fter weeks of taking fire over veterans' accusations that he had lied about his Vietnam service record to win medals and build a political career, Senator John Kerry shot back yesterday, calling those statements categorically false and branding the people behind them tools of the Bush campaign.

His decision to take on the group directly was a measure of how the group that calls itself Swift Boat Veterans for Truth has catapulted itself to the forefront of the presidential campaign. It has advanced its cause in a book, in a television advertisement and on cable news and talk radio shows, all in an attempt to discredit Mr. Kerry's war record, a pillar of his campaign.

How the group came into existence is a story of how veterans with longstanding anger about Mr. Kerry's antiwar statements in the early 1970's allied themselves with Texas Republicans.

Mr. Kerry called them "a front for the Bush campaign" - a charge the campaign denied.

A series of interviews and a review of documents show a web of connections to the Bush family, high-profile Texas political figures and President Bush's chief political aide, Karl Rove.

Records show that the group received the bulk of its initial financing from two men with ties to the president and his family - one a longtime political associate of Mr. Rove's, the other a trustee of the foundation for Mr. Bush's father's presidential library. A Texas publicist who once helped prepare Mr. Bush's father for his debate when he was running for vice president provided them with strategic advice. And the group's television commercial was produced by the same team that made the devastating ad mocking Michael S. Dukakis in an oversized tank helmet when he and Mr. Bush's father faced off in the 1988 presidential election.

The strategy the veterans devised would ultimately paint John Kerry the war hero as John Kerry the "baby killer" and the fabricator of the events that resulted in his war medals. But on close examination, the accounts of Swift Boat Veterans for Truth' prove to be riddled with inconsistencies. In many cases, material offered as proof by these veterans is undercut by official Navy records and the men's own statements.

Several of those now declaring Mr. Kerry "unfit" had lavished praise on him, some as recently as last year.

In an unpublished interview in March 2003 with Mr. Kerry's authorized biographer, Douglas Brinkley, provided by Mr. Brinkley to The New York Times, Roy F. Hoffmann, a retired rear admiral and a leader of the group, allowed that he had disagreed with Mr. Kerry's antiwar positions but said, "I am not going to say anything negative about him." He added, "He's a good man."

In a profile of the candidate that ran in The Boston Globe in June 2003, Mr. Hoffmann approvingly recalled the actions that led to Mr. Kerry's Silver Star: "It took guts, and I admire that."

George Elliott, one of the Vietnam veterans in the group, flew from his home in Delaware to Boston in 1996 to stand up for Mr. Kerry during a tough re-election fight, declaring at a news conference that the action that won Mr. Kerry a Silver Star was "an act of courage." At that same event, Adrian L. Lonsdale, another Vietnam veteran now speaking out against Mr. Kerry, supported him with a statement about the "bravado and courage of the young officers that ran the Swift boats."

"Senator Kerry was no exception," Mr. Lonsdale told the reporters and cameras assembled at the Charlestown Navy Yard. "He was among the finest of those Swift boat drivers."

Those comments echoed the official record. In an evaluation of Mr. Kerry in 1969, Mr. Elliott, who was one of his commanders, ranked him as "not exceeded" in 11 categories, including moral courage, judgment and decisiveness, and "one of the top few" - the second-highest distinction - in the remaining five. In written comments, he called Mr. Kerry "unsurpassed," "beyond reproach" and "the acknowledged leader in his peer group."

The Admiral Calls

It all began last winter, as Mr. Kerry was wrapping up the Democratic nomination. Mr. Lonsdale received a call at his Massachusetts home from his old commander in Vietnam, Mr. Hoffmann, asking if he had seen the new biography of the man who would be president.

Mr. Hoffmann had commanded the Swift boats during the war from a base in Cam Ranh Bay and advocated a search-and-destroy campaign against the Vietcong - the kind of tactic Mr. Kerry criticized when he was a spokesman for Vietnam Veterans Against the War in 1971. Shortly after leaving the Navy in 1978, he was issued a letter of censure for exercising undue influence on cases in the military justice system.

Both Mr. Hoffmann and Mr. Lonsdale had publicly lauded Mr. Kerry in the past. But the book, Mr. Brinkley's "Tour of Duty," while it burnished Mr. Kerry's reputation, portrayed the two men as reckless leaders whose military approach had led to the deaths of countless sailors and innocent civilians. Several Swift boat veterans compared Mr. Hoffmann to the bloodthirsty colonel in the film "Apocalypse Now" - the one who loves the smell of Napalm in the morning.

The two men were determined to set the record, as they saw it, straight.

"It was the admiral who started it and got the rest of us into it," Mr. Lonsdale said.

Mr. Hoffmann's phone calls led them to Texas and to John E. O'Neill, who at one point commanded the same Swift boat in Vietnam, and whose mission against him dated to 1971, when he had been recruited by the Nixon administration to debate Mr. Kerry on "The Dick Cavett Show."

Mr. O'Neill, who pressed his charges against Mr. Kerry in numerous television appearances Thursday, had spent the 33 years since he debated Mr. Kerry building a successful law practice in Houston, intermingling with some of the state's most powerful Republicans and building an impressive client list. Among the companies he represented was Falcon Seaboard, the energy firm founded by the current lieutenant governor of Texas, David Dewhurst, a central player in the Texas redistricting plan that has positioned state Republicans to win more Congressional seats this fall.

Mr. O'Neill said during one of several interviews that he had come to know two of his biggest donors, Harlan Crow and Bob J. Perry, through longtime social and business contacts.

Mr. Perry, who has given $200,000 to the group, is the top donor to Republicans in the state, according to Texans for Public Justice, a nonpartisan group that tracks political donations. He donated $46,000 to President Bush's campaigns for governor in 1994 and 1998. In the 2002 election, the group said, he donated nearly $4 million to Texas candidates and political committees.

Mr. Rove, Mr. Bush's top political aide, recently said through a spokeswoman that he and Mr. Perry were longtime friends, though he said they had not spoken for at least a year. Mr. Rove and Mr. Perry have been associates since at least 1986, when they both worked on the gubernatorial campaign of Bill Clements.

Mr. O'Neill said he had known Mr. Perry for 30 years. "I've represented many of his friends,'' Mr. O'Neill said. Mr. Perry did not respond to requests for comment.

Mr. O'Neill said he had also known Mr. Crow for 30 years, through mutual friends. Mr. Crow, the seventh-largest donor to Republicans in the state according to the Texans for Public Justice, has donated nowhere near as much money as Mr. Perry to the Swift boat group. His family owns one of the largest diversified commercial real estate companies in the nation, the Trammell Crow Company, and has given money to Mr. Bush and his father throughout their careers. He is listed as a trustee of the George Bush Presidential Library Foundation.

One of his law partners, Margaret Wilson, became Mr. Bush's general counsel when he was governor of Texas and followed him to the White House as deputy counsel for the Department of Commerce, according to her biography on the law firm's Web site.

Another partner, Tex Lezar, ran on the Republican ticket with Mr. Bush in 1994, as lieutenant governor. They were two years apart at Yale, and Mr. Lezar worked for the attorney general's office in the Reagan administration. Mr. Lezar, who died last year, was married to Merrie Spaeth, a powerful public relations executive who has helped coordinate the efforts of Swift Boat Veterans for Truth.

In 2000, Ms. Spaeth was spokeswoman for a group that ran $2 million worth of ads attacking Senator John McCain's environmental record and lauding Mr. Bush's in crucial states during their fierce primary battle. The group, calling itself Republicans for Clean Air, was founded by a prominent Texas supporter of Mr. Bush, Sam Wyly.

Ms. Spaeth had been a communications official in the Reagan White House, where the president's aides had enough confidence in her to invite her to help prepare George Bush for his vice-presidential debate in 1984. She says she is also a close friend of Senator Kay Bailey Hutchison of Texas, a client of Mr. Rove's. Ms. Spaeth said in an interview that the one time she had ever spoken to Mr. Rove was when Ms. Hutchison was running for the Texas treasurer's office in 1990.

When asked if she had ever visited the White House during Mr. Bush's tenure, Ms. Spaeth initially said that she had been there only once, in 2002, when Kenneth Starr gave her a personal tour. But this week Ms. Spaeth acknowledged that she had spent an hour in the Old Executive Office Building, part of the White House complex, in the spring of 2003, giving Mr. Bush's chief economic adviser, Stephen Friedman, public speaking advice. Asked if it was possible that she had worked with other administration officials, Ms. Spaeth said, "The answer is 'no,' unless you refresh my memory.''

"Is the White House directing this?" Ms. Spaeth said of the organization. "Absolutely not.''

Another participant is the political advertising agency that made the group's television commercial: Stevens Reed Curcio & Potholm, based in Alexandria, Va. The agency worked for Senator McCain in 2000 and for Mr. Bush's father in 1988, when it created the "tank" advertisement mocking Mr. Dukakis. A spokesman for the Swift boat veterans said the organization decided to hire the agency after a member saw one of its partners speaking on television.

About 10 veterans met in Ms. Spaeth's office in Dallas in April to share outrage and plot their campaign against Mr. Kerry, she and others said. Mr. Lonsdale, who did not attend, said the meeting had been planned as "an indoctrination session."

What might have been loose impressions about Mr. Kerry began to harden.

"That was an awakening experience," Ms. Spaeth said. "Not just for me, but for many of them who had not heard each other's stories."

The group decided to hire a private investigator to investigate Mr. Brinkley's account of the war - to find "some neutral way of actually questioning people involved in these incidents,'' Mr. O'Neill said.

But the investigator's questions did not seem neutral to some.

Patrick Runyon, who served on a mission with Mr. Kerry, said he initially thought the caller was from a pro-Kerry group, and happily gave a statement about the night Mr. Kerry won his first Purple Heart. The investigator said he would send it to him by e-mail for his signature. Mr. Runyon said the edited version was stripped of all references to enemy combat, making it look like just another night in the Mekong Delta.

"It made it sound like I didn't believe we got any returned fire," he said. "He made it sound like it was a normal operation. It was the scariest night of my life."

By May, the group had the money that Mr. O'Neill had collected as well as additional veterans rallied by Mr. O'Neill, Mr. Hoffmann and others. The expanded group gathered in Washington to record the veterans' stories for a television commercial.

Each veteran's statement was written down as an affidavit and sent to him to sign and have notarized. But the validity of those affidavits soon came into question.

Mr. Elliott, who recommended Mr. Kerry for the Silver Star, had signed one affidavit saying Mr. Kerry "was not forthright" in the statements that had led to the award. Two weeks ago, The Boston Globe quoted him as saying that he felt he should not have signed the affidavit. He then signed a second affidavit that reaffirmed his first, which the Swift Boat Veterans gave to reporters. Mr. Elliott has refused to speak publicly since then.

John Kerry, hands on hips, and
Roy F. Hoffmann, kneeling, in Vietnam.
Mr. Hoffman helped start a group that
criticizes Mr. Kerry.

The Questions

The book outlining the veterans' charges, "Unfit for Command: Swift Boat Veterans Speak Out Against Kerry," has also come under fire. It is published by Regnery, a conservative company that has published numerous books critical of Democrats, and written by Mr. O'Neill and Jerome R. Corsi, who was identified on the book jacket as a Harvard Ph.D. and the author of many books and articles. But Mr. Corsi also acknowledged that he has been a contributor of anti-Catholic, anti-Muslim and anti-Semitic comments to a right-wing Web site. He said he regretted those comments.

The group's arguments have foundered on other contradictions. In the television commercial, Dr. Louis Letson looks into the camera and declares, "I know John Kerry is lying about his first Purple Heart because I treated him for that injury." Dr. Letson does not dispute the wound - a piece of shrapnel above Mr. Kerry's left elbow - but he and others in the group argue that it was minor and self-inflicted.

Yet Dr. Letson's name does not appear on any of the medical records for Mr. Kerry. Under "person administering treatment" for the injury, the form is signed by a medic, J. C. Carreon, who died several years ago. Dr. Letson said it was common for medics to treat sailors with the kind of injury that Mr. Kerry had and to fill out paperwork when doctors did the treatment.

Asked in an interview if there was any way to confirm he had treated Mr. Kerry, Dr. Letson said, "I guess you'll have to take my word for it."

The group also offers the account of William L. Schachte Jr., a retired rear admiral who says in the book that he had been on the small skimmer on which Mr. Kerry was injured that night in December 1968. He contends that Mr. Kerry wounded himself while firing a grenade.

But the two other men who acknowledged that they had been with Mr. Kerry, Bill Zaladonis and Mr. Runyon, say they cannot recall a third crew member. "Me and Bill aren't the smartest, but we can count to three," Mr. Runyon said in an interview. And even Dr. Letson said he had not recalled Mr. Schachte until he had a conversation with another veteran earlier this year and received a subsequent phone call from Mr. Schachte himself.

Mr. Schachte did not return a telephone call, and a spokesman for the group said he would not comment.

The Silver Star was awarded after Mr. Kerry's boat came under heavy fire from shore during a mission in February 1969. According to Navy records, he turned the boat to charge the Vietcong position. An enemy solider sprang from the shore about 10 feet in front of the boat. Mr. Kerry leaped onto the shore, chased the soldier behind a small hut and killed him, seizing a B-40 rocket launcher with a round in the chamber.

Swift Boat Veterans for Truth describes the man Mr. Kerry killed as a solitary wounded teenager "in a loincloth," who may or may not have been armed. They say the charge to the beach was planned the night before and, citing a report from one crew member on a different boat, maintain that the sailors even schemed about who would win which medals.

The group says Mr. Kerry himself wrote the reports that led to the medal. But Mr. Elliott and Mr. Lonsdale, who handled reports going up the line for recognition, have previously said that a medal would be awarded only if there was corroboration from others and that they had thoroughly corroborated the accounts.

"Witness reports were reviewed; battle reports were reviewed," Mr. Lonsdale said at the 1996 news conference, adding, "It was a very complete and carefully orchestrated procedure." In his statements Mr. Elliott described the action that day as "intense" and "unusual."

According to a citation for Mr. Kerry's Bronze Star, a group of Swift boats was leaving the Bay Hap river when several mines detonated, disabling one boat and knocking a soldier named Jim Rassmann overboard. In a hail of enemy fire, Mr. Kerry turned the boat around to pull Mr. Rassmann from the water.

Mr. Rassmann, who says he is a Republican, reappeared during the Iowa caucuses this year to tell his story and support Mr. Kerry, and is widely credited with helping to revive Mr. Kerry's campaign.

But the group says that there was no enemy fire, and that while Mr. Kerry did rescue Mr. Rassmann, the action was what anyone would have expected of a sailor, and hardly heroic. Asked why Mr. Rassmann recalled that he was dodging enemy bullets, a member of the group, Jack Chenoweth, said, "He's lying."

"If that's what we have to say," Mr. Chenoweth added, "that's how it was."

Several veterans insist that Mr. Kerry wrote his own reports, pointing to the initials K. J. W. on one of the reports and saying they are Mr. Kerry's. "What's the W for, I cannot answer," said Larry Thurlow, who said his boat was 50 to 60 yards from Mr. Kerry's. Mr. Kerry's middle initial is F, and a Navy official said the initials refer to the person who had received the report at headquarters, not the author.

A damage report to Mr. Thurlow's boat shows that it received three bullet holes, suggesting enemy fire, and later intelligence reports indicate that one Vietcong was killed in action and five others wounded, reaffirming the presence of an enemy. Mr. Thurlow said the boat was hit the day before. He also received a Bronze Star for the day, a fact left out of "Unfit for Command."

Asked about the award, Mr. Thurlow said that he did not recall what the citation said but that he believed it had commended him for saving the lives of sailors on a boat hit by a mine. If it did mention enemy fire, he said, that was based on Mr. Kerry's false reports. The actual citation, Mr. Thurlow said, was with an ex-wife with whom he no longer has contact, and he declined to authorize the Navy to release a copy. But a copy obtained by The New York Times indicates "enemy small arms," "automatic weapons fire" and "enemy bullets flying about him." The citation was first reported by The Washington Post on Thursday.

Standing Their Ground

As serious questions about its claims have arisen, the group has remained steadfast and adaptable.

This week, as its leaders spoke with reporters, they have focused primarily on the one allegation in the book that Mr. Kerry's campaign has not been able to put to rest: that he was not in Cambodia at Christmas in 1968, as he declared in a statement to the Senate in 1986. Even Mr. Brinkley, who has emerged as a defender of Mr. Kerry, said in an interview that it was unlikely that Mr. Kerry's Swift boat ventured into Cambodia at Christmas, though he said he believed that Mr. Kerry was probably there shortly afterward.

The group said it would introduce a new advertisement against Mr. Kerry on Friday. What drives the veterans, they acknowledge, is less what Mr. Kerry did during his time in Vietnam than what he said after. Their affidavits and their television commercial focus mostly on those antiwar statements. Most members of the group object to his using the word "atrocities" to describe what happened in Vietnam when he returned and became an antiwar activist. And they are offended, they say, by the gall of his running for president as a hero of that war.

"I went to university and was called a baby killer and a murderer because of guys like Kerry and what he was saying," said Van Odell, who appears in the first advertisement, accusing Mr. Kerry of lying to get his Bronze Star. "Not once did I participate in the atrocities he said were happening."

As Mr. Lonsdale explained it: "We won the battle. Kerry went home and lost the war for us.

"He called us rapers and killers and that's not true," he continued. "If he expects our loyalty, we should expect loyalty from him."

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August 20, 2004

relentless rise in the cost of employee health insurance has become a significant factor in the employment slump, as the labor market adds only a trickle of new jobs each month despite nearly three years of uninterrupted economic growth.

Government data, industry surveys and interviews with employers big and small indicate that many businesses remain reluctant to hire full-time employees because health insurance, which now costs the nation's employers an average of about $3,000 a year for each worker, has become one of the fastest-growing costs for companies. Health premiums are sapping corporate balance sheets even more than the rising cost of energy.

In the second quarter, the cost of health benefits rose at a 12-month rate of 8.1 percent - more than three times the inflation rate and the rate of increases in wages and salaries.

"Health care is a major reason why employment growth has been so sluggish," said Sung Won Sohn, the chief economist at Wells Fargo.

Although the economy emerged from recession long ago, posting 11 straight quarters of growth, there are still about a million fewer jobs in the United States than there were at the beginning of 2001, just before the country sank into recession.

A spurt in job growth between March and May raised hopes that employment would emerge from the doldrums. But job growth slowed sharply again in June and came to a virtual standstill last month. In July, businesses added a mere 32,000 jobs, and for the first time this year more businesses let workers go than hired new ones.

Because of the cost of health insurance, "we are making decisions not to hire people," said Steve Hayes, the owner of Custom Electronics in Falmouth, Me., which installs electronic systems like home theaters and communications networks in homes and offices. "Before, we hired based on workload," he added. "Now it's a question of affordability."

Mr. Hayes said his health insurance premiums had risen by 22 percent a year in the last four years. He now pays $4,150 a month in health insurance premiums for his 33 employees, and the workers contribute an equal amount from their own pockets. The company's revenue - less than $5 million annually - has been growing briskly, he said, but outlays for health benefits are growing even faster, eating into the company's profits.

The increase in health insurance premiums reflects the rising cost of health care, which is being driven by expensive new drugs, many of them heavily advertised to consumers; medical advances including diagnostic tests that require costly new machines; and a reaction to past restrictions in managed care health plans that sought to rein in costs.

In the presidential campaign, both candidates have proposed measures for tackling the high cost of health insurance, including tax credits for small businesses and low-income people.

President Bush has pointed out that consumers can buy relatively inexpensive, high-deductible insurance to protect against catastrophic illnesses and can pay for routine care with new tax-free health savings accounts.

He also favors pending legislation that would let small businesses get volume discounts by buying insurance through trade associations, a plan that is opposed by many insurers, state insurance officials and some influential Senate Republicans. Critics say they are concerned that those associations would be largely exempt from state regulation and their insurance pools might attract healthier people, driving up costs for those who stay in the traditional insurance market.

Senator John Kerry's campaign plans to weigh in today with its own study of the link between rising health care costs and the employment slump. A summary of the report, which was prepared by Laura D. Tyson, who served as an economic adviser to President Bill Clinton, contends that industries with more health care benefits - like automobile manufacturing - have suffered the biggest losses in jobs and that those, like food service, that typically offer few benefits have realized the biggest gains.

"We're losing jobs in high-wage, high-benefits sectors like manufacturing, where employers are responding to this surge in health care costs,'' Ms. Tyson said in an interview yesterday.

A centerpiece of Mr. Kerry's plan would be to reduce health insurance premiums by having the federal government pick up 75 percent of the cost of catastrophic medical care. That would reduce the cost to employers and employees about 10 percent, or $1,000 a year, according to campaign officials.

Businesses, meanwhile, are trying all kinds of coping strategies. Some companies have responded by shifting part of the health insurance burden onto their workers or by ratcheting up premiums and deductibles. Some have eliminated coverage for dependents, while others have canceled their medical plans altogether. Many have frozen or reduced wages to compensate for ever bigger health insurance bills.

"Our health care costs are rising at three to four times the rate of increase of our revenues," said Michael Stoll, vice president for corporate benefits at the Kroger Company, a supermarket giant that owns several retail chains, including Ralph's, Food 4 Less and King Soopers, and employs 290,000 people around the nation.

Kroger, one of the targets of the five-month supermarket workers' strike in California that ended in March, reached an agreement with unions in that state to retain existing health benefits for current workers but to allow the company to offer new employees significantly curtailed health plans.

Trotter Machine, a small maker of parts for hydraulic valves in Rockford, Ill., has taken a different approach. In the last year, the company has doubled the employee's deductible on the company health plan, to $1,000 a year, and it has slowed wage increases - all in response to the company's escalating health care premium, which has risen to $18,000 a month from less than $10,000 five years ago.

Trotter's business has picked up after two flat years, and the company has responded by adding 12 full-time jobs since last November, bringing the total to 65 full-time workers and 5 temporary positions. But health care inflation has instilled a new level of caution in the hiring process: 9 of the 12 new workers started off as temps, achieving full-time status only after three or four months on the job.

"In the past we would hire people right out of the gate, and they could get on the health plan in 60 days," said Skip Trotter, the company's vice president for operations. "Now we use temp services. I can keep a temp for 90 to 120 days, and the agency pays for the health benefits."

The lagging job market has contributed to brisk growth in the temporary employment industry, where jobs may or may not include health benefits. In July, 2.4 million people were working for temporary agencies, according to the Bureau of Labor Statistics. That was a 9 percent increase from a year earlier, compared with an overall increase in the labor force of 1 percent, to 131.2 million.

Mr. Hayes, at Custom Electronics in Maine, says the soaring cost of health insurance has tempted him to do away with health benefits altogether. But he has held back.

"You lose your best people, you don't lose your worst people," he said. "I would rather fire more of the bad people and keep the benefit than risk losing my good people."

Other businesses are resorting to tactics of dubious legality to avoid the health care burden.

Phyllis Burlage, an accountant in Millersville, Md., whose clients include several small businesses, said rising health insurance costs were driving some employers to skirt age-discrimination law by hiring only younger workers as a way to reduce premiums. "It's the deep dark secret of small businesses," Ms. Burlage said.

Even though the economy emerged from recession in late 2001, unremitting international competition has led to continued financial restraint by American employers. They have been uncharacteristically reluctant to invest in capital equipment and have tried to wring as much productivity and profit as possible from their existing workers.

"In other business cycles, businesses hired in anticipation of demand; that's no longer the case," Mr. Sohn of Wells Fargo said. "Today businesses only hire people because they have to, to meet demand."

In this economic environment, rising health care costs are particularly burdensome because they increase labor costs even as wages are barely moving. In the second quarter, wages for private-sector workers increased 2.6 percent from the year before, according to the Labor Department's employment cost index. Yet the inflation rate for benefits, primarily for health insurance, was 7.3 percent, pushing total compensation costs up 4 percent.

The trade-off between health and wages has become a prime workplace topic. In 2002, Local 226 of the hotel and restaurant workers union in Las Vegas negotiated a contract agreement with casino and hotel operators for a blanket raise of 60 cents an hour, which the union could apportion between wages and health care.

The union considered the deal a victory because it allowed workers to maintain health care benefits at virtually no cost. In the first year of the contract, though, all of the increase ended up going to health care, leaving nothing for higher wages. "It was the first time we had to sacrifice wages to health care," said Pilar Weiss, assistant political director of Local 226.

The growing portion of employee compensation used for health care ultimately depresses workers' ability to spend on other items. And health care outlays can, in turn, force automakers and other consumer-product companies to raise prices.

The Big Three automakers spent $8.5 billion last year on health care. General Motors estimates that providing health coverage for its workers and retirees adds about $1,400 to the price of each of its vehicles built in the United States.

Allan D. Gilmour, the vice chairman at Ford Motor, said it was difficult to trace a causal relationship between higher health care costs and weak employment, because hiring decisions were driven by many factors. But he agreed that escalating health care costs were a drag on the labor market.

"Health is a larger and larger part of our compensation package," Mr. Gilmour said. "It is hard to know what we are doing or not doing because of this. But on a macro level there's no question about it: this pressure comes to bear on everything we do."

Milt Freudenheim and Edmund L. Andrews contributed reporting for this article.

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August 19, 2004

OSCOW

RUSSIA is again emerging as a superpower - but the reason has less to do with nuclear weapons than with oil.

The country has its swagger back, as its economy expands for the fourth consecutive year and the world price of oil hovering at just over $45 a barrel. Now the second-largest oil producer behind Saudi Arabia, Russia has positioned itself as an important alternative supplier to the increasingly unstable Middle East.

But Russia's oil supply is looking none too stable these days. The Kremlin's protracted battle with its largest producer and exporter of crude oil, Yukos, has raised doubts among some skittish traders about the reliability of Russian supplies and helped drive up prices in unusually tight global oil markets.

The Yukos affair began last October, when the government arrested Mikhail B. Khodorkovsky, the company's founder. Officially, he was detained on tax and fraud charges, though there has been speculation that the arrest may have been retribution for his support of political parties opposed to President Vladimir V. Putin.

Not long after that, Yukos was hit with a $3.4 billion tax bill for 2000, and some analysts said tax bills through 2003 could total $10 billion. At the same time, the government has barred the company from selling assets to raise cash and has frozen its bank accounts. Yukos's share price has tumbled - and concern about the reliability of Russian oil supplies has soared - amid the appearance that the Kremlin is driving the company into bankruptcy proceedings.

People in the industry are split on whether Yukos will survive in its current form, but they are almost unanimous in dismissing concerns about Russia's commitment to remain an oil-exporting superpower. They, and the government, point out that even amid the back-and-forth over Yukos, Russia's oil production has not dropped by a single barrel.

Indeed, Russia's output has risen strongly over the past year. And Viktor Khristenko, the industry and energy minister, took pains to publicly reassure Mr. Putin and the world on Wednesday that the Yukos situation would not disrupt exports.

"Production is growing steadily," Mr. Khristenko told the president, in remarks that led national news broadcasts. For the first seven months of this year, Russia produced about 2 billion barrels of oil, and the year's total should be almost 3.3 billion barrels, he said. In 2003, Russia produced 3.073 billion barrels.

Oil markets are likely to remain jittery for a while, because of sabotage in Iraq, a referendum today on President Hugo Chávez of Venezuela and the Aug. 31 deadline for Yukos to pay its 2000 tax bill. But the Kremlin is unlikely to let Russian exports drop significantly as a result of its fight with Mr. Khodorkovsky, industry executives and analysts said.

For one thing, Russia can produce more oil than it has the pipelines to export, so any dip in Yukos's production could be made up elsewhere. For another, high prices are letting Russia reap windfall profits from oil sales. Lastly, the Kremlin is unlikely to risk the international opprobrium that turning off Yukos's taps would generate.

"Russia's international standing would be destroyed," said Christopher Weafer, chief strategist at Alfa Bank here. "The Kremlin wouldn't jeopardize its position in the global economy by what would be nothing short of an act of global economic terrorism."

In some ways, the Kremlin itself may have been surprised by the effect of its Yukos prosecution on the global oil market. "Russia has become a decisive force in the world oil market in a way it hasn't been since the beginning of the 1960's, when its exports stimulated the birth of OPEC," said Daniel Yergin, chairman of Cambridge Energy Research Associates, based in Cambridge, Mass.

Mr. Yergin added, however, that the Kremlin's tussle with Yukos "at another time wouldn't have had the same effect." This, he explained, is in part because "the world oil market is even tighter than in the 1973 oil crisis."

What the Kremlin certainly did know before prosecuting Yukos was just how important the company is to Russia's status as a petro-state. Yukos produced 591 million barrels of crude oil last year, nearly 20 percent of Russia's production. Yukos has 14.7 billion barrels of oil reserves, almost as much as the OPEC members Algeria and Indonesia combined.

That helps explain why the Yukos affair has had such a powerful global effect. "If it weren't for Yukos, we wouldn't have crossed the $45 mark," said Fadel Gheit, oil analyst at Oppenheimer & Company.

INDUSTRY leaders in Russia say they encourage outsiders to take a longer view of the country's ability to prevent the price of crude from spiking. "Russia today has a very important role in the stability of world oil markets," said Viktor Vekselberg, one of the founders of the big Russian oil company TNK.

Mr. Vekselberg noted that his company operated a 50-50 joint venture, called TNK- BP, with the big British oil company BP. While that is the only large investment to date by a foreign company in Russian energy, others could follow, he said. "The fact that BP and several other international oil majors are coming here speaks to the fact that they see Russia as a stable supplier and participant in the world oil market," Mr. Vekselberg said.

Notwithstanding such sanguine forecasts for Russia's oil industry in general, investors now expect the government to auction off Yukos's main subsidiary to pay the tax bill. Its main subsidiary - Yuganskneftegas in western Siberia, which produces 60 percent of Yukos's oil output and holds more than 70 percent of its reserves - may end up in the hands of a rival, possibly one more friendly to the Kremlin. It is unclear what would happen to minority investors in that event.

On Thursday, the Ministry of Justice appointed the investment bank Dresdner Kleinwort Wasserstein to determine the value of Yuganskneftegas. Analysts have estimated that it could fetch from $10 billion to $20 billion.

The financial screws on Yukos are definitely tightening. Just this week, it said its banks had the right under loan covenants to start seizing oil export revenue because it had defaulted in July on a $1 billion loan from Société Générale, Citigroup and others and more recently on a $1.6 billion loan organized by Group Menatep, Mr. Khodorkovsky's investment company and Yukos's controlling shareholder.

Even if Yukos ends up being run by someone other than its current management, however, Russia's status as a mighty global oil producer is secure, experts said.

Over the next decade, production from Russia and the Caspian will increase as much as that in the Middle East, said Mr. Yergin. "Russia is big time," he said. "A superpower when it comes to oil and gas."

The question is: Who will the superpower allow to own those oil assets? The Kremlin clearly wants a larger role in oil and gas, which it views as a strategic sector of the economy. But government control could mean that Russia's production would not grow as swiftly as it might under private ownership, with oligarchs and other wealthy businessmen trying to maximize profits.

"Russia has huge potential," said Mr. Gheit, the analyst. "It is underdeveloped and underexploited, and foreign oil companies with money burning in their pockets are salivating to get in. But no one will go to Russia if they can just take companies away like Yukos."

resident Bush reacted decisively to this month's shockingly bad employment report - by quickly changing the topic to terror. The Federal Reserve chairman, Alan Greenspan, also focused elsewhere, namely on rising oil prices. Mr. Greenspan used inflationary energy costs as the rationale for raising interest rates a quarter point, despite the drastic slump in hiring and a recent slowdown in productivity growth.

What neither man seems ready to acknowledge outright is that policy makers have run out of tools for stewarding an economy that - nearly three years into a recovery - has yet to flourish and may even be downshifting to neutral. The president's fiscal policies, mainly high-end tax cuts, have resulted in a record federal budget deficit without spurring hiring or income growth. If Mr. Bush continues on the tax-cut path, continuing high deficits will further threaten job creation and living standards.

Mr. Greenspan passed up opportunities to discourage Mr. Bush's disastrous tax-cut strategy back when it might have done some good. Instead, the Fed pursued its own stimulative policy, pushing interest rates to the lowest level in a generation. One result has been a debt load that is a big factor in the overall decline in households' net worth, despite the rise in housing values. That alone argues for tightening the money spigot. Another reason for raising rates is that the continuation of a cheap-money policy would probably precipitate inflation, as a glut of dollars would eventually feed rising prices.

Mr. Bush and Mr. Greenspan have now exhausted almost all of their stimulus options. The economy is on its own, and it is not clear whether it is on track for a stronger recovery in the second half of the year.

No wonder, then, that Mr. Bush won't acknowledge the bad news on jobs. Doing so would imply a need to re-examine the policies that have led to this point, something he is not willing to do. Given the facts, his intransigence is appalling: according to a new research report by Economy.com, an independent provider of economic data and analysis, the $700 billion swing from surplus to deficit under President Bush accounted for nearly two percentage points of economic growth a year. But it has generated economic gains of just over one percentage point.

The main reason for the crippling discrepancy is that the tax cuts were mostly handed out where they did the least good - that is, lavished on the people least likely to spend the largess. The reduction in the tax rates, the largest of Mr. Bush's tax boons, provided only 59 cents of economic stimulus for every dollar of lost tax revenue. The tax cut for dividends and capital gains produced 9 cents of stimulus for every forgone dollar. (Did someone say, "Deficits as far as the eye can see"?) In contrast, the economic bang for a dollar of aid to state governments is $1.24. Yet such assistance accounted for only 3 percent of the total cost of Mr. Bush's fiscal policies.

The president was right to use a fiscal stimulus to counter a recession - it's just that his favorite tactics were wrong, and they failed to create an environment that fosters growth in jobs and income. Now, along with outside factors like oil prices, Mr. Bush's priorities are actually contributing to the weak picture for jobs. And in a perverse feedback loop, a continuation of these policies will further swell the deficit, impeding job growth even more.

While the economy is still expanding and jobs are being created, the pace pales in comparison with the pace of other recoveries at this same stage. For real prosperity to take hold, a much broader swath of the labor force must be able to find jobs and earn decent wages. That isn't likely to happen under Mr. Bush's policies.

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ASHINGTON, Aug. 8 - The stunningly slow pace of job creation, which sank to growth of just 32,000 in July, has provided new ammunition in an intense political debate over job quality.

For months, Democrats have said that the long-delayed employment recovery was concentrated in low-wage jobs that paid far less than those that were lost. White House officials replied that the available data failed to settle the matter one way or the other.

The data is still inconclusive. But the weakness in job creation and the apparent weakness in high-paying jobs may be opposite sides of a coin. Companies still seem cautious, relying on temporary workers and anxious about rising health care costs associated with full-time workers. Many economists say that over the long term, the most vulnerable positions are those at the low end of the wage scale that require fewer skills and are easily replicated.

Even now, at a time when a disproportionate number of new jobs appear to be lower-paying ones, there has been growth in some high-income occupations like accounting, architecture and software.

Yet the earnings gap between the highest-paid employees and the rest of the work force is still widening, as it has over most of the last 30 years. The trend is most striking in factories, which accounted for the bulk of job losses in the last three years and tended to pay above-average wages.

In contrast to previous recoveries, when companies rehired a large proportion of laid-off workers, manufacturers have added only 91,000 jobs this year, having eliminated more than two million jobs in the previous three years.

The largely permanent decline in manufacturing employment, which has been more acute after this recession than in previous ones, spans all levels from blue-collar workers through senior management. It has coincided with a bulge in the number of jobs in low-paying fields that are comparatively easy to enter: retail sales, hotel services and clerical work.

The ragged pattern of the recovery has given rise to the political debate, with Senator John Kerry, the Democratic nominee, saying that new jobs pay, on average, $9,000 a year less than the jobs that were lost.

White House officials disagree, saying that such calculations are based on an erroneous comparison of median wages between industries that are expanding and contracting. The main error, they say, is that even low-wage industries like retailers and fast-food chains hire high-income executives and managers.

" McDonald's has C.E.O.'s and accountants, and investment banks hire janitors,'' said N. Gregory Mankiw, chairman of the president's Council of Economic Advisers. "Simply knowing what broad categories are rising and falling doesn't tell you anything about the jobs people are getting.''

But a growing number of analysts say the evidence increasingly suggests that the current recovery has indeed been tilted toward lower-paying jobs. Industries ranked in the bottom fifth for wages and salaries have added 477,000 jobs since January, while industries in the top fifth for wages had no increase at all, according to an analysis of Labor Department payroll data by Economy.com, an economic research firm.

"Since employment peaked, we've lost many more higher-paying jobs than lower-paying jobs,'' said Mark Zandi, chief economist at Economy.com. "In recovery, we've created more lower-paying jobs than higher-paying jobs."

Though acknowledging that the payroll data was inconclusive, Mr. Zandi said that the pattern had become firmer over the last month and that it was increasingly similar to what had been found in the Labor Department's household survey, which categorizes work by occupation as well as industry.

But many economists say the long-term pattern, and problem, are quite different.

Daniel Aaronson, a senior economist at the Federal Reserve Bank of Chicago, said the pattern of high-paying and low-paying jobs routinely fluctuates with economic cycles. "When aggregate employment growth is strong,'' Mr. Aaronson said, "you see more jobs created in higher-income sectors, and when employment growth is weak, the number of those jobs just tanks. We shouldn't be concerned about short-term wiggles in the data, but on the bigger issues of increasing productivity and increasing worker education.''

Other economists say the more enduring pattern is the widening gap between people with different levels of education.

"You want to think of two job markets - roughly speaking, one for college graduates and the other for high school graduates,'' said Frank Levy, professor of economics at the Massachusetts Institute of Technology and an author of a new book on the subject, "The New Division of Labor.''

"The market for college-grad jobs over the last four years has been expanding,'' Professor Levy said. "But the market for high school graduates has been deteriorating, with production and clerical jobs shrinking and being replaced by lower-paying service sector jobs.''

Other analysts say the long-term trend is more complicated, noting that real wages for middle-income workers have been losing ground to those in the top 10 percent of earners over most of the last 30 years.

The problem confronting President Bush is that job creation of all kinds has been slower in this recovery than in other ones, and White House officials acknowledged they were disappointed by Friday's report.

Employment finally seemed to surge in March and the economy added just over a million jobs in the first six months of the year. But the nation still has about 1.2 million fewer jobs than when Mr. Bush took office, and the work force has expanded by more than a million since that time.

Adjusted for inflation, average hourly wages have fallen slightly in the last year. And for many who have lost their jobs as a result of plant closings and layoffs, the impact has been more acute: a recent survey of displaced workers by the Labor Department found that 57 percent of those who had found work were earning less than they did in their old jobs. As of December, when the survey was taken, 4 of 10 displaced factory workers had yet to start a new job.

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August 9, 2004

OP-ED COLUMNIST

Admit We Have a Problem

By BOB HERBERT