Stay the Course

Paul Krugman
Photo: Fred R. Conrad/The New York Times

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Paul Krugman
June 14, 2009 - The New York Times

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The debate over economic policy has taken a predictable yet ominous turn: the crisis seems to be easing, and a chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts. For those who know their history, it's déjà vu all over again — literally.

For this is the third time in history that a major economy has found itself in a liquidity trap, a situation in which interest-rate cuts, the conventional way to perk up the economy, have reached their limit. When this happens, unconventional measures are the only way to fight recession.

Yet such unconventional measures make the conventionally minded uncomfortable, and they keep pushing for a return to normalcy. In previous liquidity-trap episodes, policy makers gave in to these pressures far too soon, plunging the economy back into crisis. And if the critics have their way, we'll do the same thing this time.

The first example of policy in a liquidity trap comes from the 1930s. The U.S. economy grew rapidly from 1933 to 1937, helped along by New Deal policies. America, however, remained well short of full employment.

Yet policy makers stopped worrying about depression and started worrying about inflation. The Federal Reserve tightened monetary policy, while F.D.R. tried to balance the federal budget. Sure enough, the economy slumped again, and full recovery had to wait for World War II.

The second example is Japan in the 1990s. After slumping early in the decade, Japan experienced a partial recovery, with the economy growing almost 3 percent in 1996. Policy makers responded by shifting their focus to the budget deficit, raising taxes and cutting spending. Japan proceeded to slide back into recession.

And here we go again.

On one side, the inflation worriers are harassing the Fed. The latest example: Arthur Laffer, he of the curve, warns that the Fed's policies will cause devastating inflation. He recommends, among other things, possibly raising banks' reserve requirements, which happens to be exactly what the Fed did in 1936 and 1937 — a move that none other than Milton Friedman condemned as helping to strangle economic recovery.

Meanwhile, there are demands from several directions that President Obama's fiscal stimulus plan be canceled.

Some, especially in Europe, argue that stimulus isn't needed, because the economy is already turning around.

Others claim that government borrowing is driving up interest rates, and that this will derail recovery.

And Republicans, providing a bit of comic relief, are saying that the stimulus has failed, because the enabling legislation was passed four months ago — wow, four whole months! — yet unemployment is still rising. This suggests an interesting comparison with the economic record of Ronald Reagan, whose 1981 tax cut was followed by no less than 16 months of rising unemployment.

O.K., time for some reality checks.

First of all, while stock markets have been celebrating the economy's "green shoots," the fact is that unemployment is very high and still rising. That is, we're not even experiencing the kind of growth that led to the big mistakes of 1937 and 1997. It's way too soon to declare victory.

What about the claim that the Fed is risking inflation? It isn't. Mr. Laffer seems panicked by a rapid rise in the monetary base, the sum of currency in circulation and the reserves of banks. But a rising monetary base isn't inflationary when you're in a liquidity trap. America's monetary base doubled between 1929 and 1939; prices fell 19 percent. Japan's monetary base rose 85 percent between 1997 and 2003; deflation continued apace.

Well then, what about all that government borrowing? All it's doing is offsetting a plunge in private borrowing — total borrowing is down, not up. Indeed, if the government weren't running a big deficit right now, the economy would probably be well on its way to a full-fledged depression.

Oh, and investors' growing confidence that we'll manage to avoid a full-fledged depression — not the pressure of government borrowing — explains the recent rise in long-term interest rates. These rates, by the way, are still low by historical standards. They're just not as low as they were at the peak of the panic, earlier this year.

To sum up: A few months ago the U.S. economy was in danger of falling into depression. Aggressive monetary policy and deficit spending have, for the time being, averted that danger. And suddenly critics are demanding that we call the whole thing off, and revert to business as usual.

Those demands should be ignored. It's much too soon to give up on policies that have, at most, pulled us a few inches back from the edge of the abyss.

Audit Finds That US Overpaid Blackwater by Tens of Millions of Dollars

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Yochi J. Dreazen
June 16, 2009 - Wall Street Journal

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A government audit found that the State Department overpaid the contract-security firm once known as Blackwater Worldwide by tens of millions of dollars because the company failed to properly staff its teams in Iraq.

The report didn't identify any specific security breaches, but it said the State Department should have withheld at least $55 million in payments to the company because of the shortfalls.

The audit by the Special Inspector General for Iraq Reconstruction and the State Department's Inspector General said the firm didn't employ enough guards, medics, marksmen and dog handlers to fully man the teams, which were responsible for protecting the U.S. ambassador to Iraq and other high-level officials.

The failure to consistently field the right numbers of guards endangered the U.S. officials whom the company was being paid to protect, the report concluded.

"We believe the full manning of protective details is important to the safety of the principal being protected, as well as to the members of the protective details," the audit noted. "Insufficient manning exposed the department to unnecessary risk."

The audit also found that Blackwater, which this year changed its name to Xe, sometimes overcharged for airfare to and from Iraq and failed to properly account for some equipment received from the U.S. government.

Anne Tyrell, a company spokeswoman, said it had been "fully compliant with the terms and conditions of the contract." Ms. Tyrrell said the company believed it was entitled to all of the disputed $55 million.

Officials in the State Department's Diplomatic Security office, which oversaw the contract, referred questions to the department's Bureau of Administration, which declined to comment.

The audit is the latest report to raise questions about Blackwater, which was for years the best known Western contractor in Iraq. Under the new name, Xe, the company is seeking new contracts worth tens of millions of dollars in Afghanistan for services ranging from training Afghan personnel to flying cargo for the U.S. military.

Blackwater wound down its Iraq operations earlier this year, after the Iraqi government refused to renew its operating license because of a 2007 shooting incident involving one of its security teams in which 17 Iraqis died. In December, U.S. prosecutors charged five former Blackwater guards with manslaughter and weapons charges for their alleged roles in the incident. Families of several of the dead Iraqis have also sued Blackwater in federal court seeking financial compensation.

The company also faces civil and criminal scrutiny stemming from the alleged killing of an Iraqi guard by a Blackwater employee inside Baghdad's heavily protected Green Zone on Christmas Eve 2006.

In Afghanistan, four U.S. contractors affiliated with Xe are under U.S. military investigation in the shooting of a civilian vehicle in Kabul last month, wounding at least two Afghan civilians.

The company has said it is cooperating with the investigations into all three incidents but denied responsibility. When the five former guards were indicted in December, the company said it didn't believe "criminal violations occurred" but that the men should be held accountable for any wrongdoing. The company fired the guard involved in the Christmas Eve shooting, fined him thousands of dollars and sent him back to the U.S.

Last month, the company said it terminated the contracts of all four of the guards involved in the Kabul shooting.

Detainee says he lied to CIA in harsh interrogations

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Khalid Shaikh Mohammed, the self-proclaimed mastermind of the Sept. 11 attacks, told the U.S. military that he made up stories, documents show. The news could intensify the debate over interrogations.

Julian E. Barnes and Greg Miller
June 16, 2009 - Los Angeles Times

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Self-proclaimed Sept. 11 mastermind Khalid Shaikh Mohammed told U.S. military officials that he had lied to the CIA after being abused, according to documents made public Monday. The claim is likely to intensify the debate over whether harsh interrogation techniques generated accurate information.

Mohammed made the assertion during hearings at Guantanamo Bay, Cuba, where he was transferred in 2006after being held at secret CIA sites since his capture in 2003.

"I make up stories," Mohammed said, describing in broken English an interrogation probably administered by the CIA concerning the whereabouts of Al Qaeda leader Osama bin Laden. "Where is he? I don't know. Then, he torture me," Mohammed said of his interrogator. "Then I said, 'Yes, he is in this area.' "

Mohammed also appeared to say that he had fingered people he did not know as being Al Qaeda members in order to avoid abusive treatment. Although there is no way to corroborate his statements, Mohammed is one of the militants whom the CIA repeatedly subjected to the simulated-drowning technique known as waterboarding.

The newly released information could amplify calls for the Obama administration to make public more details about the treatment of terrorism suspects or allow a broader inquiry into the George W. Bush administration's interrogation policies. Monday's disclosure represented a rare allegation by a detainee that he had lied while being subjected to harsh practices.

A lawyer for the American Civil Liberties Union, which obtained the documents through a Freedom of Information Act lawsuit, said Mohammed's statements raised questions about the effectiveness of the CIA's interrogation program.

"It underscores the unreliability of statements obtained by torture," said Jameel Jaffer, director of the ACLU's National Security Project.

The CIA, however, took issue with the description of its interrogation techniques as torture and the assertion that they were not useful.

"The CIA plainly has a very different take on its past interrogation practices -- what they were and what they weren't -- and on the need to protect properly classified national security information," said Paul Gimigliano, an agency spokesman.

The bulk of the documents released Monday, consisting of transcripts of court hearings held at Guantanamo Bay for accused Al Qaeda members, had been previously released. But the Bush administration classified many parts of them, including detainees' allegations that they were abused while in CIA custody. The re-released transcripts remained heavily redacted, containing long passages of blacked-out text.

The ACLU expressed disappointment that President Obama, who has pledged greater openness, had decided to withhold so much of the information.

"The public has a right to know what took place in the CIA's secret prisons," Jaffer said, adding that the ACLU would continue to press in court for completely unclassified versions of transcripts from the Guantanamo Bay tribunals.

In addition to Mohammed's allegation that he had offered false information after being tortured, the documents contained some new details about the detention of terrorism suspects.

A newly declassified portion of Mohammed's transcript showed that the CIA apparently told him that he had no constitutional rights.

"This is what I understand he told me: You are not American and you are not on American soil," Mohammed said in the military hearing. "So you cannot ask about the Constitution."

Ben Wizner, the lead ACLU lawyer in the lawsuit seeking an unclassified version of the transcripts, said the fact that the CIA had previously sought to classify that statement was extraordinary.

"Why would the Bush administration suppress [Mohammed's] statement that he was told by the CIA that he was not protected by the Constitution?" Wizner said. "This was suppressed to avoid embarrassment."

The newly declassified material provided little new information on the treatment of another detainee, accused Al Qaeda facilitator Abu Zubaydah. He was captured in a violent raid on a Pakistani compound in March 2002.

On one page, the CIA declassified two paragraphs in which Abu Zubaydah complained about a lack of treatment for injuries he sustained in the shootout, including the loss of a testicle.

"They did not care about my injuries that they inflicted to my eye, to my stomach, to my bladder, and my left thigh and my reproductive organs," Abu Zubaydah said.

He went on to complain that he was "losing my masculinity. Even my beard is falling out, not from injuries but from the lack of treatment."

Wizner said the techniques the CIA used to interrogate Al Qaeda suspects were made public when the Obama administration this year released Justice Department legal memos authorizing them, so there was no reason to keep the detainees' testimony secret.

"There is only one explanation for the continued suppression. It is not to protect national security, it is to protect the CIA from accountability," Wizner said.

Despite the CIA's efforts to suppress prisoners' statements about their treatment, other sources have provided highly detailed accounts -- including a 2007 Red Cross report that surfaced publicly this year.

In that document, Abu Zubaydah described his reaction to being waterboarded, saying he thought he was going to die.

"I lost control of my urine," Abu Zubaydah told the Red Cross, according to the organization's report. "Since then I still lose control of my urine when under stress."

In the documents released Monday, Rahim Nashiri, who is accused of involvement in the bombing of the U.S. destroyer Cole in 2000, described the aftereffects of his questioning.

"Before I was arrested I used to be able to run about 10 kilometers," he said at the hearing in March 2007. "Now I cannot walk for more than 10 minutes. My nerves are swollen in my body."

And in another newly released portion of the transcript, he described how government officials would "drown me in water," a reference to the CIA's waterboarding technique.

More than 7 1/2 pages of the hearing transcript of Majid Khan, another accused Al Qaeda member, remained classified and appeared as one long block of blacked-out text. Among the few newly released statements of Khan's include his assertion that the evidence against him was a result of torture.

"In the end," he said, "any classified information you have is through [redacted] agencies who physically and mentally tortured me."

Water Risks Ripple Through the Beverage Industry

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Martinne Geller
June 16, 2009 - Reuters

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At New York's Del Posto, diners can share a $130 entree of wild branzino fish with roasted fennel and peperonata concentrato and a $3,600 bottle of Dom Perignon. They cannot share a bottle of Perrier or San Pellegrino water.

The Italian restaurant backed by celebrities Mario Batali and Joseph Bastianich is one of several shunning bottled water, along with the city of San Francisco and New York state.

"The argument for local water is compelling and obvious," said Bastianich, who is phasing out bottled water across his restaurant empire, which stretches to Los Angeles.

"It's about transportation, packaging, the absurdity of moving water all over the world," he said.

As environmental worries cut into sales from traditionally lucrative bottled water, beverage companies such as Coca-Cola, PepsiCo, Nestle and SABMiller are becoming more attuned to the risks of negative consumer environmental perceptions.

Water is becoming scarcer, raising a fear that so-far manageable price increases could spike and leading drink companies to take action to maintain access to water and fight their image as water hogs.

"Water is the new oil," said Steve Dixon, who manages the Global Beverage Fund at Arnhold & S. Bleichroeder, repeating what has become a mantra as climate change and population growth tax water supplies.

"As an investor, I'm not concerned about the reality," Dixon said, guessing there will always be enough water overall. "But I'm aware of the perceptions ... and you can't totally shrug it off because perceptions are important."

About a third of the world's people now live in areas of water stress, said Brooke Barton, manager of corporate accountability for Ceres, a network of environmental groups and investors seeking to address sustainability challenges. By 2025, she said it will be more like two-thirds.

COST

Water is still cheap, but that is changing.

"(Water) is currently not a very big cost. The issue is where it will it go in the future," said Andy Wales, head of sustainable development for brewer SABMiller, which used 94.5 billion liters of water in its latest fiscal year. That works out to 4.5 liters for every liter of beer it made.

Water and energy combined only made up 5 percent of its costs, overshadowed by brewing ingredients, bottling materials and labor. Still the brewer said water costs at a Bogota, Colombia plant are rising some 12 percent a year from increased soil being washed into the river as cattle grazing upstream causes deforestation.

New water pricing schemes are emerging, such as the European Union's Water Framework Directive that will tax water from 2010 to encourage more sustainable use.

Some 70 percent of the water the world uses is for agriculture, while industry uses 20 percent. But any industry reliant on agriculture -- from meat to jeans -- has more to wade through than its own use.

SABMiller is one of a few companies, including Coke and Pepsi, calculating "water footprints." It found that water used throughout its supply chain, such as to grow barley and hops, can be 34 times more than its use alone.

With 139 breweries on six continents, the brewer's total water use can range from about 40 liters for a liter of beer in Central Europe to 155 liters in South Africa. Using the smaller ratio as a proxy, SABMiller's entire "water footprint" was roughly 8.4 trillion liters of water last year, more than double what the small nation of Iceland used in 2004.

"In the long term we do see it as a risk," Wales said.

REPUTATION

As they face criticism, multinational drink companies are setting water conservation targets, building community wells and more efficient factories, working with locals on sustainable farming, water harvesting and reforestation and looking for new technologies to reduce their water consumption even as they make more drinks.

"For our type of business, or any that have a very direct link to water ... We've got to play that role," said Greg Koch, Coke's managing director of global water stewardship.

Within their own walls, nonalcoholic drink makers use one out of every 3,300 gallons, or 0.03 percent, of the groundwater used in the United States, according to the American Beverage Association. But its symbolism as a visible user puts the sector at the forefront of the fight over water resources, said Kim Jeffery, chief executive of Nestle Waters North America.

"Picking on our industry is like a gnat on the elephant," said Jeffery, whose 2003 contract to build a bottling plant in McCloud, California has been derailed by opposition from residents and groups concerned about the environmental impact and the threat of water privatization.

Nestle just began a 3-year study of the area's resources, but Jeffery said there is a good chance the project will never happen, due to changing economics and cold feet on both sides.

"At the end of the day, if they don't want us there, we won't be there," he said.

Tom Pirko, president of consulting firm Bevmark LLC, said it is key for companies to act in line with consumers' mindsets on such issues, since it is hard in such a crowded marketplace to regain support once it evaporates.

Coca-Cola learned that the hard way, after a drought in the Indian state of Kerala led to the closure of its bottling plant there amid criticism that it was sucking the water table dry.

Coke said its plant did not fuel the shortages, but an outcry still spread across the globe, with students in Britain and North America urging boycotts. Massachusetts' Smith College even severed a five-decade relationship with the company by refusing to let it bid for its soft drink contract.

"What we lost there was the social license to operate," Koch said. Environmental and community groups are still fighting to kick Coke out of other villages in India.

"When the consumer turns against you, you're dead," Pirko said.

CIA Axes $1000-A-Day Waterboarding Experts

Psychologists Bruce Jessen, left, and Jim Mitchell shaped the CIA's interrogation program of al Qaeda detainees, including Abu Zubaydah. Both refused to speak to ABC News citing confidentiality agreements with the U.S. government.(ABC News)

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'Architects' of Enhanced Interrogation Program Among Recent Contractor Purge

Matthew Cole
June 16, 2009 - ABC News

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The CIA has reportedly cut its ties to the two psychologists credited for being the architects of the CIA's brutal interrogation program after 9/11, a news report said yesterday. Dr. James Mitchell and Dr. Bruce Jessen, who suggested and supervised waterboarding at secret prisons around the world have been told their services are no longer needed. Mitchell and Jessen, according to their associates, boasted of being paid $1,000 a day by the CIA to oversee the use of the technique on top al Qaeda suspects.

Their firings came during a purge by CIA Director Leon Panetta of all contractors involved in the interrogation program. In early April, Panetta told CIA employees that contractors involved in the interrogation program and secret prisons were being "promptly terminated."