The MacNeil/Lehrer NewsHour

MR. MacNeil: Good evening. Leading the news this Wednesday, Federal Reserve Chairman Alan Greenspan said U.S. budget deficits were corroding the economy and must be reduced, the U.S. foreign trade deficit fell in September, with a surge in exports. The Parliament of Estonia today declared a sovereign republic with a right to veto Soviet laws. We'll have details in our News Summary in a moment. Jim.

MR. LEHRER: After the News Summary, we look at Federal Reserve Chairman Alan Greenspan's concerns over the budget deficit with Economists Alice Rivlin, Richard Rahn, Benjamin Friedman, and Robert Eisner. Then Jeffrey Kaye updates a California insurance story. NEWS SUMMARY

MR. LEHRER: Federal Reserve Chairman Alan Greenspan sounded a new warning today about the federal budget deficit. He said it was doing serious damage to the economy and must be reduced. He was one of several economic experts who testified about the deficit before the Bipartisan National Economic Commission in Washington.

ALAN GREENSPAN, Chairman, Federal Reserve Board: The presumption that the deficit is benign is clearly false. Allowing it to go on courts a dangerous corrosion of our economy. Fortunately, we have it in our power to reverse this process, thereby avoiding potentially significant reductions in our standards of living.

MR. LEHRER: There was good news on the trade deficit today. The Commerce Department said it was down 15 percent in September to 10.5 billion dollars from the 12.3 it was in August. Robin.

MR. MacNeil: British Prime Minister Margaret Thatcher paid a sentimental farewell visit to President Reagan today. Received with the full panoply of White House honors, including a 19 gun salute, Mrs. Thatcher called the Reagan Presidency, "one of the greatest in America's history." Later, in the Oval Office, she said this was an emotional moment for both of them.

MARGARET THATCHER, Prime Minister, Great Britain: My thoughts are sad and I thought the ceremony this morning was most impressive and I shall always remember it. Until this morning, we'll be looking back and seeing what a different world it was when we both began in the early 1980's, but because it's in the nature of both of us, we shall also be looking forward, because although I may not see the President in this capacity again, I'm sure I shall see and talk with him many more times.

MR. MacNeil: George Bush also got the Thatcher seal of approval. Mrs. Thatcher said, "We're all very fortunate in the Western world" because the continuity of policy would give stability.

MR. LEHRER: In Pakistan, Benazir Buto claimed victory for her party in today's national election. She based her claim on very early election returns and there was no independent confirmation. We have a report on today's voting from Louise Bates of Worldwide Television News.

LOUISE BATES: Despite the long lines of the country's 35,000 polling stations, Pakistan's first Democratic election in 11 years attracted only 50 percent of eligible voters. The days leading up to the polling have been marked by arguments over the I.D. cards each voter must carry. Many Moslem women won't have their picture taken, a fact Pakistan People's Party Leader Benazir Buto said would cut into her support. The government said its intention was to avoid fraud and it was using a variety of checks to make sure each vote was legitimate. Buto, daughter of the country's last Democratically elected Prime Minister, appeared confident when she cast her vote. The supporters are ready to see a woman lead this Moslem nation. Her main opponent has been Nawa Sharif, leader of the Islamic Democratic Alliance, and a protege of former Pakistani President Zea Ulhak. The race appears to have come down to these two candidates. But with more than 30 parties to choose from, it's possible no clear winner will emerge.

MR. LEHRER: The Parliament of Estonia declared its sovereignty today from the Soviet Union. Estonia is one of three small republics on the Baltic Sea that was annexed by the Soviets in 1940. Today's vote said the Parliament would exercise a right to veto Soviet laws and would take control of land and factories, but stopped short of a full declaration of independence. The vote was 258 to 1 and was preceded by a debate over charges Central Soviet control has been damaging to Estonia. There was no immediate reaction from Soviet authorities or media in Moscow.

MR. MacNeil: In Israel's occupied territories Palestinian teenagers celebrating the declaration of a Palestinian state defied military forces with some stones and flaming tires. Eight Palestinians were shot and wounded. Israel launched a campaign to dissuade more countries from recognizing the state proclaimed by the Palestine National Council. Foreign Ministry Spokesman Mati Amiki said, "We have a problem trying to make our point of view clear because the PLO succeeded in transmitting an image of real change." In Washington, the State Department said the Palestinian declaration did not satisfy U.S. conditions for opening a dialogue with the PLO.

MR. LEHRER: Back in this country, terrible storms crashed through the middle part today. At least 49 tornadoes were triggered in Arkansas, Missouri, Kansas, Illinois, and Iowa. Heavy snow fell in the Eastern Dakotas, Minnesota, and Nebraska. Seven people were killed by the tornadoes, six in Arkansas, where as many as 10 twisters touched down last night. The National Guard was called out today to help clean up. Thirty homes were destroyed or severely damaged and a new high school gymnasium was also leveled. One person was killed in Missouri, when a tornado hit a trailer park. A National Weather Service spokesman said a tornado outbreak of this time of year is most unusual. And heavy winds were partly responsible for an unusual fire in Altus, Oklahoma, last night. The fire started in bales of newly harvested cotton, then 60 mile an hour winds spread it through Altus. Today residents surveyed the damage, which included 29 homes and businesses destroyed, 18 people were injured.

MR. MacNeil: And finally, whether it makes you feel older or younger yourself, Mickey Mouse is 60 years old. He had birthday parties at Disney establishments in Florida and California, and at the Smithsonian Institution's Museum of American History in Washington. There were balloons, a jazz band and a four-tiered cake to celebrate Mickey's birth and movie debut in the film Steamboat Willie, the first synchronized sound cartoon. Museum Director Roger Kennedy hailed Mickey as a terribly important figure in American mythology.

MR. LEHRER: That's it for the News Summary. Now, it's on to four opinions of what to do with the budget deficit and a California insurance update. FOCUS - MOUNTAIN OF DEBT

MR. LEHRER: Alan Greenspan made the federal budget deficit the lead story again today as it has been many days before in Washington. The Federal Reserve Board Chairman said what he has said before, that the deficit is ruining the economy, but this time he said it to a special bipartisan Budget Deficit Commission known as the National Economic Commission. Four economists, two of whom also testified today, are here to sort through the options available to the Commission, the new Bush administration and the Congress, but first a healthy excerpt from what Greenspan said to the Deficit Commission.

ALAN GREENSPAN, Chairman, Federal Reserve Board: It is beguiling to contemplate the strong economy of recent years in the context of very large deficits and to conclude that the concerns about the adverse effects of the deficit on the economy have been misplaced. But this argument is fanciful. The deficit already has begun to eat away at the foundations of our economic strength, and the need to deal with it is becoming ever more urgent. To the extent that some of the negative effects of deficits have not as yet been felt, they have been merely postponed, not avoided. Moreover, the scope for further such avoidance is shrinking.

DREW LEWIS, Co-Chair, National Econ. Comm.: And I wonder if you could comment even though it's somewhat implicit in your statement on the feasibility of and the present economic conditions of our growing out of the federal deficit the next five to six years and secondly growing out of the trade deficit. Could you comment on that, and then I'll turn to Representative Gray.

ALAN GREENSPAN: I think we could grow out of both deficits if we were at much lower levels of economic activity and had sufficient slack to absorb very large increases in economic output, which in turn could very readily resolve certainly the budget deficit and could be a major factor in moving the trade deficit down as well. However, we are at a point with respect to current economic activity that leaves very little room for a rate of increase in economic activity which will engender the increase in resources and taxable incomes and tax receipts which will get us out of this merely by growth alone.

REP. WILLIAM GRAY, [D] Pennsylvania: So, therefore, to argue that we're going to grow our way out does not seem a plausible solution from your point of view?

ALAN GREENSPAN: Certainly does not to me.

REP. WILLIAM GRAY: Then that really leaves us, Chairman Greenspan, with some very hard choices that we face for deficit reduction. Three-quarters of the budget is now for defense, interest, Social Security, Medicare, Medicaid and for trust fund programs with their own sufficient earmarked taxes. Under current law, Social Security will grow faster than inflation, CBO estimates that our current law on Medicare and Medicaid commitments imply cost growth at about three times the rate of inflation. Many of my colleagues whom I respect a great deal tell us after their experience with national security that national security cannot be cut below current service and it actually needs some real growth. The President-elect has a position on Social Security to protect it and many Democrats have joined in that position, so it's bipartisan. Others say don't cut trust fund programs, because they have sufficient revenues that are dedicated to themselves. I guess the question I want to ask you after describing that scenario is that after all of the spending cuts that are prudent and feasible are made, is it better that we continue with large budget deficits, or that we take additional action on the revenue side, which would be better to do?

ALAN GREENSPAN: I'm not going to mention my own personal opinions of how to resolve this issue. I would suspect that everyone up here has got their own solution to the problem I do. The difficulty unfortunately is that's not helpful. What we have got to do is find a means by which we can find a national consensus or some national compromise which resolves the deficit problem. How that is done is far less relevant than that it be done. We know all the numbers. The question is now to make the political choices, the political compromises that are required for purposes of resolving this --

MR. LEHRER: Now to two others who testified this morning. Alice Rivlin, an Economist, is a Senior Fellow at the Brookings Institution; she was the first Director of the Congressional Budget Office; Richard Rahn is the Vice President and Chief Economist for the U.S. Chamber of Commerce, and was an economic adviser to the Bush campaign. First let's begin at the beginning. Ms. Rivlin, do you agree with Greenspan's dire words about the deficit?

ALICE RIVLIN, Former Budget Director: Yes, I do. I think the deficit is the most serious problem facing the nation and we need to get it behind us.

MR. LEHRER: Most serious problem facing the nation, Mr. Rahn?

RICHARD RAHN, U.S. Chamber of Commerce: No. The deficit is coming down. It's been coming down steadily for four years. It's a problem that's getting better, and suddenly to put it to crisis proportion, I think is unwarranted.

MS. RIVLIN: The deficit has come down some. It's certainly better than it was a few years ago in part because the Congress and the President acted to cut spending, principally defense spending, and to raise taxes. We've raised taxes several times over the last few years. But we've still got a problem, and it's bigger than it looks, because the main reason that the deficit is coming down now is that we have a surplus in the Social Security Trust Fund. We are offsetting that surplus with a very large deficit, 200 billion approximately, as far as the eye can see, as Dave Stockman said, in the rest of the budget. That's the big problem.

MR. LEHRER: Mr. Rahn, what do you say to -- well, let's put it this way. Where has Chairman Greenspan, as well as Alice Rivlin and others, gone wrong on this? Chairman Greenspan said that if something is not done, we may have serious changes in our standard of living. You heard what he said. You saw what he said. How have they got it so wrong?

MR. RAHN: Well, part of Chairman Greenspan's testimony which you didn't include in your clip was that he said it would be better to work on the spending side, rather than increasing taxes.

MR. LEHRER: We're not even to that question yet.

MR. RAHN: Okay.

MR. LEHRER: We're just talking about the deficit. We'll get to that in a minute.

MR. RAHN: Okay. I have a difference with the Chairman on our potential for economic growth. I think it's higher than he thinks it is. Typically, Fed Chairmen have been pessimistic on potential for growth and if you look at the Fed's track record over the last few years, you find that they did not forecast growth anywhere near as high as actually occurred. Secondly --

MR. LEHRER: So in other words, you say it may be a problem, but it's not a crisis because there are enough built-in things that - - in other words, you believe it can grow, we can grow out of it?

MR. RAHN: We can grow faster, but we have to do things on the spending side, and I think we're all in agreement on the necessity for reducing the growth rate of spending. We still have many government programs that are growing too rapidly. Many of them are wasteful. We haven't really taken the budget ax and cut spending at all. Spending has been growing faster than the rate of inflation. Fortunately, tax revenues have also been growing very rapidly. Tax revenues are now growing in the 7 to 8 percent a year rate and if you can hold spending growth to 4 to 5 percent increases, which is still substantial and above the rate of inflation, you, indeed, will bring down that deficit as we have been. And I think back several years ago, the Congressional Budget Office and others were saying, we're going to have 300 billion dollar a year deficits. That did not come about. In 1987, the deficit came down $70 billion in one year. And we're only talking --

MR. LEHRER: Just by the growing out of it, you mean?

MR. RAHN: By economic growth and spending growth rate control. You've got to do both.

MR. LEHRER: What do you think of that?

MS. RIVLIN: We didn't grow out of that deficit. Those projections were approximately correct. They presumed that the defense budget would go on growing at the rate at which the Reagan administration was proposing and essentially Congress said, no, we're going to stop --

MR. RAHN: It wasn't only defense. It was a number of other items too.

MS. RIVLIN: Other things were cut and taxes were raised, but it wasn't growth that was responsible. It was actual actions.

MR. RAHN: Growth was responsible for a part of those big increase in revenues, and I don't think we can deny that. And the growth rates have been much higher than virtually everybody forecast.

MR. LEHRER: Let me ask you both, beginning with you, Ms. Rivlin, the same question that Chairman Gray asked Chairman Greenspan, and he said, no thanks in his answer, and that is, which is worse, raising taxes or continuing to let the budget deficit be what it is?

MS. RIVLIN: I think continuing the budget deficit is worse, and that doesn't mean that I think all of the solution should be on the tax side. But the problem is that we are using our national saving to finance the government rather than to finance productive investment. And we've got to stop that. We've got to begin investing more in new technology, in research and development, in training people better, so that for the future, we can have a larger Gross National Product. And the deficit is one of the things that is keeping us from doing that.

MR. LEHRER: What is your worst case scenario if something is not done about the -- through whatever means, whether it grows out, whether taxes are raised, whether the spending cuts, whatever, if something is not done, what happens worst case?

MS. RIVLIN: Well, the worst case is not a collapse of the U.S. economy; it is just slower growth in the future so that people don't live as well in the next decade or the one after that as they otherwise would have.

MR. LEHRER: Why would that happen? Explain that, please.

MS. RIVLIN: That comes back to what I was saying about saving. Right now we're a low saving country by world standards, and we are using our saving to finance the government. Now that hasn't given us a disaster because we've been able to borrow savings from the rest of the world, and we're going on doing that now at a very hefty rate. That makes problems for Alan Greenspan, because he's got to manage his monetary policy so that those funds keep flowing in and we all are in a precarious situation in case foreigners decide they don't want to lend to us, but that's not the most serious problem. The most serious problem is we're building up a very large foreign debt and debtors have problems. They have to pay it back in the long run. We'll be paying interest and dividends and profits to other people out of whatever we produce in the future.

MR. LEHRER: Mr. Rahn, raise taxes or don't worry about the deficit or don't make it a No. 1 priority, which is worse?

MR. RAHN: Well, I want to point out I want to reduce the deficit, but we ought to do that through spending growth rate control. What happens when we increase taxes? Well, first of all, under the Gramm-Rudman Law which is in effect, which sets deficit targets, if you increase taxes, you automatically increase government spending. It is not used to bring down the deficit.

MR. LEHRER: They just spend it?

MR. RAHN: They just spend the extra amount. And what we have found over the years is the Congress has no method for enforcing spending control. They make an agreement with the administration, we're going to reduce spending, then they end up not doing it. And I would be very reluctant to go into an agreement with somebody where I am bound and the other folks aren't bound, and that's what we've found in the past.

MR. LEHRER: So in other words, the answer to my question is, you think it would, if you had to make the choice, the worst sin is to raise taxes?

MR. RAHN: First of all, it slows economic growth, you have slower progress against unemployment, higher levels of poverty, less economic opportunity and not only that, governments the additional, the Congress will spend the additional revenue, and you end up with bigger government.

MR. LEHRER: And I would take it also you would disagree with what Chairman Greenspan said to Mr. Gray, which is it doesn't really matter, the specifics don't really matter right now, what does matter is that there be a consensus and there be compromise and something be done. You don't think it requires that?

MR. RAHN: No. I think at one point though in his testimony he did point out that spending growth rate reduction is better than increasing taxes. And if we know that's better, and I agree with the Chairman on that, why in the world would we want to take the less optimal route?

MR. LEHRER: How about that?

MS. RIVLIN: I don't agree with much of any of that. I think it isn't even consistent. Dr. Rahn said earlier that we had cut spending and we have. And I think the Congress keeps bargains. Congress doesn't have exactly the same set of spending priorities that the administration has had. It has been more inclined to cut defense spending and less inclined to cut domestic spending, but I think the Congress can make a bargain with the President, and it is essential that the new President and the new Congress do that, to share the pain of cutting the deficit somewhat across-the-board in spending programs, and I think in new revenues too. And if we don't do that, then we have this long run problem that is just eating away.

MR. RAHN: I think we have got to correct some terminology. We haven't cut spending; we've reduced the growth rate of spending. In both nominal and absolute terms, government spending is up much faster than inflation, much faster than population growth.

MS. RIVLIN: A lot of that is interest on the debt that we've been running up in the process.

MR. RAHN: Well, but it's also on the real programs. Programs have grown.

MR. LEHRER: Don't go away. Robin.

MR. MacNeil: Now we move from the politics of the budget deficit to the views of two academics who study the issue. Robert Eisner is a Professor of Economics at Northwestern University. He's author of a book entitled, "How Real is the Federal Deficit?". He joins us from Chicago. Benjamin Friedman teaches economics at Harvard University and is the author of a new book "Day of Reckoning, The Consequences of American Economic Policy under Reagan and After". Professor Friedman, do you agree with Greenspan that the deficits threaten dangerous corrosion of the economy and must be reduced as quickly as possible?

BENJAMIN FRIEDMAN, Harvard University: Yes, I do. We heard a lot during the election campaign about the current economic expansion and how it's the longest expansion in our peacetime history. But what nobody bothered to mention is that this is the first business expansion in fifty years in the United States in which the average working man or woman is seeing his wage rise less rapidly than prices. Real wages are going down; we're corroding our standard of living. No why is that? I think that one of the reasons is that the government's borrowing to finance its deficit has absorbed three-fourths of all of the saving that you and I and other Americans have done during the 1980's, and for that reason, we are investing less in new business equipment, new plant, and new technology than we did in the 50's, or the 60's, or the 70's. That mean we're not being productive, we're not being competitive, and we're not achieving a rise in the standard of living for the average American.

MR. MacNeil: What about Mr. Greenspan's point -- it wasn't in the clip that we showed -- but Mr. Greenspan's point that you can't expect the foreign countries to go on indefinitely, or that the United States should not count on the foreign countries going on indefinitely financing that deficit, what is your reading on that?

PROF. FRIEDMAN: I think that's quite right. After all, as we're not competitive and as we're exporting far less than we're buying from abroad, we have to finance that deficit. People don't contribute all those Toyotas and cameras and watches to us. They sell them to us. And when we can't pay for what we buy with exports, we have to borrow from abroad, and as we borrow, and now we've gone from being the world's largest lender country to being the world's largest borrower, we become ever more beholding to the Japanese and the Germans and the ever countries whose central banks are holding dollars and supporting our currency. And I think we've already seen some erosion of our ability to be forceful and effective in projecting influence in world affairs.

MR. MacNeil: Professor Eisner in Chicago, I take it you don't agree with this, that the deficit is corroding the economy?

ROBERT EISNER,Northwestern University: I very definitely do not agree. I think it's unfortunate that we have so much rhetoric of this kind. The question of what the deficit does to the economy is twofold. What it's doing to our level of prosperity, our level of well being right now, and it has been pointed out that we've had a very substantial recovery for some five years now or six years not despite the deficit, but I would argue largely because of it. But the second question is what the deficit is going to be doing for the future. And all of the speakers are correct in suggesting we should be concerned about our investment for the future. But that raises two questions. One, have deficits really been reducing private investment? I'm rather amused because Prof. Friedman had an article some 10 years ago in which he pointed out that debts seemed to crowd in investment, not crowd it out. My own work certainly shows that. But perhaps even more important is that investment for the future is much more than private investment. It is government spending for roads, for bridges, for harbors, research, for education, for education, for training. Those are the things that will really contribute to our future. And I think what's so appalling is so many people talk about the deficit without knowing how it's measured, what we really mean, and what it comes down to is the measures to reduce the deficit may well even throw the economy into a recession, may also involve cutting the vital spending for investing in our future, which is what the whole argument should be about.

MR. MacNeil: So you just flatly disagree -- another thing Mr. Greenspan said today was the idea that the deficit is benign is just wrong -- and you just flatly disagree with that, you think it is benign.

PROF. EISNER: Well, I do think deficits matter; they make a big difference. One thing I wish we had time to get into is how we measure this federal deficit. I would argue that at the moment the deficit is not even real. I don't know how many businessmen look into the accounting of the federal government --

MR. MacNeil: Let me interrupt you for a moment. I'll give you a chance to say that in a moment, but first so we don't get confused, let's just go back to Prof. Friedman on the idea, Prof. Friedman, that Mr. Eisner said the deficit is really doing a lot of good and is investing in the future.

PROF. FRIEDMAN: I don't believe that. If I thought that what we were doing at the government level was borrowing in order to invest in roads and highways and bridges and port facilities and research, I'd think that's a good thing. That's equivalent to what any sound business does. But the irony is that in the 80's, just as the deficit has exploded, the share of government spending going for that kind of research activity and investment activity has shrunk to the lowest share in the post war period. So we're not running up a deficit by borrowing for investment purposes. We're running a deficit in order to pay for military personnel, military hardware, Medicare, Medicaid, Social Security, and the other core programs that soak up about 3/4 of what the government spends.

MR. MacNeil: Borrowing for current expenditure, in other words?

PROF. FRIEDMAN: Yes, that's right. Bob Eisner also mentioned correctly that I had at one point done an analysis showing that government deficits were likely to crowd in rather than crowd out investment. And that's perfectly true, but that was a story about an under employed economy. That was a story 10 years ago about what to think about deficits in the context of years like 1975 and '76, when there was high unemployment, and it would have been a good story about the deficit in 1982 and '83, but not now when we have no excess capacity in industry and no unemployed labor to speak of.

MR. MacNeil: Let's go back to Prof. Eisner and his idea that the deficit is being wrongly measured. You were going to say that -- can you hear me?

PROF. EISNER: Yes. Surely, yes. I'm happy to go back to that. Well, it's wrongly measured first because it does not take into account capital expenditures, as any private business would do. I might interject that we do have a problem that we're not using the deficit properly to finance enough government investment. It is also wrongly measured because we don't take into account an inflation tax, that is, the deficit adds to debt. But as long as prices keep going up, the real obligation of the government in terms of debt goes down and the real assets of the public in terms of this debt also go down.

MR. MacNeil: So how big is the deficit by your measurement? What's the realistic figure?

PROF. EISNER: Well, I like that. Maybe I'll send some people home happy if they're that worried about it, because I have some figures on which correcting for the capital expenditures takes $70 billion off the deficit, correcting for the inflation tax takes another 100 billion off, and then adding in state and local government surpluses, which are running about 50 billion, brings the official $155 billion deficit that we keep talking about as of the last fiscal year to a surplus of 70 billion. That, of course, doesn't really tell you that we shouldn't change it, but it I think puts another light on things.

MR. MacNeil: Prof. Friedman, how do you react to that?

PROF. FRIEDMAN: I think you have to ask where we are now versus where we were 10 years ago. The answer is that the deficit is much greater. The amount of the government spending that goes for investment purposes is less. As Prof. Eisner says correctly, we are not using our government spending wisely now.

PROF. EISNER: That's the real issue.

PROF. FRIEDMAN: And in addition, the inflation correction is now lower than it was before, because after all, our inflation has come down not to 0 but to 4 percent, so the idea that all of the deficit just amounts to an inflation tax on the outstanding debt, I think is not right either.

MR. MacNeil: We can't obviously go all the way into the economics lesson on this. In concluding just this section, starting with you, Prof. Friedman, what is your remedy for the situation as you see it? What is the specific proposal you would make if you had testified today to the Commission?

PROF. FRIEDMAN: I think we have to do three things. First, I think we need genuine cuts in government spending, not just the smoke and mirrors we've had recently, but genuine cuts in a variety of programs. Second, because I don't think we're going to find enough cuts, I think we'll also need higher taxes. From an economic perspective, it isn't that important. Alan Greenspan was right. What matters is solving the problem, and if we were going to get a consensus to do it all on the spending side, that would be fine with me, but I don't think we're going to, so I am for higher taxes to the extent that we can't find the spending cuts. And then third, I think we need an easier monetary policy, translated, that means lower interest rates, in order to stimulate the economy to have more investment to offset the lower consumption and to have more exports to offset the lower imports.

MR. MacNeil: Prof. Eisner, what would you do about the deficit as you see it and calculate it at the moment?

PROF. EISNER: Well, I would go along with an easier monetary policy which would lower interest rates. That would lower the deficit no matter how you calculate it. It would also result in a greater degree of more private investment. It would leave room for the economy to grow more. I guess one fundamental difference I have with Prof. Friedman and with some of the others is, with Alice Rivlin too I suspect, I do believe this economy can grow more. I'm delighted the unemployment rate is 5.3 percent, instead of the 10.7 percent we had in 1982. But I remember 20 years ago the unemployment rate was 3.5 percent. I don't like to share the bankers' pessimism that we can't go grow more and, therefore, we have to slow the economy down. Slowing the economy down is not the way to proceed either for current benefits or for investment of any kind for the future.

MR. MacNeil: Okay. Jim.

MR. LEHRER: Let's bring Alice Rivlin and Mr. Rahn back into this. What do you think about what he just said to you? He was talking to you.

ALICE RIVLIN, Former Budget Director: I think the economy can grow faster over the long run, but I think that takes current sacrifice. We're going to have to consume less, both publicly and privately, in order to save more and invest more. And I think that's why we need to get the deficit down. We're building up these surpluses in Social Security so that we will have funds for people, the baby boom generation when they retire, but the baby boom generation ought to be very concerned with what we're doing with that money. We're spending it for current government programs, rather than investing it for their future.

MR. LEHRER: So you would agree with both Mr. Friedman and Mr. Eisner on that point, right, that the money is being used for the wrong reasons? I mean, the deficit money is being used for the wrong things?

MS. RIVLIN: Yes. I think we ought to be running a surplus, including Social Security, and that we should use part of that surplus to retire debt, so that we get funds back out into the private sector and lower those interest rates that we'd all like to get down and encourage more investment. I think we can use part of the surplus to offset a deficit in the federal budget for investment purposes, building roads and more research and development and that sort of thing, but I don't think we can offset current consumption with that surplus.

MR. LEHRER: What's your view of that, Mr. Rahn, as to how this deficit is being used?

RICHARD RAHN, U.S. Chamber of Commerce: I think I agree with the others, that we're not using the money as wisely as we ought to. Now clearly, rather than having the government run a surplus, as Alice would like, I prefer to see us adjust our tax code to encourage more private saving in both corporations and among individuals. We have a tax code that is heavily biased against private saving, much more so than most countries around the world. It becomes no surprise that our individual savings rate is low, because we tax savings so heavily. Now the best way to go is to reduce that tax burden on saving. That encourages more private capital formation, which enables us to have higher economic growth which gets us out of some of these problems.

MR. LEHRER: Let's talk -- in the few minutes we have left here - - let's talk about what -- no matter what the four of you may wish was going to happen -- about what is probably going to happen. You heard -- Mr. Friedman, I think you said there's no consensus on spending cuts and there never will be a consensus on spending cuts. Do you agree, Mr. Rahn?

MR. RAHN: Yes. You never get a consensus on spending cuts. But at times, you can come to compromises on spending, and here is where I think Vice President --

MR. LEHRER: But what he's saying is, he's saying is that there is, if you wait for everybody to agree that the only method to cut down -- I think I'm right on this, right -- that if you wait for there to be agreement on how to cut the budget just through spending cuts, you'll never cut the budget deficit, right?

MR. RAHN: But you won't have to. Remember, the Gramm-Rudman Law is there and if the Vice President sticks with his pledge, which I'm sure he will, not to increase taxes, then that forces Congress to debate alternative spending growth rate reductions because if they don't, they go to a sequester under the Gramm-Rudman Law. Right now, the President-elect is holding the high card.

MR. LEHRER: Alice Rivlin, Sen. Bennett Johnston said today that if President-elect Bush holds to his thing on taxes that it's going to be a train wreck, because there's no way in the world Congress will ever be the ones to raise taxes on their own, so nothing is going to happen?

MS. RIVLIN: Well, I think he's right that Congress will not on its own solve the problem. We know that. We've had eight years of experience with that theory. The opportunity now with a new President and newly elected Congress is for them to get together and compromise their positions. That's going to be hard, but I think that's the only way out of this. And it's certainly doable if each side will give a little bit in the interest of getting the deficit down.

MR. LEHRER: But there is no indication from Mr. Rahn or from anybody else who interprets or know what President-elect Bush's position is that he is going to compromise on this at all.

MR. RAHN: No. What the Vice President said, he said immediately after inauguration that he would call the leaders in Congress into a meeting where the would sit down and work on this. And the only thing he took off the table were tax increases and Social Security. Everything else is on the table. That's an enormous sum of money. And we're not talking about reducing the level of growth in spending by that much, a couple of percent. That can be done.

MR. LEHRER: Mr. Friedman, does that sound like a beginning of a solution?

PROF. FRIEDMAN: I think it sounds like a beginning, but I think it's important to recognize how far Mr. Bush boxed himself in, and I think boxed all of us in, with campaign pledges. He isn't going to look at taxes; he isn't going to look at Social Security. For sure, he isn't going to default on the interest payments on the national debt. Then there's defense, there's Medicare, Medicaid. I didn't hear anything about cutting defense, that sounded like the other direction. And after all, what does the one-fourth of the budget that's left go for? It's not all waste and fraud and abuse. It's things like the courts and law enforcement and the Immigration Authority and embassies abroad and the interstate highways and the space program, and lots of things that I think Americans are going to be very reluctant to do without and that as a practical matter, I don't see us getting very far if we focus on those alone. So I think if taxes are off the table and Social Security is off the table and defense looks pretty tight, I don't see how we're going to make enough progress to be meaningful.

MR. LEHRER: Prof. Eisner, what's your view of it, in terms of the practical possibilities here?

PROF. EISNER: I suspect the practical possibility will be largely some muddling through. I do think there's substantial room to grow. The deficit is much below what it was before. We are in something of a bind because of this Gramm-Rudman Law, but Congress put itself in that bind. They can perhaps get themselves out it, either by clever accounting or by changing the law.

MR. LEHRER: Alice Rivlin, what power or persuasion or whatever do you think this Commission might have on this? Is that going to give cover to anybody?

MS. RIVLIN: Well, it will give cover if the President and the Congress want it. If they want an agreement and have come to some kind of an agreement, then they can invoke all kinds of powers and a bipartisan commission advised us to do this. I think a commission can help. Alan Greenspan's own commission helped resolve the Social Security problem. But mainly, it has to be the Congress and the President deciding we want to do this.

MR. LEHRER: What do you think about the Commission, Mr. Rahn?

MR. RAHN: Well, I think if they expand our horizons a little bit, they can do fine. There's a lot things that can be done, other than just spending growth rate reduction. There's a lot of things that can be done with privatization. We haven't really talked about that. You could possibly have index bonds or gold-backed bonds, which reduce that --

MR. LEHRER: You think the Commission, if it came down, could at least help things get on the table?

MR. RAHN: Yes. But again the American people made an overwhelming choice. They spoke. They did not want a tax increase. The Vice President understands that. The Congress ought to understand that and the Commission members ought to understand that.

MR. LEHRER: All right. And we understand we have to go. Thank you all very much, all four of you.

MR. MacNeil: Still to come on the Newshour, the California auto insurance revolt, and the West Point honor code. UPDATE - INSURANCE AGENCY

MR. MacNeil: Next tonight we look at an attempt by Californians to cut their car insurance rates. Last week, voters in that state passed Proposition 103, which they thought would reduce those rates by 20 percent. Jeff Kaye of public station KCET in Los Angeles tells us what did happen.

JEFFREY KAYE: When California voters entered polling booths last Tuesday, they encountered one of the longest and most complex ballots in state history. It included 29 separate state propositions, five of them dealing with insurance issues.

VOTER: I was kind of confused by a lot of the insurance initiative stuff; most of them I didn't vote on.

MR. KAYE: Those who did vote rejected four of the insurance initiatives, including the one sponsored by lawyers and by the insurance industry. But by a slim margin, 51 to 49 percent, they approved a radical measure, Proposition 103, proposed by a group called Voter Revolt. The new law, backed by consumer advocate Ralph Nader, is designed to sock it to the insurance industry. Its proponents have become regular fixtures on local talk shows.

RADIO TALK SHOW HOST: The man who wrote Proposition 103 is with us, Harvey Rosenfield. Glad to have you with us, Harvey.

HARVEY ROSENFIELD: Same here.

RADIO TALK SHOW HOST: So what will Proposition 103 do once it is okayed by the California Supreme Court?

HARVEY ROSENFIELD: First of all, it's immediate refund justice after years of being ripped off by the insurance companies. Prop. 103 will lower all rates for auto, homeowner, business, non- profit, municipality, 20 percent of what they were in November of 1987.

RADIO TALK SHOW HOST: So it's retroactive?

HARVEY ROSENFIELD: It retroactively cuts back all those increases in 1988, then takes another 20 percent off what the rates were in 1987.

MR. KAYE: Proposition 103 was spawned in part by California's rising auto insurance premiums. In addition to rate rollbacks, the measure would force insurance companies to justify premium increases in public hearings and to open up their books. It would also require the industry to establish rates based on drivers' records instead of their addresses, which is the current practice. The bill's approval triggered pandemonium in the insurance industry. Some companies said they would stop writing automobile insurance in California. Others said they wouldn't do any more business in the state. Industry lawyers quickly filed long planned lawsuits. Attorney Allen Katz of the Association of California Insurance Companies persuaded the California Supreme Court to issue a stay to block the implementation of Proposition 103 until the legal challenges can be resolved.

ALLEN KATZ, Insurance Assn. Attorney: This statute violates both the California Constitution and the United States Constitution by depriving insurance companies of due process.

MR. KAYE: Meaning what?

ALLEN KATZ: Meaning that their business is being taken away from them without any reasonable opportunity to earn a fair rate of return. The law is arbitrary and capricious.

MR. KAYE: With an indefinite stay in place, the companies that threatened to quit doing business in California are staying put for the time being. Now things are, more or less, back to normal, insurance clerks are keeping busy, as are claims adjusters. But many people who voted for proposition 103 are angry, angry that the measure didn't take effect immediately as they had expected when they cast their ballots.

CONSUMER: The voters voted on what they wanted concerning insurance and the voters, you know, why are they takin' us through this lawsuit? We want a discount now. We voted for it.

VOTER: They should do what the people want. People vote for 103 so they should leave it.

BUSINESSMAN: It's a corporate strategy on the part of insurance companies to take the posture that they have and it'll be -- it's a real test of the political process in the courts to see whether, who's going to hold sway.

MR. KAYE: The California Department of Insurance has added extra staff to field calls from concerned consumers.

BOB MUISE, California Insurance: [on phone] Well, that's up to the Supreme Court, we would have no say on that, and they haven't indicated to anybody, to my knowledge, as to when they will make a determination on Proposition 103.

MR. KAYE: Bob Muise says consumers are irritated.

BOB MUISE: The majority of phone calls have been on when will I get my refund and their attitude has been I want it now.

MARYELLEN GREEN: I'm angry about it.

MR. KAYE: Maryellen Green is particularly frustrated. She thought Proposition 103 guaranteed rate relief, but just this week she learned her auto insurance premium doubled to $1600 a year, because she moved 20 miles to a zip code whose residents tend to have more accidents.

MARYELLEN GREEN: Well, I thought that 103 would offer controls in a completely out of control situation, and I think that 103 still has the capacity to do that. I'm just looking forward to getting some controls. I think it's absolutely crazy. I'm angry, I'm frustrated, and truthfully, I can't afford to be insured anymore.

PROP. 103 VOLUNTEER ON PHONE: It's frantic. We're getting a lot of calls from folks who want to donate -- in fact, hold on a second second -- Prop. 103 --

MR. KAYE: At Proposition 103 headquarters, the court's action revived the campaign as if the election never took place. The initiative's chief spokesman, Attorney Harvey Rosenfield, is a 36 year old protege of Ralph Nader. His detractors see him as a scrappy street fighter. He sees himself as a populist, pushing a bread and butter pocketbook issue. The media see him as a man always ready with a savage, anti-insurance industry quip.

HARVEY ROSENFIELD, Prop. 103 Author: For the insurance companies this is no longer the wild west that it used to be before Prop. 103. There's a new sheriff in town and it's going to clean up their act and they've got to obey the law.

MR. KAYE: Rosenfield and other activists blame industry lobbyists and California legislators for not resolving the insurance crisis. They say large campaign contributions have contributed to a legislative log jam in Sacramento, the state capital. But the passage of Proposition 103 has prompted political action. David Roberti is President Protem of the California State Senate. He wants to compel insurers that now sell automobile insurance in California to continue selling.

DAVID ROBERTI, President, California Senate: They've got to stay here. How we can do it, well, they've got assets in California, we're going to tell them they can't pick or choose what kind of insurance they sell here. They just can't pick the kinds that they're going to make a big profit on and not sell auto insurance because they're going to be crimped a little bit there.

MR. KAYE: Some insurance companies while initially indecisive are now starting to unveil their own post election business plans. State Farm Mutual, for example, has stopped writing new auto insurance policies, but an affiliate, State Farm Fire & Casualty, is signing on new auto insurance customers at rates that are 20 percent higher, exactly the same percentage as the rollback required by Proposition 103. We spoke by phone to Company Vice President Pete Ingham in his Bloomington, Illinois, headquarters.

MR. KAYE: It's been suggested that this is simply a way to get around Proposition 103. Is that the case?

PETE INGHAM, State Farm Insurance: Well, certainly it's a way of increasing the income for the new business we take on board, and the higher number of 20 percent, we still will suffer losses on every policy we write.

MR. KAYE: How will Proposition 103 affect you?

PETE INGHAM: If it goes into effect --

MR. KAYE: If it is implemented.

PETE INGHAM: 103 by itself, we think would produce an annual loss of $500 million. Currently, we expect to lose 400 million without Proposition 103.

HARVEY ROSENFIELD, Prop. 103 Author: They're always pleading poverty, and meanwhile, their profits nationally went up 700 percent between 1985 and '87, and at the same time that their rates were going up so much that they were forcing people out of businesses. They're forcing businesses to close down; they're forcing people to be unable to drive or drive illegally, because they couldn't afford to buy the insurance that was required for their automobile. so this is an industry which constantly pleads poverty, constantly complaints it's going broke, but when you force it to open up its books, it resists, because the books will show that they're making a lot of money.

MR. KAYE: The insurance industry claims it's misunderstood, that high repair and health costs, together with high priced lawyers, have forced companies to raise premiums. Stanley Zax is President of the California Association of Insurers.

STANLEY ZAX, California Association of Insurers: The voters are disgusted with the insurance industry. I think they're disgusted with trial lawyers. I think they're disgusted with the fact that the legislature hasn't solved this problem. I think the public is totally confused in terms of having to deal with five initiatives on the same subject, and it's been very clear to us for a long period of time that the public is angry and wants some kind of changes in the system. On the other hand, it's not clear to me that the public clearly understands that the auto insurance industry is a very competitive industry, that it has not made any money in this state in a long period of time, and that the reason that the insurance companies continually raise their rates is because our costs continually rise.

MR. KAYE: While the debate between the insurance industry and its detractors continues in the political arena, much of the focus now shifts to the courts, where the constitutionality of Proposition 103 will be argued. The Attorney General of California, John Van De Kamp, has thrown the power of his office behind the backers of Prop. 103. He is asking the State Supreme Court to reverse the decision to block its implementation.

JOHN VAN DE KAMP, California Attorney General: We'd like to have the court remove the stay first of all, because we think that there are other avenues for the insurance companies to explore under the law for the relief that they claim that they deserve. They should go to the insurance commissioner, they should open their books there, they should claim whatever relief they're entitled to under Proposition 103, and then have their rates set, so to speak. 103 is not going to put them out of business.

MR. KAYE: Of all 103's provisions, the rate rollback is particularly irksome to the insurance industry.

ALLEN KATZ, Insurance Assn. Attorney: It would be just the same as if your boss came in to you and said we've decided that starting today your salary is going to be cut to 20 percent below what it was a year ago. Well, you might well say, well, fine, but I'm not coming in to work, and that is, that will be the sensible reaction of many insurance companies if this is allowed to go into effect, and the result of that will be that people cannot get insurance.

MR. KAYE: Some experts suggest it could be several months to a year before the constitutional issues surrounding Proposition 103 are resolved. In the meantime, its proponents say they are fielding calls from reform-minded activists outside California. But insurance company executives worry that if similar measures are enacted nationally, much of the insurance industry won't be able to stand the impact. ESSAY - CODE OF HONOR

MR. LEHRER: Finally tonight essayist Juan Williams of the Washington Post has some thoughts about the standards of honesty in America today.

JUAN WILLIAMS: Last spring, the U.S. Military Academy at West Point expelled a cadet who was found guilty of quibbling, telling less than the full truth in order to deceive. The Pentagon later reversed the expulsion, the punishment was judged too harsh, and the cadet graduated. But the case has not ended there. This fall, the army will appoint a panel to review West Point's honor code, but if they're to do a good job, the panel will have to go beyond the gates of the academy. There are plenty of ethical problems in America far more serious than quibbling. The old American standards of honesty and fair play that produced the honor code are themselves in need of revision. Insider trading on Wall Street continues to be uncovered, but it's not big news anymore. We've become accustomed to that brand of cheating. Two Beechnut executives are convicted for selling amber colored water as baby apple juice, a case so shameless as to be an absurdest fairytale about corporate ethics gone to hell. Steroid use among Olympic athletes and drug use among football players is so common it seems only the moralists among us continue to be outraged about it. Even those fundamentalists, Jim and Tammy Bakker, used church money to build an air conditioned doghouse and that was before the preacher was found to be an adulterer. As for politicians, it's no exaggeration to say that quibbling wouldn't get a Congressman expelled from the House or Senate or, it seems, a member of the executive branch from his post. Even the commander in chief of the armed forces has been known to quibble. Remember the time he said that no arms were traded to Iran for hostages? Last year, U.S. News & World Report found that 70 percent of Americans are dissatisfied with the standards of honesty in the nation. In the midst of all this dishonesty, I can imagine many people saying keep the West Point honor code, make it tougher, teach those young people to be honest. But it doesn't make sense to have a tougher honor code. Look. We don't have the public trust, the eye to eye contact that we had in our public relationships when this nation was younger, its institutions not so large, its public officials not hidden behind TV cameras. Today we often deal with people we've never seen before and will never see again. A Reader's Digest poll found that most auto mechanics, especially those in the big city, cheat strangers. The same is true, I bet, of people we don't know anymore, the banker, the grocery store owner, the policeman, the city councilman, the television minister. We really don't know those people and we have no reason to trust them. Yes, honesty is still critical to Americans, particularly among relatives and friends, but when it comes to dealing with strangers, experience tells us we are vulnerable to those who lie and steal. how will West Point's honor code deal with the reality of a modern America, where quibbling, if not outright lying, is an understandable response to rampant dishonesty? The panel may have to reduce its standards by asking the cadets not to lie, cheat or steal among themselves. After all, they have to trust each other, rely on each other in battle, and in army life, but if the panel tries to take that attitude outside of West Point's gates, it may find the cadets laughing at those impractical rigid old men who don't understand what it's like to live in the bump and run of a big anonymous modern society. RECAP

MR. MacNeil: Once again, the main stories of the day, Federal Reserve Chairman Alan Greenspan said federal budgets were a dangerous corrosive to the U.S. economy and must be reduced, the U.S. foreign trade deficit did come down in September by 15 percent, with a surge in exports. The Parliament of Soviet Estonia today declared the Baltic state a sovereign republic, with the right to veto Soviet laws. Good night, Jim.

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