The MacNeil/Lehrer NewsHour

MR. MacNeil: Good evening. I'm Robert MacNeil in New York.

MR. MUDD: And I'm Roger Mudd in Washington. After the News Summary, we begin a series of reports on the new budget plan. Tonight, taxes and who pays what. Then Correspondent Paul Solman revisits a town in Massachusetts to gauge the economic climate. Charles Krause talks about America with a group of Russian high schoolers, and Anne Taylor Fleming has an essay about Vincent Foster. NEWS SUMMARY

MR. MacNeil: The 1993 budget became law today. President Clinton signed the bill in a ceremony on the White House south lawn. The budget is expected to cut $496 billion from the deficit over five years through a series of spending cuts from tax increases. It was so controversial that it passed the House and Senate by the smallest possible margin. We'll take a look at taxes in the bill right after the News Summary. Also at the White House today Judge Ruth Bader Ginsburg became Justice Ruth Bader Ginsburg, the second woman ever to serve on the Supreme Court. She spoke about that during the East Room ceremony.

RUTH BADER GINSBURG, U.S. Supreme Court Justice: A system of justice will be the richer for diversity of background and experience. It will be the poorer in terms of appreciating what is at stake and the impact of its judgment if all of its members are passed from the same mold.

MR. MacNeil: Justice Ginsburg replaces Justice Byron White who retired last month. Roger.

MR. MUDD: The U.S. Park police said today that White House lawyer Vincent Foster's death on July 20th was a suicide and that there was no evidence of foul play. The police also released the text of a note written by Foster and found in a briefcase in his office a week after he died. The note read in part: "I was not meant for the job or the spotlight of public life in Washington. Here, ruining people is considered sport." The chief of the park police discussed the investigation at a Washington news conference.

ROBERT LANGSTON, Chief, U.S. Park Police: The condition of the scene, the medical examiner's findings, and the information gathered clearly indicate that Mr. Foster committed suicide. The information gathered from associates, relatives, and friends provide us with enough evidence to conclude that Mr. Foster, that Mr. Foster was anxious about his work and he was distressed to a degree that he took his own life.

MR. MUDD: As deputy White House counsel, Foster had played a major role in handling the shake-up of the White House travel office. He said in his note that he had made mistakes from ignorance, inexperience, and overwork, but he said he knew of no intentional violation of law or standard of conduct by anyone in the White House.

MR. MacNeil: CIA Director James Woolsey flew to the capital of the former Soviet republic of Georgia today to retrieve the body of a slain American diplomat. U.S. officials would not comment on reports that the man, 45-year-old Fred Woodruff, was an agent of the CIA, but the Woolsey trip was believed to be tacit acknowledgement that he was. Woolsey was met at the country's airport by President Eduard Shevardnadze. Woodruff was with Shevardnadze's head of security when he was shot by an unknown assailant on Sunday. He'd been on temporary duty in Georgia reportedly to train body guards for Shevardnadze.

MR. MUDD: U.N. peacekeepers in Bosnia this evening said Serb forces have now retaken key mountainside positions overlooking Sarajevo. They had started transferring control of those positions to U.N. forces yesterday under the threat of NATO air attacks. The Bosnian Serb leader Radovan Karadzic insisted the withdrawal would be complete in another 24 hours. The territorial dispute led to another postponement of the peace talks in Geneva which are aimed at the partition of Bosnia. Meanwhile, Karadzic told the Associated Press that if a single NATO bomb strikes a Serbian position, there would be no more talks. The NATO allies yesterday agreed to launch air strikes if the Serbs did not lift their siege of the Bosnian capital. A critically wounded five-year-old Bosnian girl was in stable condition in a London hospital today. The girl, whose plight became the focus of international attention this weekend, was evacuated from Sarajevo yesterday after a six-day delay blamed on United Nations red tape. She was wounded in the abdomen and spine in a mortar attack that killed her mother. The publicity surrounding her suffering produced offers to help 40 or so other seriously ill patients in Sarajevo. A U.N. official said those victims could be evacuated in a matter of days.

MR. MacNeil: A State Department official today said that U.S. troops could remain in Somalia for at least another year and possibly longer. Amb. David Shinn told reporters in Washington one obstacle to withdrawal was warlord Mohamed Farah Aidid, whose forces he blamed for the killing of U.S. soldiers on Sunday. Shinn said it was very important that the fugitive warlord be removed from the equation. There are about 4,000 U.S. troops in the U.N. Somalia force which is there to maintain stability in the country while the government is re-established.

MR. MUDD: The productivity of American workers fell during the second quarter of the year at an annual rate of 2 1/2 percent. It dropped at a 1.6 percent rate during the first quarter. The April-May-June decline was theworst in more than four years. Economists argue that productivity must increase for living standards to improve or at least remain stable. That's it for the News Summary. Just ahead on the NewsHour, adding up the budget bill, bouncing back from hard times, discovering America, and questioning an untimely death. SERIES - JUST THE FACTS

MR. MacNeil: Tonight we begin a short series of reports intended to help clarify the complicated budget bill signed into law today by President Clinton. Tonight we look at what the tax changes and don't mean to individual taxpayers. In other reports, we'll examine the impact on business and on the economy more generally. We begin with an excerpt from the President's remarks at today's signing.

PRESIDENT CLINTON: In five months, the American people heard too little about the real debate and too much from those who oversimplified and often downright misrepresented the questions of tax increases and spending cuts because they had narrow economic or political or personal reasons to do so. So today, as we sign this landmark legislation, I say again now we can talk about the national interest, how this plan will begin to bring the change we need in America, how we can have economic revival and hope if this is a beginning and we move forward from here. We now have real fairness in the tax code, with over 80 percent of the new tax burden being borne by those who make over $200,000 a year, with the middle class asked to pay only $3 a month, and with a tax cut to working families with children who make under $27,000 a year. By expanding this earned income tax credit to working families and especially to the working poor, this Congress has made history by enabling us to say for the first time now if you work hard and if you have children in your home and you spend 40 hours a week at work you could be a successful worker and a successful parent, and you will be lifted out of poverty.

MR. MacNeil: Janice Johnson is the director of tax policy for the New York State Society of Certified Public Accountants. Ms. Johnson, thank you for coming. According to a Washington Post- ABC News poll half of Americans think that taxes are going up somewhat and a fifth of Americans think they're going up a great deal. Can they all be right?

MS. JOHNSON: I think most Americans will not see anything increase, other than their gas tax, and the gas tax won't be dramatic.

MR. MacNeil: What would the gas tax be for the average driving that Americans do?

MS. JOHNSON: Well, if you think average driving is maybe 500 gallons a year, that's about a $20 gas tax, and that is not -- that has to be a burden on energy consumption.

MR. MacNeil: All right. So apart from the gas tax, let's look at some specific categories. The President just mentioned the working poor. What difference is the new tax bill going to make to them?

MS. JOHNSON: If you look at a working poor family that has two children, married couple, they make $10,000 a year, they already don't pay any income tax. When you take their personal exemptions and itemized deductions, they're down at a level where they don't pay income tax. What there is for them is an earned income credit, a refundable credit they actually get back to increase their total income. Right now, in 1983, it will be somewhere in the neighborhood of $1500 to that family with two children. In '94, and one of the differences here this is not retroactively from the tax rates, in '94, it will go up by about $600. They'll get about $2100. So that is a significant increase for them in their overall income.

MR. MacNeil: So the only other impact on them will be the gas tax we just --

MS. JOHNSON: Right. If they actually own a car and are paying gas tax, there will be a little there.

MR. MacNeil: Right. Let's move on to middle -- people who might be called middle class and discuss the impact on them.

MS. JOHNSON: Right. Well, if you look at a couple that has $70,000 say in gross income, that's a salary and any savings they have.

MR. MacNeil: Probably made up of at least two wage earners doing that.

MS. JOHNSON: Probably in middle America you have two wage earners. They have two children. You're probably looking at deductions and personal exemptions in the neighborhood of $20,000. If they're paying state taxes, they're paying mortgage interest, all those things together added up, probably 20,000, so they've got taxable income of about $50,000. This law does not kick in for married couples until their taxable income goes over $140,000.

MR. MacNeil: So no change?

MS. JOHNSON: No change other than the gas tax.

MR. MacNeil: And then the gas tax on that.

MS. JOHNSON: Right.

MR. MacNeil: But there are changes for retired people, and let's look at a couple of categories of retiring people.

MS. JOHNSON: Okay. Among retired people, a lot of retirees don't really have that much in taxable income, so you start looking at what do they have in income, what do they have in Social Security income, and whether or not that Social Security income is taxable. If you've got a retiree with say $20,000 in pension income and $20,000 in Social Security income, they're not going to pay any additional tax if they're a married couple filing jointly. The Social Security increase is not going to affect until you've got $44,000 in income.

MR. MacNeil: In taxable income.

MS. JOHNSON: Well, in income that includes tax exempt interest for this purpose, because your tax exempt interest is counted in income to determine whether Social Security is taxable. So assuming we've only got pension and --

MR. MacNeil: Tax exempt interest would be interest from --

MS. JOHNSON: Municipal bonds.

MR. MacNeil: -- say some investments that were tax free.

MS. JOHNSON: Right.

MR. MacNeil: Well, let's look at a couple who have, who have some investments.

MS. JOHNSON: Okay. Then if you've got this couple with investments and they've got another $20,000 in income in investments, so that in total their income is $60,000, then their Social Security is going to be hit by a new rule. The new rule tells you that 85 percent of the Social Security benefits at this level pretty much will be taxable instead of 50 percent under the old law.

MR. MacNeil: Everybody pays tax on 50 percent of their Social Security now, right?

MS. JOHNSON: Right. So another 35 percent to these people will be taxable, so in this couple's case another $7,000 in taxable income will be there.

MR. MacNeil: With a tax result of what?

MS. JOHNSON: Well, the -- their maximum rate hasn't changed. It's still 31 percent, so it's another about $2,000 in taxes, a little more than that.

MR. MacNeil: Which is a considerable amount for somebody at that --

MS. JOHNSON: It is a considerable amount, but I think the Clinton administration is looking at this. Treasury estimates only 13 percent of retirees are in this level that will be hit, and generally retirees have a little more disposable income than some other segments of the population, and they felt, again, based on ability to pay, this was probably a segment of the population that could afford to pay a little more in tax to make up the budget deficit. That was the thinking that they saw.

MR. MacNeil: And so they would be, and so the only other thing in their case, they would be affected by the gas tax as well?

MS. JOHNSON: Right. The gas tax is across the board, automobile drivers.

MR. MacNeil: Okay. Let's go on to some categories of upper income people.

MS. JOHNSON: Okay. If you've got a couple that has two kids and say has $250,000 in gross income, you're looking at all salary income in this case today, they're probably going to have in the neighborhood of $50,000 in deductions and personal exemptions against that. And what they'll have probably is mortgage interest. They'll have state income taxes. They may have some charitable contributions, a few other things like that. And they will get part of their personal exemptions, but they will lose about half of those not because of this law but because of a change in the law a couple of years ago. What this law did is it made that loss of part of your personal exemption at upper income levels permanent.

MR. MacNeil: Personal exemptions mean the amount you can deduct for dependents?

MS. JOHNSON: Right. For each, for each person you have in the family, the husband, the wife, and the two children, you get a $2350 personal exemption in 1993, $2,350, and these people will lose about half that benefit at this income level. They will also lose some of their itemized deductions, because there are limitations on itemized deductions for upper income people. And in their case, they'll probably lose about $3500 in itemized deductions. They will also -- and this is another quirk in the law -- the Medicare tax now applies to every dollar of salary income. It used to cut off at $135,000 of salary. Now it goes all the way up. That tax on the employee is 1.45 percent, about 1 1/2 percent. So in a case of this couple, assuming everything's earned income, they're going to pay about $940 in additional Medicare tax. So overall, they're going to pay about $3,000 in additional income tax, and they're going to pay the $940 in Medicare tax, and they're going to pay the gas tax.

MR. MacNeil: And the reason they're going to pay more in income tax is because their income comes above the $140,000 level. So they would be paying that -- and that raises the rate from --

MS. JOHNSON: From 31 percent to 36 percent in this case, because you've got $60,000, the difference between $200,000 in their taxable income and a $140,000 cutoff subject to this new 36 percent rate, another 5 percent that they weren't paying in tax.

MR. MacNeil: So the net difference to them would be, what do you think?

MS. JOHNSON: The net difference in taxes is probably going to be about $4,000 when you factor in the gas tax.

MR. MacNeil: $4,000 to people who have a gross income of $250,000.

MS. JOHNSON: Right. And married, filing jointly with two kids. Now keep in mind single people, all these cutoffs are lowers, so that a single person starts paying the 36 percent rate at $115,000 in taxable income.

MR. MacNeil: Right. We've kept this to couple with two kids just to keep it all the same all the way through. Go up higher now to another category of people with higher incomes.

MS. JOHNSON: Well, if you look at somebody say with $600,000 in gross income and assume they've got $100,000 in itemized deductions because they have a bigger house, they've got a lot more mortgage interest, they may be a little more charitably inclined, and they're certainly paying much bigger state taxes, so they've got $1/2 million in taxable income, $500,000. Under the old law, '92, they would have paid $147,750 about in income tax. This new law is going to require them to pay $27,000 in additional income tax. That's made up of the difference between the first $250,000 in taxable income less the $140,000, where the cutoff for the old rates are. That difference of $110,000 is another 5 percent tax because of the 36 percent rate, and then the law imposes a surcharge on taxpayers who earned or who have taxable income of over $250,000. And that surcharge is equal to a 39.6 percent income tax rate. So they're paying 8.6 percent additional tax on the whole $250,000 that exceeds the $250,000 cutoff. So their income tax bill has gone up enormously. And additionally, people in this income bracket don't get any personal exemptions. They have lost the benefit entirely.

MR. MacNeil: Was that under the old law as it came into effect this month?

MS. JOHNSON: It was under the old law. What this law did, it was supposed to end in about '95 and we were supposed to go back to full benefits from personal exemptions and full benefits from itemized deductions. This law is another way of raising revenues extended permanently that rule. So now you always have a phase out of personal exemptions and of itemized deductions. You lose part of them. So they've got that, an additional $27,000 in taxes as well as, assuming all this is earned income, there's another $5300 in Medicare tax on that employee. And so that's a big tax burden when you look at it.

MR. MacNeil: Yeah. So go up to -- finally, we have one more category here.

MS. JOHNSON: Say you have somebody -- somebody on Wall Street is the most likely example of this -- earning a million two hundred thousand dollars in just earned income. And say they've got $200,000 in itemized deductions. One of the things you see is itemized deductions tend to drop a little bit in this category because you don't have as much mortgage interest. The house may be paid for. You may have more charitable, and you've got more state taxes. So their net, their taxable income is a million dollars. In that case in '92, they would have paid about $303,000 in tax, in federal income tax. In 1993, they're going to owe an additional $70,000 in income taxes, because everything over $250,000, $750,000 of this taxable income is taxed an additional 8.6 percent, and then the difference between 140,000 cutoff and 250,000 taxed an additional 5 percent. That's a very big tax increase, and I think what you're seeing is the tax increases in most cases are hitting people who truly have big incomes to the major extent. They're the ones paying a much larger tax bill than they have in the past. Now additionally, if this person is earning all their income, they're going to have over $12,500 in additional Medicare tax. And that's a huge Medicare tax to tack on to this. So the total additional tax burden is about $82,500 to a person.

MR. MacNeil: But for most people -- these, all these people in the $140,000 and above are under 2 percent of the taxpayers you say.

MS. JOHNSON: Right.

MR. MacNeil: Going back to most people around the country, there will be no change in the withholding for them this year or next year?

MS. JOHNSON: There should be no change in withholding. There should be no change in their tax. There should be no difference to them when they file their tax return, because these cutoffs are fairly high. And what this bill did to help people who are affected by these rate increases and the fact that these rate increases are retroactive to January 1, 1993, is at the last minute they said, we're going to give you a calculation to make of what tax is due to the rate increase. We'll give it to you. We'll send it out with your forms package. We'll be able to do it then, and you can spread that tax liability over a three payment period. You can pay a third of it on April 15, 1994, a third April 15, 1995, and a third April 15, 1996. They tried to make the burden of this additional payment as painless as they can make it.

MR. MacNeil: But even for the people at $250,000, which is well into the 2 percent and would be a large part of that 2 percent I guess --

MS. JOHNSON: Right.

MR. MacNeil: -- you say that the additional tax burden on income tax is going to be about $2,000.

MS. JOHNSON: Well, it's about actually on the income tax about $3,000.

MR. MacNeil: $3,000.

MS. JOHNSON: So in, in all, with Medicare tax, it's about 4,000, so yes, they're paying a substantial amount, but if you spread that amount over a three-year period or three payment period, it's not huge. The, the real burden falls on the really high income people.

MR. MacNeil: Well, Ms. Johnson, thank you very much for joining us.

MS. JOHNSON: Thank you.

MR. MUDD: Still ahead, a small town on the rebound, America seen through Russian eyes, and an Anne Taylor Fleming essay. FOCUS - THE LONG VIEW

MR. MUDD: At today's budget signing ceremony, President Clinton said his plan had already begun to work. Interest rates have gone down, he said, because progress has been made on the deficit reduction front. But does this necessarily mean the long-awaited economic upswing has finally begun? Tonight, Business Correspondent Paul Solman of WGBH-Boston tries to find out with his report from Southbridge, Massachusetts. Over the years, Salmon has used Southbridge and its historic restoration called Old Sturbridge Village as a gauge of the economy's ups and downs. Here's his report.

MR. SALMON: This is Old Sturbridge Village, a living history museum that recreates life as it was lived in New England about 160 years ago. When we first started coming here in 1990 to look in on the recession which hit New England especially hard -- this is Massachusetts and we're not far from both Rhode Island and Connecticut -- well, we return today to look in on economic recovery and why this one seems to different from economic recoveries of the past. And speaking of the past, let's start with a little living history. Back in the 1830's, America's very first industrial slump meant tough times even down on the farm. But people kept to their business and slowly the economy came back, a recovery that contented nearly everyone. The economy's been going up and down ever since, including the recession we found here in the fall of 1990. At Old Sturbridge Village, attendance was down, layoffs up, and we found hard times just about everywhere we went, from downtown --

BILL McNALLY, Florist: [1990] We are in a dying situation in Southbridge.

MR. SALMON: -- to the neighborhood defense firm --

SPOKESMAN: [1990] We're keeping spending under control anticipating a pretty rough 1991 as far as the economy is concerned.

MR. SALMON: -- to the local paper.

SPOKESMAN: [1990] If this isn't a recession, I don't know what recession is.

MR. SALMON: It's now three years later, and finally for Loren Ghiglione the presses are rolling. He's making money for the first time since 1989. But publisher Ghiglione hasn't seen the sharp uptick, the fast growth that's characterized recoveries of the past.

LOREN GHIGLIONE, Newspaper Publisher: I thought the bands would be blaring a lot sooner than today, and I was planning on it, but it just hasn't happened. And I don't think it is going to happen. I mean, I'm sort of less, less optimistic about a recovery anytime soon.

MR. SALMON: The nearby Holyoke paper died waiting for the economy to sharply turn back up. Ghiglione, a journalist, is in business today because newspapers are no longer his main source of income. Two-thirds of his business is printing and inserting ad fliers, often for supermarkets.

LOREN GHIGLIONE: I think you just have to look at your company as in our case a delivery system company.

MR. SALMON: This change in definition means Ghiglione's now more a printer than a publisher. He'll soon be printing and inserting specific fliers for individual households with a special offer on pies say if the store's electronic tracking system shows you just haven't been buying enough baked goods lately.

LOREN GHIGLIONE: We're going to do that off of these inserting machines that you see downstairs, and those machines I think ultimately -- it won't take that long -- they'll be able to be just as sophisticated in breaking down to the households rather than the geographical territory.

MR. SALMON: You're excited about that.

LOREN GHIGLIONE: I am. I think it's a challenge and yeah, it's, it is. It's exciting.

MR. SALMON: So to affect his own recovery, Ghiglione had to redefine his business. He's got a delivery system, not just a newspaper. A few miles away is another company looking to redefine its vision, Galileo, the local defense contractor. The company's main source of income was making night vision devices for the military using fiberoptics glass technology, but the recession combined with defense cutbacks slashed the company's sales by 25 percent between 1990 and 1992, resulting in massive layoffs. Galileo needed a new line of work.

BILL HANLEY, Manufacturer: That was the crux of the problem. How do we survive when all we know how to do is make components for military night vision devices? We had to reinvent ourselves from scratch in order to survive.

MR. SALMON: So Galileo, like the local newspaper, had to figure out what it was good at that could be sold in the changing world of the 1990s.

BILL HANLEY: What we ended up defining ourselves as we are in the signal acquisition and delivery business. We are not in the night vision business. We do signal acquisition and delivery for our customer.

MR. SALMON: This is simply tech talk for the basic act of moving electronic signals, like images or data, from one place to another, here through glass instead of wire. And by redefining itself, Galileo's sales have gone 30 percent non-military to 94 percent today. But recovery in the 1990s takes more than just redefining and repackaging what you're already doing. You've got to find new applications. For instance, these night vision magnifying devices, which didn't meet military specs and which Hanley gave out as keepsakes, they might conceivably have a civilian use.

MR. SALMON: When we were here first you gave us these little sort of reject scopes to take home as sort of a memento and I gave one to my daughter who brought it to the fish market, and the guy came to me one day when I was buying fish and said, look, can you get me these as novelty items for Christmas, and I came back, I called you up and said, listen, there might be a market for this stuff, and you said it'd cost how much?

BILL HANLEY: $350.

MR. SALMON: Right. So it was like out of the question as a novelty item -- that's what I told him. Can you imagine ever getting the cost down to the point that you could make those things into novelty items?

BILL HANLEY: Absolutely. We've actually done some focus groups and done some market tests looking at those particular devices. I think that's going to happen someday. I also think the way we make that product will be completely different than the way we make it today. In order to get to where we have to be as a company and as a nation. You have to think what we call outside the box.

MR. SALMON: When Bill Hanley talks about thinking outside the box, this happens to be the box he's talking about. It's a famous brain teaser which we're going to use to explain an economics lesson and, therefore, we're going to make use of the invisible hand. The way it works is you take a pencil or a pen and without it ever leaving the paper, you have to draw four lines such that they go through all the dots. So let's try one -- up there -- three, four -- no, that doesn't do it. Here's another one, one, two, three. Here's another one, one, two, three, four, no. But you see if you think outside the box, what you do is up, outside the box, down, outside the box, across, and then up, and you've got all the dots covered. That's looking outside the box. In business terms, this means you don't confine yourself to the rules as you always understood them. You look for new answers, unorthodox solutions. In Galileo's case, thinking outside the box caused them to start making surgical vision devices, inexpensive arthroscopes for knee surgery. And while the company has yet to match its record sales of 1990, Hanley's sure he's on the road to recovery without military intervention. The successes of Hanley and Loren Ghiglione, however, are not the result of the long-expected robust recovery so much as individual firms changing with the changing times. But, can every business get outside the box? What about Old Sturbridge Village, itself? Isn't it, by definition, a prisoner of the past? Well, the folks at Old Sturbridge Village know that change must come, and they're trying, raising and selling plants from the 19th century, for example, running a special Halloween Night. But even if it changes with the times, as Galileo and the publisher have, there'd still be a problem we haven't even mentioned yet, the creation of new jobs. At its peak, the newspaper company employed 350 people. Today it's down to 257. And while things are much improved up at Galileo, the company isn't hiring. Galileo is still at a lean and mean level of employment.

BILL HANLEY: One of the things you must do to your company is become more productive, if you will, when you go from a military to a commercial environment. If -- we have approximately tripled our productivity measures in sales dollars per employee per year in the last 10 years.

MR. SALMON: Productivity means that firms are doing more work with fewer workers. This wouldn't be a big problem for the recovery if it were happening just at Galileo and the newspaper, but it's happening everywhere, even at American Optical. For a century, this company was the region's principal employer. At its peak, 6,000 people worked at the AO plant. Now only 1300 people work for American Optical in Southbridge. Most of the work is done overseas. It's no surprise then that even in recovery, Southbridge has a 15 percent unemployment rate, highest in Massachusetts, just as it had back in 1990, because in this recovery companies, even the ones that are doing well, are just not adding jobs. As a result, Southbridge, like so many communities, is now looking to the employer of last resort, Uncle Sam.

PROMOTIONAL VIDEO SEGMENT: Time is how you get from here to tomorrow.

MR. SALMON: In fact, recently, a campaign was launched to lure defense jobs to town.

PROMOTIONAL VIDEO SEGMENT: July 1995, the American optical facility has been fully reincarnated as a modern four building campus, accommodating more than 7,000 employees of the defense, finance, and accounting service.

MR. SALMON: Town manager Florence Chandler led the charge.

FLORENCE CHANDLER, Town Manager: You have a community that would welcome the employees here. You have a community that is 100 percent behind this. You have an entire region here that has written 10,000 letters to the President. I delivered them personally. I know, believe me. There were 10,000. Each of us took one suitcase full of our clothes and one suitcase full of letters on those planes, and they were heavy. So I, I know that the spirit of this community is behind it.

MR. SALMON: Impressive but should Southbridge win these jobs, someplace else we lose them. In fact, the Pentagon is consolidating its accounting offices and cutting jobs overall. In other words, this recovery seems like a zero sum gain, with communities fighting each other for what jobs there are instead of creating new ones. Our last stop then, the two economists featured in our earlier trips here to ask why this recovery is so weak, so jobless. First, Nick Perna of Shawmut Bank, who assured us last time that the economy was poised to take off.

MR. SALMON: Where did you go astray?

NICK PERNA, Shawmut Bank: Well, I thought it was my evil twin who must have said that. Where did I go astray? I've been asking myself that question. And I think one factor is that this is particularly important to New England, that the defense cuts that came, came even harder than most people thought would happen. But the second thing is, this is a national phenomena, a national problem. This is the first time, first time we've ever tried to get out of a recession without some fiscal stimulus.

MR. SALMON: Without the government printing money?

NICK PERNA: Yes.

MR. SALMON: Or spending it.

NICK PERNA: Without a tax cut or a spending increase program.

MR. SALMON: Now this is a traditional economist's view of our slow recovery. The government, constrained, of course, by the deficit, just isn't doing enough, and there are other explanations. Automation has taken away jobs, so has foreign competition. Health care costs are so high that employers simply can't afford to take on new employees. But we've also got to include a less conventional explanation. Three years ago we ended our first recession story here at MIT with Prof. John Sterman, who accurately predicted a slow, jobless recovery. That prediction was based on his view that the economy rises and falls in long fifty to sixty year cycles. He dates the bottom of the last cycle from the Depression of World War II after which America in the '50s, '60s, and '70s built, rebuilt, and eventually overbuilt, and he says that we've been working off our over capacity in factories, office buildings, and the like in fits and starts for the last 20 years.

JOHN STERMAN, Economist: That means you now have industries that are overexpanded. They have to downsize. Every company is faced with intense competitive pressure. They have to downsize to stay alive. But what happens when they do? You have unemployed workers. They've lost their income. They've lost their hope. They've cut back on their consumption. They've tried to pay down their debts, and that reduces demand. So even as companies seek to reduce employment, to balance their capacity with the demand, they create a side effect which lowers demand for everybody and intensifies and prolongs the depression.

MR. SALMON: For John Sterman then, the economy is still under a cloud, much as America was during its first downturn back in the 1830s. Firms like those we've seen that redefine and invest for a very different future may be harbingers of the next long-term recovery, but by Sterman's analysis, and others, that could take quite a while. In other words, the story of this recovery is to be continued. FOCUS - FOREIGN EXCHANGE

MR. MUDD: During the Cold War, they were called cultural exchanges, Soviet delegations of ballet dancers or scientists or agronomists visiting the United States but always watched over by the KGB. But with the end of the Cold War comes something entirely different. More than a thousand high school students from the former Soviet Union living and studying in the United States under an exchange program paid for by the U.S. Government. Correspondent Charles Krause reports.

MR. KRAUSE: Who would have ever thought just a few years ago that the U.S. Government would pay to bring high school students from the old Soviet to live and study in the United States? Even more improbable that authorities in the Kremlin would have let them come. But there they were on the steps of the capitol last January, the first of more than a thousand high school students from the old Soviet Union who've come to the U.S. this year. They're called Bradley kids, because it was Sen. Bill Bradley of New Jersey who was the principal sponsor of the exchange program that brought them here. Proud of his kids, the Senator, had some words of wisdom for them when he met with them at the start of their visit last winter.

SEN. BILL BRADLEY, [D] New Jersey: Don't hesitate to ask questions. Everybody'll take your questions like it's a real opportunity. They want to answer your questions. So ask a lot of questions.

MR. KRAUSE: From Washington, the young exchange students from Russia and Kazhakstan fanned out across the United States. The American Field Service arranged host families for them in up state New York, Ohio, Minnesota, Missouri, Florida, California, and even Alaska.

[FAMILY AT BREAKFAST TABLE]

MR. KRAUSE: Sergei Kuzmin from Moscow was typical. He lived with the Lang family near Minneapolis. Early each morning Sergei had breakfast with his American parents, Jim and Ruth Lang, then drove to school with his American sister, Alicia. At West Tonka High School, Sergei learned to love American computers. After school, he tried to learn to play golf. By the time Sergei and the other students were reunited in Washington a few weeks ago, there were lots of questions and stories to tell.

JOE DUFFY, U.S. Information Agency: We describe your countries as the newly independent states, the NIS.

MR. KRAUSE: Joe Duffy, the new head of the U.S. Information Agency, wanted to know what to call the old Soviet Union. When our turn came, shortly before the Bradley kids left for home, we asked them what their biggest misconception of this country was before they came to the United States.

SERGEI KUZMIN, Moscow: We all had a, you know, it's so free, you know land of opportunities and it's free, you know, no restrictions, no nothing like that, but it's not true. People, I mean, have the rules, have the laws to follow, and even family traditions, they're pretty strict compared to our families sometimes.

MR. KRAUSE: So you don't think people here are as free as you thought they were?

SERGEI KUZMIN: Right. Actually, I think everybody would agree.

DIMA CHTCHOUROV, St. Petersburg: Yeah. I would expect more freedom here.

MR. KRAUSE: But freedom of what kind, what were you expecting?

DIMA CHTCHOUROV: Just there are so many restrictions and regulations.

MR. KRAUSE: For example.

DIMA CHTCHOUROV: I don't know. The ID thing about the bars, 21 age and all this.

MR. KRAUSE: And yet we think of your country as being very regimented, as being certainly when the communists were in power, being everyone had to do things a certain way and that was it.

AINURA BAZARBAYEVA, Alam Ata, Kazakhstan: Yeah. Like several years ago we had to wear those uniforms, but like now we can wear whatever we want, and like here.

ALINA KUZNETSOVA, St. Petersburg: This is kind of stereotype. Everybody was saying that, well, you can do only the things that somebody is saying to you, like you have this Communist Party and they were saying to you what you had to do that many people said, and it's not true. I mean, I felt here that the kids are not free at all. They, they can't really do the things that they want to do. Maybe their parents think there's way too much crime or something, I don't know. Just, they are not free at all. They are not trust - - they are not trusted too much.

DIMA CHTCHOUROV: In Russia, everybody acts more mature, I think, like children, they're more --

GIRL: Independent. Here you have curfews. They can be grounded.

DIMA CHTCHOUROV: Yeah. In Russia, there is no thing like grounded.

SERGEI KUZMIN: Maybe it's good. Who knows? I mean, because if you have the laws, then there is less crime and less mess, you know. That was misconception. We expected different, you know.

MR. KRAUSE: But how about things like racism, things like, you know, the differences between, economic differences between classes? I know that at least in the old days in your country not so very long ago this was the kind of thing that was said about America, that it was a racist country, that it was a capitalist country where people were starving, poor people and that sort of thing. Did you sense that there is a lot of racism?

SLAVA TIKHOMIROV, Moscow: Yeah, because like before I came here I thought that racism was from the '60s going down, down, now it's going to be much better, but when I came to school everybody, just everybody, except like a few, they're just saying that some jokes or, you know, saying something all the time about blacks or how they don't like them or, you know, like -- that was really a surprise.

DIMA CHTCHOUROV: I found more racism than I thought before.

SERGEI KUZMIN: I found less racism.

GIRL: I think I found more.

MR. KRAUSE: Kind of a split, isn't it? Some more, some less. Do you think that Americans are rich by and large?

GIRL: No.

MR. KRAUSE: No.

LYUBA ROGUDEVA, Moscow: I think -- remember we were talking about misconceptions, so I remember just one of the misconceptions was that people in Russia, many people in Russia think that Americans are wealthy, healthy, and happy. You just imagine that Americans have a huge house, they have the American jogging or working --

YOUNG GIRL: Swimming pool in the backyard.

LYUBA ROGUDEVA: -- jogging or working in the backyard. It was one of the misconceptions.

MR. KRAUSE: How did the schools here compare to the schools in Russia and Kazakhstan in terms of the kind of things, the difficulties, the advanced education?

SERGEI KUZMIN: I studied personally much harder in my Moscow school than I did here.

MR. KRAUSE: Give me a couple examples, if you would, of, of how the schools are easier here or different here than they are in your country.

SLAVA TIKHOMIROV: The thing of the first surprise, when they gave me the list, they say, choose six subjects. I go only six? Because we have thirteen, fifteen subjects. And during the week we've got like seven subjects a day, and then different combinations of fifteen subjects. And so it's like much more study and there is only six.

SERGEI KUZMIN: The other big difference is -- it will be quick - - you can redo your test. That's incredible. I was oh so happy, I mean.

MR. KRAUSE: You could redo your test?

SERGEI KUZMIN: Yeah. I mean, if you had some tests in school here to do and you did like and you got D or C, you can, you know, next day you can redo it.

MR. KRAUSE: But do you think that when American students finish high school, when they graduate, do they have the same amount of knowledge as you would have if you went to a Russian school?

GROUP: No.

ALINA KUZNETSOVA: They might have this knowledge, but it's like different way. You know, some things we don't know, but they don't know more.

SERGEI KUZMIN: They teach them how to be able to create, to think positively, or, I mean, how to think as a human being, and then in college I guess they put all the information in.

MR. KRAUSE: Let me ask you a few questions now about politics, a little bit about the U.S. Government and a little bit about your government. First of all, do you think -- what do you think of President Clinton? He's met with Yeltsin twice, and he's been -- you like that.

BOY: That's very nice.

MR. KRAUSE: Do you feel that the United States and President Clinton, this country is committed to helping your country get through this period and make the changes that --

GIRL: I hope so.

LYUBA ROGUDEVA: I think our countries feel like tied. You know, we're like together. We are like one couple. You know, we can't, we can't break up because it's hard. We've been tied up for a long time, being rivals and then being together. It's hard now for either of the countries to break up, and it won't be possible, I don't think.

MR. KRAUSE: Do you think by the time your adults in ten years or so that Russia will be a different country, that these reforms are going to take hold?

SLAVA TIKHOMIROV: Just Russian --

GIRL: Different, but how different?

ALINA KUZNETSOVA: Well, it's definitely going to be different, maybe not the way that you are talking about. It's going to be, it's going to be better. It's going to be like completely different country, but I mean 70 years before it was, we were one country, and then --

SERGEI KUZMIN: It's going to take about 90 years.

ALINA KUZNETSOVA: Then everything was broken like at once. It can't rebuild in couple of years. It's just like impossible.

NATASHA DAVIDIAN, St. Petersburg: Our teachers, our parents are all the time talking that your generation will do all the changes. Everything will --

SERGEI KUZMIN: This is probably -- you know, we're going to try to do it and we're going to do it because older people now, they don't even think about doing something. They just wait for something, wait, wait, and wait. So it's younger people, I mean, it's us basically who are going to, you know, rule the country, who are going to work for it.

MR. KRAUSE: And will you go back now and think, do you think that the system here, the capitalist system, the economic system that you've seen here, is this something that you think should be brought to Russia, or not, maybe not?

LYUBA ROGUDEVA: No, I don't think, I don't think that this system would fit our country, because we are completely different country. This country is real young, and it started to be democratic. It was a country of opportunity from the very beginning, but we have this history that's long and we've had like, I don't know, how many centuries of history we've had, and we have different attitude. We have different, different nature, so it would be hard to take this system and just to install it in our country. That's why I think we are having problems now, because now they're trying just to install American system. I mean, I'm not saying American, just capitalism in our country after all these years of socialism, are trying to --

SERGEI KUZMIN: See, I don't agree with that completely, because - -

DIMA CHTCHOUROV: I think it's only one way.

SERGEI KUZMIN: Yeah. We don't need to take everything from, you know, the system in America, but the most part, because I think American system is a unique creation of very many different systems from all over the world, because American nation is, you know, made of different people, so I mean -- and this is what, you know -- how people live and they survive, and they have pretty good lives generally. So I think most of the things we got to take and think about it, you know, and use it in Russia, I think.

LYUBA ROGUDEVA: I think we should create our own system.

SERGEI KUZMIN: Well, it's not going to be the same as here, but - -

LYUBA ROGUDEVA: It's not going to be exactly the same. We should take the best things from all over the world, like the best things from Sweden, from Switzerland, and France, and eastern countries, and something from Japan and Taiwan, so --

MR. KRAUSE: Okay. But what did you see here that you would want to -- if you could wave a wand and order something --

SERGEI KUZMIN: Banking system, please.

MR. KRAUSE: A banking system.

DIMA CHTCHOUROV: Yeah. This is probably --

GIRL: But now they're not going to work with our inflation.

SERGEI KUZMIN: Banking system as a general --

MR. KRAUSE: What else?

LYUBA ROGUDEVA: And small businesses.

DIMA CHTCHOUROV: Communication is pretty bad in Russia.

MR. KRAUSE: Better mail system?

DIMA CHTCHOUROV: Yeah.

LYUBA ROGUDEVA: Something I wouldn't take for sure. I wouldn't take public transportation. I would take air companies. I would take Delta. I would take Eastern Airlines. I would take other airlines, but I would never take buses or trains or whatever. Here that was a problem. That was a real, real problem.

MR. KRAUSE: What could your country offer this country? What?

GIRL: Metro.

MR. KRAUSE: Metro. The subway system.

GIRL: Public transportation.

ALINA KUZNETSOVA: Museums, theaters, ballets.

MR. KRAUSE: Do you think it's going to be hard to go back to Russia?

GROUP: Yes.

MR. KRAUSE: Why?

DIMA CHTCHOUROV: Very.

ALINA KUZNETSOVA: Because it will be like so different. We are coming to different country, what's left. We don't know what we are going to expect there and what is going to happen.

SERGEI KUZMIN: It's going to be hard to see more homeless people, more crime, you know, more stress, less money.

LYUBA ROGUDEVA: Well, also it's hard to leave, because for me I just left so many people in California that I love, and I don't know if I'm going to be back. I'm not sure if I see them ever again in my life, but I mean, it's like a part of me stayed there, and I'm turned off. I don't know what I'm going to do. It's hard. It's hard. I have two families now, and I live in one family, I want to go to the other one, and I live with the other one, I want to go back, soit's being between two countries.

MR. KRAUSE: Do you think this was worthwhile for you and for the other students who will participate?

GROUP: Yes.

BOY: That was the best time.

GIRL: That was the best time.

OTHER GIRL: It was absolutely great.

MR. KRAUSE: Thank you very much. ESSAY - WE NEVER KNEW HIM

MR. MacNeil: We close tonight with an essay about Vincent Foster, the White House lawyer who committed suicide a few weeks ago. Shortly after his death, White House officials found a note written by Foster and turned it over to police, but only after a 30-hour delay which fueled speculation about what was in the note. Police released the text today. It ended with a poignant line. "I was not meant for the job or the spotlight of public life in washington. Here, ruining people is considered sport." Los Angeles essayist Anne Taylor Fleming has been thinking about the man who wrote those words.

ANNE TAYLOR FLEMING: Most of us would never have known his name had he not killed himself. Vincent Foster I'm talking about, Bill Clinton's big handsome aide, his deputy White House Counsel, his boyhood friend, who recently shot himself to death near the Potomac River after spending the morning at his White House desk. Many of us know the scant details in those first days after, the lack of a suicide note, the insistence by Foster's colleagues and friends that they had no knowledge of his state of mind in those last days. Why would he do such a thing? Why would anyone? Clinton was visibly sorrowed when he first talked to the press about Foster.

PRESIDENT CLINTON: We'll just have to live with something else we can't understand I think.

ANNE TAYLOR FLEMING: Two days later, he and Hillary went home to Arkansas to help bury their friend. But Vincent Foster's suicide wouldn't go away. Vince Foster wouldn't. He riveted many of us, especially those of us who weren't his high achieving baby boom contemporaries. He riveted us as the dark side of the Clinton dream. Clinton sweeping to power in a nostalgic '60s haze, all shiny and new and plump and full of promise. One of us, sweeping the old guys out of power at last and sweeping our generation into the big White House, sweeping his longtime friends along with him, Arkansas men, like White House Chief of Staff Mack McLarty and Vincent Foster, kind men, bright men, who had lived their entire lives with Bill Clinton as his star rose and they attended his ambitions. There they were at the pinnacle of power, where all those bright young aides of all those Presidents had labored before them, Reagan aides and Johnson aides and Kennedy aides long into the night, the lights burning, the speeches to be written, wars to be fought or avoided, messes to be cleaned up, the nation's work to be done in the most exhilarating pressure cooker in the world. Vince Foster couldn't handle it or didn't want to. Such was the stories that began to emerge. A shredded note in his briefcase signaled his depression, and friends and family did know he had been under strain. So Bill Clinton wasn't quite on the up and up, it would seem, when he told us there were no clues. There were. There always are, in hind sight. It's Bill Clinton's Vietnam thing in a way, ambition, the manufacturing of a public image, maybe even guilt about survival that keeps him from being totally straight. President Clinton wasn't quite straight about Vince Foster's suicide just as candidate Clinton had a hard time dealing straight with Vietnam. People were gone, and he was still alive, robust and shrewd and ambitious, if a little beaten down by the same town that apparently beat down his lifetime friend. But these are tough people, the Clintons, no less than the Reagans or the Johnsons, and Washington is a tough town, sentimental only about power, not about people. The treadmill moves and new bright men and women get on it and get off it, and on it goes. Some, like Vince Foster, don't make it through their tenure, and it is left to those of us watching from afar who never even knew him to mourn in and in a perverse way to appreciate his all too real fragility in that toughest of towns and whitest of houses. I'm Anne Taylor Fleming. RECAP

MR. MacNeil: Again, the major stories of this Tuesday, President Clinton signed the Budget Act into law. It will reduce the deficit by nearly $500 billion over five years, with higher taxes and spending cuts. And Ruth Bader Ginsburg was sworn in as the 107th justice and second woman on the U.S. Supreme Court. Good night, Roger.

MR. MUDD: Good night, Robin. That's the NewsHour for tonight. We'll be back tomorrow with a Newsmaker interview with Sec. of State Warren Christopher. I'm Roger Mudd. Thank you, and good night.