Andrew Leonard: The crash in Republican economics. For most of us, what happened over the weekend, not just to Bear Stearns but to capitalism as we know it, is nearly impossible to fathom. Leonard's been writing a column called "How the World Works," and he's come as close to tracking it as anyone I've found. This is a very important article, which needs (and deserves) to be read very carefully. The following quote only sets the stakes:

The consequences of Bear Stearns' failing are simply too great to allow ourselves the moral satisfaction of watching the guilty and the greedy drown in their self-inflicted gore. If anything has been conclusively demonstrated by the past year of market follies, it is that the world's financial institutions are bound together more closely than they have ever been before in a web that is extraordinarily fragile. If one string unravels, the whole structure seems poised to disintegrate -- a process that will inflict pain on a far greater number of people than those who go to work in buildings on the southern tip of Manhattan.

Another quote:

But whether or not the current ills afflicting the economy do bloom into something much worse, it's hard to argue with the thesis that the rhetoric of market fundamentalism hasn't looked this threadbare since Ronald Reagan won office in 1980. Deregulated markets were given their chance. They didn't work, or, at least, they now look to be in need of serious overhaul.

He then tails off by looking at what the presidential candidates have to say about all this. Not much, folks (although you won't have any trouble handicapping them). As for Bush, there's an entry in "How the World Works" that I can only quote whole (title: "George Bush's reality distortion field"):

The president addressed the economy Monday morning. Referring to an economic update provided to him by Henry Paulson, secretary of the treasury, he said:

You've reaffirmed the fact that our financial institutions are strong and that our capital markets are functioning efficiently and effectively.

How the World Works finds itself incapable of summoning up the appropriate level of sarcasm necessary to comment on this quote. Truly, the end times are nigh.

Nicholas von Hoffman: Economic Chaos, Political Consequences. Not much optimism in the what-does-it-all-mean department:

We are in unknown territory facing situations that have never arisen before and taking measures that have never been tried. For the present we know that Bear Stearns/J.P. Morgan has been saved -- sort of. We suspect that some thousands of Bear employees will lose their jobs in the near future; we know that the news of the latest Fed actions was quickly followed by a fall in stock prices in Asia and another dip in the value of the dollar.

In a few weeks this latest insult to the once-imperial Yankee dollar will express itself in higher gasoline prices. That will hurt, but it may be the least of our pain. No body, no government agency, no clutch of economics professors, certainly nobody on Wall Street can lay out a plan of action. We do not know the dimensions of the storm buffeting us but that it is huge and enormously dangerous there can be no doubt.

Of course, what makes these events newsworthy is that now we're finally talking about economic events that hurt rich people -- that in fact threaten to blow their whole financial house of cards into dust. When it was just jobs that were being lost, when it was just the private and public sector safety net that was being shredded, when the infrastructure that supports our way of life was eroding, when the spreading gap between rich and poor was undermining the notion that we live in a just society, those were all things that could blithely be swept under our carpet faith in free markets, as the media quickly moved on to report the Dow Jones numbers. For a long time now, but especially since the 2001 recession that was compounded and exacerbated by 9/11, the federal government has been stuffing money into rich people's pockets to prop up the illusion that they are the health of the economy. What we're finding is that the rot at the bottom is increasingly hard to cover up with the riot at the top.

Von Hoffman thinks that we're going to be so busy bailing out the rich that there won't be any money for aspiring politicians to fix any problems:

There will be no health insurance for everyone. No long-needed increases in teachers' salaries, no big infrastructure projects, no decent-paying new jobs for those laid-off workers in Ohio, Michigan and Pennsylvania, and nothing for single-parent (read mothers) households. There is no money. As things stand now we may have to spend hundreds of billions to prevent millions of people from being thrown out of their homes and billions more to prop our crooked, avaricious, heedless and duplicitous financial system so it does not come crashing down on all of us.

It isn't clear to me that these things are either/or, although they will be if it isn't recognized that the finance problems are symptomatic of more serious structural problems: in particular, the growing chasm between rich and poor. The Keynesian money pump is a way of compensating for short-term slumps in demand, but doesn't add to persistent demand unless it increases the wealth of people at the bottom end of the scale. The current vogue for stimulating the economy via tax cuts and low interest rates for the rich has remarkably little effect. The only thing that stands a chance of actually reversing the hollowing out of the US economy that we've witnessed over the last few decades is to start putting not just money but power into the lower classes, to build up the sense of worth that drives long-term demand. The Fed won't be taking the lead there. To do so requires political change. But it wouldn't be unprecedented: that's pretty much what did in fact happen in the New and Fair Deals.

Postscript: In another How the World Works column ("Easy money days are here again?"), Andrew Leonard notes that the net effect of the ultra-low interest rates that Alan Greenspan pushed from 2001 through Bush's 2004 election, against the backdrop of an otherwise stagnant economy, sent Americans off on a spending spree at the cost of accumulating $3 trillion in household debt. Now that interest rates are dropping again, will the same thing happen? Well, starting out $3 trillion deeper in debt makes it that much harder to convert newly available money into consumer demand. We already saw from 2001-04 that the low interest didn't go into new capacity. It mosty went into the pseudo-growth of asset inflation (i.e., the real estate bubble). With debt past any resemblance of sane limits, and assets deflating like crazy, it's hard to see where the money can go -- although I suppose some people will try to use it to pretend nothing disastrous is happening. Last thing anyone would think of doing with it would be to spend it on poor people, helping them live a little better and becoming more productive.

Michael D Shear and Matthew Mosk: McCain staff tied to Airbus lobbying. The Kansas political world, which is totally in Boeing's hip pocket, is livid over the Air Force awarding its $35 billion tanker boondoggle to Airbus (technically, Northrop Grumman) over Boeing. Caught in the crossfire is John McCain, one of whose few good deeds was working to derail Boeing's previous scandalous one-bid tanker contract in 2004. McCain still cites his role there as preventing $6 billion in fraud. Several Boeing execs wound up in jail as a result, and the whole thing got restarted, with Airbus lobbying hard to get in on the graft. Looks like they won the contract at least partly on merit, but it no doubt helped that they've made major strides in playing Boeing's political game. And while I believe McCain when he says that he never personally lobbied on the issue, it turns out that he's close enough to plenty of lobbyists that it isn't hard to connect dots.

McCain has spoken out for years against the influence of special interests in Washington, but his campaign includes a number of prominent Washington lobbyists, including campaign manager Rick Davis, who founded a lobbying firm.

McCain finance chairman Tom Loeffler and Susan Nelson, who left Loeffler's lobbying firm to be McCain's finance director, both began lobbying for the parent company of Airbus in 2007, Senate records show. William Ball, a former secretary of the Navy and frequent McCain surrogate on the trail, also lobbied for Airbus, as did John Green, who recently took a leave from Ogilvy Public Relations to serve as McCain's legislative liaison.

The conspicuous presence of lobbyists in McCain's campaign has been noted elsewhere, but hasn't really sunken into the public mind, which has conveniently forgotten that McCain only started wearing his scruples on his sleeve after getting caught up in the savings and loan scandal as one of the notorious Keating 5. Given how much play this is getting in Kansas, where Boeing's congressional flunkies are all Republicans, you can imagine how it'll play in Washington, where Democrats predominate -- both support Boeing slavishly, but the exporting jobs issue plays to their base instincts, and they have no reason to cut McCain any slack.

Meanwhile, Wichita Eagle editorial cartoonist Richard Crowson has been groping with the question of why Boeing's having such a hard time competing with Airbus. An earlier cartoon suggested several reasons, like the old saw about government subsidies. (You think Boeing is unsubsidized? Aside from all the cost-plus, reuse-the-technology Defense deals, Kansas has financed Boeing with billions of dollars in state-backed bonds, and every city, state, and country Boeing builds or contracts in has had to pony up for the privilege.) But today Crowson settled on health care costs, and picked an appropriate way to represent them. The little dog in the lower left corner says: "Didn't I see you in Detroit?"

I'm not sure that really explains it in Boeing's case, but then I know some folks Boeing laid off for being diabetic, so I figure they're pretty much on top of their costs there, as they are elsewhere. (Boeing is self-insured, so they have a lot of incentive to grind those costs down.) Still, Crowson is right in general, and it's good to see the point made.

The Eagle also published a letter today from a Merlin C. Hussey, under the title "Boeing is not without blame." It's worth quoting in its entirety:

Some media and politicians argue that awarding the tanker contract to Northrop Grumman and the European Aeronautic Defence and Space Co. would compromise our national security and American jobs. This may be true, but what has Boeing done to negate either of those factors? Twenty percent or more of the 767, including the wing box, is built by Japanese companies in Japan.

In a 2005 paper, authors David Pritchard and Alan MacPherson demonstrated the loss of jobs and transfer of aircraft development technology to Japan by Boeing. They contended this was a result of Boeing's contracts with Japanese airlines and Boeing's low level of research and development and capital investment compared with Airbus.

Example: In 2003, Airbus allocated 9.5 percent of its total revenues toward research and development, compared with 3.5 percent for Boeing. In the same year, Boeing allocated only 0.97 percent of its total revenues to capital investment, compared with 9.1 percent for Airbus. In addition, a minimum of 35 percent of the 787, possibly up to 70 percent, will be built in Japan.

Adding to our selective reasoning is the focus on France and the rest of the European Union while still ignoring the impact of China on U.S. jobs and national security. In 2007, imports from China exceeded exports from the United States by a whopping $256 billion. In 2007, our trade deficit with the entire EU was only $107 billion.

Shouldn't we be asking if the tanker issue is real, or whether we are trying to compensate for our federal government's foreign trade and economic policy failures?

One thing I haven't seen pointed out at all here is that Airbus is working at an enormous disadvantage given how badly the dollar has fallen vs. the euro -- as I recall, the euro has gone from about $0.90 to $1.50 since Bush took office. That in itself makes European labor more than 60% more expensive that it already was, which it already was given that Europe has more effective unions. Boeing is in a constant state of whine about how they have to get their costs down to compete, but it never shows up in the prices of their products, least of all when the US government is buying. Rather, Boeing's entire "competitive advantage" has hitherto been their superior ability to grease political palms. They built this game, and now that they've lost a hand it's hard to see anyone else to blame -- not that they haven't been trying nonstop since the contract dropped, pulling out every stop, even the very real problem of exporting manufacturing jobs, which is something else they've pioneered.

Of course, at this point I hope they do manage to scuttle the Airbus deal. The last thing we need is more tankers able to project American power to the far corners of the earth, imbrogling us in more disastrous wars.

In the Jan. 21, 2008, New Yorker, Sasha Frere-Jones offers this note on the record industry:

Nielsen SoundScan recently released its sales and performance data for 2007. Album sales declined fifteen per cent, compared with 2006. The record business has seen slumps before: revenues fell substantially in the early eighties. What's most striking is the fact that the shrinking industry is now almost completely Balkanized. The top ten artists played on radio were seven country acts, two hard-rock bands, and a pop star named Justin Timberlake. The top ten streamed videos were largely for songs by young women who sing R&B. Eight of the top ten ringtones were hip-hop. Two of the year's best-selling records offer vivid illustration of how the market has fragmented further while remaining alive. The Eagles' Long Road Out of Eden, released on their own independent label and available only at Wal-Mart, sold 2.6 million copies. The biggest-selling album of the year was Josh Groban's Noël, which sold 3.7 million copies despite being released in October. SoundScan does not track the popularity of stocking stuffers, but Groban's album was likely the champ.

One little factoid that I read some years back is that Christmas albums outsell jazz albums. I don't have the data to back this up, but if you throw out pop jazz and vocals, it seems possible that last year there were no more than 2000 jazz albums released and on average they sold fewer than 2000 copies each. Multiply that out and you get less than 4 million, about what one Christmas title sold. Actually, I doubt that as many as 500 new jazz titles sell 2000 copies in their first year. When I surveyed several labels a couple years ago, several larger independents like Palmetto and Sunnyside indicated that 20000 copies was about their top limit. The Balkanization Frere-Jones talks about makes it all the harder for a real jazz record to break out of this ghetto.

The more generally striking thing is that 3.7 million copies seems historically very low for the year's best-selling album. Past years have been led by giants topping 10 million, sometimes several. Groban's way more than 15% off the pace there. While that may be part of the Balkanization trend, there's also a lot of volatility at the top, and it may just be a bad break. The majors seem to be especially dependent on a handful of giant albums each year. If they're suddenly hard to find or make and break, their whole business model falls apart. When that sort of thing happens businessfolk tend to go crazy, which may have something to do with such bizarre behavior as suing ordinary customers for downloading and copying music. It's a lot of fun working in a business that's growing like gangbusters and making money hand over foot. You get to where you think that's normal, and expect it to happen forever, so it's all the more shocking when any sort of restructuring or retrenchment occurs. It looks like something like that is happening in recorded music lately. Beyond that, I haven't done the research, and don't have a lot of opinion. I just try to listen to as much as I can, and note what I find most appealing and/or interesting. But I've started thinking about a new column superseding Recycled Goods, and it would likely start to take a look at the business end -- not least because rather big and disturbing things are happening in business these days. There may be a lot more retrenchment in the near future.

The Wichita Eagle carried an article today by Halimah Abdullah of McClatchy Newspapers, titled "Majority of students in South are poor":

For the first time in more than 40 years, the majority of children in public schools in the South are poor, according to a report released today. [ . . . ]

Twenty years ago, Mississippi was the only state in the country with such a high percentage of poor public school students. However, as textile mills shut down in the Carolinas, Appalachian coal mines cut workers and a recession swept the nation, families in the South were especially hard hit, the Southern Education Foundation report found.

Also hitting the South disproportionately were federal cutbacks in anti-poverty programs, the region's higher rates of underemployment and the increased birth rates of Hispanic and African-American children, who are statistically more likely than their white peers to be born into poverty.

Now, a majority of public school students are considered low income in a total of 14 states, including 11 in the South. The South shows tremendous variability, with 84 percent of students considered low-income in Louisiana, 75 percent in Mississippi, 62 percent in Florida, 49 percent in North Carolina, but only 33 percent in Virginia.

According to the report, public schools in the West may face similar problems in the next five to seven years. Already, 51 percent of public school children in California and 62 percent of those in New Mexico are considered low income.

All told, the report said, 54 percent of students in Southern states are judged to be poor, a significant increase from the 37 percent so classified in the late 1980s. Nationally, 46 percent of public school students are low-income.

This isn't much of a surprise. All my life it's been clear that the people who run Mississippi would rather be part of a third world banana republic than a developed first world democracy, and probably for no better reason than spite: having lost the Civil War, they resolved to keep blacks as poor as they were during slavery, and wound up treating most whites little better, lest anyone get the idea that progress was possible. I've been reading Ira Katznelson's When Affirmative Action Was White: An Untold History of Racial Inequality in Twentieth-Century America, which has many examples of this. Katznelson quotes a letter to Mississippi Senator Theodore Bilbo in 1944, which displays the basic sentiment (p. 81):

I am a typical American, a southerner, and 27 years of age, and never in the world will I be convined that race mixing in any field is good. All the social "do-gooders," the philanthropic "greats" of this day, the reds and the pinks . . . the disciples of Eleanor . . . can never alter my convictions on this question. I am loyal to my country and know but reverence to her flag, but I shall never submit to fight beneath that banner with a negro by my side. Rather I should die a thousand times, and see this old glory trampled in the dirt never to rise again, than to see this beloved land of ours become degraded by race mongrels, a throwback to the blackest specimen from the wilds.

For whatever it's worth, the author was Robert Byrd, who became (and still is) a Senator himself, representing West Virginia. I picked out Katznelson's book because it follows up on a main theme in Paul Krugman's The Conscience of a Liberal: the single most important reason why America abandoned the New Deal welfare state was race hatred. In doing so, the white middle class created in "the Great Compression" of the New Deal and WWII has allowed itself to dissolve into inequality and uncertainty for no better reason than spiteful resolve to keep blacks from joining in the same benefits. As Katznelson points out, the white south took the lead, especially in turning against organized labor in the 1940s. The crippling of the south then (and now) cannot be attributed to diminished political power. Rather, in both cases it is the fruit of the south's political ascendency -- abetted, of course, by alliance with the Republicans, which finally have been remade in the confederacy's image.

Lack of education is nothing new to the south. Katznelson writes (p. 101):

The 1940 Census had revealed that some 10 million Americans had not been schooled past the fourth grade, and that one in eight could not read and write. This, primarily, was a southern problem. A higher proportion of blacks living in the North had completed grade school than whites in the South.

To blame the current rising figure on "federal cutbacks" ignores the fact that southern politicians have agitated for those cutbacks, and that southern states do little if anything on their own to make up for them -- unlike northern states, which are consistently better off precisely because their state governments take some interest in the welfare of their citizens.

Most likely, the trends noted are due to more than increasing poverty, although that's certainly the tide that lifts the entire region. The numbers are also increased by whites withdrawing from the public education systems their political power has wrecked. Backlash against immigrants (illegal and otherwise) is also a likely factor, especially in the west. But all three trends are squarely the fault of the political right and the wrath they take out on the poor. Not realizing that we all depend on each other for our overall welfare, they, like Byrd, would rather perish than share. The numbers show that they are succeeding.

SCO has finally filed for bankruptcy, a little six-plus years after the original SCO company sold their name and their Unixware business to Caldera Systems -- until then a minor Linux vendor whose only business success was in suing Microsoft. For a couple of years up to the sale I had worked for SCO, and had been vocal within the company about how critical it was that adopt Linux and recast the company based on enterprise-class Linux services. I was one of the first to go when the deal came down. That was always an uphill proposition at SCO, a company that was built on the principle of selling operating systems at $1000 a pop. That price point worked as long as one could save more money on commodity Intel hardware compared to the Unix workstations sold by Sun and others, but by 2000 that model was being squeezed on all fronts -- most seriously from Microsoft and Linux, both of which negated SCO's Intel hardware edge. At the time, I argued that SCO could sell to customers too smart for Microsoft, or to customers too dumb for Linux, but not both: the smart people would just move on to Linux, and the dumb people would go to Microsoft. Since SCO couldn't become Microsoft, its only chance was to become Linux. But in a classic case of companies wedded to their margin models, they did neither. They opted to try to protect their declining market by suing everyone who turned against them, including former Caldera sponsor Novell, former SCO partner IBM, and former customers like AutoZone. The only company they didn't sue was Microsoft, who fed them money to try to poison the Linux market.

When SCO sold out to Caldera, they were still doing around $150 million/year in business, down from over $200 million at their peak. Now they're down to around $6 million/quarter, and still dropping. I'd guess that all of those revenues are on legacy systems, and it's only a matter of time before those dry up completely. Those legacy systems were effectively money in the bank, requiring no new development and few employees. Indeed, SCO shed virtually everyone I knew there -- last time I heard there were still 2-3 familiar engineers on staff, but that was quite a while ago. So what led to the bankruptcy, at least in the Chapter 11 sense, wasn't revenue losses; it was legal setbacks. A federal court ruled that Novell, not SCO, owns the Unix trademark and source code -- something I heard back in 2000 when I proposed open sourcing much of that same code. It looks like the IBM case has turned against SCO as well, and maybe there are others.

I ran across a comment on Slashdot that covers the history fairly well, except for this paragraph:

Caldera didn't want the UNIX business either. They were a Linux business and thought they could convert SCO's UNIX distribution network to selling Linux instead. That didn't work out either; apparently the UNIX resellers didn't want to switch to Linux and Caldera was making more selling UNIX than distributing Linux. So they ditched Linux (and their CEO) and switched to concentrating on UNIX and changed their name to SCO for the name recognition.

Actually, Caldera always wanted to be SCO. They initially hoped they could ride Linux into that position, but they always wanted SCO-like VAR channels, and they always wanted to lock them in with proprietary bits of software. They failed repeatedly, then jumped at the chance to buy SCO. The first thing they did at SCO was to kill SCO's Linux project, which could have added a lot to Caldera's Linux product. They didn't want to convert SCO's customers to Linux because what they really wanted was SCO's proprietary margins. The real mystery is why they thought they could do a better job with a product line that was already failing.

Also, the real ogre here was Doug Williams. He had already dumped a fair chunk of his stock a year before, when SCO was peaking during the Y2K binge, just before the bottom fell out. He sold the company to Caldera not because they would help SCO survive but because they had more cash to burn than any other suitor -- cash that they hadn't earned, that fell into their lap from Microsoft to clear up Digital Research's antitrust suit -- and because they were dumb enough to believe they could make SCO's business model work. It's also quite likely that Caldera had only the vaguest idea what they were buying, although it's quite an irony, given their incestuous history with Novell, that they missed the fine print there.

I always feel sad about this because I had a great time working at SCO. I worked with a lot of great people there, including many who had followed UNIX out of Bell Labs through USL and Novell. It's too bad it's come to this. One thing I believe strongly is that employees should have a substantial stake in their companies, and consequently that companies have an obligation to their employees, as a group if not necessarily individually. SCO used to be pretty good to its employees, but in the end it was Doug Williams who called the shots, and it was Doug Williams who cashed out and sent the rest of the company off to oblivion. I knew him well enough to know that he knew what he was doing.

The New York Times has an article today by Louis Uchitelle titled "Is There (Middle Class) Life After Maytag?" It's about what's happened to Newton, Iowa (pop. 16,000) now that its major employer, Maytag, has shut down. The article focuses on ex-workers trying to scratch out a living on reduced wages, when they can find work at all. The article doesn't dig much deeper than that, but they do point out an estimate that Maytag's presence in Newton had the effect of raising wages all across the county by about $3/hour, a multiplier that will be felt by residents not directly affected by the shutdown. One can easily imagine more multipliers: real estate values, the tax base, government services, all locked in a downward spiral.

In some ways this is a typical story -- factories all across the country are shutting down, dumping their workers into what's left of the trickle down economy -- but Maytag is one of the most redoubtable brand names in American industry, and a rock-solid presence in Iowa since its founding in 1893. As far as I can tell, it was a profitable company until it was taken over by a syndicate of private investors, including a good chunk of Chinese money, and dumped into the laps of Whirlpool, who now gets to sell their crap as Maytag until the brand name decomposes into dirt. Another way we all lose in this is that competition in the appliance industry has just been reduced -- that benefits Whirlpool in the short run, and China in the long run. (The Times also has a big article on pollution in China, but one sidelight is the extent to which China's phenomenal economic growth has been built on manufacturing. They want the work, and given the balance of trade they enjoy with the US, they can even afford to buy it.)

As far as I know, the Bush Administration has done nothing to limit anticompetitive corporate consolidation -- that's what antitrust laws were for, inadequate as they were even before Bush came along -- or capital flows. The effect is to steamroll any isolated pocket of high value, even though American industry depends on product quality to justify higher prices. Not only can China manufacture products more cheaply, the rules work to relentlessly degrade Americans' ability to compete on any grounds. Moreover, the stifling of competition means that the profits of lower costs and reduced quality don't get passed on to customers -- they go into further rounds of capital consolidation. Bush even manages to avoid taxing those profits lest the government be tempted to put them to public use: no US politician since the days of slavery has worked so hard to reduce American labor to third world levels.

The Times article asks whether this will be the end of the middle class in the US. We should be more precise. What's happened to Maytag is just one example of a broad-based drive which will drive a wedge between the working class and the middle class. In the 1945-70 period, unionized workers in high value-add manufacturing industries could afford to buy houses, cars, send their kids to college, spend some extra on entertainment and leisure activities. That continues to be true for those workers lucky enough to have survived, but when you start shutting down the Maytags you can tell how thin those ranks have become. There's a fine line between getting ahead and falling behind, but depending on which side you're on, there's a world of difference in how you feel about the system. As long as workers were getting ahead, living middle class lifestyles, they had no great interest in class consciousness. But the more they find no way to get ahead, the more beef they'll have with the way things work. That may become an important unintended consequence of the squeeze on the cost of labor.

We've been seeing real wages decline for 35 years now, yet there hasn't been much of a political backlash against it. There are a bunch of things that have helped soften the blow or at least cloud the issues: assets like homes and savings have appreciated; there have been significant technological advances; there are cases where productivity increases have lowered costs (although other increases, like health care, have more than made up for them); and there's a lot more credit and debt. But mostly older workers have been picked off one by one -- the median is just a statistic until you lose your job or get slammed by a catastrophic medical bill. Young workers can seem to be making progress until they only belatedly discover they're never quite getting where they expected to be -- of course, they're told that shortcomings are their own fault, not the system's, and too many buy that. In part, that's because there still are middle class jobs available -- in management, sales, professions that promote people as much on their fealty to the system as for the quality and quantity of their work.

For most of our history, America has had a representative, relatively permeable middle class, and that has been key to political stability -- to the sense that we're all in this together. That's increasingly at risk now. Free inheritance keeps the rich ahead, while more expensive education and growing debt burdens keep everyone else from joining them. And those without those expensive education credentials have it all that much harder when all the good manufacturing jobs have moved to China. This is likely to get ugly, especially if/when some of those crutches fail. For example, the whole "subprime" mortgage fiasco is one such fissure; that subprime loans were written in the first place was an indication how desperate lenders were to put their money to work. The whole practice of loaning money to folks unable to pay it back is a way to postpone a crisis that's only likely to become worse in the long run.

The Wichita Eagle ran an AP piece by Stephen Ohlemacher today on "U.S. slipping in life expectancy rankings." This is hardly news -- as the piece notes, "For decades, the United States has been slipping in international rankings of life expectancy, as other countries improve health care, nutrition and lifestyles." But the US has now dropped from 11th two decades ago to 42nd now, trailing Europe and Japan, of course, but also countries like Jordan. Quote:

"Something's wrong here when one of the richest countries in the world, the one that spends the most on health care, is not able to keep up with other countries," said Dr. Christopher Murray, head of the Institute for Health Metrics and Evaluation at the University of Washington.

He doesn't explain what, but the simple answer is that what we're seeing is the legendary efficiencies of the private sector at work. The problem is that life expectancy, or any other normal measurement of health, is not the object of all that efficiency. The real goal is the diversion of GDP to health care spending, and the private sector has been so successful at that that Americans pay twice as much for health care as any other nation in the world. It's also likely that the industry's incentives favor inadequate treatment, since that leaves more headroom for the blind hope that spending a little more might actually achieve some gain. If we had a good health care system, the problem isn't that we'd want to use it more; it's that we'd want to reduce the unnecessary costs, not least of which is the industry's profit margin. So keeping everyone nervous keeps the money flowing, and, well, if the US health care industry does anything well, it's scaring the dickens out of people.

James Surowiecki's column in the Aug. 13, 2007 New Yorker has something useful to say about the politics of privatization, in part because it's about a case that has already developed into full-scale scandal: student loans:

For decades, student-loan companies have had one of the cushiest businesses in America. [ . . . ] The federal government, for instance, guarantees the so-called Stafford loans that college students get: if a student defaults, the government will pay off almost the entire loan. On top of that, the government hands out billions of dollars in subsidies to lenders every year. In effect, lenders get a guaranteed return with very little risk.

This convoluted process is good at making student-loan companies rich -- Sallie Mae, the biggest issuer of student loans, earned $1.3 billion last year, with a return on equity that dwarfs most other companies'. But it's not very good at getting government money to students cheaply and efficiently. President Bush's 2007 budget shows, for instance, that it's four times as expensive for the government to subsidize and guarantee private loans as for it to issue those loans itself. In other words, the current system is not just corrupt. It's also inefficient. So why are we stuck with it?

In part, it's ideology, and the dominance of what you might call the privatization mystique -- the idea tha tanything the government can do, the private sector can do better. Often, this makes sense: the free market is more likely to come up with efficient ways of creating and distributing products and services than the government is. But the student-loan market isn't a free market in any meaningful sense of the term, because the government effectively determines prices, insures against losses, and subsidizes volume. In this environment, most of the competition among private companies is really just squabbling over how to split the spoils. Economists call this behavior -- when a company seeks to manipulate economic conditions rather than actually create value -- "rent-seeking." It's common in areas where the fetish for privatization has taken hold, such as the outsourcing of homeland security to private contractors and the boom in private Medicare insurance. (The private insurers are less efficient than Medicare and receive billions in subsidies from the government.) Outsourcing tasks to private companies is spposed to let government reap the benefits of the free market. But sometimes it just ends up uniting the worst of government and the worst of the private sector into one expensive mess.

Actually, I think that's a good deal more often than sometimes. In anything it chooses to do, government has four advantages over the private sector: 1) it can borrow money at lower cost because there's no risk that it will default; 2) it can insure itself less expensively against other risks; 3) it can offset income, granting itself subsidies from general tax income, in some cases completely avoiding direct charges (and therefore marketing and collection costs); 4) it can motivate workers by appealing to their sense of public duty. Given these advantages, you have to wonder how the private sector can ever compete. The main answer is politics, on both sides of the fence. Politics works to reduce the efficiency of government, to increase its costs, to de-motivate its workers. Politics lets the private sector reduce its labor costs and run its labor force more tightly. And politics puffs up ideologies that obscure what more often than not is a direct transfer of subsidies from government to the private sector. If you get rid of the political handicapping of government, in industries where there are well-defined consensus demands, government will easily out-produce the private sector, and we'll (almost) all be better off for that.

The private sector still has a role in providing goods and services where there is insufficient political will to make sure that they are provided most efficiently. But where there is a public demand -- student loans is one such case; health care is another -- the real question is how do we make public financing and orientation work. Paying rents to private interests doesn't work, no matter how lucrative it is to politically connected beneficiaries.

The New York Times has an article today by Stephen Labaton on Microsoft's antitrust angel in the Bush administration Justice Department:

Nearly a decade after the government began its landmark effort to break up Microsoft, the Bush administration has sharply changed course by repeatedly defending the company both in the United States and abroad against accusations of anticompetitive conduct, including the recent rejection of a complaint by Google. [ . . . ]

In the most striking recent example of the policy shift, the top antitrust official at the Justice Department last month urged state prosecutors to reject a confidential antitrust complaint filed by Google that is tied to a consent decret that monitors Microsoft's behavior. [ . . . ]

The official, Thomas O. Barnett, an assistant attorney general, had until 2004 been a top antitrust partner at the law firm that has represented Microsoft in several antitrust disputes. At the firm, Justice Department officials said, he never worked on Microsoft matters. Still, for more than a year after arriving at the department, he removed himself from the case because of conflict of interest issues. Ethics lawyers ultimately cleared his involvement.

The details of Google's aren't particularly interesting. Like Netscape's complaint, they are remarkable mainly in that any outside company was able to temporarily establish any sort of commercial enterprise by hooking into Microsoft's operating systems monopoly. Microsoft is uniquely able to manipulate its interfaces, product packaging, and OEM contracts to exploit network effects, both to promote its own ancillary businesses and to undermine potential competitors.

Before Bush took office, Microsoft had been convicted of breaking antitrust law, but the remedy was under appeal. Microsoft evidently had little trouble finding the new regime's bag men: Ashcroft soon settled the case on terms very favorable to Microsoft. I don't know that the Bush administration has prosecuted any antitrust cases in the last six years. Hiring people like Barnett, whose background is defending companies, like Microsoft, against antitrust cases, is one sure way to get nothing done.

One thing this underscores is that the Bush administration isn't really all that much about promoting capitalism and free markets per se; their preference is to make the rich richer, even where that means protecting monopolies that ultimately rip everyone else off -- even the hallowed rich. Where an earlier generation of progressives realized that constricting competition hurt the economy as a whole, not least to keeping new entrepreneurs out of the market, the current view is to honor each other's scams -- all the better to safeguard one's own. In large part, this is the difference between a growing, bustling, innovative economy, such as the US had during the socalled progressive era, and the stagnant oligarchy we are becoming.

Even before Bush, antitrust enforcement was extremely spotty -- something much more likely to happen when competing powers, like Netscape and Microsoft, collide, than as a result of anyone looking out for the public interest. This is one of many cases where just rolling back to pre-Bush standards won't go nearly far enough. We should not just enforce existing antitrust laws; we need to start positively promoting competition -- taxing companies progressively according to their size, restricting consolidation, putting limits on intellectual property, subsidizing open research, making more investment funds available to new entrepreneurs, and eliminating the advantages companies seek in political favoritism.

Microsoft's antitrust case offers many lessons here. Their repetitive breaking of antitrust law is only one part of a much bigger problem, which relates to why we a private company to control such basic infrastructure as operating systems without fully disclosing the source code. On the other hand, it would be easy enough to fix the Microsoft problem by just switching to open source software alternatives. That this hasn't happened suggests more evidence of the collapse of clear thinking that appears to be increasingly endemic in America -- another way we are already experiencing the coming dark ages.

I read the following in James Surowiecki's May 14, 2007 New Yorker column, titled "Exporting I.P.":

Our recent free-trade agreement with South Korea is a good example. Most of the deal is concerned with lowering tariffs, opening markets to competititon, and the like, but an important chunk has nothing to do with free trade at all. Instead, it requires South Korea to rewrite its rules on intellectual property, or I.P. -- the rules that deal with patents, copyright, and so on. South Korea will now have to adopt the U.S. and E.U. definition of copyright -- extending it to seventy years after the death of the author. South Korea will also have to change its rules on patents, and may have to change its national-health-care policy of reimbursing patients only for certain drugs. All these changes will give current patent and copyright holders stronger protection for longer. Recent free-trade agreements with Peru and Colombia insisted on much the same terms. And CAFTA -- a free-trade agreement with countries in Central America and the Caribbean -- included not just longer copyright and trademark protection but also a dramatic revision in those countries' patent policies.

Given that the most of the world's patents, copyrights, etc., are owned by the American and multinational corporations that dominate US politics, and especially trade policy, these deals are little more than a legalistic method for the rich to collect rents from the poor. This is simply one more obstacle that prevents developing countries from advancing toward a more equitable standard of living with those countries who have a head start staking out their legal turf. This is a big problem, but we have trouble even conceiving of it.

As Richard Stallman likes to point out, "intellectual property" is a mixed bag with little coherency to it. Copyrights, patents, trademarks, etc., are different beasts, united only in that they favor those who rely most heavily on lawyers. Of these, the worst by far are patents. Copyrights at least apply to works that are distinctive due to their complexity and that are inessential: e.g., my writing a novel doesn't prevent you from writing a novel, because there's no way that two independently created novels will match. But with patents, which are allowed on relatively generic ideas, that happens all the time -- distinguishing priority in patents often reduces to a legal contest, which favors the politically connected. (Note the terms that the trade agreements dictate: that other countries recognize the patents that the US Patent Office recognizes.) An even bigger problem with patents is that we grant monopoly rights to their holders. This encourages companies to price covered products to whatever formula maximizes their return -- in the case of a uniquely effective medicine, this may literally mean your money or your life. This also lets companies use their legal position to frustrate competition. One irony here is that the effect of patent extension is the opposite of free trade.

One reason we have patents is that economists propagate myths about their value. Surowiecki does his part by saying: "Intellectual-property rules are clearly necessary to spur innovation: if every invention could be stolen, or every new drug immediately copied, few people would invest in innovation." Actually, by people he means corporations: few corporations would invest in developing proprietary monopolies, which is kind of a tautology. Innovation is actually a broader form of activity, inasmuch as much innovation currently goes unpatented. Patents actually have much more to do with the legal culture of the corporation than with the scientists and engineers who do research and development. Moreover, much discovery and innovation, including virtually the entire development of 20th century science, takes place outside of corporate labs. But even if you buy the argument that the loss of patent monopolies might reduce privately funded innovation, it would be trivial to compensate for that with public funding. And the returns of such funding would be greater, because all ideas would be subject to public scrutiny and improvement, and any could be adopted without the burden of monopoly rents.

The big money in patents these days is in pharmaceuticals, a story that provides ample evidence why patents are bad even within the US. The extraordinary profits attainable via patents steers privately funded research toward patentable products, away from any refinement of proven generic treatments. The research is mostly done in secret, where other researchers cannot critique or contribute. The results, and their marketing, are colored by business interests. One result is that prices increase, as opposed to most other development areas, where innovations aim to lower costs and, in the absence of patents, prices. As these costs are ultimately paid for by everyone, either privately or through government, it should be easy to see that public funding of pharmaceutical research would save money and result in more effective development. Yet even among people who realize the urgent need for health care reform, very few even broach the issue of patents.

Heavy lobbying by interested parties has managed to keep patents and copyrights out of the political debate, except when they try to push those rights even further. In the case of trade agreements, they argue that enforcing their monopolies worldwide will help to reverse America's trade deficits. This not only ignores the fact that hardly any Americans actually benefit from those monopolies. It also ignores the fact that intellectual property owners are increasingly foreign and/or multinational corporations. Just one example is that none of the four music majors is American owned. The pharmaceutical industry is little different.

It wasn't always like this. Developing countries should consider America's own example. Surowiecki writes:

The great irony is that the U.S. economy in its early years was built in large part on a lax attitude toward intellectual property rights and enforcement. As historian Doron Ben-Atar shows in his book Trade Secrets, the Founders believed that a strict attitude toward patents and copyright would limit domestic innovation and make it harder for the U.S. to expand its industrial base. American law did not protect the rights of foreign inventors or writers, and Secretary of the Treasury Alexander Hamilton, in his famous "Report on Manufactures," of 1791, actively advocated the theft of technology and the luring of skilled workers from foreign countries. Among the beneficiaries of this was the American textile industry, which flourished thanks to pirated technology.

There's a lot more to be written about these issues, but the point that struck me most strongly about this piece is that we are stuck in a mental rut here that is leading us to do exactly the wrong things. And I say "we" here because this isn't just a Bush thing -- Clinton was every bit as happy to curry favor from IP profiteers. The same stupid repetition of economic myths favoring monopolies is part of the general pall of dark ages descending upon us. Unless we start to push back that tide, we are doomed.

Julius B. Richmond is a M.D. with vast government experience -- a founder of Head Start, the former Surgeon-General under President Jimmy Carter (who wrote the introduction here); currently Professor Emeritus of Health Policy at Harvard. Rashi Fein is Professor Emeritus of Medical Economics at Harvard Medical School. Their book is called The Health Care Mess: How We Got Into It and What It Will Take to Get Out (2005, Harvard University Press). I picked it up at the library along with David Mechanic's The Truth About Health Care. The main difference between the two books is that most of The Health Care Mess details the history behind the current state, whereas Mechanic's book is more of a current snapshot.

The final quarter of the book makes two proposals: a pitch for a single-payer national health system, which the authors prefer, and a series of piecemeal approaches mostly based on the Federal Employees Health Benefits (FEHB) program -- the latter is pretty much what Kerry ran on, or at least namechecked, in 2004. Neither proposal comes close to sizing up the whole problem described in the early parts of the book. For that matter, the "mess" of the title strikes me as a good deal tidier than reality.

On the development of modern medicine (p. 9):

Scientific advances taking place in the early twentieth century were destined to have a significant impact on diagnostic and therapeutic interventions available to physicians, the understanding of disease patterns, and the nature of medical education and physician preparation for the emerging modes of practice. Discoveries in the natural sciences and the increasing availability and applications of the compound microscope fostered the development of pathology, bacteriology, physiology, pharmacology, and biochemistry as sciences basic to the study of medicine. The development of x-ray examinations, electrocardiography, and laboratory examinations of body fluids, based on new knowledge in phsyics and chemistry, were beginning to change the nature of medical practice.

It has been said that, at the turn of the last century, if a randomly selected patient with a random illness met a randomly selected physician, the patient had only a fifty-fifty chance of benefiting from the encounter. Those odds increased remarkably over the century, and that increase began in the early decades.

On the accidental development of employment-based health insurance (pp. 37-39):

Because the most common group arrangement and linkage involved employment, this pattern had many administrative and enrollment advantages, especially so during the Second World War when America bounced back from the depths of the depression. Between 1939 and 1944 the unemployment rate dropped from 17.2 percent to 1.2 percent, and the Gross National Product grew by almost 75 percent in real (corrected for inflation) terms. In an effort to control inflationary pressures on the prices for consumer goods in short supply and on wages in a full-employment economy, the federal government instituted price and wage controls. Nevertheless, it did permit additions (within limits) to fringe benefits, including health insurance. Given the high levels of taxation on wartime increases in profits, employers were willing to augment their contribution for health care coverage (or to offer such coverage if they had not previously done so). The costs of insurance, after all, were being paid by dollars that in large measure would otherwise have been paid in taxes.

And there was more: the amount that the employer paid for health insurance was considered a "cost of doing business." It was a cost, akin to wages and other items that were legitimate expenses and deductions from what otherwise would have been profits. Yet at the same time the value to the individual of the premium dollars paid on his or her behalf was not considered as income on which the worker would have to pay income and (perhaps) Social Security taxes. The consequent decrease in government revenues provided a substantial subsidy toward the purchase of health insurance. It should be pointed out that the failure to tax the value of the premiums as income meant that the subsidy was greater and worth more the higher the individual's income and the greater the individual's marginal tax rate. The CEO received a larger tax benefit subsidy than did the secretary. [ . . . ]

At the entry of the United States into the war at the beginning of 1942, Blue Cross covered 6 million subscribers; by 1946 enrollment had exploded to 18.9 million. Commercial insurance covered some 3.7 million persons in 1941 and 10.5 million by 1946. Further rapid growth followed; from a 1946 total of 32 million persons covered by Blue Cross, commercial plans, PGPs, and independent plans, to 53 million in 1948, and to 77 million in 1951. As a consequence of changing patterns of medical care, in particular the utilization of hospital services, much of this increase in coverage was for hospital care, creating a not-so-subtle perverse incentive to hospitalize individuals. This was the case even for diagnostic tests that could have bene performed on a less costly outpatient basis. Over time the hospital thus became all the more important and central to the delivery of health care services, a phenomenon not unrelated to the expansion in the number of hospitals and of beds following the 1946 enactment of the Hospital Survey and Construction Act (the Hill-Burton Act). In a reciprocal manner, since medical care became more costly, insurance became more useful (indeed, necessary). In turn, the presence of insurance helped underwrite a buildup of resources and an upgrading of technology that added to costs and made insurance even more valuable.

It strikes me that we can file this as yet another unanticipated consequence of WWII -- a triumphal "victory culture" that validated and reinforced everything America did during the war, regardless of its merits.

On the growth of health care expenses (pp. 73-74):

The concern about rising costs and expenditures was a matter of top priority. After all, national health expenditures (NHE) constituted an increasingly larger proportion of the GDP, and there were no signs of a slowdown in their rate of growth. In 1960 NHE accounted for 5.1 percent of GDP; by 1965 (even before the implementation of Medicare and Medicaid) the share had risen to 5.7 percent. By 1970 the proportion had increased to 7.1 percent; by 1985 it had reached 10.3 percent.

Nor was this growth accounted for solely by increases in that part of national health expenditures that went to administration, research, and construction (matters that at least in theory were amenable to control through the appropriation process). Expenditures for personal health care services (roughly 90 percent of national health expenditures) were also growing rapidly, both in absdolute terms and as a share of GDP. In 1960 personal health care service costs totaled nearly $24 billion. By 1965 the total rose to $35 billion, and by 1985 to $376 billion (all in current dollars). Per-capita expenditures rose more than twelvefold, from $124 in 1960 to $1,523 in 1985. These increases affected all Americans and, not surprisingly, were accorded a higher priority than the issue of the uninsured and underinsured, which directly impacted a much smaller number (around 15 percent) of Americans. The uninsured were a minority. Furthermore, they were "others": the poor, black, Hispanic, the unemployed, low-wage earners, those too old to work and too young for Medicare.

Another quote on progress, i.e. forgetting where you came from (pp. 98-99):

Physicians and patients who have grown up in what some consider the golden age of medicine would most probably be shocked to discover that prior to World War II physicians had little by way of specific therapies for their patients. The general public and even today's younger health professionals would surely be astonished to learn that a review of medical textbooks of the 1930s, when one of us was a medical student, indicates that the only specific medical therapies then available were liver extract for pernicious anemia, insulin for diabetes, quinine for malaria, arsenicals and heavy metals for syphilis, and digitalis for heart failure. Today's sophisticated imaging and diagnostic techniques, pharmaceutical interventions, transplantation, and microsurgery techniques did not exist. The medical and surgical resources were extremely limited.

The availability of antimicrobial medications, initially that of sulfonamides, just prior to World War II, transformed the treatment of the infectious diseases. It also created a hopeful climate for intensifying and expanding medical research during and after the war. The time was ripe, therefore, for the rapid growth of the National Institutes of Health (NIH) and the creation of a remarkably inventive partnership between the federally funded NIH and the private and state universities and research institutions of the nation. As a consequence of the increased complexity of medical care and expansion in the flow of research funds, academic medical centers that could deal with that complexity and that were equipped to respond to the research opportunitites and to the availability of funds with which to undertake them, underwent rapid expansion.

A rather good definition of schizophrenia, by no means limited to the immediate subject here (p. 119):

The American dilemma, on the one hand, of wanting to rely on market forces yet nevertheless being skeptical about their efficacy, and on the other hand, wanting something akin to the results of rational planning while rejecting planners and planning mechanisms -- that is, the dilemma of wanting lower expenditures while rejecting control and budgeting mechanisms -- shaped how we dealt, and did not deal, with graduate medical education.

How the AMA's anti-government stance let doctors be blindsided by for-profit entrepreneurs (p. 130):

Concomitant with the growth of these for-profit sectors was the corporatization of much of medical practice. In retrospect it is surprising tha tthe medical profession did not offer significant resistance to this trend. Part of the explanation lay in the fact that the largest organization of physicians, the American Medical Assocation (AMA), had long opposed any systematic planning for the delivery of medical care services. Consequently, financial flows and organizational arrangements were left to the marketplace. Physicians were now reaping what AMA ideology had sown.

The irony was that organized medicine in the form of the AMA had focused its attention on government as the threat to physician independence, power, and control, and did not recognize that the marketplace and the behavior of employers who were large purchasers of insurance and of investors who were "medical care entrepreneurs" would represent an even larger threat. While organized medicine could lobby government, it could not identify a locus for exerting pressure against employers who were more actively questioning the costs of and expenditures for medical care. Nor could it identify a locus for resisting the forces of Wall Street that were seeking new opportunities to increase profits by constraining physician behavior and cutting costs.

It's worth noting that the AMA's line fit nicely with the general Cold War ideology, which is part of the reason why conservatives have locked themselves into a private-profit health care system even though it winds up being predatory on all other forms of business.

In the early '90s price increases temporarily abated (p. 142):

Nevertheless, cost increases appeared to ease. Much of the easing could be attributed to the lower utilization of expensive hospital days. Some of the relative stability was associated with a decline in the overall rate of inflation, and some was the result of HMO (temporary) "underpricing" policies designed to improve market share. Still, whatever the explanation, in the short run employers and employees benefited from the stabilization of premiums. Between 1991 and 1998 the annual rate of increase in health expenditures slowed to a low of 5 percent. Regrettably, it started to rsie again in 1998, reaching 9.3 percent in 2002. Basing the Consumer Price Index (CPI) at 100 for average prices in 1982-1984, the CPI for all nonmedical care items was 128.8 in 1990, while the CPI for medical care was 162.8, or 26.4 percent higher. By 1999 the CPI for nonmedical care items stood at 162.0, while that for medical care was 250.6, or 54.7 percent higher. The disparity continued to grow, and by 2002 the CPI for nonmedical items was 174.3, while medical care was 285.6, or 63.9 percent higher.

Of course, the other reason for holding the line on prices was that until Clinton's plan was killed the industry needed to prove that it could regulate and moderate its appetites without government intervention. Prices started rising again once the Clinton plan was dead and the Republicans took control of Congress. The rate increased further when Bush entered the White House, even though the high tech bubble had largely collapsed. As such, there is public value in the mere possible threat of political reform, even if it doesn't lead to legislation.

On health care economics (pp. 229-230):

None of this should have come as a surprise. The marke tis not a redistributive device, and many of the health problems required some, and in a number of cases much, redistribution. The market responds to disparities in income and allocates resources to meet market demand (the exercise of which requires income) rather than to meet needs (a concept with which economists, as economists, have difficulty). Yet health issues are about "need," not about the economic concept of "demand." The latter can be measured; the former is a matter of opinion. Nevertheless, that does not make "need" any less real. Although Americans seemed to agree that health care was a "right," and did not embrace the counter-formulation that health care is a "privilege," the laissez-faire market still repeated, "follow the money."

Furthermore, the delivery of health care services constituted a special market that did not meet the various criteria usually cited by economists for a fully competitive market. Resources could not be moved freely. New firms did not have the ease of entry that, through competition, would help constrain prices and profits. The symmetry between buyer and seller was absent since the patient (buyer) had much less knowledge than the physician (seller). Indeed, as already discussed, the real buyer often was not the consumer/patient but the employer; the managed care entity, not the physician/hospital, was the seller. In addition, there had to be many sellers, no single one large or powerful enough to influence market supply significantly, as well as many purchasers, no single one large or powerful enough to influence demand significantly. True, in the nation overall and in the various states individually there were many hospitals, many HMOs, and many insurers, all together presumably making for competititon. Nevertheless, the health care market that most of us faced and in which mnost health care was produced and delivered was in fact a local market. Many local markets had a very limitd number of health institutions and of organized delivery systems. Thus those who sought and received medical care in their localities (and that, of course, meant most of us most of the time) did not necessarily face conditions that rendered a competitive market possible.

On public control of reform (pp. 259-260):

We recognize that such debates are not only about what might be considered "technical" matters. Nevertheless, we believe that it would be useful to insulate, insofar as possible, the boards from the heavy dose of partisanship that could jeopardize their activities. To that end we would urge that the terms of office, selection, and approval of board members and regional administrators should follow procedures designed to maximize the nonpartisan character of their various supervisory and policy responsibilities. Furthermore, we believe that there must be significant representation and input from the general public, and therefore recommend that a substantial proportion of central and regional board members be nonprofessionals in the health field, tha tthey be selected as individuals who represent the public, and that mechanisms be developed to facilitate substantial public input.

The book includes a fair discussion of malpractice issues, but doesn't go very far with it. There is no real discussion of moving away from private patenting of pharmaceuticals and other innovations. The present system is not just costly -- it compromises quality by limiting transparency of information, distorts the market through massive advertising promotion, and limits research by allocating capital according to potential returns rather than need.

This is the first of two posts on recent books on health care. The other, tomorrow, is The Health Care Mess by Julius B. Richmond and Rashi Fein. Neither book covers the subject all that well, and both come up short on solutions, but their partial views do help to illuminate some of the problems. I'll be looking for other views, and plan to develop my own ideas further -- one is to build on open source to extend transparency and promote science over business.

David Mechanic is director of the Institute for Health, Health Care Policy, and Aging Research and René Dubos University Professor of Behavioral Sciences at Rutgers University. I've been looking to get a better grasp on health care politics and economics, and his book The Truth About Health Care: Why Reform Is Not Working in America (2006, Rutgers University Press) caught my eye. It's relatively short (228 pages), but actually a rather slow, tedious read. He writes in cautious assertions like thin paint strokes, only gradually circling in on larger truths. I was surprised at the end of the book that I had marked so much of it as quotable.

(pp. 35-36):

Given the required trade-offs and the many uncertainties as we try to achieve a more coherent system of care, it is important to have credible spokespersons who can help the public understand its options. In earlier times the medical profession had the public's confidence, but it no longer speaks with one voice or has high credibility. Nor has government much credibility, and the public's respect for authority and expertise has generally very much eroded. This is a worldwide phenomenon across all sectors including medicine, which for much of the twentieth century was insulated from distrust because of the reverence that many had for their personal physicians. While trust in one's personal physician is still quite strong, distrust in medical leadership is now on par with distrust in other institutional leadership in government and the private sector. The majority of the public do not necessarily anticipate that their medical leaders will work in their interests.

The loss of confidence in leadership is characteristic of a mass society with many channels of information and communication. News reaches people immediately from all over the world, and the media focus on disagreement and conflict, betrayals of trust, and competing points of view. Thus, people gain the impression that the morals and trustworthiness of their leaders are less than in past times. More specifically, in the case of medical care, the media expose the population to disagreements about treatment and care, conflicts among specialists, the uncertainty of medical evidence, and stories about medical errors and poor-quality care. Thus, much of the public is skeptical about leaving health care decisiosn to medical leaders. They trust their chosen personal physicians, but that trust diminishes when they see their physicians constrained by larger institutional controls. Although it has been documented repeatedly that fee-for-service medicine contributes to overutilization, patients seem less concerned about unnecessary treatment than the possibility that something of value may be withheld. Patients are reluctant to accept that treatments they have learned about from direct-to-consumer advertising or from friends are unneeded, and physicians are faced by time pressures that make detailed explanations difficult. Unwilling to alienate their patients, doctors often give them what they wish. The media are an important part of this process and contribute to raising patients' insecurities and demands.

(p. 45):

When patients paid directly for their care the issue of who sought varying types of care was of limited social importance. In American society persons are free to spend their disposable income as they wish, and those who preferred more medical care to alternative expenditures did little harm. Under contemporary conditions, however, most people have health insurance coverage and excessive use affects everyone's premiums. Also, taxpayers in one way or another pay much of the bill, so frivolous and unnecessary uses have social relevance. Moreover, medical technologies can be harmful, so misuse of care, whether by patients' choices or physicians' decisions, has important consequences. It is no longer viable to support whatever patients demand and whatever physicians are willing to provide, if it ever was. We need more sophisticated ways of determining need and appropriate care. We probably would not want to be restrictive for less expensive visits that are important to patients in providing information, support, and reassurance, but we have to think carefully about the expensive and invasive technologies and treatments that some patients demand and that may involve serious risks.

(p. 80):

The criminalization of persons with mental illness is commonly noted, and we now have many more persons with mental illness in jails and prisons than in mental hospitals. These correctional institutions typically have poor mental health services, and persons with mental illness are commonly victimized by other inmates and sometimes staff. The large number of persons with mental illness in prisons is due to many factors, including poor community mental health services. But many patients are jailed for substance offenses that are by definition associated with DSM disorders. [ . . . ] It is also fair to say that these patients do not fall high on the average person's hierarchy of compassion or high on political agendas. But the criminalization of the mentally ill represents perhaps the greatest scandal of our health care system, and a situation that should embarrass all thoughtful citizens.

(pp. 81-82):

The pharmaceutical industry is a major player on the mental health scene. As it has expanded the markets for psychiatric drugs, the industry has an increased stake in framing how mental disorders are seen and how they are treated. Through its direct-to-consumer advertising, sponsorship of psychiatric meetings, research, publications, educational activities and other events, and sponsorship of mental health advocacy groups, it seeks to expand markets and definitiosn of treatable mental disorders. The industry forms coalitions with advocacy groups and supports activities to extend insurance coverage for new drugs, lobbies against formularies that restrict the availability of some drugs, and seeks to persuade physicians to use its drugs "off-label," that is, for uses not specifically approved by the Food and Drug Administration. It has encouraged treatment of more people, expanding and medicalizing the mental health arena for many ordinary problems of living. Increasingly, it is apparent that the published literature on the efficacy of many new drugs is biased, since drug-company-controlled studies with less positive results may not be published and disseminated. As evidence of this has become more apparent, the editors of major medical journals have made it clear that they will not publish papers from clinical trials that have not been publicly recorded prior to initiation, so it becomes possible to minotor biased reporting of the results of drug trials. The role of the pharmaceutical companies in the research process has raised troublesome questions, and this area now is receiving more attention as costs of pharmaceuticals grow much faster than other areas of medical and mental health care.

(pp. 89-90):

Consumerism takes place in an entrepreneurial context. Pharmaceutical companies, health plans, technology companies and hospitals among others seek to influence how consumers view disease and medical treatments. In the year 2001, for example, the pharmaceutical industry reported that it spent $19.1 billion dollars on marketing, most of it targeting physicians directly, but also including $2.7 billion for direct-to-consumer (DTC) advertising. Marcia Angell, former editor of the New England Journal of Medicine, has analyzed these data and argues that a more accurate estimate is $54 billion constituting 30 percent of members of the Pharmaceutical Research and Manufacturers of America's (PhRMA) $179 billion in revenues in 2001. Expenditures on DTC almost tripled between 1997 and 2001, with television ads accounting for almost two-thirds of such advertising. This vast DTC expenditure is relatively small compared with the massive funds spent on direct promotion to physicians by sales representatives, and through a variety of techniques from providing free drug samples and knickknacks to promoting drugs through sponsorship of continuing education. The Industry Profile reports that companies employ far more people for marketing (86,226) than for research and development (51,589).

The efforts to influence consumers and their physician agents is very big business. Pharmaceutical companies fund consumer groups and team up with them in efforts to lobby state Medicaid programs and others to add new expensive drugs that have not been shown to be superior to less expensive generic drugs to drug formularies. In its quest to gain brand allegiance and increased sales, the pharmaceutical industry is a major presence at meetings of almost every medical professional organization as a significant sponsor of their activities, happily providing gifts small and large, and lucrative consultancies for major figures. Thus it seeks to influence not only the drugs patients ask for but, even more, the inclinations of physicians to provide those drugs. Much is at stake in the choices physicians make under ordinary prescribing circumstances, which explains why so much marketing is directed at physicians. Drug expenditures are larger than necessary as physicians prescribe expensive new drugs that are often no better, and sometimes less effective and more dangerous, than inexpensive generic alternatives. There is some case to be made that DTC advertising may alert people to treatments from which they could benefit and make it less stigmatizing to seek assistance, but the overall influence of pharmaceutical industry advertising has added vast expense with little demonstrated advantage. As editors of major medical journals have learned, it is increasingly difficult to identify persons who have appropriate expertise to review pharmaceuticals who do not have significant potential conflicts of interest because of consultancies with the industry.

(pp. 96-97):

Consider some of the issues already discussed. Consistent implementation is impossible when each health plan has its own preferences and guidlelines and no one can speak for the profession. In some locations, plans come together to agree on a common format, but this is more the exception than the norm. Pharmaceutical companies spend massive amounts to influence (they say educate) physicians about drugs and consumers about treatments. It would be sensible to tax all pharmaceuticals and have this informational function performed by an agency that reviews the evidence objectively and disseminates accurate information to doctors and patients. Such public "detailing" has been advocated for decades and has been proven to work successfully, but it is hard to imagine the politics that could make it a reality in the United States. Other health systems, like the English National Health Service, have agencies such as the National Institute for Health and Clinical Excellence (NICE) whose role is to provide advice to the NHS and encourage doctors to use medications in a more evidence-based way, and the NHS uses its large buying power to bargain over price of pharmaceuticals. In contrast, the recent Medicare bill that extended pharmaceutical coverage explicitly forbade the government fromusing its purchasing power to keep drug prices down.

(p. 116):

The Institute of Medicine's (IOM) estimate that between forty-four thousand and ninety-eight thousand deaths and hundreds of thousands of injuries each year are dur to medical error has been widely disseminated. Some experts who work in the medical-error field believe this range to be an underestimate, while others see it as inflated. Nevertheless, there is no disagreement that we have a profound problem that requirse major interventions. Since the first IOM report in 2000, many corrective efforts have gone forward, but progress has been slow. It is difficult to change complex systems and the cultures and values they embody and get individuals to modify habitual work patterns. Improving quality of care is a multidimensional challenge that invovles technology, economic incentives, organizational coordination, and individual behavior-change strategies.

(p. 127):

As I repeatedly note, and it can't be overstated, the key to quality improvement is the implementation of an electronic medical record, the ability of systems to communicate, the capacity to identify high-risk situations and take preventive action, and the use of well-organized feedback to provide information about best practices, alerts, and opportunities to assess and correct performance. Many vendors offer a bewildering variety of informational systems and disease-management programs. Understanding and choosing wisely among them is challenging. CMS has a program to help physicians in small- to medium-sized practices adopt high-quality information technology, but it refuses, for understandable reasons, to endorse any particular vendor product or service, and this is often the kind of assistance doctors most need as they confront bewildering choices. Research on choice suggests that while people want choices, too many choices become bewildering, leading individuals to opt out.

(pp. 141-142):

We pay an extraordinarily high price for our reluctance to allocate care more thoughtfully and fairly. The inequities in access and provision of high-quality care contribute to our embarrassingly poor performance on morbidity and motality indicators compared with countries that are much less affluent. People lose not only by having too little care but also by receiving too much unneeded care, with the risk of injuries resulting from health care itself. Demand on government for more unrestricted health care provision and the rapid growth of health care expenditures compete with other important priorities and make it less likely that those priorities will be adequately financed. The need to pay more for health care requirse employers to limit wages and makes it difficult for individuals and families to balance their budgets. And despite the trade-offs between wages and salaries, total compensation packages, particularly in companies with aging workforces and many retirees receiving health benefits, make companies less competitive in global markets and more motivated to outsource work. Beyond the failure to get value for money, the willingness of our society to tolerate the health disenfranchisement of much of the population and the maldistribution of services in relation to need undermine a sense of community and furthers divisions between socioeconomic groups, races, age groups, and geographic areas.

From a section titled "Why Is Trust Important?" (pp. 145-146):

Life would be quite impossible if we couldn't trust that most people we deal with on a daily basis behave as we expect consistent with their roles, responsibilities, and relationships to us. Similarly, life would be very difficult if the less personal organizations and institutions we must deal with commonly failed to meet our expectations. We all understand that deviance and betrayal occasionally occur in personal relationships, and organizational malfeasance is not rare, but we hope and anticipate that these patterns are disruptions from normal states and not the usual state of affairs. In most activities -- whether driving in traffic, banking, purchasing stocks, filling prescriptions, or using public transportation -- where we have transactions with people we don't personally know, in order to get along reasonably we must assume that the norms and regulations in place to ensure order and responsible behavior will protect us from exploitation and harm. We know it is quite possible that another driver might disregard red lights and potentially threaten our lives, but we can't reasonably stop at every intersection to make sure that doesn't happen. We have to trust that the rules of the road are in place.

Trust involves expectations of how individuals and institutions will behave in their transactions with us, and it always involves risk, because there is no certainty. In many interactions the stakes are trivial and we can trust easily and not be much harmed if we are wrong. But the stakes also can be high and involve our fortunes, reputations, self-esteem, and even our lives. Being treated badly, and even lied to by an occasional storekeeper, may be no big deal; being lied to or betrayed by a lover, spouse, or dear friend is. Putting up with an incompetent and unresponsive telephone company, airline office, or automobile dealership may be frustrating and even a bit costly, but depending when one is seriously ill on an incompetent and unresponsive doctor or dysfunctional hospital involves bigger stakes.

Medical care is an aggregation of both small- and big-stake transactions, but trust is particularly important in patient-doctor relationships because of the intimate nature of aspects of taking medical history, physical examinations, and treatment; the effectiveness of the relationship may depend on the patient revealing intimate and privileged information. Also, successful treatment often depends on patients' cooperation and willingness to adhere to medical advice. Patients who distrust are less likely to share important information or follow the doctor's advice. Distrustful patients are also less likely to attain value such as encouragement, emotional support, and realistic optimism from the relationship. Misplaced trust can be costly, but to get the advantages of trust one has to assume some of the risks.

(pp. 147-148):

In the mid-1960s confidence in the federal government and most other institutions began to fall precipitously for many reasons; perhaps the most important was the war in Vietnam. It was in this period that public distrust of experts mounted and willingness to express dissent over government policy grew impressively. In the 1950s and early 1960s, approximately three-quarters of those surveyed said they trusted government, but by the mid-1970s it was approximately one-third. Among the attitudes associated with loss in confidence was the belief that government was run by big interests looking out for themselves, that public officials don't care what people like me think, and that quite a few people running government are crooked.

Many othe rinstitutions suffered a similar fate in loss of public confidence; by 2002, only about one-third of the public had confidence in major institutions such as government, business, labor, and the press. Confidence in medical leaders suffered a similar fate, falling sharply between 1966 and 1976 and continuing to fall, although more slowly, since then. Medicine retained some advantage over other institutions, since it had a larger distance to fall, but by the late 1990s medical leaders shared low standing with leaders of other major institutions. Social trust has much eroded in modern society, but personal trust in agents of at least some institutions has eroded much less. While most people have a low opinion of the American Congress, most people trust their specific member of Congress. Similarly, while people hold many negative beliefs about medical leaders and medicine as an institution, most trust their personal physicians. During the approximate period when trust in medical leaders was falling, surveys found little loss in patient faith in their doctors or in their satisfaction with care. Studies of patients noted increased questioning of doctors an dsome erosion of confidence in the doctor's authority, but the more significant pattern was the large gap between what people thought about medical leaders and doctors in the abstract and what they said about their own doctors and experiences.

From the New York Times, Nov. 28, David Cay Johnston, a piece called "'04 Income In U.S. Was Below 2000 Level":

Despite significant gains in 2004, the total income Americans reported ito the tax collector that year, adjusted for inflation, was still below its peak in 2000, new government data shows.

Reported income totaled $7.044 trillion in 2004, the latest year for which data is available, down from more than $7.143 trillion in 2000, new Internal Revenue Service data shows.

Total reported income, in 2004 dollars, fell 1.4 percent, but because the population grew during that period average real incomes declined more than twice as much, falling $1,641, or 3 percent, to $53,974.

A White House spokesman blamed the 2000 stock market bubble for distorting the figures. That's unlikely to impress anyone who didn't benefit from owning stock then, and for that matter isn't likely to please anyone who did own stock and got hosed. These are aggregate figures, so they ignore any zero-sum shift from poor to rich -- of which there seems to be quite a bit. But even if you buy the line that a rising tide raises all boats, the corollary is that with a sinking boat everyone gets wet.

Stephen Labaton, in a front page Oct. 29 New York Times article ("Businesses Seek New Protection From Litigation") writes:

Frustrated with a recent round of laws and regulations that have been used to sue big companies and auditing firms, corporate America -- with the encouragement of the Bush administration -- is preparing to fight back.

Now that corruption cases like Enron and WorldCom are falling out of the news, two influential industry groups with close ties to administration officials are hoping to swing the regulatory pendulum in the opposite direction. The groups are drafting proposals to provide broad new protections to corporations and accounting firms from criminal cases brought by federal and state prosecutors as well as a stronger shield against civil lawsuits from investors.

Although the details are still being worked out, the groups' proposals aim to limit the liability of accounting firms for the work they do on behalf of clients, to force prosecutors to target individual wrongdoers rather than entir ecompanies, and to scale back shareholder lawsuits.

The groups also hope to reduce what they see as some burdens imposed by the Sarbanes-Oxley Act landmark post-Enron legislation adopted in 2002. The law, which placed significant new auditing and governance requirements on companies, gave broad discretion for interpretion to the Securities and Exchange Commission.

To alleviate concerns that the new Congress may not adopt the proposals -- regardless of which party holds power in the legislative branch next year -- many are being tailored so that they could be adopted through rulemaking by the S.E.C. and enforcement policy changes at the Justice Department.

The first thing that struck me here is how prevalent the defense impulse is among the rich and powerful. No sooner had the Busheviks seized power than they started barricading themselves against the long reach of international law. Back in early 2001 the prospect of having their sorry asses hauled forth to the Hague had much the same hypothetical air, but five years later one thing we can say for sure is that exemption from ICC review hasn't made us less likely to commit war crimes or crimes against humanity. The threat of prosecution may not be the ideal way to encourage good behavior, but replacing it with indemnity -- all other factors remaining equal -- is damn sure likely to have the opposite effect.

My second thought was how typical this approach seems in an era where appearance is valued way above reality -- mostly because it's so much easier to fake appearance. What Enron and WorldCom did was actually something almost universal in the corporate world: they attempted to construct a façade that appeared even more successful than they actually were. Everyone does that, and it works as long as nobody looks too close at what's being covered up. So the idea here is to make it harder to look, to reduce the motivations for looking, and to reduce the risks if anyone still bothers. Only in a world where appearances are everything would anyone even suggest such a thing. But that's increasingly the world corporate titans and politicians live in, along with their market researchers, PR flacks, lobbyists and lawyers.

My third thought concerns victims. Corporate fraud is not a victimless crime. The best you can say is that in most cases all the victims lose is money, but it's hard to argue that money is a matter of little importance to them. They are, after all, the investors who provide the capital that capitalism depends on. Laws against corporate fraud and malfeasance aren't generally intended to harrass corporate management, except insofar as they ensure that management is responsible to the investors. So this is not a question of the rich screwing the poor -- investors include more of the middle class than used to be the case, but as a class they are anything but poor. No doubt the Busheviks like this because they have the same relationship to the voters as the corporate managers have to the investors, including a relish for whatever they can get away with. But take away the control that protect investors and eventually you'll hollow out the whole system. Much like Bush's abuse of trust has hollowed out America's democracy.

None of this means that the regulatory expense of trying to keep publically traded corporations honest and forthright isn't a burden on business. But if it is so, it may be because we got off on the wrong foot by requiring that corporations hire the auditors who certify their accounts. The obvious alternative is for the government to hire the auditors, which would establish that they work for the public, not for the corporation. Such a case would eliminate the temptation on both sides to fudge the books -- accounting firms lose the incentive, and corporations lose the opportunity. The audits could then be further reviewed, with practices standardized in an open and transparent process, which would greatly improve the quality of information provided to investors. Better information should, in turn, lead to more productive investments, which ought to be a plus for the entire economy.

For many years this wasn't much of a problem, mostly because accounting firms were isolated from other business relationships and regarded their integrity as important. I recall reading a study back in the early 1980s that ranked professions according to integrity vs. corruption: accountants had by far the highest rating, and lawyers by far the lowest. This changed primarily because of deregulation of financial services combined with lax antitrust enforcement that allowed for industry consolidation. Those things happened because the lobbyists pushing them weighed in far more strongly than common sense that might have given us pause -- and because the politicians of all stripes learned to follow the money.

These new proposals are so contrary to what we know about the behavior of corporate management that they should be laughed all the way back to K Street. But the system is so totally corrupt that you can't be sure that anything ridiculous won't find a way to slip through the cracks. Still, there's more wrong here than mere corruption. Much as we've lost grip on the notion that there is a public interest distinct from some weighted sum of private interests, we've lost our to distinguish between systems and actors. Capitalism depends on accurate investment and price information and competitive markets, but corporations often gain their advantages by subverting just those things. The SEC exists to protect capitalism from corporations, but we've gotten more and more confused on this point, in large part because we assume that the corporations are capitalism. Similarly, we assume that the actors in top management are the corporations.

Same thing happens when we assume that the executive branch is the government, and that the president is the executive branch. This sort of association shifts power to the top, not least by weakening checks and balances everywhere else. That may seem to work if you have someone at the top who looks out for all the other interests in the system. That more or less happens some of the time -- more so in the business world where competition has a sobering effect. But we have many other examples of what happens when that sort of power is han