriers have cut these exclusive deals. Mr. Meena is hoping to get some sympathy from Senators who represent rural states, like Mississippi Republican Roger Wicker and Minnesota Democrat Amy Klobuchar.

In fact, the wireless marketplace has never been more competitive. Eight years ago there were 100 million U.S. wireless customers. Today there are more than 270 million. It's true that AT&T (82 million) and Verizon (72 million) have the lion's share. But the next two largest carriers, Sprint and T-Mobile, have a combined 82 million, and the five carriers that round out the top 10 have another 18 million among them. Merely because Cellular South doesn't threaten Verizon's share doesn't mean other companies don't. As for rural areas, 96% of Americans have a choice of at least three carriers.

What these smaller carriers really want Congress to do is prevent bigger rivals from reaping the benefits of scale. But the government's role is to ensure competition, not protect competitors. AT&T, Verizon and other large carriers have invested billions to build the networks that device makers find so attractive.

There's also no denying that these distribution deals have benefited consumers. More than 30 devices have been introduced to compete with the iPhone since its debut in 2007. The fact that one carrier has an exclusive has forced other companies to find partners and innovate. In response, the price of the iPhone has steadily fallen. The earliest iPhones cost more than $500; last month, Apple introduced a $99 model.

If this is a market malfunction, let's have more of them. Isn't Washington busy enough re-ordering the rest of the economy?

Of NICE and Men

Of NICE and Men. WSJ Editorial
The Wall Street Journal, Jul 07, 2009, p A14

Speaking to the American Medical Association last month, President Obama waxed enthusiastic about countries that "spend less" than the U.S. on health care. He's right that many countries do, but what he doesn't want to explain is how they ration care to do it.

Take the United Kingdom, which is often praised for spending as little as half as much per capita on health care as the U.S. Credit for this cost containment goes in large part to the National Institute for Health and Clinical Excellence, or NICE. Americans should understand how NICE works because under ObamaCare it will eventually be coming to a hospital near you.

* * *
Associated Press President Barack Obama speaks about health care during a town hall meeting at Northern Virginia Community College last Wednesday.The British officials who established NICE in the late 1990s pitched it as a body that would ensure that the government-run National Health System used "best practices" in medicine. As the Guardian reported in 1998: "Health ministers are setting up [NICE], designed to ensure that every treatment, operation, or medicine used is the proven best. It will root out under-performing doctors and useless treatments, spreading best practices everywhere."

What NICE has become in practice is a rationing board. As health costs have exploded in Britain as in most developed countries, NICE has become the heavy that reduces spending by limiting the treatments that 61 million citizens are allowed to receive through the NHS. For example:
In March, NICE ruled against the use of two drugs, Lapatinib and Sutent, that prolong the life of those with certain forms of breast and stomach cancer. This followed on a 2008 ruling against drugs -- including Sutent, which costs about $50,000 -- that would help terminally ill kidney-cancer patients. After last year's ruling, Peter Littlejohns, NICE's clinical and public health director, noted that "there is a limited pot of money," that the drugs were of "marginal benefit at quite often an extreme cost," and the money might be better spent elsewhere.

In 2007, the board restricted access to two drugs for macular degeneration, a cause of blindness. The drug Macugen was blocked outright. The other, Lucentis, was limited to a particular category of individuals with the disease, restricting it to about one in five sufferers. Even then, the drug was only approved for use in one eye, meaning those lucky enough to get it would still go blind in the other. As Andrew Dillon, the chief executive of NICE, explained at the time: "When treatments are very expensive, we have to use them where they give the most benefit to patients."

NICE has limited the use of Alzheimer's drugs, including Aricept, for patients in the early stages of the disease. Doctors in the U.K. argued vociferously that the most effective way to slow the progress of the disease is to give drugs at the first sign of dementia. NICE ruled the drugs were not "cost effective" in early stages.

Other NICE rulings include the rejection of Kineret, a drug for rheumatoid arthritis; Avonex, which reduces the relapse rate in patients with multiple sclerosis; and lenalidomide, which fights multiple myeloma. Private U.S. insurers often cover all, or at least portions, of the cost of many of these NICE-denied drugs.

NICE has also produced guidance that restrains certain surgical operations and treatments. NICE has restrictions on fertility treatments, as well as on procedures for back pain, including surgeries and steroid injections. The U.K. has recently been absorbed by the cases of several young women who developed cervical cancer after being denied pap smears by a related health authority, the Cervical Screening Programme, which in order to reduce government health-care spending has refused the screens to women under age 25.

We could go on. NICE is the target of frequent protests and lawsuits, and at times under political pressure has reversed or watered-down its rulings. But it has by now established the principle that the only way to control health-care costs is for this panel of medical high priests to dictate limits on certain kinds of care to certain classes of patients.

The NICE board even has a mathematical formula for doing so, based on a "quality adjusted life year." While the guidelines are complex, NICE currently holds that, except in unusual cases, Britain cannot afford to spend more than about $22,000 to extend a life by six months. Why $22,000? It seems to be arbitrary, calculated mainly based on how much the government wants to spend on health care. That figure has remained fairly constant since NICE was established and doesn't adjust for either overall or medical inflation.

Proponents argue that such cost-benefit analysis has to figure into health-care decisions, and that any medical system rations care in some way. And it is true that U.S. private insurers also deny reimbursement for some kinds of care. The core issue is whether those decisions are going to be dictated by the brute force of politics (NICE) or by prices (a private insurance system).
The last six months of life are a particularly difficult moral issue because that is when most health-care spending occurs. But who would you rather have making decisions about whether a treatment is worth the price -- the combination of you, your doctor and a private insurer, or a government board that cuts everyone off at $22,000?

One virtue of a private system is that competition allows choice and experimentation. To take an example from one of our recent editorials, Medicare today refuses to reimburse for the new, less invasive preventive treatment known as a virtual colonoscopy, but such private insurers as Cigna and United Healthcare do. As clinical evidence accumulates on the virtual colonoscopy, doctors and insurers will be able to adjust their practices accordingly. NICE merely issues orders, and patients have little recourse.

This has medical consequences. The Concord study published in 2008 showed that cancer survival rates in Britain are among the worst in Europe. Five-year survival rates among U.S. cancer patients are also significantly higher than in Europe: 84% vs. 73% for breast cancer, 92% vs. 57% for prostate cancer. While there is more than one reason for this difference, surely one is medical innovation and the greater U.S. willingness to reimburse for it.

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The NICE precedent also undercuts the Obama Administration's argument that vast health savings can be gleaned simply by automating health records or squeezing out "waste." Britain has tried all of that but ultimately has concluded that it can only rein in costs by limiting care. The logic of a health-care system dominated by government is that it always ends up with some version of a NICE board that makes these life-or-death treatment decisions. The Administration's new Council for Comparative Effectiveness Research currently lacks the authority of NICE. But over time, if the Obama plan passes and taxpayer costs inevitably soar, it could quickly gain it.

Mr. Obama and Democrats claim they can expand subsidies for tens of millions of Americans, while saving money and improving the quality of care. It can't possibly be done. The inevitable result of their plan will be some version of a NICE board that will tell millions of Americans that they are too young, or too old, or too sick to be worth paying to care for.