The MacNeil/Lehrer NewsHour

Intro

JIM LEHRER: Good evening. In the news this Monday, President Reagan will conduct a pre-summit summit with Western leaders; new indicator numbers show the economy improving; and King Hussein said he wants a peace treaty with Israel. We will have the details in a moment. Judy Woodruff is in New York tonight. Judy?

JUDY WOODRUFF: We have two major focuses on the NewsHour tonight, beginning with part one of Charlayne Hunter-Gault's week-long series of documentary reports on South Africa. Her focus is apartheid's people, with a special look tonight at how one black township has been affected by the violence. Then, three of the nation's leading economists, Milton Friedman, Felix Rohatyn and Lester Thurow, join us for an assessment of where we're headed.News Summary

LEHRER: President Reagan will have a pre-summit meeting with the leaders of the Western world, the White House announced today. The meeting will be in New York City October 24th. A spokesman said it is designed to involve allied leaders in preparations for the Reagan-Gorbachev summit meeting in Geneva. The leaders of Canada, West Germany, France, Britain, Italy and Japan have been invited to the New York session. Nuclear arms talks, another summit prelude, are already underway in Geneva, and today negotiators for the United States and the Soviet Union met for 35 minutes for a big unveiling. A Soviet spokesman said the new Soviet proposal on nuclear arms reductions was put on the table, but neither side would say anything afterwards, and there was no explanation of why it only took 35 minutes. Leaks about the Soviet proposal say it's for a 40 to 50 percent reduction in Soviet offensive nuclear warheads in exchange for restraints on the development by the United States of the Strategic Defense Initiative, a space defensive system also known as Star Wars. Judy?

WOODRUFF: There were hints of progress on an approach for getting Middle East peace talks underway after today's meeting between President Reagan and Jordan's King Hussein. Hussein repeated his usual call for an international conference that would be an umbrella for peace talks between Jordan and Israel. But instead of reiterating well-known U.S. opposition to the idea because it would bring the Soviets into the process, President Reagan hinted there might be some accommodation worked out.

King HUSSEIN, King of Jordan: I have reiterated to him Jordan's commitment to a negotiated settlement of the Arab-Israeli conflict within the context of an international conference to implement Security Council Resolution 242.

Pres. RONALD REAGAN: All of us, Jordan, the United States and Israel, share the same realistic objective -- direct negotiations under appropriate auspices before the end of this year. There are complex and sensitive issues which must be resolved before actual negotiations can begin, but I believe these issues can be resolved.

WOODRUFF: In Lebanon, Soviet officials fell victim for the first time today to kidnappings which have become almost commonplace in that country. Gunmen kidnapped four Soviet Embassy officials in two separate incidents in Moslem-controlled West Beirut. This happened while Westerners were already awaiting word on a news conference promised soon by the shadowy Moslem fundamentalist group Islamic Jihad. The group is thought to be responsible for the kidnappings of a number of Americans, British and French citizens over the past 20 months. Meanwhile, in the northern Lebanese city of Tripoli, pro-Syrian forces today continued a bloody assault on a Moslem fundamentalist militian called Tawheed. Here is a report from Mike Dodd-Noble of Visnews.

MIKE DODD-NOBLE, Visnews [voice-over]: The assault was not unexpected. For two weeks, Lebanon's second city and port have been under seige from pro-Syrian leftists forces intent on imposing a Syrian-backed peace plan for the region. The city that was once home for 700,000 people has been reduced to a shell. Two-thirds of its citizens have fled their homes or seen them destroyed, and those that remain camp out in the streets without food or water. Four Syrian-backed militias began their drive against the fundamentalist Tawheed militia on Saturday after it had rejected proposals for Syrian troops to enter and pacify the city. They launched the latest assault with a rocket and artillery bombardment in the hills around Tripoli. Fighters then began a three-pronged assault on the town, punching into Tawheed defensive positions. Guerrilla spokesman claim to have planted a flag on the municipality building and to have overrun the Tawheed headquarters before advancing on the port area. Calls for a ceasefire to evacuate the wounded have been ignored as both sides prepare for a fight to the death in the latest tragedy of Lebanon's faction fighting.

LEHRER: The new federal fiscal year starts tonight at midnight, and there was good fiscal news to get it launched. The Commerce Department said its index of leading economic indicators went up 0.7 in August. That is considered a strong increase, and government analyzers said it means the economy is finally breaking out of its slump.

WOODRUFF: The White House said this evening that President Reagan has asked Mrs. Margaret Heckler, the secretary of Health and Human Services, to become the United States ambassador to Ireland. The announcement said she will take a few days to think about it; meanwhile, she will continue in her present position. There was new information today about that plane crash that killed 136 people in Dallas last month. Documents released by the National Transportation Safety Board revealed further evidence that the plane encountered a violent and sudden shift of wind known as a wind shear. The documents included a transcript of a conversation by the pilots of another plane at the airport who spotted turbulence so severe they said it looked like a tornado at the end of the runway. But that observation, made minutes before the Delta jet crashed, was never relayed to the Delta crew.

LEHRER: South African President P.W. Botha made another offer to blacks today. He said they can be included on the President's Council, a kind of upper house of Parliament with 60 members that advises on legislation. He gave no specifics on how many blacks, how they would be chosen, or whether whites would still dominate it. He spoke to a congress of his National Party in the city of Port Elizabeth, which has been hard hit by a black boycott of white-owned businesses. Our report is by Michael Buerke of the BBC.

MICHAEL BUERKE, BBC [voice-over]: Port Elizabeth, according to its local chamber ofcommerce, is on the rocks. For nearly three months blacks have been boycotting the town's white shops. Dozens of businesses have already closed down. Many more are on the point of bankruptcy. Traders say only the government can satisfy the blacks' political demands and end the boycott. Many were in the audience tonight, willing their president on to a faster program of reform. Instead, Mr. Botha started with a prickly response to foreign pressure and sanctions.

P.JW. BOTHA, President of South Africa: Does that mean that I must recall our ambassadors and military attaches because of ill treatment of Indians by the United States and the violence in certain British cities such as like Brixton?

BUERKE [voice-over]: Mr. Botha made one new concession. Some blacks may be allowed not into Parliament, but onto his powerful but purely advisory President's Council.

LEHRER: Also today in South Africa, the bodies of three more blacks were found near the city of Durban, additional victims of black in-fighting over the weekend. Five others had already been reported killed in the violence between blacks who disagree over how to oppose apartheid, among other things.

WOODRUFF: One of France's most admired women, Simone Signoret, died of cancer today at the age of 64. The actress, political activist and writer began her film career in 1942 during the Nazi occupation and went on to do more than 40 films, including Room at the Top, for which she won an Oscar in 1961. She and her husband, actor Yves Montand, who survives her, were active in leftist political causes for years, but have become more moderate in recent times.

LEHRER: That ends our summary of the news of this day. We now move to part one of Charlayne Hunter-Gault's look at apartheid's people and a wide-ranging discussion of the economy with Milton Friedman, Lester Thurow and Felix Rohatyn. Apartheid's People

LEHRER: Every day for weeks now there have been stories from South Africa, most of them about protest and fury, violence and death. What is it like to live through it every day? To live in the middle of it every day? Charlayne Hunter-Gault spent over a month in South Africa finding out. Her report on apartheid's people consists of five major documentaries, and it begins tonight with a profile of a black township called Kwa Thema. It's near the all-white town of Springs, an hour and a half from Johannesburg. More than 30 people have died in Kwa Thema in the last two months in clashes with government security forces. Part one of Apartheid's People, "Inside Kwa Thema," as seen by Charlayne Hunter-Gault. The producer was Frank Smith.

CHARLAYNE HUNTER-GAULT [voice-over]: This is Kwa Thema, a dusty, sprawling township in South Africa's heartland. It is home to more than 100,000 men, women and children, all black. It is a bustling place with people on the streets from early morning, going about their daily routines. For some, the routine has become less eventful; for still others, it is making do with what they have. On Sundays they go to church. This is Crystal Nkosi, Kwa Thema's Catholic church. And this is Sister Agatha. Sister Agatha is a 51-year-old Dominican nun who has been living and working in Kwa Thema for the past three years. On weekdays, Sister Agatha is teacher, counselor and friend. She gives religious instruction. That part of her job is easy. What has been more challenging is helping people deal with the frustrations of living in a place like Kwa Thema.

Sister AGATHA: When I rst came to Kwa Thema I was more than shocked. The filth that was mounting onevery corner in the streets was unbelievable. And to me it was a sign of people who were debased -- debased by what people normally to the system, and the system -- by the word "system" is implied apartheid. This has reduced people to the level base of being -- at least the majority -- we are nothing. And because we are nothing, then presumably we act as nothing.

HUNTER-GAULT [voice-over]: Kwa Thema has many problems, not the least of which is high unemployment and much idleness. Many of the men turn to alcohol as a way of drowning out these realities. The result is that maintaining stable family life can be extremely difficult. In spite of that, the residents of Kwa Thema are warm and friendly and have a way of putting each other at ease. The parish priest of Kwa Thema's Catholic community is an Afrikaner. His name is Father Peter Hortop. Most Afrikaners have never been inside a township. Father Peter is different.

Father PETER HORTUP: My people in Kwa Thema are all black people. I don't see the color black. For me they are people. Beautiful people. And once they know a person, they also don't see the color white. They accepted me right from the beginning, and I loved them right from the beginning. Life for me personally is very difficult, because apartheid for me is one of the greatest evils -- the greatest evil -- in my country, South Africa.

HUNTER-GAULT [voice-over congregation singing "Wonderful Peace"]: Father Peter's church is one of the rare places of peace in Kwa Thema. For the past three months, both the army and the police have waged a brutal campaign, much of it directed against the children in townships like Kwa Thema. The police justify their actions, saying that they were merely trying to contain wanton violence. They fired rubber bullets and tear gas at random. Sometimes their targets eluded them; other times the smallest children were the victims of the attack.

Sister AGATHA: Basically I am against violence. I don't entertain violence against anybody whatsoever. But sometimes people are pushed into that and, having perhaps tried in the past to be patient, time has run out and it seems there's nothing they can do to stop especially the young people from being violent.

HUNTER-GAULT [voice-over]: And so the violence continues unabated, young people venting their rage on every target within range. No one seems to be able to put an end to it, not the authorities, not the parents.

Sister AGATHA: We have transferred the anger onto people, no more onto the system or apartheid, but we are venting it out onto the people who we think are the cause of apartheid.

HUNTER-GAULT [voice-over]: This man, they say, is one of the defenders of apartheid. He is black and a policeman. His house was also burned and most of his possessions destroyed. Driven out of town, he, his wife and child and other black police families must live in tents in the back yard of a white police station. By law he and the others whose houses have been burned down cannot live in the surrounding community, but they make no apologies for their role in defending the system.

Constable MICHAEL MODISA: If the government can say right black people must control yourselves, how many murders are we going to have in the locations? How many house break-ins, how many robberies are you going to have in the locations? So I prefer the government. The government is better because if we live under government, we are not starving, then we are not [unintelligible] anybody; it's just to help the government and the system to be good in the South Africa.

HUNTER-GAULT [voice-over]: And so the state of emergency goes on, as the list of those killed, injured or imprisoned grows longer. Daily mixed patrols of army and police personnel march down the streets of South Africa's township looking for children. In addition to the violent campaign, the children have been conducting a peaceful protest. They have been boycotting their school since May, and the government has responded with a get-tough policy. Anybody caught out of school without permission is running a risk, but the students are standing firm.

1st STUDENT: It's not because we don't want to go to school. We do want to go to school. The only problem is that we are not having equal education with the South African whites. So there is a vast difference between South African whites' education and South African blacks' education.

HUNTER-GAULT: What's unequal about it?

1st STUDENT: For instance, if I take the syllabus for the whites, it's much more advanced than the black syllabus. For instance, science. We don't have any computer science at our black schools. They're having computer science.

2nd STUDENT: We now know what is good and what is not good. Yes, we don't want a meaningless kind of education. We don't want that.

HUNTER-GAULT: So you'd rather not have one at all?

2nd STUDENT: Yes, right now I'm speaking broken English because I didn't get the right type of education. See now, we cannot communicate, we cannot write, we cannot do anything. We just pass with guesswork, you know. That's what we don't like. We want proper and pure education.

Sister AGATHA: They feel that the education which is given to them is half a loaf as I said, I think, some time back. And this is only making them better slaves later on. They don't want halves or quarters; they want a perfectly full loaf.

HUNTER-GAULT: So they would rather stay out than --

Sister AGATHA: So they'd rather do that until the right type of education for everybody in the country is the same. Then only would they be prepared to go back to school, and that willingly, too.

HUNTER-GAULT: What is happening to them as a result of their not being in school?

Sister AGATHA: I think they are becoming more and more aggressive towards the situation and becoming more and more bold.

HUNTER-GAULT [voice-over]: Such boldness and aggression have been met with even more aggression from the police. Students were forced back to school all over Kwa Thema and they told stories of the brutality that followed.

Father PETER: About a dozen policemen were alleged to have gone into the classrooms and beat up the children for no reason at all, and I couldn't understand this. Really beat them up.

HUNTER-GAULT: Now, when they told you these stories, did you believe them?

Father PETER: Oh, I have absolutely no doubt that they were speaking the truth and it certainly struck me. You see, I'm a South African. I've been here for about 56 years. And it was the old-South African way. I've been brought up in it. "The only thing that these people understand is the strong arm of the law; really beat them up, then they will do what they're supposed to do."

HUNTER-GAULT [voice-over]: There is ample evidence of the beatings. These were the lucky ones. Some were worse off and ended up in the hospital. The authorities defended the police action, then clamped a lid of silence on the incident. This is the headmaster of the school in Kwa Thema where the beatings occurred. He witnessed them. But when producer Frank Smith visited the school, he found only empty classrooms and no answers.

FRANK SMITH, NewsHour producer: The classroom was full of children and the police came in here with their sjamboks, their whips, and just beat them up. It was in this classroom, was it?

HUNTER-GAULT [voice-over]: Except for a few broken windows, it was as if nothing had really happened here. Everything had been wiped clean, even memory.

Mr. SMITH: Is there anything that you can tell us about that day when the police rushed in and beat up the children?

HEADMASTER: There is nothing I can say on that.

Mr. SMITH: Why is that, sir?

HEADMASTER: The second inspector can give you information about that.

Mr. SMITH: But you're not allowed to speak about that day?

HEADMASTER: I'm not allowed to speak to the media or any other person about such things.

Mr. SMITH: Why is that?

HEADMASTER: This is policy.

Mr. SMITH: And why is it?

HEADMASTER: I don't know.

Mr. SMITH: Might you get into trouble if you speak to the media about that day?

HEADMASTER: I don't know whether I will get into trouble or not, but I'm not allowed.

Mr. SMITH: I see.

HEADMASTER: My boss says that not to say such things.

Mr. SMITH: It was, of course, widely reported in the press, and there are some horrific pictures that have been published and we have seen. What are your thoughts about that?

HEADMASTER: I don't know. I have not read anything about it.

Mr. SMITH: You didn't read anything about it, but you actually saw what happened that day. What are your thoughts about that?

HEADMASTER: It's a pity.

HUNTER-GAULT [voice-over]: It seems a pity, not only for the one lonely headmaster of the Kwa Thema school, but because there seems to be no hope that things will return to normal anytime soon. Some of the children have been forced back into school, but their daily lessons are interrupted when members of the security forces come to check on exactly who is present. Elsewhere in Kwa Thema things are also far from normal. One of Sister Agatha's friends, Theresa Nguni, attests to that. Theresa owns a shebeen, an unlicensed bar, and one night the police dropped in. Theresa's shebeen is one of the most popular in Kwa Thema. Shebeens are illegal, but since they are the only places where people in townships can go and have a good time, there is usually no trouble with the authorities, which is why their actions on a recent Saturday night stunned Theresa's patrons.

THERESA NGUNI, shebeen owner:

Come police inside my house, "Hands up! Everybody, hands up!" They search us, pockets everybody's, everybody. From there they took whatever they've got in their pockets. They take it. Money, people's knife -- whatever it is, they take it. From there they sjamboks us. That's what I remember, only that. And sjambok and sjambok us all of us. And my husband -- they have to sjambok my husband to the extent that an eye is affected, my husband's eye. They beat us to death.

SPEAKER: I felt the first blow outside. It was here and over my back here, you see? As you can see me now. And then the other blows, I had them on my way to the police station on the back here, as you can see me now. All along the way it was just like that, being sjamboked to kneel down up until we reach the police station. Thereafter, I was sjamboked again.

Ms. NGUNI: We reached that police station. There was a white man, two white men. They say, "No, don't touch these people. They've done nothing. So if you touch them, what are you going to touch them? Because you have beaten them, and that's out of law."

HUNTER-GAULT [voice-over]: Theresa was not charged with anything, either, but of all those so brutally attacked that night, she was singled out for the worst beating. Special treatment? Sister Agatha doesn't think so.

Sister AGATHA: I think it would happen to me as well. Not really myself. If it happened to Theresa, why should it be different for me? It could happen to me as well. I think so.

Father PETER: I have thought many occasions that if I was shot it probably, you know, or injured, it would be -- it could easily be by somebody of the state, and then they'd put out the story that they have before -- you know, the white priest shot by his black parishioners. I could just see the headlines.

HUNTER-GAULT [voice-over]: The real headlines do tell the story of the many who have not survived the violence. Over the past two months, as the death count mounted in other townships, Kwa Thema has buried more than 32 people shot by the state security forces. In places like Kwa Thema most funerals have turned into political events. The cemetaries have also turned into political statements. I was curious to see such a place, so one day Sister Agatha took me to the edge of Kwa Thema where the cemetary is located. There she told me what funerals can be like.

Sister AGATHA: Right away now as we are in the cemetary it looks empty and can I say, desolate, but on that particular day of the funeral it was quite different. The whole cemetary was simply teeming with people who had attended the funerals. In fact, there is that little hillock that is over there which was also packed and more were still coming in. Some of us didn't even manage to get into the cemetary. So it is, we're there. Police cars, vehicles of all sorts were there. As the procession was coming towards the graveyard, a group of some young people ranging 12, 14, 16 broke off from the procession and headed towards the place where the soldiers were. They went wild. To them it was a challenge. Part of the group broke off, caught a young man regarded as an informer, beat him up thoroughly, and that's when Father Peter Hortop dashed outside of the group where we were, got into this group, tried his level best to keep them apart, and by that time the man had been thoroughly walloped.

HUNTER-GAULT [voice-over]: The reactions of the police and the army have stirred many different emotions in the people of Kwa Thema. They have made Sister Agatha want to reach out.

Sister AGATHA: I have been dying to have a connection somehow with them as they drove past in the street, so I offered them a cup of tea, and over that cup of tea we had a sort of discussion. For instance, I said to them, "Look, it would be easy for you whites, you've got everything. The only thing that we can fight with are stones. That's all. So you can drop a bomb and in a second we'll all be gone, and you can go around doing it to all the blacks." But as I told them, "And when we have disappeared, what happens to you? Somebody else will come and do exactly the same thing to you."

Father PETER: Personally, I don't think they'll change. And I think eventually -- I think they've lost already. They have lost because the country is ungovernable at the moment. You know, if it's not Kwa Thema, it's the Siskei. If it's not the Siskei, it's Pretoria. If it's not Pretoria, it's Durban -- all over the country. And whereas we had riots in 1956 and 1960 and again in 1969 and 1976, they were able to contain it. This time they can't contain it, and I don't think they ever will. The change has really started. And the black people are going to rule. I think the white racist or apartheid-riddled regime has lost control.

LEHRER: The work of Charlayne Hunter-Gault. Her five-part look at apartheid's people continues tomorrow night with a profile of a black advertising executive who is forced to live a double life; then comes the lives and views of a union leader, an Afrikaner farmer and an exiled political leader. The Economy: What's Ahead?

WOODRUFF: As we reported earlier, there was both promising and not-so-promising news about the economy today. The government announced that its index of leading economic indicators, which predicts future economic activity, was up a strong 0.7 in August, but a new survey of the nation's business economists revealed that they expect only a modest upturn in growth in the coming months, with more than half predicting another recession by the end of next year. That seems to fit in with the entire collection of economic statistics so far this year. On the plus side, inflation has remained low, now running at around 3 annually. Unemployment has also been steady and recently fell to an even 7 . But economic growth as measured by the gross national product has only recently picked up after a slow start, and interest rates, while falling, remain high by historical standards.

To try to explain what all of this really means, we talk to three of this country's leading economic thinkers. They are Milton Friedman, Nobel Prize laureate in economics, a long-time professor of economics at the University of Chicago, now a senior fellow at Stanford University's Hoover Institution. He joins us from public station KQED in San Francisco. Felix Rohatyn, a senior partner at Lazard Freres, a leading Wall Street investment firm; he's here in New York. And Lester Thurow, professor of economics at the Massachusetts Institute of Technology and the author of several best-selling books on the economy; he joins us from public station WGBH in Boston.

Dr. Friedman, let me begin with you. We have a number of business economists today predicting we're going to have a recession before the end of next year. Do you share that view?

MILTON FRIEDMAN: They may be right. I don't share the view. But it's very hard at this stage to predict anything about the end of next year. Economists are not very good at predicting long range. So far as the next six to nine months are concerned, I think the situation is that we're going to have a substantial upturn rather than a further slowing.

WOODRUFF: What makes you --

Dr. FRIEDMAN: But what happens beyond that is an open question.

WOODRUFF: All right. What makes you so optimistic here in the short run?

Dr. FRIEDMAN: The fact that we've had a monetary explosion for the last year. The money supply has gone up at a really extraordinarily rapid rate, at about a 12 rate over the last 10 or 11 months.

WOODRUFF: And that's good enough for you?

Dr. FRIEDMAN: No, it's not good. It's bad.

WOODRUFF: No, but I mean that's enough information for you to --

Dr. FRIEDMAN: It would be almost unprecedented if such a rapid increase in the quantity of money did not at least temporarily produce a stimulus to the economy.

WOODRUFF: Dr. Thurow, what about that?

LESTER THUROW: Well, I think you're looking at kind of two to three percent growth over the next nine to 12 months. Basically, you want to think of it as kind of a race between that monetary growth in the fiscal deficit versus the trade deficit. And the trade deficit is so large it's kind of sucking a lot of aggregate demand out of the economy. And I think the Fed's going to be able to offset it for nine to 12 months, but Ithink those are the key variables. How much will the trade deficit slow down the economy, how much will the Fed and the fiscal deficit speed up the economy?

WOODRUFF: But are you as optimistic as Dr. Friedman just indicated he is?

Dr. THUROW: No. I think kind of two to three percent growth is what we'll see over the next nine to 12 months, and that's not the economy falling off a cliff, but that's not a boom either. It's the kind of growth that will keep unemployment relatively constant, but nothing you would write home about.

WOODRUFF: Felix Rohatyn, where do you fit into all this?

FELIX ROHATYN: Well, I'm not an economist, so I start off with a disclaimer. I'm a businessman. I would kind of probably share Dr. Friedman's view that we're printing so much money that it's very hard to see how in the very near future the economy would get very weak. On the other hand, I think we're living in a fool's paradise because we're living off borrowings. We're borrowing more and more. We're creating a less and less stable economy in a stable world, and I think we're going towards a terrible day of reckoning. Now, whether it happens in three months, in six months or in a year, I wouldn't dare to predict. But I don't think this thing can last indefinitely. I would be surprised if it lasted -- if it lasted a couple of years.

WOODRUFF: Dr. Friedman, are we headed for a terrible day of reckoning?

Dr. FRIEDMAN: We're not headed for a terrible day of reckoning, we're headed for a day of reckoning. I may say I don't regard my forecast as optimistic. I don't believe it's desirable for us to have swings first one way, then down again, then up again. The problem with our economy has been that we've been unstable. We've been going through these ups and downs. In the immediate future we're in for a sharp up. But that will probably set the stage for a fairly sharp down, maybe a year from now, maybe two years from now, I don't quite know when.

WOODRUFF: What do you attribute the sharp ups and downs to?

Dr. FRIEDMAN: To the fact that we've had that kind of sharp ups and downs in what's been happening to the quantity of money. You had for a period in 1983 and '84 very slow monetary growth. That was followed by a slow economy. Since the end of 1984 you've been having very rapid monetary growth. That will be followed by a speedup in the economy. As the speedup of the economy becomes noticeable, the Fed will take notice, they'll step on the brake, and then we'll be in for a slowdown again.

WOODRUFF: Dr. Thurow, does the same thing concern you?

Dr. THUROW: Well, I worry about the Fed going up and down and by big amounts in the money supply, but I think that's much too narrow a way to look at the economy. You've got a big world economy out there, and if the Fed speeds up, basically, the monetary policies at the moment, a lot of it is going to flow off to demand in basically Germany, France, Japan, and it won't necessarily speed up the American economy. It will speed up the American demand for goods and services, but it won't necessarily speed up American production, American employment, the things we all need to earn our income. And I think Professor Friedman is not paying enough attention to the world economy that we in fact live in, and you might want to think about the world rate of growth of the entire world money supply rather than just the American money supply.

WOODRUFF: Go ahead, Dr. Friedman.

Dr. FRIEDMAN: I don't disagree with that statement. I think the world economy is very important, and I believe what happens in otheres will affect us, what we do will affect them. But we don't have much control about what other countries do. And therefore I tend to concentrate on those things over which we have some control.

WOODRUFF: Are you as concerned, Mr. Rohatyn, about the international situation?

Mr. ROHATYN: Well, I think they're interconnected. First of all, I'm very skeptical, again, as I said, and my academic credentials are very dubious, but I'm very skeptical about whether anybody knows what money is and how much money is in circulation. We live in a world where some tiny peanut company can print a billion dollars of junk bonds in order to go out and take over another business today in this kind of financial casino that we've turned this country into, and all of a sudden you have a billion dollars of instant money which is created and which is borrowed essentially. And I think that there is no limit to the creation of this kind of debt. So what I'm concerned about is that we're printing money. We are consuming it. We're not creating the amount of wealth to counterbalance it, and I think that's true both here and internationally. And we've created an interdependent system which is crushed by indebtedness, and one of these days, unless we begin to do something about it, something is going to give way, and that's what concerns me.

WOODRUFF: How much should we be concernd about the trade deficit? There's so much protectionist pressure that's been building in the Congress, how concerned are you?

Mr. ROHATYN: Well, you know, if we -- in effect you have a kind of a Catch-22 situation where, because we're running a $200-billion budget deficit we feel wonderful that we're running a $150-billion trade deficit in order to finance our budget deficit. Which is like saying it's wonderful that we have cancer in this world because without it there wouldn't be any cancer research, which is kind of an idiotic proposition, it seems to me. The trade deficit concerns me because in terms of both destroying American businesses for reasons that are not necessarily competitive, we keep it up because of our domestic budget deficit, and we seem politically unwilling to do anything about it.

WOODRUFF: Well, the administration has just taken a number of steps. Some are saying it's not enough. Dr. Friedman, what is the level of your concern about the trade situation, and what do you think of the administration's moves last week, especially the move to intervene in the international currency market?

Dr. FRIEDMAN: I think it was a very bad idea. I believe it will have only a temporary effect on the price of the dollar. I believe if the fundamental forces are making for a lower dollar, which they probably are, we'll get a lower dollar independently of whether the government intervenes. But more fundamentally the problem is not the trade deficit, and the problem is not the budget deficit. The fundamental problem, and here I agree with Mr. Rohatyn, is the level of spending by government which is absorbing resources that might better be used to add to our capital and to build our country. Why do we have a trade deficit? We have a trade deficit because people around the rest of the world want to acquire dollar assets. The other side of the trade deficit is the capital surplus. It's the fact that people elsewhere are investing in U.S. goods, in government bonds and other assets. Now, insofar as it goes into bonds, that's not a very good thing. Insofar as it goes into factories and structures, that is a good thing. But so far as the protection is concerned, I regard the administration's move as protectionist, and I regret it. I think we ought to be moving in the other direction toward freer trade. Is there any reason whatsoever why the American consumer should be paying five times the world price for sugar, just to take a simple, homely example?

WOODRUFF: Dr. Thurow, is that what we should be doing, moving to freer trade?

Dr. THUROW: Well, I think we ought to be moving to freer trade, but I don't think the world economy is quite that simple. For example, this year the Japanese are going to run an $80-billion trade surplus with everybody in the world -- $50 billion with the United States, $30 billion with the rest of the world. The world economy can't really work politically with one country running an $80-billion trade surplus and the United States running $150-, $160-billion trade deficit. And just saying we ought to have a free market and let it rip, I don't think is a complete answer to that kind of a situation. You just create tremendous pressures inside everybody's country that end up blowing up that free trade. And if you want to have free trade, you've got to think a little bit about what is a set of rules and regulations under which we can have normal trade relationships between countries where basically imports and exports approximately balance, as opposed to these gross imbalances which we've had for the last year or two.

WOODRUFF: So what should we be doing?

Dr. THUROW: Well, I disagree with Professor Friedman. I think intervention in the foreign currency markets is not all that a bad thing, but I don't think it would cure the problem by itself. If you think of the fundamentals on the trade problem I think you would want a three-pronged attack. One is some currency interventions, and in fact the dollar did go down 10 last week, and that's a good thing in terms of American competitiveness. Secondly, you would want to do something about those monetary and fiscal policies. Now, the problem there is, if you're really serious about the budget deficit, that means raising taxes, and I disagree with Professor Friedman that we've got a government that's too big. If you look at the borrowing that's going on, consumer credit is as much of a problem as the federal government deficit. The third prong you'd really want to deal with is, what do you do about countries, and there are several of them, that are running large trade surpluses and basically putting tremendous political pressure on everybody else's economy as they basically export their unemployment? And I think you'd want to deal with all of those problems if you were really serious about reconstructing a world economy so it works in a more efficient and equitable way.

WOODRUFF: Gentlemen, thank you and stay with us. Jim?

LEHRER: Yes, Dr. Friedman, Dr. Thurow just laid out several things there to react to. Let's start where he says, if you're really serious about doing something about the deficit, then you've got to get serious about raising taxes. In fact, David Stockman, the President's former budget director, said that same thing yesterday in a television interview.

Dr. FRIEDMAN: Well, if you look at the facts, the fraction of the American income that is being collected by the federal government in taxes has not gone down. It's stayed around 19 or 20 percent for about the last five years. On the other hand, government spending as a fraction of total income has been going up. The reason we have a large deficit, and it is a large deficit -- and it's not a good thing -- the reason we have a large deficit is because government spending has been going up rapidly while government receipts have been staying relatively constant. The proper solution to that, in my opinion, is not to raise taxes but to lower spending. Moreover, I believe that the main effect of raising taxes would not be to reduce the deficit, but simply to encourage Congress to increase spending. So I think the problem has to be attacked from the spending side.

LEHRER: Mr. Rohatyn, what's your view of that?

Mr. ROHATYN: I would disagree with the notion that we can't raise taxes. I have felt for a long time that this country would well afford a 50-a-gallon gasoline tax, which would raise about $50 billion a year. I think if you put that together with an absolute spending freeze for a couple of years, which would save you another $40, $50 billion, you would probably take $100 billion annually off the deficit and begin to drive interest rates down seriously. I do think that one has to be careful not to see taxes that are raised simply spent in new programs. And I think that you could do it by segregating the tax by creating a trust fund where the tax would be limited to, in effect, reduction of the federal debt. I think that we really have to begin to pay attention to the fact that the national debt is doubling every four or five years and that this is like a cancer that's going to eat this country up. And I don't see how we can get away from the problem without some taxes.

LEHRER: Why is that a cancer that's going to eat the country up?

Mr. ROHATYN: Because there is nothing more lethal than the arithmetic of compound interest. You have a national debt today that's reaching $2 trillion on which the interest alone will be about $200 billion. If you assume deficits going on at the rate of around $200 billion a year and interest costs at, say, 10 , then the debt will double again in five years or six years and you will be looking at $400 billion of interest costs, and as long as the debt grows at three or four times the rate of the economy, the interest costs are going to eat your budget and are going to eat this country alive.

LEHRER: Dr. Friedman, that kind of talk scares a layman. What does it do to you sitting in San Francisco?

Dr. FRIEDMAN: It's partly true and it's partly false. It's true that you cannot let the debt go on increasing indefinitely. But you have to have a sense of proportion. As a fraction of our national income, our debt today is less than half of what it was at the end of World War II. We paid it off over that period, primarily through inflation. The real threat, I believe, that is offered by not balancing the budget is that we will be driven to pay it off again via rapid inflation. And that is why the long-term threat of inflation is a very serious one. So I agree with Mr. Rohatyn that we ought to bring the debt under control. The question is how. I believe the only effective way is by passing the constitutional amendment that has been proposed to limit taxation and require a balanced budget. And I believe that can be done through spending control, that it does not require tax increases. I agree that we could afford tax increases, no question. We could afford it at a cost -- at a cost of reducing the effectiveness of the economy and encouraging still more government spending.

LEHRER: Dr. Thurow, your view of that?

Dr. THUROW: Well, see, I think there's some faulty arithmetic there. Let's just play budget-cutter for the moment. Suppose I'm going to cut $200 billion out of the federal budget. I rst go to the biggest item in the federal budget, which is the Defense Department. They spend a little bit more than $300 billion. To take $200 billion out of that I'd have to cut them by two-thirds. The President of the United States says you can't cut defense. I then go off to the second biggest item in the federal budget, which is Social Security and Medicaid. That's $250 billion. If I was going to cut that by $200 billion I'd have to cut every pension in America by 75 . The Democrats love Social Security; they tell me I can't do that. I then go off to the third biggest item in the federal government, which is interest on the national debt, approaching $200 billion, and before I cut that some lawyer at the Justice Department reminds me it's a legal obligation and can't be cut. I then go to everything else in the federal government, and when I add it up in total leaving those three things out, I nd that everything else spends just about $200 billion. If I was going to cut $200 billion out of everything else, there'd have to be no roads, no police, no president, no Congress, no courts. Well, clearly, you can't do that. And if you go through that arithmetic, you just come back and say some kind of a tax increase is part of the answer. Now, if you think about the increase in spending over the last four years, Professor Friedman is wrong. That's not Congress. That's the President of the United States who has proposed essentially doubling the defense budget. That is government spending, but it hasn't come out of the Congress; it's basically come out of the White House. And so when you talk about limiting government spending, you've got to start where it starts, which is in the White House at the moment, with this idea that we need to double the defense budget essentially every five years.

LEHRER: Dr. Friedman?

Dr. FRIEDMAN: One third of the increase in spending over the past five years has come from the defense budget. Two thirds has come from the rest. Of course if you try to cut $200 billion out of one component at a time you get silly answers. If you ask silly questions, you get silly answers. The fact is that the way to control the budget is across the board and gradually. It's not a question of bringing it into balance in 1986. It's a question of starting a process which will bring it into balance by 1990 or something like that. That's exactly what the balanced budget amendment would do. What we're asking for is to cut government spending back not in dollars but to the same percentage of the national income that it had in abou 1980, '81, 1979. We weren't exactly in 1979, 1980 on a pared-down-to-the-penny budget. We had a pretty good budget, a pretty sizable federal budget. That's the kind of budget you would have again if you simply controlled spending, kept it from increasing. As Mr. Rohatyn said, a spending freeze. And it's absurd to take each category by itself and say you can't take the whole budget deficit out of that.

LEHRER: Well, look, we've got complete agreement on all of that. Let's move on to another area, tax reform. From your perspective, Mr. Rohatyn, has that gone anywhere? Is it going anywhere? Is that just something we all talked about and now it's over?

Mr. ROHATYN: I think tax reform is a wonderful idea that really is a huge distraction at this point. I rmly believe that what we need is a significant tax increase as part of a budget-balancing program that will take place over four or five years. and distracting the country with this enormous exercise of tax reform that is supposedly revenue neutral I think is an enormous waste of energy and a very poor priority for this country. I think we're giving people the illusion that tax reform is going to solve our problems. I don't believe it will. I think it may well add to some of our other problems. I think it is one of these wonderful things that you can't object to in theory, but in terms of today's problems, I don't think that's where the priority is. I would, as I said earlier, I think I would put in a very large energy tax or a gasoline tax and freeze the budget, deal with some of the overseas problems, deal with the Third World debt, and deal with our balance-of-trade problems and forget about tax reform for a couple of years.

LEHRER: Dr. Thurow, what's your view of tax reform?

Dr. THUROW: Oh, I think the tax reform as proposed by President Reagan, if you could kind of wave a magic wand and do it, would be fairer than the tax system we have, but I agree with Felix; it wouldn't make much difference, and you can see that if you look at the average family. The average American family would pay within $85 of what it now pays under the President's proposal. Eighty-five dollars is nothing for an average family which now has an income of around $26-, $27,000. And it just is not an important thing. If you want a simple tax form, you just fill out the simple tax form and don't look for all the loopholes. Simplicity is there.

LEHRER: All right, Dr. Friedman, we're going for agreement here. What do you think about tax reform?

Dr. FRIEDMAN: We're very close to agreement. I think that a real honest-to-God tax reform, one which replaced our present incredibly complex personal income tax system with a real flat rate and no deductions, would be a splendid thing and would have great effects. But what's called tax reform now is not tax reform at all. What it is is a campaign funding -- fundraising device.

LEHRER: Okay. I hear you. Dr. Friedman, Dr. Thurow and Mr. Rohatyn, thank you all three for being with us, and thank you for talking in language I almost understood most of the time. Judy?

WOODRUFF: Turning now to a last look at today's top stories, President Reagan will hold a pre-summit summit meeting with Western leaders next month in New York. That's before his November meeting with Soviet leader Mikhail Gorbachev. The Reagan administration sounded more accommodating today toward Jordan's King Hussein's plan for Mideast peace talks. South Africa's President P.W. Botha says that some black leaders can join an advisory group known as the President's Council. And President Reagan asked Margaret Heckler, the secretary of health and human services, to become ambassador to Ireland. Good night, Jim.

LEHRER: Good night, Judy. We'll see you tomorrow night. I'm Jim Lehrer. Thank you and good night.