Adam Penenberg suggests Google News is still in beta and runs no advertising because of concern over whether the news excerpts violate fair use.
Danny Sullivan at Search Engine Watch has one of the better responses, pointing out that the same fair use issues apply to web search. Moreover, publishers realize that being listed in web search engines increases their traffic, and publishers actively seek to be listed in news aggregators for the same reason.
Adam's argument does seem quite weak. For those publishers who don't want the traffic Google News sends them, the answer is simple, remove yourself from the index. It's their loss, lost traffic, lost market share, and lost advertising revenue.
Most publishers understand the value of being listed in a news aggregator. Most publishers actively seek to be listed and even optimize their site for news crawlers. The irrational minority of publishers that ask to be removed won't significantly impact the coverage or quality of the Google News product.