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THE

RIpON F ORUM

Contents VOLUME 36 · NUMBER I · SPRING 2()() !

New Beginnings .. ......... ... ...... ... ......... .... ........ .. .... ............ .......... ... 3 A R ipon E ditorial

Burying the Death Tax .... ...... ...... .................... ..... ........ ... ....... ... ... 4 US. R epresentative Jennifer D unn

A Ripon Interview with Arlen Specter The Power of The Pardon ....... .... .. .... .. ............ ... .... .. ..................... 6 A shleigh R oberts

Congressional Inaction Threatens U.S. Companies ... .. ...... ...... ... .. 9 Kenneth j Kies

The Global Agenda ............. ............. ... .... ............................ ........ 12 Us. Trade R epresentative R obert Z oellick

A Ripon Interview with Senate Majority Leader Trent Lott A 50-50 Senate: Will It Work? ................................. ... ... ... .... .. .... 17 A shleigh R oberts

Putting People First ... ... ..... ... ...... .... ...... ... ................................... 20 US. R epresentative J im Kolbe

The Ripon F"qrllm (1SN 0035-5526) is published quarterly byThe Ripon Society.

The Ripon Society is a research and policyorganiution. It is headquartered in Washington, D.C., with National Associate memben throughout the United Statcs. Ri pon is suppon ed by chapter dues, individual con tributions, and re\'Cnues from its publications.

Comments, opinion edi torials and lcltcn to the magazine should be: addressed to: The Ripon Forum, SOl Capi tol Court, NE Suite 300, "'Vashington, D.C. 20002 or may be: transmi tted e1ectroniully to: lelten@riponsoc.org

New

Beginnings

subtle. but significant change has occu rred in

Washington. The Republican Party is growing up. The

back-bench bomb throwers ate gone, replaced by thin

but determined Republican majorities. T he l07,h

Congress exhibits a quiet maturity. marked with new

confidence and a long-overdue sense of unity.

By moving quickly on President Bush's tax plan, Repub­

licans have demonstrated the strength with wh ich they plan

to govern. l'vlcmbers are focusing more on inclusion and less

on the divisions that have derailed Republican efforrs in the

pas!. This style is highl ighted by the COP's se rious effor! to

support its President and to enact the cornerstone of the Bush

agenda.

The newfound Republican unity is a sign to the country

and the world that the Grand Old Party is ready to govern. By

late March, the U.S. House of Represematives had passed unani­

mously the centerpiece of President Bush's budget plan, a 5958

billion l O-year across-the-board cut in income tax rates. Shortly

thereafter, it passed the second portion of Bush's plan and ap­

proved a 5400 billion tax cur for married couples, including the

child tax credit.

The bill quickly moved to the U.S. Senate. While the

chamber surprised some when it passed a S1.28 tri ll ion bud­

get resolu tion, observation of the legislative process teaches

that compromise usually accompanies reform and relief. Sen-

Ripon Fon..m • Spong 2001

are acrion was no different, and our working majority provided a

Republican victory.

Compromise is a natural part of " II legislation, and Republi­

cans still have much to be happy about. T he fact rhat Democrats

acknowledge that a tax cut will be enacted is a testament to a

more mature Republican Party. The tax debate is no longer a de­

bate whether Americans will have tax cuts. It is now a discussion

over how much and what kind of tax relief will he enacted.

Republicans have struggled long enough with thei r message

and their differences. And, it appears as though the internal shake­

down is over. The Republican unity that was able to pass signifi­

cant tax rel ief in both houses underscores the Party's discipline

and readiness to lead the nation.

T he message is simple. When Republicans work tOgether,

they can drive public policy. T he diversity and independence of

Republicans makes unity difficult, but the lO7'h Congress has so

far proved it is not impossible.

That's good news for Anlcrica. Adult leadership in both the

executive and legislative branches will do much to restore the

public's fa ith in government. The new Republican marurity is

producing a major win for the Parry and for America.

Maintaining that unity will be the key to

legislative victories in the 107m Congress. If

the trend is continued, America has great

things ahead in this legislative session.

J

CA1/grwwomu1/ }mniftr DU1/1/

on Root is the principal owner of GM Nameplate, 2n equipment supply company based in Seattle, Washington.

Over the last four decades, he and his partners employed hard work, perseverance, risk and skill to turn a 14~

employee business into an enterprise that supports 1,000 workers and their families.

He has paid his fair share of taxes and is an active participant in the community.

Yet, at 65, eve rything he has built is threatened by the estate tax, better kn own as the death tax, which will be levied against the value of hi s busi~ ness above $675,000 at a confisca tory 55 percent rate. H e wou ld like to pass the business along to his chi ldren, but

since he cannot afford the estate plan that would be required to pay this high tax he is not optimistic.

I t shou ld not come to this.

Bernreen t 797 and the late t BOOs, the death tax was instituted on three separate occasions to fund wars. In each case, it

was quickly repealed. ]n 1916, however,

the death tax reappeared to help finance World War I and has remained with us ever since. As is the case with ~tempo~

rarl taxes, the federal government con~

tinues to justifY the death tax by redefin­ing its social intent.

What was once a temporary tax [Q

fund a war became a means to prevent the accumulation of wealth or [Q meet

other government ob ligations. The t ruth is that there is no social value to the death tax because it underm ines the principles on which our country was founded and the principles on which our country has thrived: hard work, risk~tak­ing and saving.

President George W. Bush ad~

dressed the nation in February and pre~ sen ted his plan to relieve the tax bur­den on American families. Central to

this plan is the elimination of the death tax, which looms like a sword of

Damocles over family-owned businesses and fa rms. Those who suppOrt the con­fiscation of a person's legacy are already working to keep this unfair tax by argu-

Ripon Fonm • Spring 2001

LEGISLATIVE UPDATE

On ApriI4, lOOI'" U.s."-., .... ",,1IIi ... possed ........ fa If ...... tioo Ad. fiIItti&IIt IIIMocnu joiooI ll6 ......... in Ioadci" ... ,..,.w 10 pIoaIIy npaI'" III ~ 1011. PftIi· doot .... issoood • ,taI'.' ....... 1hI 11410 154 Haase .... -. ¥icsIry lor lair· ""'and ..... Iar_icpuwdL· The bill ... heatIs 10 IhI !nit.

mg thal its repeal will jeopardize re­

sources needed for other gove rnment

programs, result in the n:-e mergcnce of

a permanent oligarchy, or threaten con­

tributions to charities. They are wrong

on an points.

Eve n after funding all programs of

gove rnm en t and accoun ting for

inflationary adjus t men ts. the

federal gove rnmen t will run a 55.7

trillion surplus over the next tcn years.

If one sets aside $3. 1 trillion for debt

reduction, Social Security and M edicare,

as the president and Congress have

agreed to do already, that leaves 52 .6

trillion in overpaid taxe s from

Americans. Only those who reflexively

support hi g h taxat ion and higher

government spen ding can argue that

resources do not exist to eliminate the

unfair death tax.

Ripon Fon.m • Spring 200 j

Recen tly, a group of ou r nation's

wealthiest fam ilies began a cam paign to

save the death tax on the grounds that

it is needed to prevent Ihe accumula­

tion of wealth. BUI , what would the),

suggest the children of the fami ly-busi­

ness owner or farmer do to pay this tax?

Should they sel1 part of the busi ness or

farm? How many people do they sug­

gest be laid off for the sake of this re­

distribution of wealth ?

Of course, the owner can simply sell

the business before he or she dies and

then have to pay the 20 percent capital

gai ns tax. This is what thc Frank Russel l

Company in Tacoma, Washington and

Ben Bridge Jewelers in Seattle, Wash­

ington dccided to do after calculating

their death tax li abilities. As Mr. Root

will attest, there is no societal benefit

in any of these scenarios.

To bolster their case fo r the death

tax, some have also argued that its re­

peal would threaten charitable contri­

butions. Aside from the fact that

argumen t implicitly questions the mo­

tives of our nation's mOst ge nerous citi­

zens, there is simply no evidence to sup­

pon this. Time and again, A mericans

have shown that more discretionary

fu nds resuit in more charitable giving.

With the increas ing number of

businesses being created, the apprecia­

tion in home values and the prevalence

of 401 (K)s and other retirement savings

plans, more and more middle- income

people arc being forced to pay rhe un ­

fair death tax. I believe its time the

American Dream is honored, not

taxed.

In March, Jen nifer Dunn introduced the Death Tax Elimination Act 0/2001 (HR-

8) along with U.S. Representative John

Tanner (D- Tenn.). The bill pham out the

death tax over ten years. Dunn passed

similar legislation last year. It passed both

hoults States Congress by majoritits, but died

5

The Power of The Pardon A R ipon Interview with Senator Arlen Specter

By Ash Icigh Ilobcrts

a passion for justice and a candid demeanor,

many Americans know Arlen Specter for his

ualous questioning during U.S. Senate

confirmation and investigation hearings. The three­

term Republican from Pennsylvania has a comp licated political legacy that has provoked the ire of

conservat ives and liberals alike. He offers a mix of fiscal conservatism and sociallibcrtarianism. H e is known for his tough

stances on crime and spending. But the Senator is also a dedicated

advocate for women's rights and works tirelessly to secure funding

for women's programs.

As a former district attorney of Philadelphia, fighting crime

has always been his passion. On March 15,2001, Senator Specter

discussed his latest investigation on fo rmer President Clinton's

controversial pardons and how they wiU affect future Presidents.

RF: Throughout your Senate career, many have referred to you

as the Senate "Perry Mason." Ou t of 311 of your invcstigations,

which ones stand out in your mind?

Smalor Ar/~n Sperter: When I was an assistant D istrict Attorney,

I conducted an investigation of corrupt teamster offici31s in Phila­

delphia. I started off with evidence compiled by the McClellan

Committee in the Senate, when Bobby Kennedy was their gen­

eral counsel. After further investigation, I convicted them all and

sent them to jail.

In the Senate, my most interesting investigation dea1twith Ruby

Ridge. A man named Randy Weaver was charged with gun viola­

tions and they sent a virtual army up to Ruby Ridge. They had a

firefight, a deputy marshal was killed and Weaver's wife and son

6

were killed. By the time we got all of the facts together, we made the

FBI change their rules on the use of deadly force:.

RF: In fonne r President Clinton's recent op-ed response to the

Marc Rich pardon and others, he said his pardons were no more

questionable than other presidenti31 pardons. H e cited George

Washington's pardon of the leaders of the Whiskey Rebellion,

Nixon's commutation of the sentence ofJames Hoffia and Carter's

pardon of Vietnam War draft resisters. Senator Specter, do you

agree with former President Clinton or is there something that

makes these pardons different?

Senator Spltler ta/h 'With RF Editor Ashleigh Roberts.

Ripon Forun • Spring 200 I

Senator Arlen Specter: No, I don't agree

with him at all . When you have

Washington's pardons that you re­

ferred to, he was trying to bring the

cou ntry together. There were dispar­

ate factions at work. That was really

one of the purposes of the pardon .

You could forgive transgressions and

bring the country together. When

President Nixon pardoned Jame s

Hoffa, Hoffa had served hi s sen tence.

He wasn't a fugitive like Marc Rich .

On the Vietnam pardons, that was a

time of great controversy in America

with a very unpopular war. Carter was

t rying to reunite the country. I think

what President Clinton said was a

very lame excuse .

~ -"

Another statutory provision that

I am going to push will require public

disclosure of contributions or pledges

of S5,OOO or more to presidential

libraries. So there is a vel)' important

purpose when taking a look at these

last minute pardons.

RF: So would you agree that there is a

need for a Constitutional amendment?

SenatorArien Specter: Myinc1ination

is to favor one. The objections that

were raised at the hearing were that

they would politicize the process. But

Senators and members of the House

are representatives of democracy and

they are supposed to pay attention to

what their constituents want.

It is ve ry hard to get a two-

thirds vote to override the president

~ on legislation. I believe we only

'" overrode President C linton once,

RF: Since Presidential pardons are an

un reviewable Co nstitutional power

granted to the president, what was the

original purpose of the Congressional

hearings? Smator Arlen Specter discussu the pardon pr()((ss. and I know that we only overrode

President George Bush once on

about 25 or 30 vetoes he issued between 1989 and 1993. Senator Arlen Specter: First of all, there was consideration to

whether there might be a Constitutional amendment. A very

interesting Constitutional amendment had been proposed by then

Senator Walter Mondale in about 1975, to overturn a presidential

pardo n on a two-thirds vote in bot h the U.S. House of

Representatives and the U.S. Senate. We held a hearing in the

Senate Judiciary committee on that point. The general fcelingwas

RF: Some experts say the Constitutional framers were more

worried that Presidents would pardon those convicted oftrea­

son rather than with the sale of pardons for money, favors or

votes. Do you think your legislaton will curtail what some

have called a co nstitutional loophole?

that PrcsidentClinton's pardon was so

aberrational as not to go so far as to

have a Constitutional amendment. But

that still could come up.

The investigation has really been

taken over by U.S. Attorney

Mary Jo White in the

"I think that Congress will probably pass legislation like I am suggesting. I think that there will be a very heavy black mark on President Clinton's record."

southern district of New York. A constitutional amendment still

could be a consideration. I am also about to propose legislation

that could affect the pardon process by requiring people like

Jack Quinn, Hugh Rodh am or Roger Clin ton to register as

lobbyists. They tried to do everything very secretly. H ad they

been registered as lobbyists, people would have known what

they were doing and there would have been such a public protest

that I think Clinton would n't have ac tuall y

done that.

Ripoo f orum · Spring 200 I

Senator Arlen Specter: The founding fathers did not rule out

bribery. That is still very much in place. I t would be very

hard to prove because a quid pro quo bribe has to be a pay­

ment of something of value in return fo r an official act. It is

figuratively referred to as the Latin expression quid pro quo, so that would be hard to prove, but that is very definitely a

possibility. The power of impeachment does not preclude pros­

ecuting a President for crimes. I don't think you can do it during his te rm, although that 's never been decided. But you

7

can certainly prosecute him for criminal conduct after he leaves

office.

RF: Would not the logical solution have been fo r the president

simply to come before the committee and testify as former Presi­

dent Ford had done when he pardoned Nixon?

Smator Arlm Spttter: I think he should have. I made the sugges­

tion a couple of times. On the Ford model, the committee was

reluctant, really unwilling, to invite him in because of the sensi­

tivity of calling a former president. After consulting with Senator

Lott, Senator Hatch and some of my colleagues on the Judiciary

Committee, I wrote to the president and suggested that he sub­mit to questioni ng by myself and a Democratic Senator on the

Judiciary Committee. I suggested in my letter to President Clinton

that this would avoid the circus-like atmosphere of a public hear­

ing with a lot of television cameras. It would be done in a profes­

sional way in a private office, his office if he wanted. And after

we had a chance to review the transcripts, we would make them

public. We weren't going to keep this a secret, but we would do it

in a more professional way than these highly-publicized Con­

gressional heuings.

RF: What do you think is going to happen ? When everything is

said and dOlle, what is the logical outcome of this situation?

Smator Arlm Speller: I think that Congress will probably pass

legislation like I am suggesting. I think that there will be a very

heavy black mark on President Clinton's record. It will be a warn-

8

ing to furure presidents not to be reckless, which I think Clinton was

reckless in pardoning a guy who was a fugitive and then keeping it

a secret. Beth Dozorer-L, the fonner finance director for the Demo­

cratic National Committee, was told about the pardon at 11:00 pm

on January 19'i't 2001. The pardon attorney, Roger Adams, didn't

even find out about it until 1:00 am. When he called the White

House to get information about Marc Rich and Pincus Green,

he was told they were, 'traveling abroad.' When that was men­

tioned in the hearing room, a loud laugh erupted. You don't ex­

actly say that fugitives are on a pleasure cruise or traveling

abroad.

And then Mary Jo White might fi nd something. It will be tr icky water when she talks to Denise Rich and wants to

grant her immunity. It will be the same when she talks with

Beth Dowren and Hugh Rodham. What did Hugh Rodham

say to President Clinton? What did Roger Clinton, the president's

half-brother say to President Clinton? When I was a District

Anorney and ran grand juries, we frequently would find people

willing to implicate higher ups. I think that is candidly unlikely, I"'!"I but it's possible. I.tr.I

AJhleigh Rob"tJ ;J the editor o/The Ripon Forum.

VITAL STATS: ARLEN SPEaER

Birth Date: ftbnwJ 12, 1910

Pony: !epublian

Political Philosophy: Consemtiw DO K ..... ia; liberal DO SO<iaI issues. Hot I.sue: (rime

Home: Philadelpll~ FamllJ: IIarried to Joan L Ie¥y; 2 diIdron IIeIIpn: jewisb

Educadan: UoMristy oIl'toosJMoia.l.A. (1151); IaIo uw !dIooI.lU. (1956)

....... 1IanaI ~. s.n.U.!.lenut(I98I. ,......); District ~ PIoiIadeIpioia (1966-74); Auimnt c-.I. Wamo Conomissioo (1964); Assimnr Disrricr ~ Philadelphia (1159-61); UJ. Army (1951·51)

E-mail Addna: ....... _spemr@spemr ........ ""

Ripon FO!'\IITl • Spring 200!

Congressional Inaction Threatens U.S. Companies US. financial services companies face legislative obstacle

Ily Kennelh J. Kics

he ability of US. fi nancial services companies to compete

in the global economy will depend, in no small pari, on a

seem ingly obscure - bur extremely important -

provision of the Internal Revenue Code that is scheduled

to expire at the end of this year.

T he issue involves the timing of US. tax on income earned

abroad by U.S. financial services companies. Without action by

Congress, U.S. financial services companies after 2001 will begin

to be taxed on income earned overseas by their affi liates, regard­

less of when this income is repatriated.

This change is contrary to longstanding tax policy principles

and would create an unwarranted distinction between US. finan­

cial services companies and all other types of American businesses

whose US. tax liability on overseas income will continue to be

deferred until the income is repatriated.

The principle of deferral has been imbedded in the United

States corporate income tax since its inception more than 90 years

ago. In 1986, however, a significant lapse in tax policy logic re­

sulted in the repeal of deferral for financial services companies.

Congress corrected this mistake in 1997. but only on a tempornry

basis.

Globally engaged U.S. banks, securities firms, insurers and

fmance companies are pushing hard for legislation to make per­

manent the application of deferral to the acrive financial services

RJ pon Fon.m • Spnng 2001

income. They stress that the uncertainties created by the tempo­

rary narure of Ihe rules has hindered their ability to compete with

foreign-based financial services companies in overseas markets.

The home coumries of these foreign-based companies generally

do not impose tax on income earned abroad. Disrurbing new

data support these competitiveness concerns.

THE 1986 LAPSE From the inception of the corporate income tax in 1909 un­

til 1962, income earned by foreign affiliates of US. companies

was not subject to current U.S. tax until the foreign earnings were

distributed to the United States. This rule of deferral applied

regardless of whether the income was derived by manufacturing

operntions or by active financial services operations.

In 1962, Congress enacted a regime - referred to as Qsub­

part F~ - that sought to narrow the scope of deferral in response

to revenue concerns. Specifically. Congress was concerned that

some taxpayers might be able to shiff easily moveable assetS off­

shore and use those assets to generate passive income that would

escape current U.S. tax. The subpart F rules opernTe to tax cur­

rently passive income earned overseas. T here was no intention at

that time to interfere WiTh the availability of deferral in situations

involving income earned overseas through active business opera­

tions.

,

I n 1986, Congress amended subpart F to treat all types of

financial income as if it wefe passive, thus eliminating the prin­

ciple of deferral for active financial services income. No compel­

ling policy justification was advanced at the time in support of

this change. Congress did not scale back the deferral rules that

continued to apply to manufacturing or to other services income

earned overseas.

(

ongress in 1997 recognized the error of the 1986 changes

and restored the historic treatmem of active fi nancial services

income, providing that subpart F does not apply to income

derived overseas by a U.S.-controlled foreign corporation in the

active conduct of an insurance, banking, financi ng, or similar

business. The Clinton Administration at the time acknowledged

that the "primary purpose of the provision was proper. ~ However,

due to revenue constraints, the provision was made effective for

only one year.

The U.S. financial services community fought hard to have

the subpart F provision extended again in 1998 and 1999. In

conjunction with these extensions, Congress enacted substantiaJ

safeguards to ensure that the subpart F active financiaJ services

provision applies only to active business income and cannot be

circumnavigated to defer current tax on passive-type income. The

extension enacted in 1999, as discussed above, expires at the end

of this year.

RUNAWAY HEADQUARTERS FinanciaJ services providers are subject to intense world\vide

competition. U.S. and foreign- based financial services compa­

nies compete to provide services to globaJ customers on a global

basis, and must be able to provide these services on razor-thin

profit margins.

Tax costs can materially impacr profit margins. If a U.S.­

based company bears a significantly higher tax burden than a

German- based fi rm with respect to its operations in South

America, for example, then the U.S.-based company will be

squeezed out of this market. In the absence of the subpart F

provision for active financiaJ services income, U.S. companies rou­

tinely will face a h igher tax burden than their fore ign counter­

parts, most of which are not taxed at all by their home countries

on their overseas earnings.

The ~on-again, off-again~ nature of the subpart F provi­

sion, in many important respects, is nearly equivalent to no

provision at all. T he pattern of temporary extensions has

meant that U.S. financial services companies cannot plan their

activities - which are long-term in nature and not easily

stopped and started on a year-to-year basis - with any cer­

tainty. Meanwhile, foreign-based com panies can depend on

not being taxed by their home countries on activities under­

taken ove rseas.

u.s. TAXATION OF FOREIGN ACTIVE FINANCIAL SERVICES INCOME:

10

IIOt

HISTORICAL SUMMARY

Sobpart F Ena<I1d

1961

'-~---------------...."..-Fortip ActiYt FiAancial Servim IIKOIIIe

8m Subject To Current U.S. Tu

Foreicn ActM filancial lomas ,_ SubjKt To eu ... , U.t 1M IoaI Tu

~

I I I 1916

./ '"7 2001

Ly--J Hiuoric: TrtalmeRllemnd F" hRip laM FiIwIciaI

Senices II'ICOIIf

Ripon Forum • Spring 200 I

COMPANY CROSS-BORDER ACQUISITIONS OF FINANCIAL SERVICES COMPANIES

(TRANSACTIONS OVER $500M)

Item Number

2000 ACQUISmONS (JANUARY - NOVEMBER)

Foreign acquisitions of U1 12 Financial services compatlfes

U.S. acquisitions of foreign 4 Financial services companies

1999 ACQUISmONS

Foreign acquisitions of U.S. 8 financiil services companies

U.S. acquisitions of Foreign FinalKial services companies

1998 ACQUISmONS

fomgn acquisitions of U.S. financial services companies 12

U.S. acquisitioRS of Foreign Financial services companies 1

A reflection of the increasingly competitive and globalized fi­nancial services industry is a dramatic growth in cross-border merg­

ers and acquisitions. Recent data show that U.S. -based financial

services companies arc being taken over by foreign competitors at

an alarming mte. Of the 16 cross-border acquisitions of financial

services companies that occurred in the first 11 months 0(2000, thn:c­

quarters involved foreign acquisitions of U.S. finns. Results from 1999

and 1998 are similarly disrurbing. The upshot is that there are fev,rer and

fC\VCf U.S.-headquartered financial services companies.

The life insurance industry illustrates this trend. Today, 13 of

the top 50 United States life insurance companies are foreign­

controlled. Moreover, today on ly 9 of the top 30 life insurers

worldwide are based in the United States.

This "runaway headquarters~ phenomenon may be explained

in part by the specter of uncertainty over the subpart F active

financial services provision. Investors may be concerned about

the prospect that a U.S.-headquartered global financial services

firm will be subject to U.S. tax on its overseas operations. Head­

quartering a combined firm outside the Uni ted States generally

eliminates this tax cost with certainty.

p,jpon Fon.m • Spring 2001

% of Total Total Value ($M) % of Total Value

7S.0 $48,091 79.8

2S.0 Sl2,140 201

88.9 Sll,796 96.1

ILl SI ,l70 1.9

80.0 SII,l16 76.1

20.0 Sl,SSI 2J.9

ACTION IN 2001 In light of these concerns, the U.S. financial services in­

dustry is strongly advocating a permanent subpart F provi­

sion for active financial services income and is committed

to seeking its passage thi s year. In this regard, the indus­

try was pleased by a recent show of support by the Bush

Administration for the sub part F active financial services

provISIon.

It is up to Congress to act, to make permanent what has

been a staple of the law fo r most of the corporate income tax's

history. A permanent rule will mean more financial services

companies will be headquartered in the United States, which

will support more high-value U.S. jobs and ensure criti- r."I cal financing for U.S. ventures abroad. ...

Ken Kin is a Managing Partner of the PricewaterhouseCoopers

Washington Nfltional Tax Services office and Chair of the firms

FedemlTax Policy Group. Prior lojoining PricewaterhouseCoopers

in 1998, Mr. Kies served as Chief of Staff of the Congressional

Joint Committee on Taxation.

"

u.s. Trade foreign policy

By Robert Zoellick

Edilori Nolt:Prior to being nominated and

conjirmdhylhe US. Sma/em tJxnro; Trade

R1>resenlative for 1m Un;ltd Statts, Robert Zoel/id: gave the optning addms for the

Trans-AI/an/it Polity Ne/work in Vtniu,

Ila!yin Dtctmba ManyobJerwn nQ'Wv;n.v

his Temar/iS as a lorunst for fhe Bush

Adminislralions national security, trade and

foreign poliry. The highlights of his spmh

follow:

he President will need to devote

much attention to building the

basis for governing at home. But,

the world will intrude. Indeed, the

calendar o f already scheduled

events will require President Bush to have

an active foreign policy and nalion al

security agenda.

According to lhe calendar, the Presi­

dent wiU attend summits in three regions

of principal st ra tegic inte rest for the

United States: the Americas, Europe and

East Asia. The fourth region that is criti­

cal to America's strategic posture, the

Middle East and the Persian Gulf, is on

the brink of sliding into deep dangers that

witi also command President Bush's atten­

tion.

"

THE AMERICAS: GETTING SERIOUS ABOUT HEMISPHERIC FREE TRADE

First, the countries of the Western

Hemisphere will convene the Summit o f

the Americas in Qaebec City in April. The

American neighborhood ofTers great op­

portunities for the United States, but

troubles are brewing there as well.

Over the past 15 years, much of Latin

America has moved towards democracy

and more open economies and societies.

But democracy and market economies arc

,

still on trial. The Andean region has been

engulfed in crises. Throughout all of Latin

America, elected governments arc strug­

gling to show results for their citizens.

Unforrunately, Latin America can no

longer rally support to face these problems

by pointing to a vision of hemispheric free

trade because the Free Trade of the Ameri­

cas (FTAA) has slowed to a crawl. When

the western hemispheric leaders meet in

OJlebec City within the new U.S.

Administration's first 100 days, the Latin

Americans will be watching closely for

signs of commitment from Presidem Bush.

They will be most interested in th e

Presidem 's willingness to proceed with a

legislative effort to regain trade promotion

authority (TPA), as the prerequisite to re­

storing the free trade negotiations.

Movement on the trade agenda is the

vital sign for the Latins. First, historically,

even dating back to the early 19th cenrury,

U.S. interest in free t rade with Latin

America has been the cornerstone of a

broader u.s. policy of respect for, and interest

in, the region.

Second, within Latin America, hemi­

spheric trade initiatives have been inte-

Ripon Fon.m • Spnng 200 I

grally linked to overarching goals of pro­

moting economic growth and political re­

form. Third, the Latins will wonder, with

some justification, that if the United States,

with all its advamages, is unwilling to face

vested interests that are opposed to open

markets, how can they and other develop­

ing democracies be expected to do so.

As a result, if President Bush comes to

Quebec City with good intentions

but without a commitment to TPA

and a trade agenda, the Latin Americans

will be polite, but conclude that the United

States is not serious. Of course, a new

pres idential t rade agenda will require

working closely wilil Congress, including

attendees at this meeting.

Over the past years, the basis for bi­

partisan support for trade has been present

in the US. Senate, but has been eroding

in the US. House of Representatives. I ex­

pect that the next Congress will want the

President to outline a broader trade strat­

egy, extending beyond Latin America. The

Administration will need to thread the

needle on issues such as training and ad­

justment assistance, enforcement of agree­

ments, protecting the environment, and

support for labor concerns within the

United States and abroad.

EUROPEAN ALLIES

Second, President Bush will take one

or perhaps even two trips to Europe next

Ripon Forun • Spring 200 I

year. First, there is the semi-annual EU­

US. summi t during the Swedish presi­

dency.1 t is in the first half of the year, when

it is the turn of the EU to be the host. 1

would guess that if President Bush makes

this trip, he would also try to arrange a

stop at the North Atlantic Trade Organi­

zation (NATO). The other trip is haly's

G- 7 economic summit in Genoa next

summer.

These summits will give the President

an opportuniry to outline his views and to

hear directly from America's closest allies,

on both economic and securiry topics.

A NEW ECONOMIC RELATIONSHIP Let's look fust at the economic agenda

with Europe. 1nevitably the negotiations,

or worse, the legal conflicts on individual

cases (such as bananas, beef hormones, or

the Foreign Sales Corporation legislation)

will influence the tone and context of the

U.S.-European economic relationship.

TIlese cases loom larger than the value of

trade involved. They go to the heart of the

political reliance on the World T Tade Orga­

ni'l..ation (WID) dispute resolution systems.

The real issues in the transatlantic

economic relationship, or course, extend

far beyond these cases. The corporate re­

structuring taking place, especially in Eu­

rope, is helping to create a de facto, inte-

grated transatlantic market. For example,

last year, European firms announced S241

billion in merger.; and acquisitions deals

with the United States, and U.S. firms re­

ported S97 billion dollars of activity in

Europe.

TIle new executives in Europe are n..x:­

ognizing that a strong strategic position

requires a foothold in both the United

States and Europe. European companies

not only want the link to U.S. business,

consumer and financial markets, but they

need to stay abreast of the American ad­

aptation to make use of these new tech­

nologies. Yet we do not know whether the

transatlantic political leadership will work

together to get ahead of, or even catch up

with, the social dislocation and anxiety

created by this deeper integration. These

concerns are often lumped under the term

globalization, bur the changes stem from

technology and fmance as much as global

competition and integration.

Therefore, I believe the larger trans­

atlantic economic agenda has three com­

ponents. First, we still have the challenge

of overcoming some of the traditional trade

barriers: tariffs, quotas and the use of al­

legedly defensive laws that slip into pro­

cess protectionism. Agricultural trade still

remains very constrained by barrier.; and

subsidies. Second, we wiU have to deal with the

intersection of deeper economic integra­

tion \vith topics that our governments have

traditionally considered areas of domestic

regulation. These might include competi­

tion policies, health and science regulation

and privacy protection.

Once differences in these areas slide

into conflicts with political battle lines

drawn, it becomes very hard to work out

compromise arrangements that can meet the

core objectives of numerous parties and con­

stituencies on both sides of the Atlantic.

EU Commissioner for Tmde, Pascal

Lamy, has made a similar observation. He

has called for anticipatory efforts to iden­

tifY and possibly address these issues. For

13

example, the U.S.-EV safe harbor on in­

fonnation privacy may offer an example

of negotiating a solution before a conflict.

Others can contribute to this problem­

solving approach, including transatlantic

businesses and legislative groups. For example, it will be difficult to over­

come the European fearof genetically modi­

fied organisms (CMOs) as long as Euro-

Similarly, with the fall of Milosevic,

the EU and the United States have a real

opportunity to reintegrate the Balkans and

reconnect it with the democratic and eco­

nomic trends with the rest of Europe. I

am not saying this will be easy. Countries

like Romania pose se ri ous problems.

Given the antipathy between the Serbs and

Kosovars. the region will remain a secu-

"Frankly, the tougher security questions in the transatlantic relationship will pertain to Europe's periphery."

pean publics have cause to distrust their own

health and regulatory authoritics.

Third, the U.S. and the EU will need

to decide whether their larger, global in­

terests in an open, dynamic world system

warrant cooperation to set standards for a

global agenda. Obviously, a new global

neg06ating round in the WTO has little

prospect of success if the United States and

EV cannot agree on how to lead together

while still addressing their specific politi­

cal and economic considerations.

FOCUSING ON SECURITY President Bush will also have a signifi­

cant security agenda to discuss with his

European colleagues. The European issues

on that agenda will necessitate care, but I

believe they can be handled successfully.

For example, most American officials

recognize the possible benefits of the Eu­

ropean Rapid Reaction Force if the plans

are matched by real resources. European

armies need these resources to acquire the

military capabilities necessary to become

more mobile forces. Increasingly, Ameri­

cans will look to Europeans to take the

responsibility of insuring that the Euro­

pean military force supports, and does nOt unde rmine , NATO cooperation and

interopcrability.

14

rity protectorate fo r many years.

But if the EU can act coherently and

follow through on practical policies con­

nected to a long-term strategy, the mag­

netic pull of the EU can be powerful.

These countries want to be part of the new

Europe.

Frankly, the tougher security ques­

tions in the transatlantic relationship will pertain ro Europe's periphery. Indeed, a

characteristic of the post-Cold War world

is that U.S. attitudes toward Europe will

be increasingly influenced by the narure

of European cooperation with, or opposi­

tion to, U.S. ap -

proaches toward prob­

lems outside of Eu-

rope.

NEW LEADERSHIP

IN RUSSIA The first case is

perhaps an in-between exa mple: Ru ss ia.

President Putin may

not have a clear strat­

egy, but he is demon­

strating some strong

inclinations and in­

stinct, not surpris-

ingly, related to the oullook inculcated

by the KGB.

While he wants to strengthen the

Ru ss ian state, it is probably through the mistaken means of re­

centralization at a time when the rest of

the world is moving toward distributed and

intcgra.ted networks. President Putin also

wants to reassert Russia's influence over

its neighbors. But it is probably without

the Itt:ognition that Russia would be bener

off with independent, secure and

prosperous neighbors.

He also signals that he wants to re­

vive Russia's economy, but probably

without giving up prerogatives of state

control. True democratic competition

and a free press are, unfortunately, prob­

ably impediments to Putin's plan to re­store Russia. President Putin's attacks

on media are not a good sign.

Nevertheless, Putin and his ilk are

hardheaded and practical men. They

recognize Russia's problems. They don't

want a con front ation with the United

States and Europe because they cannot

afford it, and because they appreciate that Russia's economy needs ties to the

wider world.

As a result, I expect President Putin

to seize openings to advance his inter-

flopon Forum • Spong 2001

(SIS in a calculating fashion. But he can

be influenced, especially if the U.S. and

EU aCI together to signal that Russia

will pay a price for ce rtain actions. For

the United States, and I hope the EU,

one of the most sensitive topics will be

Russian support for the proliferation of

weapons of mass destruction and missiles.

MISSILE DEFENSE The subject of missiles raises what I

expect will be the security issue that will

require the most sensi tive handling be­

t\vecn the Uni ted States and Europe in

2001: missile defense. J recognize that

some European s only associate missile

defense with President Bush and the Re­

publicans. bur I think this is a misrakcn

assumption. Especially with Iran's missile

America might not have been able to rely

on European support if London, Paris,

Berlin and Rome were potential targets for

Saddam H ussein's missiles. And we might

not have been able to win Congressional

amhorization (it was a close vote in the

US. Senate) if it involved the risk of a

nuclear attack on the US. by a Saddam

H ussein with his back against the wall.

Recall the anxiety and dangers in Is­

rael caused by Iraqi scud missiles armed with

conventional weapons during the GulfVVar

and multiply it many fold. That is why Is·

rael takes missile defense very seriously, and

has developed with the U.S., an effective

missile defense system called the Arrow.

Given this strategic logic for missile

defense, the U.S. needs to develop systems

that can reduce the threat to US. forces

"Missile defense is not motivated by an American fear that a dictator will wake up one day and decide to take out a U.S. city."

abroad, our allies and at

home. It is not enough

just to defend the U.S.

Funhermore, we

need to examine the pros­

peets for diffcrcm types of

missile defense systems,

such as sea- based and

dc\'c1opmcll(, reports from Iraq and (he

turmoil in the greater Middle East. Any

American administration will press ahead

on missile defense.

On the other hand, I believe that the

US. has not done a good job explaining

the strategic logic for missile defense.

Missile defense is not motivated by an

American fear that a dictator will wake up

one day and decide to take out a U.S. city.

Instead, the concern is that some fu­

ture Saddam Hussein, or even the present

one, will threarcn security interests in a key

location and then use missiles anned with

weapons of mass destruction to checkmate

a U.S. responsc.

IfSaddam Hussein had had lo ng­

range missiles armed with bio logical

or nuclear weapons 10 yea rs ago, we

cou ld have nOt rel ied on plans to bring

half a million troops though Saudi ports.

Ripon Forum • Spong 200 I

boost-phase defenses. These systems

might be more appealing to allies and oth­

ers, because they ca n target defenses

against localized dangers and help protect

allies.

I also think it would help to place

missile defense in a larger context by mov­

ing more quickly to cut offensive weap­

ons. The U.S. and Russia are no longer

nuclear enemies. We don't need huge ar­

senals to fulfill targeting plans based on a

balance of terror. There cerrainly are signs

from Russia that it would like to cut of­

fensive nuclear forces rapidly, betlusc it

cannot afford its current strategic rocket

forces. And Russia may also have an in­

terest in boost-phase missile defense.

In sum, I believe the President will pUI'"

sue missile defense, but he can do so much

more adroitly with Europeans and Russians.

VVe may not agree fully, but the U.S can ex-

plain its strategy better and perhaps meet

some European and Russian concerns.

CHINA: U.S. PDLlCY BEYDND WTD

The President 's third major trip will

be to Shanghai in November for the APEC

summit. This visit will enable the Presi­

dent to meet the Chinese leadership with­

out all of the formalities and expectations

associated \vith a one-on-one state visit. It

also sets a time frame within which the

Administration will need to shape its

China policy.

Both countries can "map bacbvards"

to plan what actions they might take to set

up the summit. 1 can assure you thar Chi­

nese diplomats arc already thinking precisely

in these terms. There is a need for a new

framework for Sino-Amcrican rclations. fu the Members of Congress can tell you, both

parties and Members across the whole po­litical spectrum, have a strong interest in U.S.

policy towards China.

President Bush is going to need [0 build

his China policy on the foundation

of support from a core bipartisan

group in Congress. In doing so, he will no

longer be able to employ China's accession

to wro as a rallying point for a positive

counterweigh t. In fact, the inevitablc

complaints about China's implementation

of in 'NTO agreement are likely to produce

frictions.

Therefore, the Administration will

need to consider how to adjust the alli-

15

anee relations with Japan and South Korea,

given the changes taking place in both coun­

tries. It will also have to consider how the

adjustmems with these fWO kt.'Y parOlers will

relate to security relalions with C hina.

I also suspect that uneasy relations

between Taiwan and Beijing will con­

tinue to create tension between Wash­

ington and Beijing. T he good news is

that Beijing is no longer maki ng threat­

eni ng sounds towards Taiwan and its

new President, Chen Shui- Bian. T he

bad news is that Beijing does not trust

C hen or h is party, the O PP, and is try­

ing to wea ken both so tha t the O PP will

fail in next year's legi slative elections.

A more flexible and self-confident

leadership in Beijing could have picked up

on Chen's early offerings. They could have

then moved beyond them to reshape rela­

tions and created a reciprocal process in

areas like arms control, economic and even

international political relati ons. But

Beijing is limited by its own poli tics of

political succession leading up to the 16m

party in congress in 2002.

INCREASING TENSIONS IN THE

MIDDLE EAST AND PERSIAN GULF Finally, President Bush will face un­

happy prospects in the M iddle East and

Persian G ulf region. Anti-American and

Anti- Israeli sentiment is intensifYing in

the Arab countries.

A recent poll conducted by Bir Zeit

University reported that 73 percen t of

Palestinians support some sort of military

operations against U.S. targets in the

region. Th is sentiment has spread to

varying degrees in the Arab world, a world

that is weakened by its stagnant economies'

continued reliance on oil prices, and

internal challenges to legitimacy.

On the other hand, the Israeli public

has undergone a number of blows, the

implications of which will be clarified in

next year's election in Israel. After ten

years of difficult debate, Israel's democracy

"

had come to term s with the idea of a

Palestinian state and a withdrawal from

Lebanon.

Israelis were then shocked by Araf.n 's

unwilljngness to Baf2k's offers, the

outbreak of vio le nce , and mos t

significantly, the hostility of Arabs within

Israel irsel£ No one will do the Palestinians

any favors by suggesting that the United

Nations, or anyone el se, will save the

Palestinians from the need to make hard

compromises.

aity, circumvented mOst of the sanctions

and eroded the international coalition.

Then: arc regular reports about its missile

program. Iraq's nuclear program only lacks the necessary fissionable material. And re·

glonal instability serves Saddam's interests.

THE NEED FOR PARTNERSHIP It is hard to believe that the next four

years will not witness a major challenge to

peace and security in the Middle East,

Persian Gulf, or both. W hich brings me

"It is hard to believe that the next four years will not witness a major challenge to peace and security in the Middle East, Persian Gulf, or both."

I have begun to wonder whether the

Palestinians face even a bigger problem.

Unlike Israel, whose democracy debated

these issues and provided a basis o f le­

gitimacy for comprom ise, the Palest in­

ia ns do not have a legitimate political

process through which the public can

participate, debate and resolve differ·

ences peacefully.

As a result, the Palestinian leaders are

wary of the reaction, or even violence, from

their own public. Furthermore, the public

has no sense of civic responsibility to com­

promise, which is developed through par­

ticipatory politics.

In lran, the forces associatt.-rl with Presi·

dent Khatami have been embattled on do·

mestic issues and certainly have not chal­

lenged Iran's foreign and serurity policies.

Iran conlinues to deny Israel's right to exist,

and it conlinues to develop long-range mis­

siles and nuclear weapons. Iran also refuses

talks with the United States despite an offi·

cial offer. Indeed, Iranian fundamentalists

arc quick to attack anyone who suggests im·

proved relations with the United States.

I n I raq, Saddam H usse in ha s

thrown ou t the inspectors without pcn-

back to my principal point about the Presi­

dent and Europe.

President Bush will face a number of

international economic and security chal­

lenges in key regions around the globe,

starting early next year. H is relations, and

indeed America's relations with Europe

will increasingly be based on U.S. - EU abil­

ity, o r inabi lity, to frame common ap­

proaches to this global agenda.

Good transatlantic relations arc nec­

essary, but not sufficient.

As Europe's capabilities grow, as I

believe they will, and as regional economic

and security issues become more intercon­

nected around the world, the EU and the

United States will need to do more to­

gether. They will need to become partners,

or at least cooperative colleagues, on

a global agenda. m Rohut Zot/lick was rtuntly appointtd

Unittd Statts Tradt Rtprtstntati'IJr. Brfort

acupting this position, IN was a follow attht

Gtrman Marshall Fund, a Washington think

tank (1999-2001) and str'fJtd as fht CEO­

drsignate lor (ht Center oj Straltgic and

Intt matioua! Sludits (1998-99).

Ro pon Forun • Spnng 2001

A 50-50 Senate: Will It Work? A Ripon Interview with Majority Leader Trent Lott

Ily Ashlcigh Ilobcrls

he 50-50 split in the United States Senate is unprecedented in modern political history. Last month,

The Ripon Forum discussed the historic power-sharing

agreement with Majority Leader Trent Lott (R-Miss).

M any have touted the broad framework. which equally

split committee space, staff and funds ben'lccn Republicans and

Democrats, as the bellwether on how the 107'h Congress will operate.

RF: Mr. Leader,howwouldyoudefine me 50-SO split as it stands

today? What does it mean in practical tenns?

Majority Leader Lott: What it really means is that every vote in

the United States Senate will be a challenge for both sides of the

aisle to come up with a winning margin. Just yesterday, on the 6'"

of M arch, we voted on an important disapproval resolution to

stop a ~ri~s of regulations that Former President Clinton imple­

ment~d right before he left office. The regulations were not based

on good science and were going to cost the country's business and

industry sector billions of dollars.

We w~re able to pass that resolution by a bipartisan vote,

with aliSO Republicans and six Democrats. So, as you can sec, it's

tough to make it work. But, in a unique way, it may force the

Senate to work together more than we have in the past when one

side or the other had a signifi cant margin.

RiJXln FQo'UTl • Spring 200 I

MQjrm'ty !JudO' Tunf Loll disCI4m fix 107fh JtJsion.

RF: Press accounts described the process by which you reached

an agreement as difficult, with strong opposition from both par­

ties. W hat is your recollection with a month's hindsight?

Majority L tadtr L oti: It was very difficult. It was probably

one of the two or three most difficult things thai I have had

to do since becoming M ajority Leader. When J was first

elected Senate Majority Leader back in 1996, the U.S. Senate

was com pletely balled up. It was a presidential election year.

17

Our Leader, Bob D ole, was running

for Presiden t and the Democ rats did not want him to have any suc ­

cesses. Nevertheless, we were try­ing to move his agenda and basi ­

cally everything was just completely stopped.

"In my opinion, the trial should have resulted in the removal of the President from office, but that did not happen and more to the point, I knew it was not going to happen."

Part of the p roblem and, the

key legi slative iss ue, was what should be done with minimum wage. I had to find a way to get the Senate not only back up and standing, but also

moving forwa rd in order to deal with thi s difficult issue. We needed to do the right thing and figure out what

amount could be passed. The year before last , the Senate had to get through

the Impeachment trial in a way that fulfilled our Constitu tional respon­

sibi liti es . We had to find a way to

reac h a reasonable conclusion wit hout doi ng dam ­age to the Senate or dragging the matter our endlessly.

In my opinion, the trial should have resulted in the removal of the President from office, but that did not happen and more to the poim, I knew it was not going to

happen. So, I had to figure out a way to do my job, protect the Senate and fu lfill the requirements of the United States Consti­tution. I think we did that, not to everyone's satisfaction, but I think we did that.

"

The third toughest thing that I have had to deal with since I've been Leader brings us back to the current 50-50 divide and

how you pass a system of rules that permit the Senate to function as a legislative body in a politically JUSt way. Frankly, a lot of our people didn't want to deal with it. Some were in denial that

we had lost some seats, that in fact we were in a temporary minority and that we were going to have to deal with the Democrats in a different way than we had in the past.

Wile everyone else was worrying about the Presidential election results, I worked for weeks and months trying to figure out the best course of action for the Senate. I

was reading the rules, writing papers and exchanging proposals

with Minority Leader Tom Daschle, and trying to come to grips with what we were going to have to do. When I presented

that to the Republican Senate Conference, they did not like what

they heard nor did they want to pursue our current course of action. There were quite a few people who said, 'No, we'll do it our way and the Democrats will just have to like it.' WeU, that wasn't going to be possible.

Ripon Forun • Spnng 2001

u.s. Senator Trent lott is the Senate's 16th Majority leader. He is the first Mississippian ever to hold the Senate' s top leadership post. Senator lott was elected Majority leader on Wednesday, June 12, 1996.

] was also concerned that an inside the beltway rules fight

in the Senate would be a distraction from our new Presiden t 's

agenda. I did not want to open the United States Senate's 10Th

session with a rules fight and a filibuster over Rule 25, part h.

I thought a meaningful discussion ahout education, defense,

tax relief, social security and other issues the American people

really care about was in order.

There were a few good men and women in the confer­

ence that stood up and said, 'Let's get rC:l1. This is where we

arc. This is what we arc going to have to do, whether we like

it or not, and the most imponanr thing is how we are going

to pass the agenda of the President, the Congress and the

American people.'

I think that we did the right thing. And, I think that even

the people who resisted at that rime, in retrospect, realize

that I did the best I could given the political hand we were

dealt. It was the right thing to do.

RF: Has thi s new arra ngement made "political gridlock"

more difficult and how is it working with regard to the indi­

vidual committees and their legislative timetables?

Majority Leader Lott: It has changed the process. Again, we

must have unity and reach across the aisle. That takes a lot of

work. If we do that it may well be we wil l have less gridlock

on the big issues and keep the little ones off the table. It 's

going to be difficult. Every committee is divided 50-50, with

some more partisan than others. While it won't be easy, t be­

lieve we can make it work.

RF: How will the 50-50 divide affect the Bush agenda?

Majority L eader Lott: Well first, to even co nsider President

Bush's agenda, we had to p:l.SS the rules, the committees had

to come to agreement regarding funding and then there were

their individual rules. I think now, with that behind us, it will

al low us to con tinue to focus on the substantive issues and

the president's education and tax relief initiatives.

Ripon Fon.rn • Spnng 200 I

RF: Are you as optimistic with regard to the budget and the

proposed tax cut?

Majority !..Lader Loll: I think the fact that we dealt with this prob­

lem tllkes that disagreement and fight off the tllble and allows us

to focus on the tax cut. Without question, having a 50-50 Senate

will make the tax cut debate and the results very difficult to achieve.

That is not because of what we did with the rules., but because we

have a 50-50 Senate. With the Vice-President we actually have a

51-50 Senate. But, t believe that if we can get Senators to do their

work and focus, then we can win these tough issues.

RF: Is there an understanding that the current agreement is in

place for the remainder of this session, regardless of possible

change in the Senate?

Majority Lead" IAtt: No. there is not. If the numbers change, ei­

ther way, then the rules could very wcll have to be fC-vis ited. Some

committees, however, have reached an agreement for the balance of

this session. Who knows what providence will provide. good or bad. 'The bst time we had a similar siruation, there were nine senators who

died in the next two years and yet the majority never changed hands.

RF: Will you be that lucky?

Majority Leader Lott: Wcl1, we'U just have to see.

Ash/~jgh Rohtrls iJ lhe editor of The Ripon Forum.

............. t, 1IifI ..... , ,,. 'Rhl

•••• 11-11 .. .:: II ... ... ,.." .... ·~IIIIIIIiJllltIIfiIJ .. ;;. F - . .................. JtJi , ~ .

'-d '-, --Sf ' In 1i • ..,IIIIiIi"_I-,;1II ...... I a a,

m

"

Putting People First Congressman Jim Kolbe pushes to modernize the nation's outdated and inefficient Social Security program.

By u.S. Itcprcsenlalivc Jim Kolbe

Congressman}im Kolin

20

or too long, my colleagues and

predecessors have cons idered

Social Security the Third Rail of

politics. My experience, both as a

Member of Congress and as Co­

Chairman of the National Commission

on Retirement Policy, has convinced me

that [he American public is ready and

willing to discuss the need to modernize

Social Security, albeit in a constructive,

responsible manner.

It is essen tia l that we address not

on ly the financial shortfal ls looming

in Social Secur ity, but that we al so

modernize the program so that Social

Security is as good a deal for today's

worke rs as it was for yesterday's work­

ers. Soc ial Security's benefit struc­

ture is based on an outdatt!d portrait

from tht! 1930s: a husband as tht! so le

wage t!a rnt!r with a dept!ndt!nt wife

who remains a t home. As two-carner

househo lds becomt! the norm and the ~typ i cal" family becomes harder to de­

fine, Social Security has not adapted.

Thi s failure has resulted in gla ring

inequalitie s between si ngle and dual ­

earne r fam il it!s , younger and ol dt!r

workers, and among married, divorced

and widowed retirees.

PERSONAL ACCOUNTS ARE

A POWERFUL TOOL As the co-architect ofhvo Social Se ­

curity reform proposals, I know first­

hand how persona l accounts, when

structured prope rly, can be a powerful tool in reducing the financial burden

Social Security will impose on our chil­

dren. Moreover, personal accounts are

an effective way to reduce and/or elimi­

nate the generational and familial in­

equitit!s perpetuated by the current sj'i­

tern. SpecificalJy, personal accounts art!:

Flexibl t! - Unlike the current So­

cial Security program, with personal

accounts your retirement savings

work for you while you are working or staying at home .

Equitable - A modernized Social

Ripon Fon.xn • Spring 200 I

Security system incorporating pe r­sonal accounts wou ld correct many

of the inequalities co nce rning di ­vorce, dual-earner families and wid­

ows' benefIts.

Portable - Personal accounts go

with you as you change jobs, change spouses and enter and exit the workforce. Empowering - Personal accounts provide low- income Americans the

opportunity to create wealth by us­ing their exist ing tax dollars. They also insulate retirement benefits

from political risk. Finally, personal

accounts would establis h pro perty

rights to a portion of your Social Se­curity benefits.

Safe - Every pe rsonal account plan introduced in Cong ress provides workers with the choice to invest in safe, ri sk- free Treasury securit ies.

No one should be fo rced to invest

in the stock market. F iscally responsible - Using cur­

rent payroll taxes to pre- pay a por­

tion of future benefits will help re­duce the $11.3 trillion and currently unfunded obligation looming over

Social Security.

While individual accounts are not a magic bullet, they can be a

powerful tool in restoring fiscal stability and ge ne rational equity to the

Social Security program. T he bipartisan leg islation I have introduced with

Representative Charlie Stenholm (D­Texas), H R 1793,establishes personal accounts that are carved out

from existing payroll taxes, enhances the

p rogressive benefit formula of the curre nt sys tem and

actually strengthens the government safety net by increasing the defined benefit for low-income workers. Our plan

Ripon Forum • Spong 200 I

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21ST CENTURY RETIREMENT SECURITY ACT

A Bipartisan Plan to Save Social Security Congressman Jim Kolbe (R-Ariz.) and

Charlie Stenholm (O-Teus)

The Higt1ligt1ts of the Bill

Scored by the actuaries of the Social Security Administration as restoring 15-year solvency to the Social Security program.

Has bipanisan, bicameral support.

Contains no tax increases.

Preservts the existing benefit promises for current and near retirets.

Increases the rate of return for all workers.

Enhances the government safety net.

Reduces Social Security's S1.4 trillion unfunded liability betwetn 2014-2034 by more than 50 percent.

Dots not rely on accounting gimmickry.

Does not rely on projected surpluses to create new general fund liabilities.

Establishes the opportunity for all Americans to create wealth.

Provides individuals with ownership of and control over their retirement assets­including the freedom to invest in safe, risk-free Treasury securities.

Rewards work.

preserves current law benefits for existing

and near- retirees, eliminates publicly­held debt by 2014 and places Social

Security on sound fiscal footing in

perpetuity.

duce our obligation in the future.

The 21st Century Retirement Se­curity Act provides payroll tax relief for all working individuals under the age

of 55 by diverting two percent of Fed­eral Insurance Contributions Act (FICA) taxes into personal Ind ividual

Security Accounts. Wo rkers would be allowed to make additional voluntary co ntributions of up to 52,000 a year to

their individual account. The legisla ­tion also provides a savings subsidy to help low-income workers build their

individual accounts.

WHAT IS THE

KOLBE-STENHOLM PLAN! The Kolbe-Stenholm Social Security reform

plan is based on the concept of "pre-funding."

Currently, the federal govern ­

ment is running a surplus of So­cial Security. This bill would use the

surplus to pre-pay a portion of future benefits to workers now, and thereby re-

The individual accounts in our plan would be modeled on the federal government's Thrift Savings Pl an

21

A RESPONSE TO ISSUES AND CONCERNS

Q. Why is it bfttfr [0 allow indiYiduais to inmt in tht sUKk marktt~ Why not Itt dtt pmmflll ilMSt tht S«QJ Securiry trust fund in the marttt~

A. Government investment dots not addrm the national cry for pmonal ownership and conlfol. Polls demonstrate that Americans want their own stake in the U.S. Kanomy, and more (ontrol oyer their retirement brodin. The current symm pro­vides only a statulory right to benefits that (ongrm may adjust at any lime. Only penonal iccounu offer workers ownmhip of (onnitutionally protemd property.

"oreovu, inmting the trun fund in equities would cauu risk to permute the en· tire ,ynem. This is &tUUSf the symm's solvency, and the ability to provide basic Social Security btnefits. will rise and fall with the performance of the nock market If the market suffers a downturn in a year in which the trust fund ratio already is low, the ability of the Social St<urity symm to provide benefits would be jeopar­dized.

Undel the 21n Century Retirement Act, the Social St<urity Trun Fund's ability to provide bene fin is not afft<ttd, enn if the market has a bad year.

Once the federal gonrnment's balance shut depends on the performance of the equities market, influencing the market up will become an unavoidable aspect of day-to-day t<onomic decision making in Washington. Political influences will be brought to bear on the choice of Social Security investments. Acquiring significant ownmhip stakes in a large number of corporations has significant consequenm. Moreover, government innnment in private companies would conflict dirtctly with the federal government's role as a regulator of industry.

lastly, simply moving the Irun fund into equities to duck tough choices will not add to national savings. If Social Security did get a higher rate of relUrn , it would be at the COil of lower rates of return in the private savings symm. In other words. it would jun be a hidden til on other invtstments 10 fund current benefit promises of the federal government.

(TSP). In TSP, individuals pe rsonally choose investmen t options, including a stock index fu nd, a bond index fund and

a Treasury securities index fund. Unlike other proposals, our plan would provide individuals with owne rship and con trol over their retirement assets, including the freedom to invest in safe, ri sk-free Trea­sury securities. It does not force anyone

to invest his or her Social Security funds in the stock market. It 's your money, it's you r choice.

The b ill also strengthens Social Security's safety net by creating a guaranteed minimum benefit that is

more substantial than what the cur­rent law provides low- income work­ers. Moreover, thi s benefit is given

regard less of other factors. Conse­quently, any inco me from the indi­

vidual accounts would supplement, not replace, the enhanced guaranteed Soc ial Secu rity benefit fo r low-in­come workers.

Our plan makes chan ges in the defined benefit, but in a progressive

manner that in sulate s vu lnerable populations. These benefit adjustments large ly affect mid-to - high income

individuals who would benefit

di sproportionately from the individual accounts.

POli cyma kers may debate the details of the perfect solution for Social Secu rity, but all of us mu st share

a commitmen t to address ing the issue he ad-on. There are few issues more important for C o ngr ess and the

p resident to tac kle than finding a b ipa rt isan consensus to s tr engt hen Social Security for our ch ildren and the

ge nerations that will follow. No matter where one stands on these ideas, we

must begin to tal k honestly a nd

directl y, without resorting to partisan attacks and demagoguery.

If Congress an d the Wh ite H ouse do noth ing, by 2030 the annual cash

defi ci t in Social Security will reac h $814 billion (in 1999 dollars). To help

close thi s gap, th is legislation slowly phases in other changes that would re­duce the cash shortfall and eliminate

over 50 perce nt of the 57.4 trillion un­funded liability. While some of these provisions involve some tough choices, as a recent Government Accounting Office report illustrated, they are nec­essary to ensu re that Social Security

survives for the next generation of r."I ret irees and beyond . ....

us. RtprmntativtJim Kolbt isa Rtpublican

rtprmnting tht fifth District of Arizona. Ht

urvtS as a mtmbtr of tht Appropriations Commit/U.

RJpon Fon.m - Spring 2001

At Fannie Mae, we're turning the roadblocks

to homeownership into picket fences.

You can see Fannie Mae at work all across the country. A family in the Midwest

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Because every day, we work with our mortgage lender

partners and other housing leaders to fulfill a goal. To knock

down the barriers to homeownership. To lower costs

andincrease opportunities for low- and moderate-income families.

To make affordable rental housing available to all Americans. How do we

do this? As the nation's largest source of mortgage funds , we put our financial

strength and innovation to work to make sure that low-cost mortgage funds are readily

available so that our lender partners can help more working families live the American Dream of homeownership.

We believe that when more Americans have safe places to call home, it strengthens families, communities, and

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lower rates. Lower costs. Increasing homeownership opportunities. Fannie Mae at work.

B(' a Part of till' Bipoll So('i(·t~

The annual Rough Riders Award Dinner is May 1, 2001 at the Willard Hotel in

Washington, D.C. Ripon is proud to award Senator Don Nickels, HHS Secretary

TommyThompson, Congressman Michael G . Oxley and Congresswoman Nancy Johnson

with the Teddy Roosevelt Rough Rider saber for their achievements in public service.

QmK"mman Clay Shaw (R-FIIl.) sharts highlighls.from fix Ripon 'fIiial, "Rt!al PlOplt. Rial Progrw" with Ripon mtrnMrs.

THE

RIpON F ORUM 501 Capi/ol Court, NE, Sui/e 300

Washington , D.C. 20002

Clara NdxJI, un altn7lllltdtltgalt.from NnDJrruy. lath with Congrasiof/al Athlisf)ry Board mt!mbffS &nattlr Susan Collins (R-Maint!) Qnd Congrtu'WOmanJenniJtr Dunn (R-Wash.) a/lhe 2000 IUpublieon National Conwntion.

Sma/or Chuck Hagrl (R-Ntb) disctmes flrrign pdirywilh.formn' &prtsn/tQliw and Ripon Srxi(ty Pmidml Bill Frenul.

SECOND-CLASS

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