Consumer Price Rise Puts Fed in Quandary

Consumer prices rose 2.7% in March from a year ago,
presenting a quandary for Federal Reserve officials who say their mission is to
keep the inflation rate lower.

The Fed has been predicting since the 2008 crisis that
immense economic slack—in the form of unemployed workers, vacant homes and idle
factories— would hold inflation down because it would make it more difficult
for firms to raise prices or workers to win wage increases. But inflation has
repeatedly moved above the Fed's expectations during the recovery.

Fed officials have said they would consider another round of
bond-buying, known as quantitative easing, to bring down long-term interest
rates if the recovery falters. They continue to expect inflation to slow
because of underused resources such as idled plants. But if it remains above
2%, it could make the Fed less willing to do any more to boost economic growth.
.
The Labor Department reported Friday its consumer price
index rose 0.3% in March from February and has advanced at a 3.7% annual rate
in the past three months after slowing late last year. Rising energy prices
were a primary factor, with gasoline costs up 9% in March from a year earlier.
Inflation has slowed from higher levels—as the Fed predicted last year—and
other measures of inflation are a bit tamer. For example, the Fed's preferred
yardstick, the Commerce Department's personal consumption expenditure price
index, was up 2.3% in February from a year earlier. Moreover, measures that
exclude food and energy are lower.

The Fed says its goal is to keep inflation at 2% in the long
run. It has predicted consumer prices would settle at or below that rate during
much of the economic recovery. In January, for instance, officials forecast
inflation between 1.4% and 1.8% by year's end. They will update that forecast
at their next policy meeting April 24-25. The low-inflation expectation also
underpins their decision to hold short-term interest rates near zero for years
to come.

In recent years, Fed officials have largely seen jumps in
gasoline prices as temporary. They correctly predicted last year that oil and
other commodities prices would settle down after jumping in early 2011. But
inflation's recent return above 2% has reignited a broader debate inside the
central bank about whether factors other than short-term bursts of energy costs
might be at play.

Some officials argue that there isn't as much slack in the
economy as is commonly believed, and thus inflation pressures have been
stronger than expected. The recession and financial crisis, this group of
officials argues, left structural problems in some markets that are creating
price pressures.

Housing is one example. Millions of homes remain unoccupied
five years after the housing bust, representing a large stock of unused
capacity that should be putting substantial downward pressure on housing costs.
But many people have opted to rent where supply is tight, in part because of
under-building of rentals during the home-ownership boom.

Associated Estates Realty Corp., a 53-property apartment
owner based in Richmond Heights, Ohio, has a 97% occupancy rate. "There
hasn't been a lot of new product built in the last four or five years, and we
have more renters coming into the pool," said Jeffrey Friedman, the
company's chief executive. The firm expects to raise rents 4% to 5% this year
to an average rate of about $1,000 a month.

Nationwide, rental costs were up 2.5% from a year earlier in
March, the Labor Department said Friday. A wing of inflation-wary officials at
the Fed see this kind of example as a reason to worry the Fed's policies are
fanning inflation pressures.

"The economy has experienced both a reduction in the
demand for goods and damage to its productive capacity," Narayana
Kocherlakota, president of the Minneapolis Fed, said in a speech in Minnesota
this week. "It does not appear that demand is significantly below the
productive capacity of the United States." Because of that, inflation
hasn't receded as much as the Fed forecast, he argues.

.
Wal-Mart is still expanding in China, despite higher food
prices and rising labor costs. The WSJ's Deborah Kan and Laurie Burkitt speak
to Wal-Mart Asia CEO Scott Price.
.
Many others in the central bank, including the Fed's most
powerful decision makers, disagree with Mr. Kocherlakota, who declined to
comment for this story. These officials believe there is still a great deal of
spare capacity in the economy which will hold inflation down despite temporary
spikes. High unemployment—at 8.2% in March, well above its long-run average of
less than 6%—is their key piece of evidence.

"There is still slack in the U.S. economy, and this is
really the important thing to focus on," New York Fed President William
Dudley told students at Syracuse University Friday. Because of that, he said he
expects inflation to fall below 2% by next year.

He added that new efforts by the Fed to spur growth would
"absolutely" be considered if the economy shows signs of faltering
and inflation remains well-behaved. His camp of officials argues that inflation
is not falling more in part because consumers and businesses have become
conditioned by 30 years of inflation stability to expect prices to move
predictably.

During the 1970s, oil-price jumps spurred inflation fears,
prompting workers to demand higher wages and companies to raise prices in
anticipation. Today, in contrast, top Fed officials believe that stable-price
expectations have prevented such anticipatory moves, meaning inflation doesn't
rise by very much.

Fed researchers have been wrestling with this question, too.
Fed staff at the central bank's last policy meeting in March revised downward
their estimates of the economy's potential output, a slight nod to the
Kocherlakota argument.

But the revisions were small and the staff argued to
officials that there still are lots of underused assets holding back inflation,
minutes of the Fed's March meeting show.

In War Against Iran, U.S. Firepower Would Vie With Guerrilla Tactics

By NATHAN HODGE
Adm. Jonathan Greenert made an important observation last
fall from the tower of the aircraft carrier USS John C. Stennis while in the
Strait of Hormuz on the southern coast of Iran, the world's busiest
oil-shipping lane.

The chief of naval operations was sailing in a flotilla that
showed off the Navy's overwhelming power to strike at long distances: F-18
fighter jets, Tomahawk cruise missiles and deck guns able to fire a shell 15
miles.


As concerns grow over Iran's nuclear program, the U.S. is
beginning to develop a plan in the event that military intervention is
necessary. Reports WSJ's Nathan Hodge, Iran has an inferior military that, in
many ways, could make it more dangerous.
.
Yet in the claustrophobic waters of the strait, which
narrows to just 24 miles, Adm. Greenert noted that all that long-range
firepower could potentially be countered by the Iranian patrol boats that came
out to track the U.S. warships. Faced with a fight in close quarters, Adm.
Greenert told a Senate panel recently, "You also may need a sawed-off
shotgun."

As the U.S. and other Western powers prepare to meet
Saturday in Istanbul with Iran to resume negotiations over its nuclear program,
the U.S. military is sharpening its contingency planning. Advocates of peaceful
engagement say economic sanctions against the Islamic regime are starting to
bite, and are hopeful that Tehran will give up its uranium-enrichment program.
Iran says the program is for use in electricity generation, but intelligence
services say the regime is close to developing the capability of building a
nuclear weapon. The Obama administration plays down the chances of a
breakthrough at this meeting, the first face-to-face encounter between US. and
Iranian diplomats in more than a year, saying the best outcome may be agreement
for a second round.

Should all else fail and the U.S. or Israel decide to attack
Iran, say analysts, they would face a miniature version of the U.S. military,
circa 1975—sustained, barely, by a world-wide spare-parts bazaar. Experts say
the Islamic Republic's claims of advanced weaponry—such as armed,
Predator-style drones—are mere boasts.

Spotlight on Iran
Take a look at key dates in the U.S.-Iran relationship and
recent international sanctions, details on major players, a map of major
nuclear sites, and possible naval strategies.

Military officers and defense analysts say the U.S. could
quickly overwhelm Iran's air defenses, leaving evenly spaced bomb craters, for
example, on runways to disable Iranian air bases. Pinpoint airstrikes would
attempt to destroy all Iran's known nuclear facilities—a goal complicated by
the fact that the regime has buried some of its production sites. The Pentagon
is rushing to upgrade its largest conventional bomb to better penetrate
fortified underground facilities.

Naval officers believe Iran would retaliate by waging the
naval equivalent of guerrilla warfare in the Persian Gulf by mining the Strait
of Hormuz or swarming U.S. naval vessels with small boats.

Such threats, so-called asymmetric warfare, could prove as
dangerous and unpredictable as roadside bombs in Afghanistan or Iraq, with an
low-cost mine potentially crippling or sinking a billion-dollar warship.

In such a scenario, the U.S. military would face a
time-consuming and often perilous effort to reopen shipping lanes to
international oil traffic.

"They have stayed true to their stripes," said a
senior military officer in the Middle East. "They have always taken an
asymmetric approach, going back to the '80s."

Before the 1979 Islamic Revolution, Iran had among the most
formidable conventional arsenals in the region, equipped with modern weaponry
sold to the Shah by U.S. defense firms.

Iran's military was later battered during eight years of war
with Iraq in the 1980s. Iran has since cobbled together an array of
weapons—some homegrown but much acquired from China, North Korea and the former
Soviet Union.
Plane captains stood by as a U.S. helicopter took off from
the flight deck of the aircraft carrier USS Abraham Lincoln in the Strait of
Hurmuz in February.
.
Iran has already threatened to block the Strait of Hormuz in
response to tighter international sanctions. Military analysts now estimate
Iran has amassed as many as 5,000 naval mines, ranging from rudimentary devices
that explode on contact, to high-tech mines that, tethered to the sea floor,
can identify the acoustic signature of specific types of ships and explode only
under the richest targets.

Scott Truver, a mine warfare analyst, said finding and
clearing Iranian mines would be a cat-and-mouse game for the Navy. Mine
warfare, he said "is as tough and dangerous as the IEDs on land were.
Mines are equally hard to detect, if not harder."

The U.S. Navy knows firsthand. In April 1988, the frigate
USS Samuel B. Roberts struck an Iranian mine, which blew a hole the size of a
pickup truck in the hull, and nearly sank the ship. The U.S. retaliated by
attacking two Iranian oil platforms and sinking several Iranian vessels.

Among the newest threats are sophisticated torpedoes Iran
acquired from Russia that can home in on the turbulence of a ship's wake and
aren't easily fooled by the decoys commonly used by warships.

Military planners worry about torpedoes launched from Iran's
three Russian-built Kilo submarines, as well as approximately four North Korean
Yono-class mini-submarines, the class of vessel that sank a South Korean
warship in 2010, killing 46 sailors.

Iran's mini-subs cannot range far or stay long under water.
But in the close quarters of the Strait of Hormuz, they could be easily
positioned for attacks.

Iran also is known for its fleet of hundreds of small
speedboats that can carry everything from machine guns to large antiship missiles.
While a single speedboat may not imperil a warship, a swarm of small boats
could overwhelm a larger ship's defenses. In early 2008, a cluster of Iranian
patrol boats sailed close to a convoy of U.S. warships. No shots were fired,
but the provocation underscored potential dangers.

Conventional naval vessels aren't the only concern. Iran can
deploy mines or even missiles from merchant vessels, or dhows. Such threats
would be nearly impossible to spot in the crowded shipping lanes of the Persian
Gulf.

Ten years ago, the Rumsfeld-era Pentagon held a top-secret
war game to test a Persian Gulf scenario. A maverick Marine Corps general, Lt.
Gen. Paul Van Riper, led the "Red Team," the fictional Iranian
adversary. Gen. Van Riper relayed orders to his front-line troops by motorcycle
messenger, so the U.S. could not hack into his networks; he sent out speedboats
armed with missiles and explosives to swarm U.S. warships. After the fictional
smoke cleared, more than a dozen U.S. warships were at the bottom of the Persian
Gulf.
That exercise, known as Millennium Challenge, was a wake-up
call about the potential of asymmetric warfare. The Navy has since unveiled
plans to boost the defenses of its ships in the Gulf.

Adm. Greenert said the Navy is interested in new robotic
underwater vehicles that can search for mines and submarines and improved
Gatling guns to counter Iranian small-boat attacks. The Navy has rushed to test
and field a new anti-torpedo torpedo—a weapon that would potentially counter
Iran's more sophisticated torpedoes.

The Navy recently announced plans to double its fleet of
Avenger-class minesweeping ships in the Persian Gulf.

The U.S. military is taking other steps. Earlier this year,
the Pentagon unveiled plans to refit a transport ship as a staging platform for
different kinds of missions, from countering mines to launching remotely
piloted aircraft. It also could be used as a platform for launching commando operations
with small patrol boats to intercept Iranian vessels, escort ships or protect
oil platforms.

Beyond the waters of the Persian Gulf, military planners
worry about Iran's expanding arsenal of ballistic missiles, built with North
Korean cooperation and know-how. The Defense Department estimates Iran has
around 1,000 short- and long-range missiles that can travel from 90 to 1,200
miles, the largest inventory in the Middle East.

The longer-range Shahab-3, which could reach Israel, has
received the most attention. But Iran's shorter-range Scuds are on mobile
platforms, allowing them to more easily evade detection.

Within striking distance of Iranian missiles are U.S. Army
installations in Kuwait, a command post in Qatar, and the U.S. Fifth Fleet in
Bahrain.

While relatively inaccurate, those missiles may have the
potential to strike panic or provoke a wider war if they hit U.S. allies in the
region. A retired Navy officer said the missiles don't have sophisticated
targeting but could score a blind hit on a Saudi oil field, a Qatari gas
production facility or a city in the United Arab Emirates. "Face it, how
accurate does it need to be?" he said.

Officials with Iran's elite Revolutionary Guards threaten
reprisals against any country used as a launch pad for strikes against Iran. A
conflict with Iran, then, could be a real-world test for U.S. missile-defense
plans. As part of a shift from Bush-era missile defense, which focused on defending
U.S. territory from a long-range missile attack, the Obama administration has
sought defenses against shorter-range Iranian missiles targeting U.S. troops
overseas, as well as allies.

There is also a presumed terror threat. Iran's Ministry of
Intelligence and Security could activate so-called sleeper agents for acts of
sabotage or terror attacks, according to U.S. officials. Militants sponsored or
trained by Iran might attack U.S. diplomatic facilities in Iraq or bases in the
Middle East.

"The assumption is that there are sleeper cells all
around that would be activated in some way," said retired Marine Corps
Gen. Anthony Zinni, the former head of U.S. Central Command, the U.S. military
headquarters that oversees the region.

Military professionals generally agree that U.S. forces
would quickly overwhelm Iran's air defenses. Former Air Force Chief of Staff
Gen. T. Michael Moseley, an architect of the shock-and-awe air campaign against
Saddam Hussein in 2003, said a U.S. air campaign could inflict "a sense of
strategic paralysis" on Iran's air defenses by targeting
command-and-control facilities, early warning radars and airfields.

But, Gen. Moseley said, Iran's air-defense system—comprised
of mostly older U.S. Hawk missiles and some surface-to-air missiles of Soviet
design—was "not a trivial" threat to U.S. aircraft. "Anything
that shoots at you merits some respect," he said.

Military officials said Iran's forces shouldn't be entirely
discounted. In the late 1970s, the Iranians "had all the latest and
greatest stuff" from the U.S., said Richard Brown, a Navy fighter pilot
who helped train Iranian aviators in Isfahan.

Iran maintains a fleet of Vietnam-era F-4 and F-5 jets,
according to defense analysts; its helicopter fleet, which includes versions of
the Chinook, the Cobra and the Huey, would look familiar to a U.S. military
veteran.

It still flies the F-14 Tomcat, made popular in the movie
"Top Gun." Iran was the only foreign military customer for the F-14,
once a high-end U.S. fighter.

Today, many of these aircraft are close to the end of their
service life. Aviation experts say Iran keeps them airworthy by cannibalizing
and reverse-engineering spare parts. Iran bought nearly 80 of the F-14s.
Analysts believe around 25 can still fly. By comparison, Saudi Arabia's fleet
of U.S.-made F-15 fighters outnumbers Iran's F-14s by about six to one.

Veterans of the 1970s training programs in Iran doubt the
Iranians have maintained enough parts to keep its U.S.-made aircraft in flying
condition. Ric Morrow, a naval aviator who worked on the Iranian F-14 training
program, said what remained of the Iranian air force would be "no
contest" for the U.S.

The air-to-air weapons built for Iran's aircraft also may
have outlived their shelf life. Steve Zaloga, a missile expert at the Teal
Group, a defense consultancy, said the solid rocket motors and batteries go bad
over time.

Some evidence suggests, however, that Iran operates a global
procurement network to buy spare U.S. military parts. Since 2007, the U.S. Justice
Department has handled more than two dozen export and embargo-related criminal
prosecutions related to military spare parts destined for Iran.

Clif Burns, an export attorney at the law firm Bryan Cave in
Washington, D.C., tracks such cases. He said Iran appeared to give shopping
lists to independent contractors who buy parts in the world's aviation market.
"The procurement effort is pretty large and enforcement alone isn't able
to stop the flow of aircraft parts into Iran," he said.

FOR BIG COMPANIES, LIFE IS GOOD--Large Corporations Emerge from Recession Leaner, Stronger—and Hiring Overseas

Big U.S. companies have emerged from the deepest recession
since World War II more productive, more profitable, flush with cash and less
burdened by debt.

An analysis by The Wall Street Journal of corporate
financial reports finds that cumulative sales, profits and employment last year
among members of the Standard & Poor's 500-stock index exceeded the totals
of 2007, before the recession and financial crisis.


Companies that survived the recession are ahead of where
they were in 2007 in terms of sales, profits and employment, but many of the
jobs they've added are overseas, Scott Thurm reports on the News Hub. Photos:
AP/AP/Reuters
.
Deep cost cutting during the downturn and caution during the
recovery put the companies on firmer financial footing, helping them to
outperform the rest of the economy and gather a greater share of the nation's
income. The rebound is reflected in the stock market, with the Dow Jones
Industrial Average at a four-year high.

"U.S. companies became leaner, meaner and
hungrier," said Sung Won Sohn, a former chief economist at Wells Fargo WFC
-3.41%& Co.,

The performance hasn't translated into significant gains in
U.S. employment. Many of the 1.1 million jobs the big companies added since
2007 were outside the U.S. So, too, was much of the $1.2 trillion added to
corporate treasuries. Two-thirds of Apple Inc.'s AAPL -2.82%$82 billion in cash
and marketable securities as of Sept. 30 was held by foreign subsidiaries, for
example.

RECESSION AND REBOUND
Most big U.S. companies emerged from the recession more
productive, as measured by revenue and net income per employee, and holding
more cash. See how individual companies fared on those measures during the
recession and recovery.

The Labor Department said Friday that employers added fewer
jobs than expected in March, reigniting concerns that the economic recovery
would stall again. Much of Europe is in recession and growth is slowing in
China. Even before Friday's report, analysts expected earnings from S&P 500
companies to rise 9% this year, down from 15% last year.

Overall, though, the Journal found that S&P 500
companies have become more efficient—and more productive. In 2007, the
companies generated an average of $378,000 in revenue for every employee on
their payrolls. Last year, that figure rose to $420,000.

Consider Agilent Technologies Inc., A -2.99%a Santa Clara,
Calif., maker of scientific equipment, that was suffering from the shock of the
economic crisis. In 2009, the company laid off 4,000 employees, or 20% of its
work force, as revenue plunged 22% and the company posted a loss.

.
When revenue began to rebound in 2010, Agilent resumed
hiring—but primarily outside the U.S., in countries such as China and Brazil.
Last year, Agilent's revenue was 22% higher than in 2007, boosted by its 2010
acquisition of Varian Inc. But Agilent employs fewer people than in 2007, even
after absorbing Varian's work force. And Agilent had more than $3.5 billion in
cash on Oct. 31, 2011, nearly twice as much as four years earlier.

But hiring? That's another matter. Chief Executive Bill
Sullivan says he remains "very, very cautious" about hiring while the
recession's scars are fresh. "That's a lesson current leaders of industry
will not forget," he says.


The Journal's analysis is based on data gathered by Standard
& Poor's Capital IQ from corporate filings with the Securities and Exchange
Commission. The analysis includes the 468 companies of the current S&P 500
that have reported financial results for last year.

The analysis also found a rebound in capital spending, that
is, spending on new plants and equipment. Agilent, for example, boosted capital
spending more than 50% last year, to $188 million from $121 million.

For the S&P companies as a group, capital expenditures
rose 19% last year, more than double the 9% increase in 2010. The sharper
increase brought capital spending back to 5.8% of total revenue for the
companies in the Journal's analysis, equal to its level in 2007.

Analysts say the recovery is favoring big companies, like
those in the Journal's analysis. Many smaller companies are struggling to stay
competitive or to obtain financing.

Big U.S. companies have emerged from the deepest recession
since World War II more productive, more profitable, flush with cash and less
burdened by debt.
.
"It's a real winners-versus-losers phenomenon,"
says John Graham, a professor of finance at Duke University. Mr. Graham directs
a quarterly survey of chief financial officers, with CFO Magazine. The March
survey found that finance chiefs of companies with revenue of more than $1
billion were significantly more optimistic about the U.S. economy and their own
companies' outlooks than their counterparts at smaller companies.

The Journal's analysis may overstate the health of American
corporations by looking only at the companies that survived the recession.

Some of the growth in revenues and earnings resulted from
mergers. The analysis excludes former titans like Lehman Brothers Holdings Inc.
and Circuit City Stores Inc., which failed or Anheuser-Busch Cos., which was
acquired by a foreign rival.

Many companies continue to struggle. Revenue at home
builders is less than half the peak levels from the last decade. Medical-device
maker Boston Scientific Corp. BSX -3.35%has shed more than 3,000 jobs since
2007, but its revenue continues to decline and the company posted losses in
four of the past five years.

A Boston Scientific spokesman declined to comment.

One reason for optimism among bigger companies is their
global reach, which helped many cushion the impact of the recession.

Revenue at McDonald's Corp. MCD -0.69%and Starbucks Corp.
SBUX +1.72%declined in 2009, then rebounded on strong sales outside the U.S. At
McDonald's, international revenue rose 24% since 2009, three times as fast as
in the U.S. At Starbucks, international revenue jumped 35% the past two years,
more than double the 14% increase in the U.S.
.The two consumer companies also boosted profit margins by
closing locations during the recession and adding menu items. Such moves are
spawning considerable amounts of cash. McDonald's spent $24 billion to pay
dividends and repurchase shares since 2007—and still boosted its cash holdings
18%, to $2.3 billion.

Foreign corporations also are looking at the U.S., pushing
American companies to be more nimble globally. When Chief Executive Paul Bisaro
arrived at generic-drug maker Watson Pharmaceuticals Inc. WPI +0.32%in 2007,
virtually all of its manufacturing was in the U.S. Mr. Bisaro bought a U.K.
drug maker, closed factories in North America and moved half of Watson's
manufacturing to India, in part to be closer to non-U.S. customers.

Mr. Bisaro kept four U.S. plants to make Watson's most
sophisticated products, installing new equipment and retooling the
manufacturing process. In 2007, the company's Davie, Fla., factory used 866
employees to crank out one billion extended-release pills and capsules. Last
year, 937 workers produced 2.5 billion items.

Watson was sheltered from the worst of the recession—its
annual revenue never declined—and could add employees while becoming more
efficient. Other companies didn't have that luxury.

Revenue at Union Pacific Corp. UNP -0.74%plunged 21% in 2009
as the recession cut railroad shipments. Union Pacific idled locomotives, shut
rail yards and eliminated more than 4,000 jobs—roughly 10% of its work force.
By last year, revenue rebounded to 20% above the 2007 level. But Union Pacific
still employs 10% fewer workers than before the recession.

A Union Pacific spokesman says the company plans to increase
capital expenditures this year " to focus on customers' logistics needs as
well as our own operating efficiency."

Such efficiency moves are essential for companies. But
economists warn that improved efficiency and continued executive caution are
slowing the recovery.

"What's best for an individual firm may not be best for
the overall economy," says Lynn Reaser, chief economist at Point Loma
Nazarene University in San Diego.

Health Case Ripples Outward

After three days of historic Supreme Court debate, the
political world and health-care companies confronted the prospect of President
Barack Obama's health law being wiped away, a decision that would upend years
of planning by businesses and roil the November elections.

Among those set to implement the law, insurers would have to
ditch changes to their businesses designed to bring in millions of new
customers. Provisions that have already gone into effect, including letting
children stay on their parents' insurance plans until they turn 26, would no
longer be required.


Justices in the Supreme Court's conservative majority said
Wednesday that it would be difficult to figure out which parts of the Obama
health-care law should survive if one part of it is judged unconstitutional.
Jess Bravin has details on The News Hub. Photo: Reuters.
.Companies facing the law's requirements would be reprieved,
including health firms set to pay new taxes and businesses that would have been
required to insure their employees or pay a fee.


As the affordable health care law arguments wrap at the
Supreme Court, WSJ's Peter Landers checks in on Mean Street to outline the next
steps in the legal process. Photo: Getty Images.
.
It is impossible to predict how the court will rule, but
skepticism from key justices heightened the possibility the 2010 health
overhaul could be overturned in June, when the court is set to announce its
opinion.

During the marathon arguments, the government's attorney was
grilled by the conservative majority over the constitutionality of the law's
central plank, the mandate to buy insurance. On Wednesday, the final day, the
court's conservatives appeared inclined to wipe away the entire law if it found
the mandate in error.

The same justices even questioned the basis for the law's
expansion of the Medicaid insurance program for the poor, giving credence to an
argument that even some of the challengers had declared a long shot.

Few disputed that untangling the law would be tricky if it
is overturned. It would leave "a mess," said Jon Kingsdale, a
managing director with Wakely Consulting Group and a former official of
Massachusetts' near-universal insurance system. "It just ripples
throughout Medicare and Medicaid and the private markets."

Neil Trautwein, a vice president at the National Retail
Federation, a Washington trade group that represents stores, said: "If the
clock went back and health-care reform was gone, we could live with that."
He said it would be "a little trickier" if the court decided to only
strike down parts of the law.

Under any outcome, the decision will wedge itself into the
2012 presidential election.

White House officials said they remained confident the law
would be upheld, and that it was impossible to predict the outcome. Ultimately,
one official argued, the election is likely to turn on the economy, not health
care, no matter what the ruling. Mr. Obama, who returned late Tuesday from
South Korea, was briefed by staff on the court deliberations.


.
Still, if all or part of the law is struck down, it would be
a blow to Mr. Obama and Democrats, and create a liability months before the
election. Republicans would hold up the victory as evidence the Obama
administration overreached in trying to expand the scope of federal power.
"To strike it down would send a chilling message to the administration's
agenda," said Rep. Tim Scott (R., S.C.).

Congressional leadership aides from both parties say a
health law left with holes would have no chance of getting patched until at
least after the election. What happens next would be largely driven by the
election result. Republicans want to repeal the law, and Democrats have little
incentive to restart work on a legislative fix, given how the law has thus far
been a political loser.

Lawyers for the Obama administration pressed the court on
Wednesday for its preferred outcome, which would be to scrap certain popular
insurance rules tied to the mandate, if the court was inclined to rule out the
mandate.

Justice Antonin Scalia called it "totally
unrealistic" to expect a court to "go through this enormous bill item
by item and decide each one." Justice Anthony Kennedy, a key swing vote,
suggested the justices may "lack the competence" to pick and choose
what parts should stay.

Chief Justice John Roberts, whose vote is also somewhat
unclear, asked several questions that appeared to further the case of the
challenger's attorney, Paul Clement, who argued the whole law be struck down.

The court could decide to strike down parts of the law. If
it nixed only the insurance mandate, insurers say premiums would skyrocket
because there would be nothing to stop people from waiting to buy coverage
until they got sick.

Health-industry officials on Wednesday began grappling with
a range of problematic outcomes and said there was little they could do to
prepare for them.

Molina Healthcare, which manages care for 1.7 million
low-income Medicaid members in 10 states, saw in the health law a growth
opportunity. Steven T. O'Dell, the senior vice president overseeing Molina's
growth strategy, said it was preparing for an influx that could as much as
double its membership as states boost Medicaid rolls to comply with the law.

If the law fails in the court, Mr. O'Dell said, the company
would turn instead to a state-by-state strategy, seeking to expand in states
that overhaul their own health systems or expand Medicaid. That is a decision
each state will make based on "politics and budget," he said.

If the entire law fell, many parts of the law already in
place would cease to exist, including checks for seniors to fill a gap in their
Medicare prescription-drug program and insurance pools covering nearly 50,000
Americans who otherwise can't get health insurance.

Planning for the main pieces of the law that are set to
begin in 2014—including new marketplaces where consumers can shop for policies
and subsidies designed to expand coverage to millions of lower earners—would
halt. Experts said it could be years before the U.S. again tackled the issue of
covering the tens of millions of Americans who lack insurance.

If only the mandate falls, insurers have scratched out
backup plans that could potentially be done with support from state officials.
These include offering narrow annual windows in which people could buy
policies, or allowing plans with narrower benefits and lower premiums, which
might entice younger and healthier people to sign up. They plan to press
Congress to get rid of the requirements most closely linked to the mandate,
should the court not strike those down, too. But with little political will
among Republicans to fix a law they dislike, there is little chance a federal
replacement to the mandate could get passed.

In states such as New Jersey, which in the 1990s guaranteed
policies to all applicants but didn't require all residents to carry coverage,
premiums rose about 30% over the first few years of the policy, said Robert
Laszewski, president of Health Policy and Strategy Associates, a consulting
firm, and a former insurance-industry executive.

Mr. Laszewski said insurers could decide to voluntarily keep
in place the requirement that children can stay on parents' plans, which the
Obama administration says has covered 2.5 million young adults. That change is
already priced into coming policies and isn't expensive, he said.

Justices Question Health Law

WASHINGTON—The Supreme Court's conservative justices sharply
challenged the Obama administration's health-care overhaul Tuesday, raising
clearly the prospect that its signature domestic achievement could be struck
down.

The court's liberal and conservative wings seemed inclined
to split evenly over the question of whether the "individual mandate"
requiring Americans to carry health insurance or pay a fee is constitutional.

Justice Anthony Kennedy—nearly always the court's deciding
vote—at times appeared to back the administration's position but also offered
one of the toughest tests to the mandate, suggesting the government faced
"a very heavy burden" on the requirement.

..
Justice Kennedy said the mandate took "a step beyond
what our cases have allowed," echoing in his line of questioning the nub
of the challengers' argument. Later, however, he seemed to show more sympathy
for the government's position.

Justice Antonin Scalia posed the challengers' favorite
hypothetical about the government's power over a market. "Everybody has to
buy food sooner or later, so you define the market as food, therefore,
everybody is in the market," he said. "Therefore, you can make people
buy broccoli."

The solicitor general, Donald Verrilli, seemed ready for the
argument, replying that food isn't a market in which a person's participation
is unpredictable or involuntary.

The skepticism of Justice Scalia and the other conservative
justices brought home the possibility that the insurance mandate could be
overturned. If so, that would raise the question of which parts of the law, if
any, could remain, a question the court was set to address Wednesday morning on
the final day of arguments.

The court's four liberal justices all seemed friendly toward
the law, and two conservative justices—Mr. Scalia and Samuel Alito—left little
doubt they would vote against it. Justice Clarence Thomas remained silent, as
is his custom, but his prior writings suggest little sympathy for the
government's position.

Apart from Justice Kennedy, Chief Justice John Roberts's
vote also appeared to be in question.

Rising to open the two-hour hearing, Mr. Verrilli seemed
almost overcome by the moment, choking momentarily as he opened his defense of
President Barack Obama's signature legislative achievement.

The stock prices of health insurers fell in the morning as
word emerged of Justice Kennedy's skeptical questioning, then recovered
somewhat as a fuller picture emerged.

Health insurers fear that if the mandate is struck down but
the rest of the law survives, they would be forced to accept millions more sick
customers without enough healthy customers to balance out the risk pool.

At the Supreme Court, the courtroom again was packed and
demonstrators outside filled the streets.

Inside, the justices finally arrived at the centerpiece of
the case after two years of legal battles, and they dived headfirst into
questioning what powers the federal government has, and when do they go too
far.

Mr. Verrilli immediately asserted the premise behind the
law: that virtually everyone already needs health care or eventually will. He
said the law doesn't force people to buy something they don't want, but rather
governs how they pay for something they inevitably will need.

The government described an existing nationwide market for
health services and said almost everyone already is part of it. The
challengers, joined by several conservative justices, saw the product in
question as health insurance—and said people have a right to stay out of that
market if they wish.

"Why do you define the market that broadly?"
Justice Scalia asked Mr. Verrilli. "It may well be that everybody needs
health care sooner or later, but not everybody needs a heart transplant."

"That's correct, Justice Scalia, but you never know
whether you're going to be that person," Mr. Verrilli replied, saying that
is why the American health-care system is largely financed through insurance.

The challengers conceded that the government could do many
things to regulate the health-care market, including requiring individuals to
pay for medical services with insurance or creating a system in which the
government pays for everyone's care.

The law aims "to get care for the ones who need it by having
everyone in the pool, but is also trying to preserve a role for the private
sector, for the private insurers," said Justice Ruth Bader Ginsburg.
"There's something very odd about that, that the government can take over
the whole thing and we all say, 'Oh, yes, that's fine,' but if the government
wants to preserve private insurers, it can't do that."

Paul Clement, an attorney representing 26 Republican-led
states challenging the law, said Congress had options beyond a "government
takeover." He said the government could simply use its taxing and spending
power to give insurers a subsidy that would enable them to offer coverage to
all comers.

Alternatively, he said, Congress could require people to
purchase insurance immediately before actually obtaining medical care.

"That would be regulating at the point of
purchase," when individuals would be voluntarily entering the health-care
market, Mr. Clement said.

"It seems as though you are just talking about a matter
of timing—that Congress can regulate the transaction, and the question is when
does it make best sense to regulate that transaction," said Justice Elena
Kagan. "And Congress surely has within its authority to decide…[that] it
makes sense to regulate it earlier."

Justice Kennedy, and to an extent Chief Justice Roberts,
seemed to take that position seriously.

Uninsured people, Justice Kennedy said, "are in the
market in the sense that they are creating a risk that the market must account
for."

Mr. Clement said that was true with any industry. "When
I'm sitting in my house deciding I'm not going to buy a car, I am causing the
labor market in Detroit to go south," he said. But he said that shouldn't
entitle the government to force him to buy a car.

Michael Carvin, an attorney representing private plaintiffs
including the National Federation of Independent Business, rejected the
government's premise that 40 million uninsured Americans are distorting the
health-care market by shifting costs of free emergency-room care to taxpayers
and insurance ratepayers.

"The failure to buy health insurance doesn't affect
anyone," Mr. Carvin said. "Defaulting on your payments to your
health-care provider does. Congress chose for whatever reason not to regulate
the harmful activity of defaulting on your health care provider," he said.

Justice Kennedy's response contained glimmers of hope for
both sides.

"I agree that that's what's happening here," he
said. While the government asserts the insurance market is unique, "in the
next case, it'll say the next market is unique," he said, cheering the
challengers.

But Justice Kennedy went on to suggest that "most
questions in life are matters of degree." And in a comment that pleased
the health-law's backers, he said uninsured young people are "very close
to affecting the rates of insurance and the costs of providing medical care in
a way that is not true in other industries."

The Supreme Court scheduled three days of arguments on the
law. During initial arguments Monday, the justices sent clear signals that they
believe they can rule on the health-care overhaul now, casting aside a possible
procedural hurdle.

A decision is expected by the end of June.

—Brent Kendall

Fed Hosts Global Gathering on Easy Money

WASHINGTON—The world's leading central bankers have spent
much of the past few months putting out financial fires and launching measures
aimed at recharging the global economy.

On Friday, they will gather here to gauge the impact of
their easy-money policies—including whether the controversial bond-buying
strategy known as "quantitative easing" is a good weapon to keep in
their monetary arsenals.

Enlarge Image


Close.
A number of researchers say it is, despite nagging
doubts.

Quantitative-easing programs "stimulate the economy
by reducing credit costs," concludes Mark Gertler, a New York University
professor, in a paper he will give Friday. The conference is sponsored by the
Federal Reserve and the International Journal of Central Banking.

The impact of these policies on unemployment and
inflation "is very similar to that occurring under conventional
policy," said the paper, which Mr. Gertler will present to an A-list of
central bankers, including Fed Chairman Ben Bernanke, Bank of England Governor
Mervyn King, Bank of Japan Governor Masaaki Shirakawa and Jean-Claude Trichet,
the former European Central Bank president. ECB chief Mario Draghi won't be
there.

Quantitative easing, or QE, refers to central-bank
purchases of long-term bonds or other securities to drive down long-term
interest rates and drive up the prices of other assets, such as stocks, to
encourage more spending and investment. It is an alternative to the traditional
tool of lowering or raising short-term interest rates.

Central banks including the Fed, the Bank of England and
the Bank of Japan have used the approach because short-term interest rates are
stuck near zero and can't be moved much lower to support growth. The ECB has
relied on other unconventional measures.

More
Bernanke Says Low Rates Didn't Fuel Bubble
.
Critics say these policies are doing more harm than good,
because they cause inflationary pressure without helping growth, damping
household spending power. Some worry, for example, that the policies are
pushing up commodity prices. Even many of those who are sympathetic to QE as a
necessary measure when conventional policy is impossible worry about its costs
and benefits.

Researchers like Mr. Gertler are increasingly taking the
view that the policies work and are incorporating them into formal economic
models for the Fed and other central banks to use in devising new policies.

One of Mr. Gertler's conclusions is that central-bank
purchases of government bonds are less effective than purchases of other
assets, like mortgage-backed securities—a conclusion reached in other academic
research in recent months.

Mr. Gertler's presentation is notable because he is a
friend of Mr. Bernanke's, and the two were close collaborators on economic
research during Mr. Bernanke's years as a Princeton University professor before
joining the Fed.

The two days of meetings are informal and aren't aimed at
setting new policy. But they could help shape how policy makers think about
their next steps.

The meetings, to take place at Washington's Madison
Hotel, will resemble the Fed's annual retreat to Jackson Hole, Wyo., in
everything but the vistas. They are centered on a series of academic
presentations by central bankers and university professors.

Donald Kohn, a Brookings Institution scholar and former
Fed vice chairman, said he hopes quantitative-easing programs won't be needed
in the future but that they "need to remain in the central bank tool
kit." He added that "the general public and many of its elected
representatives do not seem to be convinced of the efficacy of these actions or
that the benefits exceed the potential costs." He said central banks
"need to keep working on delineating and explaining costs and
benefits."

The timing of the conference is significant because many
of the world's central banks have recently completed a new round of measures
meant to stimulate economic growth and forestall another financial crisis.

The Bank of Japan and the Bank of England, for instance,
in recent months have increased asset-buying programs meant to drive long-term
interest rates lower. The Fed has revamped its communication policy and said it
would keep short-term interest rates low until late 2014.

The Fed has left open the option of more bond buying. But
officials have signaled that their decision will depend on how the economy
performs. Faster growth or a persistent pickup in inflation could take the
strategy off the table, while slower growth or inflation could spur the Fed to
act.

Mr. Bernanke will deliver brief opening remarks on
Friday, and Fed Vice Chair Janet Yellen will moderate a panel Saturday with Mr.
King and Mr. Shirakawa.

Canada, Hampered in U.S., Turns to the East

BEIJING -- Prime Minister Stephen Harper of Canada pledged
closer trade ties with China during a meeting with Premier Wen Jiabao on
Wednesday, even as he pressed Beijing over its recent decision to block a
United Nations Security Council resolution against Syria's government.

The trip is part of a broader strategic push by Canada to
more closely align itself with China and reduce its reliance on the U.S. Mr.
Harper aims to increase Canada's capacity to export oil and other resources to
China, an effort that has intensified following the Obama administration's
decision to reject for now TransCanada Corp.'s Keystone XL pipeline, which
would have shipped oil-sands crude from Alberta to the U.S. Gulf Coast.

Finding alternative markets for its natural resources has
become a top priority for Canada, which today sells nearly all of its oil to
the U.S., but sees environmental regulations from Washington as an increasing
impediment to its oil-export ambitions. In that quest, China looms large.

Analysts say the trip is a somewhat tricky one for Mr.
Harper, as he looks to promote deepening trade ties between the countries while
not appearing too cozy with Beijing. He joins other leaders, including German
Chancellor Angela Merkel, who have visited Beijing in recent weeks and
pressured China over its continued defense of regimes in Syria, Iran and
elsewhere.

"There was a view when we took office that you either
had to deal with the Chinese on economics or to deal with them on human rights
and consular matters, but you couldn't do both, and we refused to accept that
view," Mr. Harper said. "My view continues to be that it is possible
and necessary to raise with the Chinese a full range of issue as part of a
frank and productive relationship."

Mr. Harper said he pressed the Chinese premier over
Beijing's decision to block the Security Council resolution calling for Syrian
President Bashar al-Assad to step aside amid intensifying violence there.
"I raised in very clear and strong terms Canada's position on this
issue," Mr. Harper told reporters following his meeting with Mr. Wen.
"We would hope to see in the future action from the Security Council on
this matter, and I was very clear about that."

Mr. Harper, on his second trip to China since taking office
in 2006, declined to say how Mr. Wen responded. Chinese leaders weren't
available to comment on Wednesday, but the country's Foreign Ministry has
deflected criticism previously over the veto, arguing proponents of the
resolution against Syria pushed for a vote before differences had been
resolved. Russia, another permanent member of the Security Council, vetoed the
resolution as well.

For China, rising uncertainty over the reliability of supply
from its traditional oil providers, including Iran, has forced Beijing to
aggressively seek out alternatives across the globe. Canadian officials say the
country needs to harness China's rapid ascent in order to keep its own economy
churning.

"Diversifying our markets is a key priority for Canada
and we look forward to expanding our cooperation in many important areas
including energy, natural resources, tourism and education," Mr. Harper said
during his meeting with Mr. Wen. Mr. Wen, for his part, said China was
"ready to expand imports of energy and resource products," the
state-run Xinhua news agency reported.

In a sign of deepening business ties, the countries said
Wednesday they had finished negotiations on a new series of regulations that
aim to make investing in China easier for Canadian companies.

Canadian investment in China in 2010 increased by 38% to
almost $5 billion. Chinese investment in Canada rose 9% in that period, to $14
billion.