The MacNeil/Lehrer NewsHour

Intro

ROBERT MacNEIL: Good evening. These are today's headlines. The U.S. says there won't be a significant arms control agreement at the summit. Former Navy officer Arthur Walker was sentenced to life imprisonment as a Soviet spy. Congress and President Reagan collided on the balanced budget bill. Details of these and other stories coming up. Charlayne Hunter-Gault's in Washington. Charlayne?

CHARLAYNE HUNTER-GAULT: Here is what's happening on the NewsHour tonight. How to tame the wildly swinging dollar will be debated by three men with widely varying views -- Representative Jack Kemp, Senator Bill Bradley and economist Milton Friedman. A challenge to rent control reaches the Supreme Court; we have a documentary on what's behind that. We'll get some best guesses on whether the battle for defense dollars will sink the effort for a balanced budget and we pay a final tribute to Arthur Rothstein, the man whose camera captured the human tragedy of the Dust Bowl during the Great Depression.News Summary

MacNEIL: President Reagan's special arms advisor Paul Nitze said today the U.S. and Soviet Union have given up efforts to reach significant arms control agreement at the summit next week. Speaking from Washington in a satellite interview with overseas correspondents, Nitze said "We are now looking for something less ambitious, perhaps bilateral problems or guidelines which might be of some assistance to our arms negotiators to move towards such an agreement." Nitze said draft proposals by both sides proved unacceptable because the superpowers were still far apart on all arms control issues. He said areas where some summit agreement might be found included air safety in the Pacific and landing rights for commercial airliners. President Reagan also indicated today he did not expect concrete agreements. Speaking to foreign journalists the President said he hoped to create an atmosphere of trust.

Pres. RONALD REAGAN: I don't envision this meeting as being one where we will get down to specific numbers and so forth. We have a team of negotiators, each side in Geneva, that have been negotiating on the possibility of nuclear arms reductions for some time. I would think that what we should be dealing with at the summit is, as I said earlier, the elimination of suspicion and mistrust to the point that we could turn the specific numbers over to those other negotiators but that they could have a signal from both sides, from their government and ours from us, have a knowledge that we want them to continue and to arrive at an agreement.

MacNEIL: The President was asked how he will approach Mr. Gorbachev at the summit.

Pres. REAGAN: I just told our people this morning that there will be another first in these meetings. It will be the first time we've ever had someone on our side of the table who's older than the fellow on the other side of the table. So maybe I can help this young man with some fatherly advice.

MacNEIL: One of the reporters asked Mr. Reagan why he no longer called the Soviet Union an evil empire. He said the Soviets had called the U.S. such things as cannibals and added, "I think both of us have stopped that language, thinking we'll get further at the meetings if we can come together to try to eliminate the need for such talk." Charlayne?

HUNTER-GAULT: President Reagan's attention was not just focused on summit matters. He told a group of congressional leaders that there would be a financial crisis unless the Congress raises the federal debt ceiling before a Thursday deadline. The debt ceiling bill is linked to the Gramm-Rudman balanced-budget act. Today a House-Senate conference committee broke into small groups to search for a compromise on what programs get cut and also when automatic cuts would go into effect. And the House Ways and Means Committee is considering a short-term debt extension that would allow the budget debate to go on in the Congress after the President returns from the Geneva summit. Mr. Reagan is on record as supporting the Gramm-Rudman balanced budget amendment, but today he told his congressional visitors he is worried about possible defense budget cuts. After the White House session, Senate leaders talked about the upcoming financial crisis and the President's support for Gramm-Rudman.

Sen. ROBERT BYRD (D), West Virginia Minority Leader: I indicated to the President that he had a big surprise coming with respect to Gramm-Rudman because it was going to cut or bring about serious cuts in defense expenditures, and that therefore somebody had apparently been advising him, the President, wrongly. He should not expect to continue his defense buildup if Gramm-Rudman becomes the law.

REPORTER: How will you keep the government out of default, and how will you keep the government operating? What did you decide to do about that?

Sen. ROBERT DOLE, (R) Kansas, Majority Leader: We didn't decide anything, but I think it was sort of suggested maybe there ought to be a summit meeting here with the leadership and the President before he heads for the other summit. We're certainly prepared on the senate side to sit down and try to work out something.

HUNTER-GAULT: A White House spokesman said the President has no plans at this time to hold a domestic summit meeting with House and Senate leaders.

MacNEIL: Retired Navy Lieutenant Commander Arthur Walker was sentenced to life in prison today for his part in a family spy ring working for the Soviets. He was sentenced to three life terms plus 40 years and fined a quarter of a million dollars. U.S. District Judge J. Calvitt Clarke told the Norfolk, Virginia, court, "I can't treat this as a slap on the wrist case. The evidence is all to the contrary." Walker, who is 51, said he wanted "to apologize to all the citizens of this country for what I did. I dishonored myself." Walker's brother John and his son Michael await sentencing in Baltimore for their part in the ring. A fourth man, Jerry Whitworth, is awaiting trial in San Francisco.

HUNTER-GAULT: In Beirut a suicide bomber crashed a pickup truck loaded with explosives into a monastery where top Lebanese Christian leaders were meeting. Four were killed and 17 injured. Those wounded included former President Camille Chamoun and the head of President Gemayel's Phalange party.

In London, the Archbishop of Canterbury, Dr. Robert Runcie, the head of the Anglican Church, said he was sending a personal envoy to Beirut tomorrow to seek the release of six American hostages.

In the West African state of Liberia, an exiled former general launched a coup on Monrovia, but head of state Samuel Doe said he was still in charge. Doe told reporters by telephone that loyalist troops had killed about 15 rebels who attacked the executive mansion before dawn.

MacNEIL: Finally in the news, Prince Charles and Princess Diana went to Palm Beach today for a charity dinner that's expected to raise $4 million for the United World College in Montezuma, New Mexico. First, the prince played in a polo match. For a British view of how that went, here is Michael Cole of the BBC.

MICHAEL COLE, BBC [voice-over]: No one could mistake this for the Braemar gathering. The Queen might think twice about permitting this at Windsor Great Park. But when the Prince of Wales comes to play polo at Palm Beach everyone and his wife gets out a mallet and heads for the action. Palm Beach has probably more millionaires per square yard of carefully groomed turf than anywhere else on earth. But it's not just the wealthy who turn up and sit down. Plus the odd British eccentric. The prince has played here twice before. His polo ponies, all solid mounts, have been hand-picked. The prince had made clear the impossibility of playing with or against any Argentines while peace remains undeclared by Buenos Aires. However, it was reported that one pony was pampas-bred and took instruction only in Spanish. But as there was no record of the pony having invaded the Falklands, that seemed to be okay. He and the princess are staying at a house at the polo club. The prince is playing number four for Palm Beach against the all-stars. But the game didn't start well for the home side, despite the injection of royal talent. The allstars went into the lead before he'd even managed to touch the ball.

MacNEIL: But he finished all right. The prince did score a goal and the penalty shot and his team won, 11 to 10.

HUNTER-GAULT: Coming up on the NewsHour, we'll have three different views on how to tame the wildly fluctuating dollar -- Jack Kemp's, Bill Bradley's, and Milton Friedman's. We'll report on the rent control challenge now before the Supreme Court. We'll also look at the battle between defense and the balanced budget, and we pay homage to the man who immortalized human misery in the Dust Bowl, Arthur Rothstein. Restoring Order

MacNEIL: First tonight we focus on the issue that brought leading economists and politicians from around the world to Washington today, currency rates and the strong dollar. The two-day meeting is the brainchild of Republican Congressman Jack Kemp and Democratic Senator Bill Bradley. Both men are pushing for extensive and controversial reforms in the present monetary system. They and other participants are worried about the dollar's continued strength and the overall stability of the world's financial system. Addressing the conference this morning, Treasury Secretary James Baker conceded that the present system had problems.

JAMES BAKER, Secretary of the Treasury: The current system has not been as stable as we would have liked, and we should not be complacent about the problems which exist. The close interdependence of our economies has magnified the potential impact of policies in one country on the ability of other countries to pursue their own economic objectives. This interdependence coupled with divergent economic performance among the major industrial countries has contributed, as we all know, to large exchange rate movements and to potentially destabilizing imbalances among our economies which have fostered strong, indeed exceedingly strong, protectionist measures. There is a clear need, therefore, to improve the functioning and the stability of the system as an essential framework for international trade and for overall economic growth.

MacNEIL [voice-over]: This is not the first international conference to overhaul the world's financial system. In July, 1944, some 700 delegates from 44 countries arrived at Bretton Woods, New Hampshire, to hammer out a plan to ensure economic stabilityin the postwar world. Their goal was to prevent the global financial havoc that had brought on the 1930s Depression. The plan they came up with, termed the Bretton Woods Accords, established fixed exchange rates between foreign currencies, made the U.S. dollar the world's dominant currency, pegged the dollar to gold at the rate of $35 an ounce, set up institutions like the World Bank and International Monetary Fund to aid poor nations.

These accords provided the institutional framework for two decades of worldwide growth and prosperity, but by the late 1960s the American economy began to sag, bogged down by inflation, foreign competition and an overvalued dollar. President Nixon responded in 1971 by launching the first of two dollar devaluations. He also announced that the dollar could no longer be exchanged for gold, moves which effectively undercut the Bretton Woods Accords. The changes gave way to a new system of floating exchange rates, meaning the value of individual world currencies were mostly determined by the free market. As a result, the dollar's value rose and fell virtually unchecked. This monetary instability is causing growing problems and concerns for the United States and other world economies. Today's conference is an effort to find a way to restore order to the international currency markets, order which many economists say has been lacking since the 1960s.

HUNTER-GAULT: We turn now to the two organizers of today's monetary conference, Senator Bill Bradley, Democrat of New Jersey, and Congressman Jack Kemp, Republican of New York. Congressman Kemp, starting with you, why is it so necessary to change the current monetary system?

Rep. JACK KEMP: Well, it's not working is probably the most important reason for change. I think Secretary Baker in even the short clips that your show has had this evening provide us with a guideline for what needs to be done. We're in a non-system. We need to tie the currencies of the world to some rule, some measure, some standard, if you will, to bring back not only more stable exchange rates but to facilitate international trade, international economic development, reduce interest rates, and indeed lead to the type of growth policies that can allow those countries of the world who have these huge debts overhanging their heads to be able to start paying off that debt in a growing economy.

HUNTER-GAULT: All right, let me ask your co-sponsor here, Senator Bradley, how specifically is this not-working system affecting, say, the U.S. economy, U.S. consumers?

Sen. BILL BRADLEY: I think it's hitting the United States extremely hard. I mean, the practical goal of this conference is to try to get some agreement on changes that would preserve American jobs and make American business more competitive abroad.

HUNTER-GAULT: Well, how is the monetary system affecting jobs?

Sen. BRADLEY: The value of the dollar is the price of goods in international transactions, and that price is very high. Because it is very high, it is like a tax on all of our exports, and it is as if we have subsidized imports into this country. As a result, you find a trade deficit of close to $150 billion. Now, if we're going to solve that we need cooperation among our allies in the world. We need to be willing to intervene in the exchange rate markets, and most of all as a nation we have to lead the world toward that kind of coordinated response.

HUNTER-GAULT: So, Congressman Kemp, do you think this is something that the average American should be concerned about?

Rep. KEMP: Well, absolutely. From Buffalo, New York, where I come from, to New Jersey and throughout this country, to the agricultural sector of the Midwest, all of us have a big stake in providing a more vigorous response to the international trade situation, more exports, a more stable exchange rate for the dollar against other currencies. In my view, Bill Bradley is exactly correct because so many countries are using their currency to gain an unfair trade advantage against the United States. So it hurts not only industry but agriculture, keeps interest rates artificially high. It allows other countries to have an advantage against us in our own market, notwithstanding other markets, and it leads to protectionism which ultimately is a "beggar thy neighbor", zero-sum game. So the workers of Buffalo and throughout this country have a big stake in getting interest rates down and growth up and more markets for U.S. exports.

HUNTER-GAULT: All right, what specifically would you do to reform the system?

Rep. KEMP: Well, number one, I think the G-5 meeting that was alluded to by Secretary Baker in his remarks was a step in the right direction.

HUNTER-GAULT: And that was what, exactly?

Rep. KEMP: Well, it was a move away from the floating exchange rate system that has existed since 1971 to a groping, if you will, but nonetheless a sharp step towards more stable exchange rates. Unfortunately, we have not yet come to consensus in this country or in the world what we're going to replace this non-system, the floating-rate system -- what it's going to be replaced with. And in my view I'd like to see a modernized, improved, forward-looking Bretton Woods international monetary system with stable exchange rates, with an anchor. that anchor might be a basket of commodity prices with the usual harbingers of inflation in that basket --

HUNTER-GAULT: Like what, specifically?

Rep. KEMP: Well, gold would be one of those prices that you would look at. I think we could tie the dollar to that basket of commodities as well as stabilize the dollar against other currencies.

HUNTER-GAULT: All right. Let me just get you, Senator Bradley. You have a different proposal, I take it?

Sen. BRADLEY: Well, I think you have to think of our economy as if it were a car. A car has four wheels. The wheels of economic growth are, I believe, getting the budget deficit down, moving toward tax reform, moving toward much more coordinated intervention in the exchange rate markets, which is the subject of this conference, and some rescheduling of the Third World debt that hangs over our world economy like an avalanche.

HUNTER-GAULT: When you mean more coordinated intervention, you mean governments going in to stabilize the --

Sen. BRADLEY: I mean we can't in this country have a very tight monetary policy and a very loose fiscal policy and have the reverse in another country. We have to coordinate our efforts with our allies. And I think at a minimum what we must do is to go further and faster in the direction that President Reagan and his secretary of the Treasury, Baker, announced in the G-5 agreement. We need to go further toward intervening in the exchange rate markets so that the dollar becomes more competitive and so that we preserve American jobs and we make American business more competitive abroad.

HUNTER-GAULT: What about Congressman Kemp's proposal? Would you agree that that would be a viable option?

Sen. BRADLEY: Well, if we are talking about the gold standard I'd say it was unrealistic and impractical.

HUNTER-GAULT: Why?

Sen. BRADLEY: Well, I think that it makes us vulnerable to a very tight monetary policy, and in my view it also makes us vulnerable to countries like South Africa and the Soviet Union dumping gold into the world market.

HUNTER-GAULT: What about that --

Sen. BRADLEY: Now, I think that the key point here is that out of this conference is coming a broad agreement that we have to have governments involved in seeking change in this system.

HUNTER-GAULT: Do you agree with that, Congressman Kemp, that governments have to be active?

Rep. KEMP: Look, I think it's unfair to characterize my proposal as simply subjecting the United States economy to tight money because of some fixity on gold. Irrespective of that debate, I think Bill would agree that a system cannot work without some reference point around which central banks would decide to make the intervention that he supports. Having said that, as far as I'm concerned, the issue is not what we finally move towards; it is, how do we have the intervention that I support as well as Bill Bradley, and what anchor or what rule we use to decide when to intervene, when to tighten, when to loosen? And I do not favor the type of tight monetary policy or loose monetary policy. I want a sound, stable monetary policy that will help bring down the terrible discrepancies that exist in foreign exchange markets and help provide a guideline around which people can gauge the long-term value of the United States dollar. In my view that would lower interest rates and have a significant impact upon the industrial Northeast and the agricultural sector of this country.

HUNTER-GAULT: But what would be wrong with a tight or loose monetary policy Senator Bradley's proposing?

Rep. KEMP: Well, again, if it's too loose it leads to inflation; if it's too tight it leads to deflation. We don't want a monetary policy that causes the dollar continually to appreciate against other currencies. We don't want to get back into the type of inflationary monetary policy -- loose monetary policy -- which caused inflation to rise at 13 and interest rates to go to 21 . We want stable prices.

HUNTER-GAULT: All right, but --

Rep. KEMP: And we had that for about 40 years under Bretton Woods. I think we can improve upon that. And it's not an ideological commitment to any one commodity; it's a recognition that the dollar needs a measure, a unit of account around which we can conduct, along with our trading partners, a better system for the world, and particularly the people that we represent.

HUNTER-GAULT: Just very briefly, the inflation part of his argument against your position.

Sen. BRADLEY: Well, I actually think that our positions are more similar than you would imagine. I think out of this conference that we jointly co-sponsored we will see more governments actively seeking to change the present system. And I think that's positive. At a minimum in this country we have to realize that domestic economic decisions that we take have international repercussions, and we have to think about that before we take them. For example, the big budget deficit in 1982 we financed with high interest rate policy. That high interest rate policy we thought was going to create no loss. But it precipitated the Third World debt crisis which sucked capital out of Latin America and other places into this country and also halted U.S. banks from loaning abroad. The result of that was an extremely fragile financial system, which is where we are now. If we're going to get out of that, we need more coordination. And the only entities then can coordinate effectively are governments. And I think that's the message from the conference that's being held in Washington that Jack and I co-sponsored and that is attended by people from all over the world. We want a change in the present system because the floating exchange rate system is not working.

HUNTER-GAULT: All right, we'll come back. Robin?

MacNEIL: Not everyone agrees that the current monetary system should be tampered with. A leading critic of today's conference is Milton Friedman, Nobel laureate in economics and longtime professor at the University of Chicago. Professor Friedman is now a senior fellow at the Hoover Institute in Stanford.

Professor Friedman, they both think whichever kind, some kind of monetary reform is essential. What do you respond to that?

MILTON FRIEDMAN: Everybody thinks some kind of monetary reform is essential, but everybody thinks a different kind is essential. And the fact of the matter is that there is no agreement among either these two gentlemen or the people at their conference as to what form an international rearrangement should take. The fact of the matter is that the floating exchange rate system has worked extraordinarily well. It has existed now since 1971; it has existed during a period in which world trade expanded very rapidly. It has existed during a period where you had unusual disturbances in the form of oil and food crises, and it has enabled the countries of the world to weather them. The fact is, there is no effective alternative to a floating rate system. I believe these gentlemen are setting the problem upside down. The way to get stabler exchange rates is not through coordination --

MacNEIL: You agree that stabler exchange rates are desirable?

Prof. FRIEDMAN: Stabler exchange rates would be a good thing if the circumstances existed which led to them. They are a bad thing if they are artificially repressed. For example, let me digress for a moment. These gentlemen imply that somehow or other the strong dollar is losing jobs, that somehow the strong dollar and a large balance of payments deficit on current account is costing jobs in the United States. Well, if a strong dollar loses jobs, then you would think that a weak franc and a weak mark would gain jobs. That seems logical, doesn't it? How is it that employment in the United States has been going up very rapidly and employment in Germany and France has gone down? How is it that our strong dollar has been accompanied by a very strong economy with relatively high levels -- increasing levels of employment? The plain fact is that the strong dollar does not cost any jobs; that's nonsense. It changes jobs. Some jobs become less available and other jobs become more available.

MacNEIL: And some jobs do go overseas.

Prof. FRIEDMAN: Some -- well, I don't know if they go overseas. Some jobs -- some concerns sell less; other concerns sell more. Some concerns employ fewer; other concerns employ more.

MacNEIL: What about --

Prof. FRIEDMAN: -- on net. On net. The total employment in the United States has been going up rapidly, but going back --

MacNEIL: Well, what about Congressman Kemp's other concerns that the whole thing is leading to high -- it's keeping interest rates higher than they need to be, it is leading to protectionism?

Prof. FRIEDMAN: It's doing the opposite. It's doing the opposite, excuse me. Surely the capital inflow from abroad makes interest rates lower than they otherwise would be. That's why I say this is upside down. The way to get an improvement in the international exchange rate system is to have an improvement in the internal policy of each country separately. The United States has been through a 10-year period of extraordinarily unstable conditions. That's because we've had unstable policies at home. It's not the fault of other countries. It's not because we haven't coordinated other countries. And I believe that the effective way to have an improved international trading system is for each country separately to mend -- doctor, cure thyself. We should have a much stabler monetary policy, not wide swings up and down.

MacNEIL: By a stabler monetary policy you mean controlling the money supply by the Federal Reserve Board?

Prof. FRIEDMAN: The Federal Reserve has controlled the money supply in such a way that we have had wild swings with monetary growth rapid and then slow. We should also, I agree that we need to have a smaller federal deficit, provided it's achieved by cutting spending. We need to cut government spending. Government is absorbing too large a fraction of our resources. And that's a much more important source of our problems than any exchange rate.

MacNEIL: Let me go back to the gentlemen in Washington. Congressman Kemp, here's a man who's got a Nobel Prize in economics who said you're setting the problem upside down. You just heard what he said.

Rep. KEMP: Well, there probably is more room for agreement than I think Dr. Friedman would acknowledge, at least in the short brief time that we've been on the show together. He has recently turned out, in the Journal of Political Economy, a statement in which he said the earlier commodity link provided a physical anchor to the price level over the long term, which led to stable prices for almost 150 years. I don't disagree with Milton Friedman that the doctor should cure himself. I'm a strong supporter of tax reform to bring down rates and encourage investment and to cut the deficit and to deregulate the economy, and I'm a big fan of Milton Friedman. But I think it just stands to reason that if we're to have stable prices we ought to have a monetary policy that looks at the price level as measured by some rational objective standard as opposed to looking at just how many angels can dance on the head of M-1 every Thursday at 11:15 on the line.

MacNEIL: You're saying that controlling the money supply here at home won't cure the problem.

Rep. KEMP: Because you don't know what the demand for money is. The supply doesn't -- M-1, which is Dr. Friedman's favorite target, or the monetary base, or whatever he would use tonight, you don't know what the demand for money is, and the demand for dollars right now in the world is very strong. The supply is relatively low, and you measure it by what's happening to the dollar, what's happening to exchange rates, what's happening to gold, what's happening to commodity prices and what's happening to interest rates. If you look at those objective criteria, it seems to me that right now we're too loose, just as in 1979 we were way too easy.

MacNEIL: Let's get Dr. Friedman to comment and then go to Senator Bradley.

Rep. KEMP: All right.

Prof. FRIEDMAN: Two comments. First, for my good friend Jack Kemp it is certainly true, and I have always argued, that gold did provide a long-term price anchor. But remember, it did not provide stability in the short run. Remember that it was under a gold standard that we had the Great Depression. It was under a gold standard that we had the panic of 1907. It was under a gold standard that we had the serious depression of '21. So the gold standard does provide a long-term anchor, but it provides -- it permits a highly unstable short-term fluctuation in the society. Now, when we come to the present situation, let's look at the things you are talking about. Employment has been relatively good in the United States. Unemployment is too high, but not for the reasons of a high exchange rate, because of rigid wages and other reasons. So far as prices are concerned, inflation has been relatively low, but we have had inflation. Remember, when President Nixon in 1971 put on price and wage controls, prices were rising 4 a year. Now that's success.

MacNEIL: I want to get Senator Bradley back into this. Senator Bradley, Mr. Friedman says all the evils you attribute to the overvalued dollar are not really there.

Sen. BRADLEY: Well, I wouldn't want to ask someone in the manufacturing sector that question. I don't think they would agree with Dr. Friedman. Far be it from me to question the economic expertise --

MacNEIL: But he says in net terms -- he says in net terms --

Sen. BRADLEY: -- of a Nobel laureate.

MacNEIL: He says in net terms the U.S. economy is producing more jobs.

Sen. BRADLEY: Well, let me --

Prof. FRIEDMAN: How do you explain that the weak mark --

Sen. BRADLEY: You know, the [unintelligible] things that the jobs are being produced in, in service industries; they're also being produced in certain investment sectors. But it is unquestionable that job loss is occurring in the manufacturing sector and in the agricultural sector.

Prof. FRIEDMAN: That's no doubt true.

Sen. BRADLEY: And it's that mismatch that is the problem. And when we argue that a high interest rate is positive because it attracts capital from abroad and the appreciation of the dollar is the result and that's to be applauded, I'd also look at the ancillary effect to that, which is that banks, because of the world debt crisis, pulled back lending to Third World. Our lending to the Third World in 1982 was $120 billion. This year it will be $20 billion. That has led to a further appreciation in the value of the dollar. My only point being is that domestic economic considerations have got to be viewed in the context of international policy repercussions.

Prof. FRIEDMAN: I agree with that. Can I ask you a question? What we have to do domestically is to try to maintain a stable policy. What we have to do is to cut government spending; what we have to do is maintain stable monetary conditions so we can have a reasonable stability of prices, and what we have to do is to eliminate our restrictions on foreign trade.

MacNEIL: I hate to say this, gentlemen, but what we have to do is go. I'd like to thank you all for joining us. Congressman Kemp, Senator Bradley, Milton Friedman, thank you. Charlayne?

HUNTER-GAULT: Still ahead on the NewsHour, why rent control is before the Supreme Court, how the battle between defense and a balanced budget is shaping up, and an homage to the man who immortalized the Dust Bowl, Arthur Rothstein. Rent Control Challenged

HUNTER-GAULT: An old issue has come back to haunt the rental housing market. The shortage of affordable rental housing has generally led to higher rents in the last few years, but many communities have gotten around that by passing local laws limiting the increases that landlords could charge. It's called rent control. Landlords never liked the law and today a group of them from Berkeley, California, managed to get a hearing before the U.S. Supreme Court. Spencer Michels of public station KQED in San Francisco filed this report.

SPEAKER: This man deserves to retain his tenancy, and if this board is going to sit there saying your eviction appears to be valid, then why do we have a rent board? Why dowe have a rent control law? Now, we can't --

SPENCER MICHELS, KQED [voice-over]: Even as Berkeley's rent stabilization board and the city itself fight in court to retain rent control, the law and how it's administered come under constant attack.

GUS NEWPORT, mayor: I think if you hear the landlords' side, they say they're getting screwed; if you hear the tenants' side, they say they're getting screwed, and in our society, in which people have the right to speak out what's not in their best interest, each side claims to be getting screwed when all was doing all right.

MICHELS [voice-over]: Today Berkeley has one of the strictest residential rent control laws in the country, a law that has allowed only small rent increases, penalizes landlords who don't fully comply with its complex provisions. The city also has the nation's first commercial rent control law enacted to preserve neighborhood business. Both laws have kept rents low, which was the aim of rent control all along.

The seeds were sown early in the 1960s when students at the University of California at Berkeley cried out for civil rights and free speech. The war in Vietnam radicalized thousands and brought Berkeley to the brink of total chaos. But when the war ended the activists, many of whom stayed on, found other, local battles to fight. Affordable housing, especially for renters, became a rallying cry in an era when real estate prices were soaring. For Berkeley, despite its political turbulence, proved an attractive place to live, so attractive that gentrification posed a threat to the less affluent. Activists began agitating for rent control, and in 1972 voters passed a complicated rent control law which the Supreme Court tossed out. Among the early advocates for that law was Veronica Fukson.

VERONICA FUKSON, City Council: And rent control is one piece of a program to guarantee long-term affordable housing. If Berkeley does not have affordable housing, then we are going to have an incredible change in the population, which we are already experiencing, and this community will become like many other communities, a place only for upper-middle-income and affluent families, which is not one of the values that I think many of us treasure in Berkeley.

MICHELS [voice-over]: Ironically, it was conservative Howard Jarvis who, in 1978, gave rent control its biggest boost, when he led the successful fight for Proposition 13, a property tax relief measure.

MYRON MOSCOVITZ, rent law author: He told them their rents would come down. They voted for Prop 13, it passed, and their rents went up. And they were mad as hell everywhere. And all of a sudden in one year, two years, you had rent control not just in Berkeley and Santa Monica, you had it in San Francisco, in L.A., in San Jose, in Hayward, in a host of smaller cities I could tell you about, and these were not radical movements. These were ordinary, middle-class tenants and homeowners voting for it all over the state.

MICHELS [voice-over]: But Berkeley pursued rent control with more zeal than most. Single-family homes as well as apartments are covered. Landlords must pay a $60-per-unit-per-year fee to register their property. Rent increases are controlled by the rent board. One year it was 9 ; one year it was nothing; this year it was 2 . When a tenant moves out, the controls remain. Strict and expensive penalties including rent rollbacks were enacted for violations. Evicting tenants was made more difficult. Berkeley tenants, like the single mother and her daughter who live in this small house, benefited most directly.

LISA MALM, renter: The rent was $200 when I moved in here and now, seven years later, it's $241. I think two rooms plus a kitchen and a bathroom in a free-standing house, not an apartment, would cost between four and five hundred dollars.

MICHELS: So what do you think about rent control?

Ms. MALM: I think it's terrific. It's afforded me a nice place. A decent place to live, to raise my daughter.

MICHELS [voice-over]: With low rents and few vacancies, tenants stay put, leaving little room for newcomers. This young couple can vouch for the fact that Berkeley's housing crisis is now worse than ever.

WOULD-BE RENTER: The situation is by the time we get there it's been rented last week.

MICHELS [voice-over]: There's room in the dorms for only a sixth of University of California students. The other 24,000 must search through listings, many of them for dwellings miles away, to discover vacancies. People pay good money to find rental housing in a market that Berkeley realtors claim is shrinking.

REALTOR: Come down and look at the past week's listings to get an idea before you pay the fee.

MICHELS [voice-over]: They say that 10,000 units have been taken off the rental market, sold to owners planning to occupy the property since rent control went into effect. One landlord who is not selling out is Muriel Rosencranz, who owns a five-unit apartment house one mile from campus.

MURIEL ROSENCRANZ, Property Owners Association: Rent control has decreased the value of property so sharply you see a lot of owners are just desperate. They don't have -- they're not tough and they can't stand it, and they sell at drastic losses to themselves.

MICHELS [voice-over]: Rosencranz, like many landlords, says her rents are so low that she can't afford to make repairs.

Ms. ROSENCRANZ: I just let it go. All of the windowsills, they're absolutely rotting away.

MICHELS: I mean, why wouldn't you fix that, though?

Ms. ROSENCRANZ: Well, because you'd have to paint the whole -- all of the trim on the whole building. Look, I would have painted the whole building if there wasn't rent control because it hurts me to come over and look at that.

MICHELS [voice-over]: She is angry at those who, she believes, forced rent control on the city.

Mr. ROSENCRANZ: And the BCA, the Berkeley Citizens Action, that are the radical left, they used rent control as a tool to get power. And they have it.

MICHELS [voice-over]: The radicals do in fact hold and flaunt power, winning an eight-to-one majority on the city council last year.

Ms. FUKSON [taking oath of office]: Against all enemies foreign and domestic --

MICHELS [voice-over]: Vice Mayor Veronica Fukson is part of the radical majority.

Ms. FUKSON: Landlords and property owners have always had incredible power over other people's lives, and they've always dictated what could happen with that property. We're fighting over money, and money is very often a source of long struggle.

MICHELS [voice-over]: And struggle accurately describes the often chaotic rent board meetings where the more radical faction holds a one-vote majority. Board member Betty Olds is in the minority.

BETTY OLDS, rent board: Well, until I got on the Berkeley rent board I thought I was a liberal, but now I'm seen as a landlord toady and a conservative old bag.

MICHELS [voice-over]: Olds said the board, in setting the annual rent increase, ignores economics.

Ms. OLDS: The final outcome is always a political decision.

MICHELS [voice-over]: She strongly suppots rent control in Berkeley, but feels that the law unjustly penalizes the small property owner.

PROPERTY OWNER: I've worked all my life to have two lousy apartments. When your rent board started, everything changed. Half of Mexico stayed in my apartment, and we weren't allowed to say one word.

MICHELS [voice-over]: While some landlords deplore Berkeley's rent control, some small business men welcome it, worried that skyrocketing rents and property values could force them out of business. That's just what started to happen in a neighborhood commercial center called the Elmwood. Community activists found out that a big developer planned to buy the building housing Ozzie Osborn's soda fountain. They organized a campaign to save the fountain and the neighborhood, and as a result Berkeley instituted the nation's first commercial rent control.

BERL WILLES, merchant: We want to be able to, you know, get all of our services right here without having to get into cars and go three and four miles to the other side of town to get our shoes repaired or to buy stationery.

OZZIE OSBORN, merchant: Thank God Berkeley was sensitive enough in this one instance anyway here to really address that at the polls.

MICHELS [voice-over]: But the commercial rent control that saved Ozzie's along with residential rent control could be wiped out by the Supreme Court. The constitutionality of Berkeley's law has been upheld by state and federal courts, who have concluded that it does not deprive landlords of their property. But the high court will soon hear a challenge by property owners who are charging that the law violates the U.S. Sherman Antitrust Act. James Parrinello will argue that without specific authorization from the state legislature cities cannot impose rent control.

JAMES PARRINELLO, landlords' attorney: The antitrust laws say you can't fix prices, and it says there must be competition in the price marketplace. To give you an example, if all the landlords in Berkeley got together and fixed prices, decided they weren't going to raise prices or they were going to lower them, that would be illegal. The same thing is true when the city says that there shall be no price competition in the marketplace.

Mr. MOSCOVITZ: Cities have to be treated differently if they're going to do their job of protecting their citizens.

MICHELS [voice-over]: Attorney Myron Moscovitz helped write Berkeley's rent control law and is defending it before the court.

Mr. MOSCOVITZ: The problem with bringing cities totally under antitrust laws is that about half of what cities do in regulating businesses, in regulating land use does restrain trade, but the irony is that these antitrust laws were set up to protect consumers from price gouging by monopolies and businesses who got together to fix prices. What local rent control laws do is one of the few occasions in American history the consumers themselves have gotten some power to see that they're not exploited by businesses.

MICHELS [voice-over]: If the Supreme Court invalidates Berkeley's law on antitrust grounds, all local rent control ordinances in California could be thrown out. Cities could ask the legislature to pass a law authorizing rent control, but that would seem unlikely in the current statewide political climate. In Berkeley the local political climate infuriates economist Michael St. John, who counsels landlords through the labyrinth of rent control.

MICHAEL ST. JOHN, landlords' consultant: The balance of rights in Berkeley has gone out of balance, and owners are being treated like criminals merely because they own buildings. I personally believe it's only a matter of time until we see foreclosures and loss of buildings and closing of buildings, boarding up of buildings, the way it happened in New York.

MICHELS [voice-over]: Landlords here know, and in some cases even accept the fact, that rent control is a Berkeley priority.

Mt. MOSCOVITZ: You know, we are very serious about going after people woh are not going to pay their registration fees come September 1st.

MICHELS [voice-over]: What they would like to change is the overzealous enforcement of a law that they believe gives tenants all the power. Defense Under Siege?

MacNEIL: For weeks the House and Senate have been struggling to reconcile two versions of a bill to require a balanced budget. Once again a deadline is approaching because the bill is tied to approval of a higher ceiling on the federal debt. If that isn't approved by Thursday night, in theory the Treasury will run out of money. That Perils-of-Pauline scenario has been played before, but in tonight's thrilling installment there's a new twist. President Reagan, who supports the budget-balancing bill, is said to be concerned that it would also entail cuts in defense just when he's off to Geneva to face Gorbachev at the summit. There was a showdown at the White House today, with Democrats telling the President he can't have guaranteed defense increases and the budget balancing bill, which is called Gramm-Rudman after its sponsors. We pick up this debate now with Wisconsin Democrat Les Aspin, chairman of the House Armed Services Committee, and Senator Warren Rudman, a Republican from New Hampshire, a co-author of the balanced budget legislation. They both join us from Capitol Hill.

Congressman Aspin, you were at the White House today. What did you tell the President the impact of the Gramm-Rudman bill would be on defense?

Rep. LES ASPIN: I said, and I think that it was agreed by most of the people there, that defense gets a very, very severe hit under Gramm-Rudman. He was talking about trying to go into the negotiations with Mr. Gorbachev being able to tell Mr. Gorbachev that we would be willing to match them weapon for weapon on a buildup, and that if the Soviets were not interested in arms control, that they ought to know that we are not going to let ourselves fall behind in an arms race. And I think that's the right position to take in a negotiation. But I pointed out that if he goes to the arms talks having signed Gramm-Rudman, he cannot make that guarantee. I think that there is no way that you can have both the kind of buildup that he's talking about, using to pressure the Russians with, and Gramm-Rudman at the same time. He's got to choose.

MacNEIL: Why can't he? How seriously would Gramm-Rudman cut into defense?

Rep. ASPIN: There's two things about Gramm-Rudman. One is the sequestration process that goes in if the targets are not met, and that cuts defense very heavily.

MacNEIL: Meaning that if the deficit isn't reduced each year by the amount the bill prescribes?

Rep. ASPIN: That's right. Then you have a process that goes in that puts the reduction on kind of an automatic pilot and that automatic pilot takes a good chunk of money out of defense. And it cuts it in a very bad way for effective management of defense. So that is very damaging. Now, the counter-argument is, ah, but that process only goes into effect if the President and Congress fail to meet the targets in the first round, because in the first round we do the normal budget process, and if we make the targets in the normal budget process then this ugly sequestration process never takes place, which is true. But there is no way that you're going to get an increase in defense spending -- the President talked about 3 . There is no way you're going to get a 3 real increase in defense spending with everything else being cut out in the amounts that you're going to have to to make the targets that are in the Gramm-Rudman proposal. So the first part of it fails on politics; the second part of it fails on process.

MacNEIL: Senator Rudman, you're one of the authors of this bill. What do you say to this argument?

Sen. WARREN RUDMAN: Well, I don't say too much to that argument, because the fact is that that is a worst-case scenario. The facts are that we have a budget process that doesn't work. All that Gramm-Rudman says is that we're finally going to have some targets, and those targets are going to be met. And if they're not met, then we're going to have a sequestration process. Now, the first half of it is the most important part of it, and that says that we will finally address these budgets with real numbers. Now, as far as what Les Aspin says, it would be true if the American people were to tell the Congress, and the President were to agree, that we are going to in fact spend money on everything and we are going to give not a damn about how much the deficit is and raise no taxes. But the fact is that faced with realities the President and the Congress are going to have a different point of view, in my opinion. If the American people want every social program that we have now, if they want every entitlement program that we have now, if they want it to continue to go up as it is going up and they believe, and there is a constituency to continue defense spending at present levels with 3 increases, you want all of those things, everything the same, then unfortunately all we'll have to tell the American people that there is in fact no such thing as a free lunch and we're going to have to pay for it. That will mean new revenue. It also --

MacNEIL: That means raising taxes.

Sen. RUDMAN: It certainly could. It also means, however, that possibly the military might have to reevaluate how it is spending money. Let me say, for example -- I don't know how Les feels about this, but I am starting to question 30 to 35 percent of our entire defense budget being spent in Europe on NATO. I wonder whether or not that needs addressing. What Gramm-Rudman will force us to do is to spend our defense dollars wisely or raise taxes to spend them foolishly or a combination of both.

MacNEIL: Senator, there are reports that the President, that some members of his cabinet are so worried, or they are so worried and have been urging him to veto this bill because of this impasse over defense. What is your advice to him?

Sen. RUDMAN: Well, let me say that for a President of the United States who for the last 20 years has been the leading spokesman -- the leading spokesman -- for balanced budgets, who has fought hard through his entire political career, I cannot even conceive of that happening. I think a much more likely scenario is that the President will sit down and say that we will make compromises so long as, if in fact in the future we need revenue increases, a fair share of them will go for defense. Obviously what the President fears and what I fear is if you pass new tax bills and put the money on the table, then the United States Congress will pounce on that money like a hungry tiger after fresh meat, and there is no guarantee whatsoever that money will be wisely spent.

MacNEIL: Congressman Aspin, has the President been painted into such a corner that he's either going to have to accept the possibility of tax increases, which he's rejected up till now, or veto this bill?

Rep. ASPIN: I think it is true that the process presents him with that ugly possibility. He's going to have to either decide that he's not going to get the kind of increases that he wants in defense, that the Gramm-Rudman is unworkable and either he helps vetoes bill or helps undermine it in some other way, or he raises taxes. And I don't think he wants to do any of that. But I don't think -- the first step in this is getting through to the President that he's living in a dream world if he thinks he can do the kinds of things that he wants to do without any conflict. And I think what Warren Rudman is saying is absolutely right, but I do not think that that message is getting through at the White House.

Sen. RUDMAN: Well, let me just add to that that I believe there has been somewhat of an attitude around here that you can spend money for everything. The President wants more defense. Some of the people in Congress want more social programs. Nobody wants to touch his entitlements, and nobody pays for it. But I believe that Gramm-Rudman, quite frankly, is going to force everybody to be a lot more accountable than we are. That's what the American people want. They want the President to be more accountable, and they want the Congress to be more accountable, and Gramm-Rudman will ensure that, however it comes out.

MacNEIL: Well, let me ask each of you -- we just have a couple of minutes. Before Thursday night, is there any possibility of the two houses of Congress coming up with a compromise that the President can sign that gets out of this impasse?

Rep. ASPIN: Not by then. I would guess that what we're heading for is a slight, an increase, extension of the debt limit for a couple of weeks --

MacNEIL: To give the conference committee more time to hash this out, you mean?

Sen. RUDMAN: Well, let me say to you, Robin, that we have just come from the conference in the Capitol, just came directly here, and we've been there for two or three hours, and I must say that I think the conference is going reasonably well and there is a willingness on both sides to discuss the issues and to discuss them forthrightly. So I'm really encouraged, and I'm hopeful that we will get a bill. We may not get it this week, but I think we'll get it.

MacNEIL: And are you predicting that Mr. Reagan is going to be brought around by this impasse over the defense spending to accept the possibility of some kind of a tax increase to cover this?

Sen. RUDMAN: No, I didn't say that. What I think the President will do is I think he will sign this so long as what comes out of the conference doesn't guarantee that defense takes an unfair share of the burden. Defense is a major portion of our budget; it should take its proportionate share of reduction if in fact there are reductions. But I don't believe that the President will veto this if he believes that he could work with the Congress towards a compromise, and a compromise is what we're going to need next year if we're going to get these budgets into balance.

MacNEIL: What's your prediction, Congressman Aspin?

Rep. ASPIN: I think the same thing, but I think that the problem is going to be that the President has not made the necessary mental calculations here to know what kind of a real world he's dealing with. I think that defense is going to have to take the kind of hit, and it'll have to a fair hit, but what WarrenRudman considers a fair hit on defense and what the President considers a fair hit on defense are likely to be two very different things. The President is still taking about maintaining his 3 real growth in defense.

MacNEIL: So he will go to Geneva with that issue unresolved, you think?

Rep. ASPIN: He better go with it unresolved because if it's going to be resolved it's going to be resolved against a 3 real growth in defense. He can't there from here.

MacNEIL: Do you agree with that, Senator?

Sen. RUDMAN: Well, let's put it this way. I don't think that we can say that he can or he cannot. My view is that if we pass this bill, next January the President will submit a budget and for seven months we will debate that budget knowing -- or six months -- knowing full well that we're playing with real dollars. During that time compromises will be made, and I think that the President of the United States, more than any other recent president, has shown that if he will stand fast to his opinions he will finally get what he wants, if he makes some compromises. And I think he's willing to make some compromises.

MacNEIL: Okay. We'll see how it comes out. Thank you both, Congressman Aspin, Senator Rudman, for joining us. Charlayne?

HUNTER-GAULT: And now the day's Lurie cartoon, a look at preparations for next week's Reagan-Gorbachev summit.

[Ranon Lurie cartoon -- Reagan outfits himself in mountaineering gear for a hike up the summit and proceeds to climb; Gorbachev likewise proceeds, but up a separate summit.]

MacNEIL: Once again the main stories of the day. The United States says there won't be a significant arms control agreement at the summit. And former Navy officer Arthur Walker was sentenced to life in prison as a Soviet spy. Portraitist of a Period

MacNEIL: Finally tonight, a remembrance of Arthur Rothstein, the photojournalist who died yesterday at New Rochelle, New York, at the age of 70. Rothstein was a U.S. Army photographer in World War II. He was director of photography for Look magazine for a quarter of a century and most recently worked for Parade magazine. His photographs chronicle a broad panorama of people and events, but he's best remembered for his photos of the Dust Bowl during the Depression.

7voice-over] Rothstein wrote, "For those who see my photographs, I hope that these images will be a remembrance of the past, a record of accomplishment and an affirmation of faith in humanity."

[on camera] Good night, Charlayne.

HUNTER-GAULT: Good night, Robin. That's our NewsHour for tonight. We'll be back tomorrow night. I'm Charlayne Hunter-Gault. Thank you and good night.