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Inside Politics

FBI Arrests One of Its Own for Espionage; President Bush Heads to Midwest to Promote His Education Agenda

Aired February 20, 2001 - 5:00 p.m. ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

(BEGIN VIDEO CLIP)

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: Allegations of espionage are a reminder that we live in a dangerous world, a world that sometimes does not share American values.

(END VIDEO CLIP)

BERNARD SHAW, CNN ANCHOR: An FBI agent, charged with spying for Moscow. What secrets may have been lost? Could it happen again?

JUDY WOODRUFF, CNN ANCHOR: Education is President Bush's main focus this day. We'll have a reality check on his drive for mandatory testing.

SHAW: And, the new Republican and Democratic Party chairmen will go head to head, right here, on INSIDE POLITICS.

ANNOUNCER: From Washington, this is INSIDE POLITICS with Bernard Shaw and Judy Woodruff.

WOODRUFF: Thank you for joining us.

He was sworn to protect the United States against its enemies, and law enforcement officials say he did exactly the opposite. Veteran FBI agent Robert Hanssen stands accused of spying for Moscow for more than 15 years. We begin our coverage of the charges, the case, and the possible cost to the nation with CNN's Kelli Arena, at FBI headquarters -- Kelli.

KELLI ARENA, CNN CORRESPONDENT: Judy, the FBI says that Hanssen was under surveillance since last fall. The bureau says that it knew he was expected to make a drop of classified information for some Russian contacts at a park just outside of Washington on Sunday night. He did make the drop. He was immediately apprehended and arrested. Agents who made the arrest say that Hanssen was both surprised and very shocked that he had been found out.

Agents also recovered $50,000 in cash left at another drop, which the FBI suggests was intended as a payment for him. FBI says it has not been able to assess the damage caused by Robert Philip Hanssen but described it as exceptionally grave. Hanssen worked for 25 of his 27 years with the bureau in counterintelligence with the highest of clearances.

FBI director Louis Freeh has asked for an outside review of the bureau's security measures that will be conducted by former FBI and former CIA head William Webster. In a news conference earlier, Louis Freeh admitted that it was exceptionally difficult time for the bureau.

(BEGIN VIDEO CLIP)

LOUIS FREEH, FBI DIRECTOR: The FBI entrusted him with some of its most sensitive matters, and the U.S. government relied upon him for his service and his integrity. He has, as charged, abused and betrayed that trust. The crimes alleged are an affront not only to his fellow FBI employees but to the American people.

(END VIDEO CLIP)

ARENA: Hanssen was allegedly working alone. He was careful not to display any outward signs he had come into extra money. As a matter of fact, the FBI says that between 1985 and the time he was arrested he was allegedly paid $1.4 million in cash and diamonds. He was so careful, in fact, that even his Russian contacts, according to the FBI, did not know true identity or that he was an FBI agent.

Mr. Hanssen is facing possible life in prison, even possibly the death penalty, although prosecutors who are trying the case say that they haven't made that determination, whether or not it is applicable here -- whether or not the death penalty is applicable here -- Judy.

WOODRUFF: Kelli, how do FBI officials and the people know who them well explain the fact that this man went undetected for 15 years?

ARENA: Well, as director Freeh said, this really does come down to the basic issue of trust. This is a man who worked side by side with many of his colleagues for many years, there was absolutely no indication there was anything going on. The real turning point came, according to the FBI, when the bureau got its hands on some original Russian documents, which they say, pointed directly at Hanssen. He was not named. He went by the code name Ramon when he was dealing with his Russian contacts.

But they said that once they got ahold of those documents -- it was sometime late last year, they were able to put the pieces together and put him immediately under surveillance and even moved him back to home base to isolate him and keep a close watch -- Judy.

WOODRUFF: Kelli Arena at FBI headquarters. Thanks -- Bernie.

SHAW: Now, let's take a closer look at the secrets that may have been handed over to the Russians. Here is our national security correspondent David Ensor. David, put this in context for us: how serious is this case?

DAVID ENSOR, CNN CORRESPONDENT: This is a very, very serious case, Bernie. This man knew a great deal about how the U.S. tries to collect intelligence against foreign intelligence agencies, he knew a lot about signals intelligence, how interceptions are conducted of communications, and he knew the names and identities of a number of U.S. agents -- Russians working for the United States and is accused of having led -- of having exposed to leading their executions. So this was a very damaging case. Louis Freeh was asked, how did he assess it, at the news conference today. Here's how he put it.

(BEGIN VIDEO CLIP)

FREEH: The full extent of the damage done is yet unknown because no accurate damage assessment could be done during the course of the covert investigation without jeopardizing it. We believe, however, that it was exceptionally grave.

(END VIDEO CLIP)

ENSOR: Now, one recently retired senior law enforcement official told me that he doesn't think that this quite ranks on the level of Aldrich Ames, the number of serious secrets he exposed, but he could well be number two, this spy -- Bernie.

SHAW: Damage control. What is the very first thing the FBI must do?

ENSOR: They must figure out how he managed to go 15 years without getting caught. There are systems in place to try and make sure that people who are trusted with as much information as Mr. Hanssen was, are not likely to be spying for a foreign government. He got through all of those; how did he do it? Do they need to change that system? That will be question number one. And you know, there are some amazing insights in the affidavit. I don't know if we've got a moment to read a couple of quotes from him.

SHAW: Please do.

ENSOR: Let me just read this. This is quoting Hanssen to the Russians in letters he sent them, according to the affidavit.

"I decided on this course when I was 14 years old. I'd read Philby's book. Now that is insane, eh? My only hesitations were my security concerns under uncertainty. I hate uncertainty. So far I have judged the edge correctly. Give me credit for that."

And how about this one, Bernie: "Recent changes in U.S. law now attach the death penalty to my help to you as you know, so I do take some risk. On the other hand, I know far better than most what mine fields are laid and the risks."

So this was a man very sophisticated, very intelligent, his colleagues say, and perhaps with some ego, perhaps, someone who wanted to show just how clever he was.

SHAW: David Ensor, thank you -- Judy.

WOODRUFF: President Bush says he is "deeply disturbed" by the spy charges against Hanssen. Mr. Bush spoke about the case en route from Ohio to Missouri, on a trip designed to emphasize his education proposals. CNN White House correspondent Major Garrett is in St. Louis -- Major?

MAJOR GARRET, CNN CORRESPONDENT: Judy, while this case has numerous and potentially far- reaching implications not only for U.S. national security, and the future of U.S.-Russian relations, President Bush first sought to comfort the legions of intelligence and law enforcement agents stunned by Hanssen's arrest.

(BEGIN VIDEO CLIP)

BUSH: This has been a difficult day for those who love our country, and especially for those who serve our country in law enforcement, and in the intelligence community. Allegations of espionage of a FBI counterintelligence agent are extremely serious, and are deeply disturbing.

(END VIDEO CLIP)

GARRETT: The president said he retains confidence in FBI director Louis Freeh and said this case proves that though the Cold War is over, Cold War-era espionage clearly is not.

(BEGIN VIDEO CLIP)

BUSH: Allegations of espionage are a reminder that we live in a dangerous world, a world that sometimes does not share American values. I thank the men and women who proudly serve our country, but anyone who would betray his trust, I warn you, we'll find you, and we'll bring to you justice.

(END VIDEO CLIP)

GARRETT: Now, the White House invited reporters up to the president's office aboard Air Force One for this statement, but did so just before the plane landed, making it nearly impossible for reporters to ask follow-up questions about the future -- for example, U.S.-Russian relations in the light of this case -- a topic the White House would rather, on this day, care to avoid -- Judy

WOODRUFF: Major, you say the president says he continues to have confidence in Louis Freeh with the FBI. Does that mean he thinks really no one has responsibility for what happened?

GARRETT: The clear implication of the president's comments, first, is to say to the law enforcement intelligence community, the president views this as an isolated incident, one that is extraordinary in its scope, but also one that he expects the FBI, as FBI Director Freeh announced today, it will review and review very seriously.

Clearly, the president wants to know, as does Director Freeh, how this could have happened. But in this opening statement, the president was trying to reassure all those in the intelligence community, he views this as an isolated matter, one deserving of investigation, but he did not say anything about Russian counterintelligence operating in this country, a topic he wanted to avoid on this first day, as more is known about what was compromised in U.S. security and how deeply the Russians were involved in the entire process -- Judy.

WOODRUFF: All right, Major Garrett traveling with President Bush. Thanks -- Bernie.

SHAW: And now, we're joined now by Skip Brandon. He is a former FBI deputy director of counterintelligence.

You heard David Ensor quote from the affidavit that one of the letters to the Russian, "I've judged the edge correctly." You know this man. Your impressions of him?

SKIP BRANDON, FORMER FBI DEPUTY DIRECTOR: He went over the edge. He mentioned the mine fields. I guess he didn't find quite all of them because they're there. People will get caught. But he was good, he was professional. He knew what he was doing.

SHAW: I want to ask you a question that goes to the heart of FBI culture. It's a painful question.

Does the FBI have difficulty in assuming that all people, especially higher-ups, are suspect and must be watched?

BRANDON: No. In my experience, that is not a difficulty. You don't like it, but you address it, and in fact, once you think that, quite frankly, there's almost -- you go at it with a vengeance. You don't like having one of your own turn.

SHAW: How do you think he managed to slip under the radar for some 15 years?

BRANDON: An extraordinarily skilled operative trained in counterintelligence may be the best training for a spy. When you know good defense, you know the offense. He was very, very good.

SHAW: Skip Brandon, how long does it take to turn an American high-up into a Russian spy?

BRANDON: There's no answer to that question. It could be a matter of minutes or it can be a matter of years. What makes a person sell out his country? What makes a person sell out his family?

SHAW: Well, that was going to be my next question. Given your background and your special insights, take a moment. You know this man, what would motivate him, given what he has alleged to have done?

BRANDON: Very often you find money is a reward. It's a reward in and of itself.

However, there is almost always something else that goes along with it. To right an imagined wrong is one motivation. To play the game. To show that you are superior is a motivation that we've seen with others who have done this.

There are a lot of different ones but there's always money involved. SHAW: At his news conference, the FBI director, Louis Freeh, said that Robert Hanssen allegedly gave the names of three Russian spies working for the United States. The director also said that two of those men were tried and executed, one remains in prison.

What kind of an effect is being had in Moscow, given these shattering revelations in Washington today?

BRANDON: Well, they're looking to see how well they're covered. They're professional. They're going to be doing an assessment just like the FBI is going to do, a professional assessment.

The professional intelligence officers will be looking back to see how they handled this, how did the person get caught. They'll be looking inside to see if, in fact, there was something that was there that allowed him to get caught. They're going to be doing the same thing, in a way, that the FBI is going to be doing, assessing their whole program.

SHAW: Last question: Given the revelations and however else comes out in the future, can the FBI make itself foolproof?

BRANDON: As long as you have people, it's never foolproof. We have to remember that millions and millions and millions of government employees are loyal Americans, very few bad ones, but it hurts when you find them.

SHAW: Skip Brandon, a former FBI deputy director of counterintelligence, thanks for coming in on such a short notice.

BRANDON: Thank you.

SHAW: Quite welcome.

And still ahead here on INSIDE POLITICS, the president turns to education and tax cuts, with his predecessor's pardons still under scrutiny. Party chairs Jim Gilmore and Terry McAuliffe talk about those issues and more, next.

(COMMERCIAL BREAK)

WOODRUFF: Joining us now, the new chairmen of the two major political parties in this country: Republican chairman and the state of -- and Virginia's state governor, Jim Gilmore, and the chairman of the Democratic Party, Terry McAuliffe. I can get a word or two out.

(LAUGHTER)

Thank you for being with us.

JIM GILMORE, GOVERNOR OF VIRGINIA: Glad be here.

WOODRUFF: And I know -- I know you've been onboard a little bit longer, Governor Gilmore.

Let me start with a question about this horrific spy case that's just been revealed today. Mr. Hanssen was spying for Russia for 15 years: seven years, by my calculation, under a Republican administration, eight years under a Democratic administration.

What does that say about politics and spying and what political party is in power, if anything, Governor Gilmore?

GILMORE: Well, I was in the intelligence corps when I was in the Army some years ago, so I've done counterintelligence work myself and I think kudos to the FBI. Their morale ought to be very good tonight because they did their job, they caught a guy.

I think the reality is that people do espionage in this country and in foreign countries as well, and the security of the nation depends on our finding and catching people like this, and I congratulate the FBI.

WOODRUFF: And the political -- and the political stripe of whoever is in power at that particular moment?

GILMORE: No, this is a national security matter. You are going see this no matter who is in charge. The good thing is that we have security people who can catch these folks.

WOODRUFF: Terry McAuliffe, would you agree with that?

TERRY MCAULIFFE, DNC CHAIRMAN: It has absolutely nothing to do with politics. When it comes to our national security, the Republicans and the Democrats come together.

This isn't about politics, this is about our country, and I commend the FBI for rooting this out and finding the appropriate person and dealing with him.

But it has nothing to do with politics.

WOODRUFF: All right. Speaking of politics, let's turn to something that's been in the news lately, and that is President Clinton's pardon of the fugitive financier Marc Rich.

Terry McAuliffe, is there anything defensible about this pardon, in your opinion?

MCAULIFFE: Well, the president yesterday wrote an op-ed, explained why he did what he did -- laid the reasons out there, explained the rationale for the judgment that he made in pardon.

But Judy, we've got to move on off of pardons. I agree with President Bush. It is time to move on. The Republicans control the House and the Senate. It's time we move on and deal with those issues that matter to America's working families the most.

Let's talk about the tax cut, let's talk about education.

WOODRUFF: And we will. And we will.

MCAULIFFE: Well, let's do it, let's move on now. People are tired of this. Let's move forward and talk about America's agenda.

WOODRUFF: But is there anything defensible about that pardon -- the Rich pardon?

MCAULIFFE: What I will say is defensible is that Bill Clinton had eight great years as president of our country, 22 million new jobs, 35 million people taking advantage of the Family Medical Leave Act. He had eight great years.

People have to get over the fact, Judy, now, I tell you and everybody else -- Bill Clinton is no longer president. You have got to move on. George Bush is president and the American people want to talk about education and tax cuts and those issues. Let's...

WOODRUFF: But I'm asking you, as Chairman of the Democratic Party, do you think there was anything defensible about it?

MCAULIFFE: I will give the president credit for what he says, he made it a judgment call. He made the decision. The right to do pardons is absolute in our constitution.

It's not for me to second-guess the president. He said he made a judgment call, let's let it go on. Let's move forward in a positive way and deal with the other issues.

WOODRUFF: Governor Gilmore, I assume you say there's nothing defensible about it, or what?

GILMORE: I can't find anything defensible about this. I don't think it was a good pardon at all. It was done outside of normal channels, it doesn't look good, it doesn't lend itself to the credibility of the American people. But the fact of the matter is that we are moving on.

The good news is we are moving on. George Bush is president, and we're moving on to the key issues of education and taxes.

WOODRUFF: Under the circumstances, Terry McAuliffe, given the high profile of former President Clinton, can your party move on in its own way while Bill Clinton is still out there front and center with stories like this one?

MCAULIFFE: I think it's a problem for President Bush, because Bill Clinton is on the newspapers every day. And it's not a problem for us. The problem is really on the other side. It's not on our side.

We want to talk about the issues, we want to talk about what the Democratic agenda is. We want to talk about campaign finance reform, which we endorse wholeheartedly. We want to talk about electoral reform. We want to talk about a tax bill, where 43 percent of the benefits, Judy, go to the top 1 percent of America. And we want to talk about an education bill, which President Bush sent up, has no school construction; talks about voucher. That's what we need to talk about. We're not sitting around talking about Bill Clinton talking about Democratic agenda. And that's why 500,000 more people voted for us than voted for George Bush.

WOODRUFF: Is it that straightforward, Governor Gilmore? Is it possible for President Bush to focus on these things and for the Democrats to talk about that while President Clinton is still out there getting this kind of news?

GILMORE: No. The good news is we Republicans are OK on this. We are able to move on. We have won the White House. We are prepared to move on and deal with these kinds of issues. I do think it's going to be hard for the Democrats. I mean, Terry is a well-known friend of former President Clinton. I think he's going to want to be speaking to the President Clinton issues and is going to be asked to do that constantly.

I'm not in that position. I'm the chairman of the Republican Party. I'm George Bush's chairman of the Republican Party, and he is the one that is now on the offense, moving ahead to deliver real tax cuts to working men and women across this country and real education to working families across this country.

MCAULIFFE: Bill Clinton is my friend and always will be, and he is a friend to all of the Democrats out there. And we had eight great years, and let's not forget it.

Governor Gilmore said they won the election. We actually won the election. They got the prize, but we need to move forward. He was sworn in. And let's get down and deal with the reality.

We've had a good couple of weeks of happy talk, but now the budget is coming up. Now, the devil is in the details. And let's get down to business and talk about those issues that affect America's working families.

WOODRUFF: Speaking of which, Governor Gilmore, President Bush has put forward a tax cut proposal, is still in the process of putting -- a number of Republicans, even, are saying they are concerned it's too big, that it's going to require cuts too big elsewhere in federal spending.

GILMORE: Well, I have a lot of experience with the fact that there are a lot of different point of views in the Republican Party. And Republicans don't go in lockstep; they have different points of view.

But this is a bipartisan tax package. It has the support of Democrats. Zell Miller is in support of this package. And I'm confident that as we go forward and show how this is going to help working people, that it's going to make a big difference.

Tax cuts are important to working people, not rich people, working people. And this tax cut delivers on that.

WOODRUFF: But you already have at least two Republicans saying it's too large.

MCAULIFFE: Four.

GILMORE: It's OK, because we have a lot of Democrats that are going to support us, too. And the fact of the matter is that the president is drawing from both parties, now, to move forward on something that's in the best interest of the people of America.

MCAULIFFE: There will not be a lot of Democrats to join onto this. Four Republican senators, to date, have come out against President Bush's tax bill. We want a tax bill that has fairness, fiscal responsibility and priorities where they should be. Education, prescription drugs, those are the issues that we want to fight for in fiscal responsibility.

We went through the '80s of a huge tax cut. This tax bill is like an American family saying, "What we're going to make the next 10 years we're going to spend today." It's irresponsible; 96 percent of a dollar goes to paying for a tax cut; 4 percent goes to defense, education and the key issues.

GILMORE: That sounds kind of like the former president to me. But the fact of the matter is that if you take a working family, here, that makes $25,000 a year, they're going to have a 100 percent tax cut. If you have a working family that makes $50,000 a year, they're going to have at least a $1,600 a year tax cut. Do you know how valuable it is to a family grossing $50,000 a year to get a $1,600 net tax cut? It's very valuable to working people.

MCAULIFFE: Already, they've told the Department of Justice to cut $1 billion out of their budget. What's the first thing to go, Judy? The Cops on the Street Program. Bill Clinton, Al Gore put 100,000 cops on the street. That's why our crime rate is as low as it is today.

Already the budget -- the devil is in the details. Let's not let this charm turn into harm. And the devil is in the details. So let's see what the budget says, and let's see where the priorities are for the American people at the end of the day.

WOODRUFF: And quickly, Governor Gilmore, you're not concerned that some departments that need an increase, like Defense, are not going to get it because of the size of this tax cut?

GILMORE: Oh, I think that you will order the priorities in a bloated government that has been allowed to do all of this kind of growing for years and years and years and focus your attention on education for working people and tax cuts for working people.

And the president has come forward with a real solid reform on education that's one of the most creative we've ever seen.

MCAULIFFE: In The Washington Post today, Judy, I'll end with this -- and Governor Gilmore knows this first hand. He has a very difficult time in Virginia. I own two cars. I love my tax rebate for my car tax. However, the teachers can't get their 3.5 percent increase because of this tax cut.

GILMORE: Actually, that's not true at all, Judy.

MCAULIFFE: That's what The Post said today.

GILMORE: The Post is not right if they said that. The House has put forward a plan that gives teachers a salary increase and still does the 70 percent car tax cut.

And the point is, on the national level, we can deliver this kind of relief to working people also.

WOODRUFF: All right. I think we can look for some spirited exchanges between the two of you.

Terry McAuliffe, Jim Gilmore, thank you very much. We appreciate it.

See, they are still shaking hands -- Bernie.

SHAW: There is much more to come on INSIDE POLITICS. Straight ahead:

(BEGIN VIDEO CLIP)

BUSH: All we're asking is, is it working? What are the results?

(END VIDEO CLIP)

SHAW: President Bush takes his education message to middle America and defends his call for annual testing. Also:

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: When you have such dramatic sanctions attached to test results, there are a lot of ways of raising average test scores without improving the actual learning of students.

(END VIDEO CLIP)

SHAW: Teaching the curriculum, or teaching the test? Behind the numbers on Texas student performance.

And later: how the Marc Rich controversy is playing in Israel. And why some Israelis think the pardon was well-deserved.

(COMMERCIAL BREAK)

SHAW: We have this late word on a major development in the Middle East. In Israel, the defeated prime minister Ehud Barak has chosen not -- not to accept a Cabinet post offered by the victor, Ariel Sharon. CNN's Jerrold Kessel is on the telephone from Jerusalem.

What is behind this, Jerrold? JERROLD KESSEL, CNN CORRESPONDENT (via telephone): More than that, Bernie. They're not accepting the present of Mr. Barak is now telling his party colleagues and Mr. Sharon that he is actually fulfilling his promise that he made on the election night when he was so resoundingly defeated by Mr. Sharon just two weeks ago, that he will step down as party leader of the Labor Party, resign his seat in the Knesset Israel parliament and take a time out, at the least, from politics.

The man is being accused of zigzagging, as well as an Olympic slalom race in a downhill skiing contest, has now done the ultimate zigzag in reversing he'd only done just five days ago -- telling Mr. Sharon will go in as the defense minister -- will lead his Labor party into a national unity government and saying, no, he is bowing out of everything.

Mr. Barak been under enormous pressure for the last several days from colleagues within his Labor party, who say, no, you must stand by your promise to quit politics. You were so badly defeated and you should do the honorable thing and step aside. Mr. Barak is now bowing from that pressure, and telling Mr. Sharon, he can't join his government; he will not join his government; and he'll step out of politics. This leaves the way open for a major debate within the Labor Party: do they go in to a national unity government? The big decision will come next Monday. The indications are, the Labor will, not a major majority, but by a majority, agree to join Mr. Sharon.

SHAW: Jerrold Kessel, why is he doing this? Why has he flip- flopped? Politically, what is going on within the Labor Party to cause him to change his mind? What's the story behind this development?

KESSEL: Ehud Barak, as you recall, was beaten in the most convincing way, the most resounding defeat that any Israeli politician has ever had in the election by Mr. Sharon. This led him to be totally discredited -- his policies and he personally. He, then, continued to say that he was going to go into Mr. Sharon's government and serve with him as the defense minister. Both men seem to want this very desperately, saying this is what Israel needed, a national unity government in a time of potential crisis in a time of what they say, of even looming greater confrontation with the Palestinians and perhaps beyond that.

But Mr. Barak has been so discredited personally within the Labor Party. He has made so many enemies within his own party and beyond and he just simply doesn't have the political backing to carry out such a move. They almost, they accuse him of the hijacking of the negotiations with the Mr. Sharon's Likud Party of attempting to high- handedly try to run things again on his own.

Well, the party faithful -- many of his former colleagues saying, this won't do, you can't do. We are to decide of whether to go into the national unity government. You must step aside. Mr. Barak has bowed to that pressure.

SHAW: OK. There's the answer from CNN's Jerrold Kessel with the latest from Jerusalem. Thanks, very, very much -- Judy.

WOODRUFF: Well, from Israel back to the United States, President Bush is on the road promoting his ideas for education reform. We will catch up with him in the classroom and examine the debate over testing right after the break.

(COMMERCIAL BREAK)

SHAW: President Bush headed to middle America to promote his education reform plan today with stops in Ohio and Missouri.

CNN White House correspondent Major Garrett reports Mr. Bush is staging an aggressive defense of his plan, especially his call for more student testing.

(BEGIN VIDEOTAPE)

BUSH: Everybody's going to college here.

GARRETT (voice-over): That's every president's promise. But during this tour of a Columbus, Ohio elementary school, Mr. Bush said the best way to achieve it is to test regularly. And he challenged conservative critics who fear even greater federal meddling.

BUSH: There's a lot of pressure on members from a couple of fronts. One is the no testing crowd, based upon -- it's not a role for government. I strongly disagree.

GARRETT: And the president took on other critics who fear testing will stigmatize minority students.

BUSH: There's a group of folks who will say you can't test because it's racist. What's racist is not testing.

GARRETT: The president's testing plan would affect every student, parent, and teacher. Some educators are wary.

ROBERT CHASE, NATIONAL EDUCATION ASSN.: When we're talking about testing we have to keep that in its proper perspective. Everything cannot be determined by an individual test.

GARRETT: At a second school in suburban St. Louis, Mr. Bush said testing will help teach children to read sooner. And he announced his budget will call for a billion more each year to support federal reading programs.

BUSH: It is critically important for us to make sure the curriculum employed around the country is a curriculum that actually will achieve the results that we want, and that is children reading by the third grade.

GARRETT: Still, Mr. Bush says he's tired of the status quo. Since 1993, federal education spending has increased by 48 percent, but national reading, math and science test scores remain unchanged.

BUSH: I do believe it makes sense and is right to ask the question: if you receive federal money, what are the results for the money spent?

GARRETT: Senior Congressional Republicans have warned the White House to expect battles over testing, vouchers and funding. Senior White House advisers say, the president's tough talk on Tuesday shows he's more than ready for the looming education fight. Major Garrett CNN, Kirkwood, Missouri.

(END VIDEOTAPE)

WOODRUFF: Schools in the president's home state of Texas today began three days of statewide testing. Mr. Bush often cites the Texas model as evidence that frequent testing can spark real learning. But the Texas program has its critics. And they argue more tests alone are not the answer. With a look at the issue from inside the classroom, here's CNN's Kathy Slobogin.

(BEGIN VIDEOTAPE)

KATHY SLOBOGIN, CNN CORRESPONDENT (voice-over): Practice makes perfect. It's a lesson these children at Parker Elementary School in Houston have learned well. Parker is a music magnet school and a prime example of the Texas success story.

The curriculum here is rich.

UNIDENTIFIED FEMALE: It says right here that Dizzy was afraid of heights.

SLOBOGIN: These fourth graders are learning how to write a mystery.

More than 90 percent of the students here pass the state's mandatory annual tests. Annual testing is the centerpiece of President Bush's education reform proposal, and his model is Texas.

Children here are tested every year from 3rd to 8th grade and again in order graduate from High School. The test is known as the TAAS, The Texas Assessment of Academic Skills.

Schools and their principals are held accountable for the scores. And the scores have climbed from 53 percent of Texas children passing the TAAS in 1994, to 80 percent passing last year.

But there's another side to the Texas success story. Critics say for many Texas children, especially where the scores aren't high, the tests dominate the curriculum. Children spend hours in intellectually-deadening practice tests, instead of learning.

LINDA MCNEIL, RICE UNIVERSITY: It is really putting our best teachers and principals in a real box where they're having to choose between teaching a substantive curriculum or just teaching to a format that produces test scores.

SLOBOGIN: Linda McNeil of Rice University says principal's and superintendent's job security depends on delivering strong scores. MCNEIL: The more the principal is worried about the test scores, the more they pressure the teachers to just use commercial test practice materials day after day, rather than have the children read a lesson, a short-story, anything that you and I would consider purposeful reading.

SLOBOGIN: These Sophomores are getting ready for the TAAS Test, learning how to write an essay, and how to win a passing score. There's a formula: 5 paragraphs, with 5 sentences each, 3 examples per paragraph.

To some, it might seem formulaic; to others, it's at least a clear blueprint.

UNIDENTIFIED MALE: Once you fill these in with actual sentences, you have your essay staring you in the face.

SLOBOGIN: Principal James McSwain is one who feels the tests, drill preparation and all, are working.

JAMES MCSWAIN, PRINCIPAL, LAMAR HIGH SCHOOL: Education in Texas has improved. It has drastically improved because of accountability, because of testing.

JIM NELSON, TEXAS COMMISSIONER OF EDUCATION: I think it's probably the most important thing we've done in Texas in the last decade is at assessing each and every grade level each and every year.

SLOBOGIN: Jim Nelson is the Texas commissioner of education.

NELSON: Are there places where they focus too much on the tests? I'm sure that's true. I mean, anecdotally you hear that. No question about it. But I also think it's fair to say, you know, if they're teaching the curriculum, and the tests cover the curriculum and if everyone agrees that these are things we want our children to know and to learn, what is it about being tested on that that's not appropriate?

UNIDENTIFIED FEMALE: ... the more spices, which means the more writing that you include in here is the better, better paragraph that you will make.

SLOBOGIN: Several researchers have examined whether Texas children are really progressing or just learning to take the Texas test. A Rand study found the dramatic Texas gains didn't show up in an independent test, the National Assessment of Educational Progress. And other measures of academic achievement don't seem to match either. Texas SAT scores have remained flat for a decade. A Texas college readiness test is failed by half the students.

WALTER HANEY, BOSTON COLLEGE: The state test is showing one thing; all the other tests are showing something quite different.

Walter Haney of Boston College, who spent two years studying Texas schools, says the pressure to improve test scores inflates the results. HANEY: When you have such dramatic sanctions attached to test results, there are a lot of ways of raising average test scores without improving the actual learning of students. Unfortunately, that seems to be what's happened in Texas.

SLOBOGIN (on camera): The strongest indictment critics make of the Texas testing is for something it doesn't measure: the number students dropping out. "Leave no child behind" is President Bush's education motto, but here there's evidence many children are left behind.

(voice-over): The state's Texas Education Agency says its official dropout rate is about 9 percent.

HANEY: I would only say that I and other observers have concluded that the TEA's dropout statistics are highly misleading.

SLOBOGIN: Haney has looked at 20 years of Texas enrollment figures. He says 25 to 30 percent of Texas students fail to graduate from high school. For minorities, it's worse: 40 percent.

UNIDENTIFIED FEMALE: 20,000 freshmen...

SLOBOGIN: McNeil also studied enrollment, and found many Houston schools lose half their students.

UNIDENTIFIED FEMALE: 8,000 seniors.

NELSON: The dropout problem is not as big as our critics say but it's big enough.

SLOBOGIN: Commissioner Nelson says the dropout problem doesn't take away the need for testing.

(on camera): Of what use are test scores in terms of accountability if you're losing so many kids?

NELSON: Well, I'm sorry, I don't buy into that analogy because I think if you don't know how the kids are doing, how in the world are you going to know, you know, whether they have the chance to be successful or not?

SLOBOGIN (voice-over): But Linda McNeil thinks the tests mislead the public.

LINDA MCNEIL, RICE UNIVERSITY: A cop out, a dodge, an attempt to give the appearance of a fix without getting really serious about what the long-term losses are going to be to produce these short-term numbers.

SLOBOGIN: As Congress takes up the president's reforms, it must decide whether accountability tests are a true yardstick for children or just another education gimmick that leaves deeper problems in our schools untouched.

Kathy Slobogin, CNN, Washington. (END VIDEOTAPE)

SHAW: Just ahead, the former president's pardon of Marc Rich, and the Israeli reaction to the pardon backlash: The latest on how this controversy is playing in Israel.

(COMMERCIAL BREAK)

SHAW: In Israel, the head of the Marc Rich Foundation is defending former President Clinton's pardon of the financier, citing his humanitarian efforts and contributions that country. As the investigation into the pardon continues here in the U.S., CNN's Ben Wedeman takes a closer look at Rich's ties to Israel and the mixed reaction to Clinton's action.

(BEGIN VIDEOTAPE)

BEN WEDEMAN, CNN CORRESPONDENT (voice-over): Avner Azulay has friends in high places: Friends in the U.S. and Israel who lent their support for the effort to win a presidential pardon for fugitive financier Marc Rich. A former Mossad agent and managing director of Rich's charitable foundation, Azulay collected letters and testimonials praising Rich and sent them to President Bill Clinton.

AVNER AZULAY, DIRECTOR, RICH FOUNDATION: We asked for help through normal channels. They considered the case. They saw the man had a lot of merits. There was a lot of merits to the case, and if they helped, and they did, there is no problem with that. I don't see any problem with that.

WEDEMAN: But for many Israeli and Jewish-American leaders, there is a problem. They say Jonathan Pollard, behind bars for passing highly sensitive U.S. military secrets to Israel, was far more deserving of a presidential pardon. While others, including Jewish- American leaders visiting Jerusalem, accuse former President Bill Clinton of shifting the blame for the pardon onto Israel.

RONALD LAUDER, AMERICAN JEWISH ORG.: We feel that he should not have used Israel. This is a legal question, and Marc Rich was someone on America's 10 Most Wanted.

WEDEMAN: And at the time of his pardon, he was still a fugitive. But to Israelis, he was a generous donor to a variety of social and cultural institutions, acknowledged by Israel's prime minister.

EHUD BARAK, ISRAELI PRIME MINISTER: And the great philanthropists who have make this possible, including (UNINTELLIGIBLE) and Marc Rich

WEDEMAN: In this case, for his support of a program designed to give young American Jews the opportunity to visit Israel. The fugitive was there, but just another face in the crowd. Rich also helped finance a new wing of the Tel Aviv Art Museum, named after his daughter, who died of leukemia. The museum didn't ask too many questions about the money. JANET INBAR, TEL AVIV MUSEUM: It's not the person's history or anything about them, but it's their interests as they dovetail with what the museum is looking for.

WEDEMAN: Rich also assisted Israeli intelligence, the Mossad, in helping Jews leave Ethiopia, Iran, Yemen and the former Soviet Union. For this, say supporters, Rich deserved the pardon.

MAYOR EHUD OLMERT, JERUSALEM: Israel owes him. Those people who are familiar with the facts felt that we owe him, and that's why we signed this request.

WEDEMAN: The fuss over the Rich pardon is seen here as a passing cloud here.

JOSEPH ALPHER, FRM. MOSSAD OFFICER: It's a stain. It's a blot. It's unpleasant. I don't think it's going to have any important long- term effect on the ongoing Israeli-American relationship.

WEDEMAN (on camera): Most people here are focused on the ongoing efforts to form a national unity government, on trying to maintain a semblance of normality after nearly five months of bloody clashes. The controversy over the Rich pardon to many here is a tempest in a very distant teapot.

Ben Wedeman, CNN, Jerusalem.

(END VIDEOTAPE)

SHAW: After the break, the Clinton pardon flap, the Bush presidency and other topics with Farai Chideya and Rich Lowry.

(COMMERCIAL BREAK)

WOODRUFF: For more on the continuing Clinton pardon controversy and other matters political, we are joined by Rich Lowry of "The National Review," and journalist Farai Chideya.

Farai, let me begin with you, is the former president permanently affected by this controversy about the Rich pardon?

FARAI CHIDEYA, JOURNALIST: I think it's too early to tell, but I do think you're putting in the right context which that this is about Clinton's legacy. This no longer about the pardon. This pardon flap has gone on for so long and threatens to have such a long shelf-life that it really has become a referendum on the Clinton years, and I think that that is unfair.

I don't think that anyone, not me, not most Democrats, not most Americans, is enthusiastic about the Rich pardon. I think that clearly this is an example of someone who, you know, did not deserve this sort of treatment, Rich, in this case. But I think that to make this the referendum on the Clinton legacy is also not fair.

WOODRUFF: Rich Lowry, unfair to make this part of the Clinton legacy? RICH LOWRY, "THE NATIONAL REVIEW": No, I think it's a pretty fair metaphor for his abuses of office. Let's remember, just getting down into basic terms here. This is a married man in his 50s who had sex in the Oval Office with an intern and then lied to the country about it. You can't get much baser than that.

So, this is the sort of thing, the Rich pardon, that we should expect from Bill Clinton and what we're witnessing is a disastrous decline in his reputation among elites. It's a little bit like, reminds me of what happened to Helmut Kohl in Germany. Kohl was considered this colossus, this genius, this world historical figure when he was in office for 10 years or so and then his reputation was washed away slowly by various scandals once he left office. And I think in miniature we are witnessing the same thing happen to Bill Clinton today.

WOODRUFF: Well, whatever happens to Bill Clinton, the Democratic Party presumably will endure, Farai. I tried to ask Terry McAuliffe, the new chair, this a little bit earlier on the program, but do you think that the party is hurt in a significant way by this. And if so, how?

CHIDEYA: Well, I think that what's interesting is that Mr. McAuliffe is clearly a part of the centrist, Democratic leadership, who has been -- clearly, he is a close friend of Mr. Clinton. And this, the Democrats have not been as forceful in divorcing themselves from the excesses of campaign fund-raising as they might have been because they have been a part of the machine.

I think that's a fact of modern-day life. I think that in this part of time, part of the whole pardon controversy is that there is this appearance of quid pro quo, and I think that the Democrats are going to have to come out much more forcefully in the future and define themselves as a party which stands up for campaign finance reform, which will not stand for quid pro quo, and which stands for reform in America.

WOODRUFF: How does that all play with regard to Republicans, Rich Lowry, since most Republican, certainly many Republicans at least in the United States Senate, oppose campaign finance reform, at least as John McCain has defined it.

LOWRY: Sure, well, Judy, what I think we're already witnessing is a lot of Democrats getting squeamish about campaign finance reform now that there's an actual chance that it could get passed and be signed by the president, and the foremost sign of that at the moment is the way the AFL-CIO is criticizing the McCain-Feingold bill for what it thinks are unwarranted restrictions on political activity by outside groups, and I think that's an important straw in the wind that the left may not be as enthusiastic about this bill as it was in the past when it was basically just filibuster bait in the Senate.

WOODRUFF: Farai, to President Bush, he has been in office one month today. Has he suffered at all because of the Clinton problem? How is he doing after 30 days? CHIDEYA: Well, I think that he's been largely able to coast through based on the fact that his education plan was fairly well- received. I do think that to recap on some recent events, the bombing of Iraq does not seem to advance any policy agenda. Many people, Friedman of "The New York Times" have pointed out that engaging with Iraq on a more substantive level will require new thinking, out of the box, not necessarily continuing sporadic bombing raids.

And I do think that there are some important issues facing the Bush presidency ranging from the excesses of the tax cut to engaging with Iraq that he has not really been tested on yet.

WOODRUFF: Rich Lowry?

LOWRY: Well, I agree about Iraq. What Bush has basically just adopted Bill Clinton's policy which is really no policy at all. It's just wishful thinking that occasional stray bombing runs will somehow help dislodge Saddam from power and I don't think that's the case.

I do think the bug worry for the Bushies has to be on the tax plan and at the moment, it's just an intellectual problem, but it could become a political one and this is what it is. The Bushies are selling their plan in Keynesian terms. They're saying we need this tax cut in order to get money into people's pockets so they can spend more.

But it's a tax cut that's structured along classically supply side lines. In other words, it cuts top rates in order to increase savings and investment.

So that doesn't quite add up, and Democrats could exploit that, I think very profitably, if they say, look, if you want more spending money for people, you need to focus this more on lower and middle income people, and they could wed that economic argument very profitably with their class warfare arguments, which is that this thing is unfair because it is skewed towards the rich. So, I think that's a potential vulnerability that we could see coming out in the coming weeks.

WOODRUFF: Well, I'd love to pursuit that and more, but we are going to have to leave it there and I want to thank both of you and hope to see you again soon. Farai Chideya, Rich Lowry.

LOWRY: Thank, Judy.

CHIDEYA: Thank you.

WOODRUFF: Good to have you both. Thank you

And there is even more INSIDE POLITICS ahead. In the next 30 minutes, the latest on the arrest of an FBI agent and the allegations of espionage.

Plus, the president's faith-based initiatives: A look at two opposing viewpoints with a supporter of the Bush program and an advocate for the separation of church and state. INSIDE POLITICS will be right back.

(COMMERCIAL BREAK)

WOODRUFF: Snapshots, from the FBI spy case: What drove the suspect and the agents who nabbed him?

Also ahead...

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: I wish you would have seen it. This was a garbage dump. All these place were empty, all the lots were empty, and there was a garbage dump. It was ugly.

(BEGIN VIDEO CLIP)

SHAW: We're going to take you on a tour of a neighborhood renovated from the grassroots, with analyst Ron Brownstein as our guide.

(END VIDEO CLIP)

ANNOUNCER: From Washington, this is INSIDE POLITICS, with Bernard Shaw and Judy Woodruff.

SHAW: And welcome back to INSIDE POLITICS. Law enforcement officials are calling it a "grave breach of national security." Veteran FBI counterintelligence expert Robert Philip Hanssen was charged today with spying for Moscow for more than 15 years, from the Cold War through the breakup of the Soviet Union until his arrest Sunday.

Authorities have been combing Hanssen's Virginia home for evidence. Officials allege that Hanssen's actions led to the executions of Russian double agents working for the United States. And they say he passed -- quote -- "substantial volumes of highly classified information to Moscow."

President Bush is calling this case "deeply disturbing."

(BEGIN VIDEO CLIP)

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: Allegations of espionage are a reminder that we live in a dangerous world, a world that sometimes does not share American values. I thank the men and women who proudly serve our country. But to anyone who would betray its trust, I warn you, we'll find you, and we'll bring to you justice.

(END VIDEO CLIP)

SHAW: The president says he continues having confidence in FBI Director Louis Freeh, and the men and the women who work for him.

CNN justice correspondent Kelli Arena joins us now.

Kelli, allegedly going on for 15 years, was there a turning point that convinced federal authorities to move it in?

KELLI ARENA, CNN CORRESPONDENT: There was, Bernie. Apparently, after the Aldrich Ames incident, the FBI and the CIA have been working together to try to find if there are any other moles within either the bureau or the agency.

They did come across as part of that investigation original Russian KGB documents that they said very clearly pointed to Hanssen as a possible mole, and then they uncovered some other information that he had had some clandestine communications with Russians, which accurately pointed the finger right at him.

The investigation, they've been having him under surveillance for the past four months, they've been looking at him. They did move him to the bureau base so that they could keep an eye on him, to isolate him from other agents. And today, as you know, the news breaks. On Sunday he was arrested.

So those, those -- securing of those documents is a result of that original investigation, really provided the key that they needed.

SHAW: What can you tell us about possible motive?

ARENA: We asked this, we asked Director Louis Freeh, FBI Director Louis Freeh today, and he said that it seemed to him that it was possibly money, that there didn't seem to be any ideological reasons for Hanssen to conduct himself in this manner.

But the documents are very sort of schizophrenic on the issue. In one letter, he writes, "Thank you for the $50,000," or "I'm sure you will find the information I provided you was worth the $100,000." And then, in another letter that was included in the affidavit, he says, I -- I am finding dealing with this money difficult, because I can't invest it, I can't spend it, or it's going to tip somebody off.

So he also asked to be paid in diamonds to secure his children's future.

All told, he got $1.4 million, allegedly, $1.4 million from the Russians from 1985 to the day that he was arrested, in money and diamonds. $800,000 of that allegedly in an offshore account, and the rest of it in cash payments here.

And as you know, when he was arrested, FBI agents also found $50,000 at another drop site that he was supposedly going to pick up as payment for this latest bit of information that he was going to supply.

So it does look like the money factor was involved. Of course, many other sources say that ego is always involved, that you can prove that you're more clever than your colleagues, that you have an edge.

SHAW: OK, thank you, Kelli Arena.

Judy, over to you. WOODRUFF: Even before the Hanssen case, there were strains on the relationship between Russia and the United States, strains that were evident even as a NATO information bureau opened in the Russian capital today.

CNN's Jill Dougherty reports.

(BEGIN VIDEOTAPE)

JILL DOUGHERTY, CNN CORRESPONDENT (voice-over): Three days before the NATO chief arrived in Moscow, Russian war games: a yearly event, but a potent message that Russia, in spite of its weakened military, can still fight battles on land, sea and air.

A highlight of those military exercises: a test launch of two Topol-M intercontinental ballistic missiles, Russia's most modern and sophisticated ICBM: hard to detect and even harder to intercept.

Moscow is warning the United States that if Washington goes ahead with a national missile defense system, Moscow will equip the Topol with multiple warheads.

Russian President Vladimir Putin has mounted a diplomatic lobbying campaign against the missile defense system. But there was nothing "diplomatic" in recent comments by U.S. Defense Secretary Donald Rumsfeld that Russia is an "active proliferator" of sensitive military technology to the very countries that threaten the U.S.

According to one key member of the Russian parliament, friction, and even potential conflict with Russia, could be the result of a harder U.S. policy.

ALEKSEY ARBATOV, RUSSIAN PARLIAMENT MEMBER: It will play hardball, and will not hesitate to apply very strong pressure on Russia if Russians do something which Americans do not like.

DOUGHERTY: Now, another blast of the Cold War: the U.S. arrest of a career FBI agent on charges of spying for Russia, and its predecessor, the old Soviet Union. The arrest comes two months after American businessman, Edmund Pope, was found guilty in Moscow of espionage and pardoned by President Vladimir Putin.

All this tough talk is a rude awakening for Moscow.

LILIYA SHVETSOVA, POLITICAL ANALYST: Even one month ago, there was a strong illusion within the Kremlin that it would be much easier to deal with a Republican president, but not with a Democratic president.

DOUGHERTY (on camera): But Russia is prepared to fight fire with fire. It may no longer be a superpower, but it seems to want to act like one.

Jill Dougherty, CNN, Moscow.

(END VIDEOTAPE) WOODRUFF: Next on INSIDE POLITICS: Resurrecting a neighborhood, block by block.

(BEGIN VIDEO CLIP)

RAUL HERNANDEZ, RESURRECTION PROJECT: 10 years from now, it's impossible for me to say, where are we going to be, because my dreams are huge and the needs of my community are big.

(END VIDEO CLIP)

WOODRUFF: A faith-based charity that gets results: Would government money make it better? A view from the streets of Chicago, when we return.

(COMMERCIAL BREAK)

SHAW: With little fanfare today, the Bush administration formally opened the new White House Office of Faith-based and Community Initiatives. This office brings new attention to what has long been a reality in America's poorest communities, the role of churches in delivering services to the poor.

Example -- Pilsen, on the South Side of Chicago, where a group called the Resurrection Project is working to reverse years of decline. "Los Angeles Times" columnist Ron Brownstein traveled to Pilsen recently to get a ground-zero view from one of the driving force, community activist Raul Hernandez.

(BEGIN VIDEOTAPE)

UNIDENTIFIED MALE: (SPEAKING IN SPANISH).

RON BROWNSTEIN, CNN POLITICAL ANALYST (voice-over): It has been a quiet revolution, a decade-long revitalization of grassroots activity all across America.

Block by block, often house by house, groups like the Resurrection Project on Chicago's South Side are reclaiming neighborhoods that once were left for dead.

Church-based charities and nonprofit community development corporations are training welfare recipients for the work force, providing safe and reliable daycare and building rows of neat new homes on streets once pockmarked with rubble.

Seen from Washington, the problems of inner-city neighborhoods often appear insurmountable. Here, on the heavily Hispanic streets where the Resurrection Project operates, the challenges are unmistakable, but so are the signs of progress.

BROWNSTEIN (on camera): Ten years ago, when the Resurrection Project started, what did this street look like?

RAUL HERNANDEZ, RESURRECTION PROJECT: I wish you could have seen it. This was a garbage dump. All these places were empty, all these flats were empty, and there was a garbage dump -- it was ugly.

BROWNSTEIN: How many homes have you got now?

HERNANDEZ: We have a little over 120 homes built, and we're still building.

BROWNSTEIN: Has it changed the community to have that many people owning their own homes?

HERNANDEZ: Definitely, definitely. The people in the community -- they got more pride in the community -- they want to -- they're real proud to be homeowners.

BROWNSTEIN: Now, you started with housing, but you branched out over the years. You're operating a daycare center now. You're talking about building a health clinic. You're talking about converting a convent into a dorm for college students. Why have you felt the need to get into these other activities beyond the initial housing focus that you had when you started?

HERNANDEZ: Well, one of the reasons why is because when you're building a house and you're building a community -- the brick-and- mortar is not going to build a community. You have a lot of other things that go right along with it. And, as we was doing this, we discovered that we had to tackle all the other problems.

BROWNSTEIN (voice-over): There's a long tradition to the work that the Resurrection Project has undertaken. A century ago, the settlement houses, like the legendary Hull house here in Chicago, helped an earlier generation of immigrants climb into the American mainstream.

Now, these new community groups have become such a force that Washington is increasingly looking to them for solutions. George W. Bush wants new tax breaks and grants meant to strengthen what he calls the armies of compassion.

(on camera): One of the things that president Bush talks about a lot are these faith-based organizations, these church-based organizations. He wants to deliver more social services through them. He wants to take on a larger role in communities like this all over America.

That worries some people. They say it threatens the wall between church and state, might lead to improper state support of religion. Do you think those are valid concerns, or does your experience here lead you sort of toward a different conclusion?

HERNANDEZ: Well, you know what, I'll be very frank with you. It is kind of scary sometimes that if they're going to start using federal government's money to start evangelizing. Yes, it's something that doesn't mix. It's something I don't want to see.

But also, you know, like our organization, for instance -- we don't ask what kind of religion you are. We don't ask what you believe or what you do. To us, you live in a community, and if your need is there, we're going to try to serve it.

BROWNSTEIN: But I think you're saying also that if you respect that line, if the institutions hold to that line, there is a role that churches can play, because they are pillars, really, of these communities.

HERNANDEZ: Well, let me put it to you this way: they already have the trust of the people. And the people always come to the church and expect the church to do those changes.

So, I mean, I think we can be very effective doing these changes if we have the resources and we have the capital to do it.

BROWNSTEIN: This is the kind of place where one of the challenges has to be keeping people here once they become -- reach a certain degree of success and have the assets and the resources to move to the suburbs. What are the biggest challenges you face in holding on to those homeowners once you've gotten them into these homes?

HERNANDEZ: Well, the biggest challenge that you face is that, first of all, you have to be proud of yourself, where you live, what you do and what you have. And you have to develop an ownership in your community. And you have to teach that to your kids.

At the beginning, it was hard in this community. There was a stigma to live in this community. It was embarrassing to say you live in Pilsen. And, little by little, we start changing, because we want to do that for our kids, so some day they can say, I live in Pilsen and say, I'm very proud. So -- and instead of ruining, why don't we stop and build.

BROWNSTEIN: This is a much bigger organization than it was 10 years ago. You started with two people, you've got 38 now. You've built over 100 homes. Ten years from now, what do you hope to be doing that you aren't doing today?

HERNANDEZ: Well, let me put it to you this way. Ten years ago, we had a goal of 24 houses. We met the goal. And then we shoot for 100. We met the goal, and we're still going.

Now, it's like we gained experience, we gained the confidence. Ten years from now, it's impossible for me to say where we're going to be, because my dreams are huge and the needs of my community are big.

But 10 years from now, maybe you're going to come over and see 200, 300 or 400 houses. Maybe you're going to come over and see more kids, more of our children being professionals. Maybe 10 years from now, one of our kids will be talking to you, and will be out there representing our people in Washington.

But most of all, we need funds to give our children the opportunity to become the leaders of the future. We need those funds to give them the education that we were not able to get ourselves.

BROWNSTEIN: People hear more funds, and they think about failed public housing projects, all the efforts at urban renewal over the years, the Great Society, all this sort of rubble left behind by well- meaning government efforts. What would be different about working through the community development corporations, the faith-based charities? Would this be any different than everything the government has tried years and years and years before?

HERNANDEZ: Well, let me put it to you -- if I come over here to you telling you what to do instead of you telling me what I need, it makes a lot of difference. I'm one of the people from the streets, I'm one of the people that lives here in my community. I see the needs. I know my needs.

And if you come over here and going to tell me I'm going to build you a beautiful house, but it's all that you're going to do, just build a house, you're not going to build anything around me. You're not going to educate me in anything that you want to do, you don't want make me develop ownership in what you're doing, it's going to fail.

And the programs that we start and the programs that we do is because the people want those programs.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

SHAW: Continuing now on the theme set by "Los Angeles Times" correspondent Ron Brownstein on the Chicago Pilsen neighborhood on the southwest side of Chicago,

Those who favor spending government money through faith-based organizations might say you can't argue with success. But others see the delivery of public money to religious groups as a dangerous precedent. For more on this church-state debate, we are joined by Marvin Olasky, an informal adviser to President Bush on the issue of faith-based initiatives. Also joining us is Barry Lynn. He's the executive director of Americans United for the Separation of Church and State.

Mr. Olasky, in a word, what does this program mean to you?

PROF. MARVIN OLASKY, UNIVERSITY OF TEXAS: It means to me the 10 years of effort all across the country, the people have put in, now coming to fruition. "World Magazine" -- we've been covering this type of stuff for a long time and thought we were alone, but now it's all over -- you are covering it, everyone else is covering it. This is absolutely terrific, an idea whose time has finally come.

SHAW: Barry Lynn?

BARRY LYNN, CHURCH-STATE SEPARATION ADVOCATE: Well, I think, frankly, that a lot of more success stories would be told if people simply explored the needs in the communities and found out the things that do in fact work. I worry very much that something like the resurrection project is going to lose some of the intensity of its purpose and the very nature of its ministry if it starts to accept government funds. I have never known a program in any field where government funds didn't carry with it some regulations, some strings that might in fact strangle the vitality of the very programs that in this case are launched with a religious motive and religious purpose.

SHAW: And you're turning your head in sharp disagreement with what he just said?

OLASKY: In sharp disagreement in part. This is a very critical phase that we are now entering into. Compassionate conservatism is now supported by most of the American people. President Bush, John DiLulio -- folks are doing a great job in publicizing it.

But now you get into the legislative process and how exactly you shape those lives and it is very important that they be shaped in a way that protects the religious groups that gives individuals additional incentives to contribute to the group's tax code, rather than doing something...

SHAW: Marvin Olasky, will all, A-L-L -- will all religious groups within the borders of this great country have equal access to the Federal Treasury in Washington?

OLASKY: Well, in my view, we should err if we are to err on the side of diversity. We should allow all kinds of groups to participate. It shouldn't be whether you or I like them. If they're doing good work, let them be involved. This is what has made this country great; competition and diversity and challenge.

LYNN: This is an interesting theory, but the president has already made it clear that he doesn't want to fund certain groups, including the nation of Islam. He said, they're haters, not lovers. I don't think we can start a problem that establishes a kind of rudeness police, deciding which religious groups are going to be so offensive, and therefore, undeserving of benefit. This has been an ill-conceived program that is moving far too quickly in too many arenas without even testing the basic ideas, like, can we engage in faith-based operations with government funds without changing the character and success of those programs?

SHAW: Is what he just said true?

OLASKY: No, these ideas have been tested for a long time.

SHAW: Well, what I ask you -- all -- you said, in my view. He said, in the view of the president, that's not true. My question to you is, what he just charged; is that true?

OLASKY: This is what's going to be decided in this process over this year, and I would encourage people to get involved in this debate. If this is just an inside Washington game, then I suspect the groups that are already in power and are getting lots of money will get more. It's very important that citizens all over this country get involved in this and work to make changes in the tax code in other ways to increase diversity rather than doing the same old, same old.

SHAW: A quick question to each of you, same question: in your judgment, the issue of separation of church and state -- is this likely to end up before the United States Supreme Court?

LYNN: I think it will end up before the Supreme Court, because I think, fundamentally, this country decided long ago it wasn't going to give a percentage of the federal budget to the Methodists and another percentage to the Presbyterians and more to the Catholics, because we fundamentally felt that volunteer efforts ought to support churches and other faith communities. Similarly, I think the Constitution will require and properly so that the ministries and the missions of those churches be privately funded, not funded through tax dollars.

OLASKY: Fundamentally, we decided a long time ago that we do not want any one particular religion or denomination to be preferred, but as long as you can put everyone on a level playing field, then there is no constitutional problem -- I suspect the Supreme Court will see that.

SHAW: But you expect it to...

OLASKY: I expect it to -- yes, these days, given our propensity to adjudicate everything, I think it will end up there. Yes.

LYNN: I hope it does. There are fundamental questions notwithstanding what you say you would like in this program. When the president says he's going to be able to distinguish certain religions from others, I think basic questions of equal protection of the laws as well as questions of church-state separation are going to be in the courts.

OLASKY: See, the problem is we right now, we don't have equal protection -- Evangelicals, conservative Catholics, Orthodox Jews and Muslims are constantly paying taxes for programs where you can't even talk about God. That's not right.

SHAW: Marvin Olasky and Barry Lynn, clearly we've not heard the last of this subject. Thank you for joining us.

OLASKY & LYNN: Thank you.

SHAW: Your quite welcome.

And, Judy, it's time for me to say, that's all for this edition of INSIDE POLITICS. But of course you can go on-line all the time at all-politics.com; AOL key word, cnn.

WOODRUFF: And these programming notes: Wolf Blitzer will have an exclusive interview with Lynne Cheney, wife of the vice president, tonight on "WOLF BLITZER REPORTS." That's at 8:00 p.m. Eastern.

And at 9:00 p.m., former FBI director William Sessions will talk about today's spy case on "LARRY KING LIVE." I'm Judy Woodruff.

And I'm Bernard Shaw. "MONEYLINE" is next.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com

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