Five United States Policy Debates to Watch in 2005

	Jerry Johnson Executive Vice President and General Manager Brodeur Worldwide, Washington DC jjohnson@brodeur.com

Incumbent Republican President George W. Bush was reelected on November 12, 2004 with approximately 52 percent of the popular vote. Compared to recently re-elected incumbents, it was not a landslide victory. The victory was significant, however, on two fronts. First, it provided the President with what he termed “political capital” for the second term. The election affirmed President Bush’s direction for the country despite a deeply divided electorate and many on-going controversial government actions, not the least of which is the war in Iraq. The post-election Bush cabinet shake-up and comments from the Bush economic team suggest the President is ready to spend this “capital” to pursue long awaited reforms on several policy fronts.

The other significance of the election was the decisive Republican sweep in both houses of Congress. Republicans increased their position in the House of Representatives from 227 to 232 seats (of a total of 435). They increased their majority in the upper house or Senate from 51 to 55 (of a total of 100). Prior Republican majorities were thin. They made it easier for Democrats to block, stall, or amend Republican initiatives. The solid Republican majorities in both houses should make it easier for Republicans to move legislation through the Congress and minimize the ability of Democrats to amend or delay.

Overall, the 2004 elections gave conservative Republicans a significant and strong grip on two branches of U.S. government – administrative and legislative.

Conventional wisdom is that while foreign policy dominated the first Bush Administration, the second term will focus on the United States domestic agenda – particularly domestic economic policy. Continued instability in Iraq and tension in the Middle East, Korea, and other areas could shift the Bush Administration’s attention back to foreign policy. However in the domestic arena there are five policy domestic debates that bear watching.

They are noteworthy on several fronts. First, they are all areas where there is some form could represent a sharp departure or change in U.S. political economic policy. Second, they are issues that sharply divide both U.S. opinion leaders and the general public. Finally, they are debates that could fundamentally change the U.S. business or political environment. In sum, they are debates whose outcomes could significantly influence the shape of the political, social, and economic development of the United States for decades to come.

REFORMING DOMESTIC U.S. ENTITLEMENT PROGRAMS

The most important and perhaps most divisive policy issues facing the Bush Administration in 2005 is reform of three key United States entitlement programs:

1. Social security: the Federal retirement insurance program

2. Medicare: the Federal retirement medical insurance program (part of social security)

3. Medicaid: the federally funded but state run medical insurance program for the poor.

Social Security was created in the United States in 1935 during the depths of the depression. The program was initially designed to provide limited financial benefits to just sixty percent of the U.S. workforce. Today, Social Security retirement benefits along with federally funded Medicare medical insurance covers 95 percent of all U.S. workers.

Social security benefits are funded on a “pay as you go” basis; that is, today’s workers and employers fund today’s retirees. The problem is that the number of U.S. retirees is growing while the number of workers is not. As soon as 2012 (only eight years from now) more money will be going out to Social Security recipients than will be coming in from workers' payroll taxes. There is a “trust fund” that allegedly could keep the program going another twenty years however the social security “trust fund” is largely fiction: the federal government has already loaned out the money to itself and spent it.

The financial problems facing the U.S. Social Security system are severe and getting worse. Fixing them will made more difficult given the political sensitivity surrounding Social Security, often referred to as the “third rail” of American politics.

Bush Administration’s focus is on privatizing a portion of Social Security for future generations. The goal is to take some money out of the government program and form a means to build personal savings portfolios that could earn greater returns. This would ease the burden in years to come but actually make the short term situation worse by diverting some of the tax income that current workers pay for today’s retirees. Some estimate the cost of this transition from a federally-run guaranteed program to a partially privatized program to be between $1 to $2 trillion dollars.

The debate over Social Security will likely have profound consequences for the U.S. political and economic landscape. If pursued aggressively it will consume the time and resources of both the Bush administration as well as Bush Administration critics. Other policy initiatives could suffer including efforts to pass a new energy bill, tort reform, prescription drug re-importation policy, and immigration reform.

Some worry that the Bush Administration’s effort to reform Social Security could suffer the same fate of the Clinton Administration when it tried to radically reform health care in 1992. That debate consumed much of the administration’s first two years in office, led to rancorous and divisive debate and the Democrats losing control of the House of Representatives in 1994. But many Republicans say that the Bush Administration will not repeat the Clinton Administration’s mistakes. Moreover, as a conservative with strong majorities in both houses, Republicans believe Bush will be able to build a consensus on social security reform that all agree are badly needed.

Regardless of the result, any change in U.S. entitlement programs could have a significant impact on businesses operating in the area of financial advisory services, insurance, investment, pension fund management, health insurance, and health care providers. The debate over America’s retirement security will present them and many others an opportunity to identify how they contribute and fit into a new world of post social security reform.

MANAGING TAX, TRADE AND MONETARY POLICY

Closely related to the problems with Social Security are other financial pressures arising from the massive and growing budget and current account deficits. The current estimated Federal budget deficit is $413 billion. Even by the Bush administration’s most ambitious standards, they only expect to be able to reduce that by one-half by the end of their next term that ends in 2008.

In addition to the budgetary deficit, the United States is also running record trade or current account deficits. Like both the social security and the budget deficit, the deteriorating U.S. trade deficit has been a problem for nearly twenty years. The consumption-led nature of U.S. growth has sucked in record levels of imports. A particular sore spot is China, whose exports to the United States have ballooned in recent years.

One of the consequences of the twin deficits is a continued decline in the value of the dollar. Since 2002 the U.S. dollar has fallen 15 percent against a basket of currencies and shed 23 percent of its value against the euro. This has been welcome news to United States exporters as it makes the value of their goods more competitive in foreign markets. However those outside the United States, particularly European countries, have cried foul and claimed that the U.S. policy of “benign neglect” of the dollar’s value risks an international economic crisis.

The Bush Administration has few good options. Given the size and macroeconomic impact of the twin deficits, intervention to stop the dollar’s slide has little chance of working. Moreover it goes against the Bush Administration’s conservative philosophy of letting markets work.

However a continued decline in the dollar will eventually put pressure on the United States Federal Reserve to raise interest rates to prevent inflationary pressures and maintain an incentive for foreigners to continue to hold massive amounts of dollars.

Any hike in interest rates, in turn, could dampen U.S. economic activity, particularly the housing market which has contributed heavily to the U.S. economic recovery.

Another option for the Bush Administration would be to adjust tax policy to address the budget deficit, something that could also dampen consumption and improve the U.S. current account balance. However there is no hint from anyone in the Bush Administration – either new or old cabinet secretaries – that a tax increase is being contemplated.

The evolution of U.S. fiscal policy bears watching for two reasons: one internal and one external. The internal dynamic will revolve around conservatives in the Republican Party. Although Republicans have firm control of all branches of government, they are not of one mind on fiscal policy. Many are uneasy about the explosive growth of the budget deficit and would sacrifice tax policy to deal with it. Others are convinced that temporary deficits are a necessary evil and that only through low taxes can the U.S. economy continue to grow. Steering a budget and trade policy that navigates both wings of the Republican Party will not be easy.

The second dynamic is how U.S. fiscal policy impacts the U.S.-European relationship. In a famous statement during a dollar crisis in the 1970s, then Treasury Secretary John Connally told his European counterparts, "The dollar's our currency; but it's your problem." That led to a schism between the two continents that could be repeated. Still reeling from the fallout of the Iraqi war, the dollar and deficit issues could increase tensions between the continents even further.

REFORMING MEDIA AND TELECOMMUNICATIONS RULES

This year will be the first year in what is widely believed to be a multi-year effort to radically overhaul U.S. media and telecommunications rules.

There is a growing recognition that the current U.S. telecommunications law, written in 1996, is in out of date. The law was written in the aftermath of the break-up of AT&T, the United States private phone monopoly. It focused on assuring competition in a post-AT&T marketplace. One of its most argued provisions was a requirement that the regional companies that emerged from the break-up, called regional Bell operating companies or RBOCs, be forced to lease their networks to rivals at discounts to assure competition in local-phone service. The regional companies fought an eight year battle to get those provisions lifted and on June 9, 2004, the four RBOCs – Verizon, SBC, BellSouth, and Qwest Communications – won a significant victory when the Bush Administration declined to intervene in an appeals court ruling gutting the local-service leasing requirements.

In today’s world, however, competition is not the issue. Consumers wanting phone service have a plethora of choices – wire line service, mobile phone service, and most recently, voice over Internet protocol (VoIP). And in each category there are many different businesses competing in both the business and consumer markets. Indeed, today’s battle is not over “plain old phone service” – also known in the industry as “POTS” – but over a new service: broadband delivery.

The Bush Administration in its first term launched an initiative to have universal U.S. broadband service by 2007. Despite having the largest number of broadband connections, as a percentage of the population, Americans are not as connected as many other advanced industrialized countries. That limits the ability of digital content rich services to develop (see next section on IP policy). At the same time broadband providers see huge potential for the U.S. market as the revenues and profit margins on broadband services far exceed that of “POTS”.

Business interests are betting heavily on ways to tap the U.S. broadband market. In 2004 and 2005, Verizon alone will invest almost $5 billion in laying fiber cable directly to homes and offices. They plan to use the fiber to not only provide broadband Internet access, but also compete with cable in the delivery of digital television services. The cable companies are not standing still. Comcast Cable television is undergoing a multi-billion dollar upgrade of its network and has begun to offer telephone service using VoIP technology. At the same time, many independent Internet companies are offering telephone services using VoIP technologies. There has also been a flurry of investor activity in the satellite delivery of broadband – both with satellite television and enterprise providers – capitalizing on satellite’s ability to connect anyone regardless of geography. Finally new technologies such as WiMax and broadband over power lines are providing everyone from start-ups to municipal power utilities to provide broadband service.

These developments make much of the current U.S. law antiquated. In fact there an increasing number of opinion leaders see the current telecommunications regulatory regime as a significant impediment to increasing broadband penetration in the United States. Among the many issues that will be debated are:

	How or whether to regulate voice over Internet protocol
	How or whether to regulate pricing of telephone and television services
	How or whether to continue competition laws
	Funding and implementation of policies for rural areas
	Federal vs. state regulatory authority

At stake is nothing less than tens of billions of dollars in capital investment and the ability of the American economy to adapt to a broadband-connected international economy.

DEVELOPING A NEW REGIME FOR PATENT, COPYRIGHT AND TRADEMARK

According to many experts, the opportunity for growth of the broadband-based economy is the ability to move right digital content through the network. However the artistic community – particularly the major record labels and movie studios – are concerned that the digital world combined with broadband networks mean nothing but more piracy and lost profits. They have bitterly fought against reforms to laws that modify intellectual property to a digital world, particularly copyright laws.

2005 may well be a brake-through year in which decisions regarding reforms in the U.S. intellectual property regime – from patent to copyright to licensing – could define a new direction of the world of digital content. At issue is how to define standards such as “fair use” of digital content and who is liable when that content is not used properly.

The current debate has similar characteristics to prior debates after the introduction of the copying machine in the 1970s and personal video tape players in the 1980s. However the consequences of this debate – both positive and negative – go far beyond the battle over whether consumers should be able to photocopy a chapter of a book or videotape their favorite episode of “Friends.”

On the one side is the content industry, lead by the Recording Industry Association of America (RIAA) and the Motion Picture Association of America (MPAA). Core copyright industries – software, movies, sound recordings, and publications – are a significant part of the U.S. economy. The sector is by far the largest U.S. export revenue generator – an important point given the nation’s current trade deficit (see section above). It generates more than five percent of the U.S. gross domestic products and is currently creating jobs three times faster than the rest of the economy. Movies alone today represent almost $15 billion in U.S. export revenue.

The content industry claims that regulations need to be increased, not relaxed, given the world of digital content and the increased penetration of high-speed Internet access. They claim that the movie industry alone is already losing $3.5 billion a year to piracy.

But critics of the current regime, including most of the major consumer electronics manufacturers as well as e-commerce sites, claim that the content industry is holding back the development of a digital media marketplace. They note that the success of Apple’s iPod shows shows that with good products and services consumers will pay for content. They claim that overly restrictive copyright laws are preventing the expansion of investment in broadband services, new e-commerce models, as well as new products that play, record, and manage digital content.

One of the developments driving policy debate is the legal fate of peer-to-peer networks. In August of 2004, the 9th U.S. Circuit Court of Appeals in San Francisco ruled that these file-sharing services were not responsible for copyright infringement because they don't have central servers pointing users to copyright material. Soon after the decision, the U.S. Copyright Office is recommended the U.S. law be amended so that companies that rely on copyright infringement to make a profit be held liable for their actions.

Opponents say the proposal would undo protections provided in the landmark 1984 Supreme Court ruling establishing the legality of the Sony Betamax video recorder. In that ruling, which the appeals court referred to when it upheld the legality of P2P networks like Grokster, judges held that companies are not liable for copyright infringement if the device they make is capable of substantial non-infringing uses.

In the coming year there will likely be several significant attempts to revised the 1998 Digital Millennium Copyright Act – the basic U.S. law that covers intellectual property issues in the new digital age. Moreover, the 9th Circuit’s P2P case is headed for the Supreme Court.

Decisions on these fronts could fundamentally change the opportunities for growth of gaming, entertainment, multimedia services, and a host of other related services and industries. They will have a profound impact – either good or bad – on the opportunities to develop and expand the broadband, digital content, and consumer electronics markets in the United States and abroad.

A NEW SUPREME COURT

Finally the next Bush Administration will have a compliant Congress that should enable it to expedite appointments to both the Federal Courts as well as the Supreme Court. Given the age of many Supreme Court justices, there will likely be an opportunity to add at least one or more justices to the country’s highest judicial body over the coming years. The head or Chief Justice of the Supreme Court, William Rhenquist, is 80 years old and suffering from prostate cancer. Three other justices, Ruth Bader Ginsburg, Sandra Day O’Conner, and John Paul Stevens, are over 70 years old. Stevens is the oldest Supreme Court Justice at age 84.

The change could come at an interesting point in the Court’s development. The Court has become increasingly conservative over the last decade. Many government laws, rules and programs, from affirmative action to states rights, have been reshaped by Court decisions.

In the next four years, the Court will have no shortage of issues confronting it. There will likely be continued rulings on the constitutionality of many government practices arising from laws following the September 11 terrorist attack on the World Trade Center and the enforcement of anti-terrorism laws. There will also be continued debate over the Bush Administration’s handling of detainees and enemy combatants.

But these will likely pale in comparison to several issues that will be given added scrutiny by a conservative administration that enjoys significant majorities in Congress. The first issue is abortion. The new Congress is decidedly anti-abortion or “Pro Life.” There will certainly be significant pressure on both the Bush administration and Congress to select and promote justices that share those anti-abortion views. That will be at odds with many moderate Republicans who believe that abortion is a woman’s right.

Another issue likely to be raised and debate is the division between church and state and the ability of the state to incorporate private, religiously-affiliated programs into what are now secular social programs. This is another issue that could split Republicans, some of whom have strong religious ties and others who believe in a more traditionally conservative distinction between church and state.

Unlike the other four policy trends listed, changes in the Supreme Court will likely not have any immediate and significant impact on business operations. It does have, however, potentially profound implications on the political debate and activity in the United States. As with the case of social security reform, a contentious and divisive battle over judicial nominations – be they for the Supreme Court or for Federal courts – could distract and eventually detract from the government’s ability to function well in other areas of policy.

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