The MacNeil/Lehrer NewsHour

Intro

JIM - nd Vice President Bush appointed a retired Navy admiral to head his task force on terrorism. Robert MacNeil is away; Judy Woodruff is in Washington. Judy?

JUDY WOODRUFF: After a rundown of the day's news we have four focus segments. First, the return of the original Coca-Cola. An analyst tells us what it will mean for the soft drink giant's fortunes. Then we get a report on how concern about terrorism is affecting the mood in Congress. Next a documentary look at the troubled island nation of Sri Lanka. And finally, did President Reagan and budget director Stockman deliberately plot big deficits? Senator Pat Moynihan says yes, Stockman's associate Lawrence Kudlow says no. Both of them join us. News Summary

WOODRUFF: The House of Representatives today passed a $25 billion foreign aid bill, marking the first time since 1981 that both the House and the Senate have managed to approve such legislation. The bill was the result of Democratic and Republican cooperation. But it was filled with language included over the past few days that reflects conservative efforts to limit U.S. aid to communist-backed governments abroad while making the way clear for aid to guerrilla forces fighting those regimes. One of those most pleased by the final result was GOP Congressman Robert Dornan of California.

Rep. ROBERT DORNAN, (R) California: I am going to support this bill for several reasons. It's below budget, and since they computerized the printing of money at the Bureau of Engraving, that becomes almost miraculous in this body. It has made stronger statements about communism than I've seen come out of this body in many years while still hitting full on the racism of apartheid. It attacks narcotics in as strong a way as I've ever seen. And it helps, helps this fight against terrorism that is barely starting. This bill ensures the survival, at least for one more year, of our finest ally in the United Nations, and the only and still very strong democracy in the Middle East. To be sure, we have to decide where those areas are that still, and they're buried deeply in some of the aid programs, jeopardize the borders of the state of Israel.

WOODRUFF: Later in the NewsHour we'll look at the reasons behind this latest conservative trend in the Democratically controlled House. In the Senate, meanwhile, members spent the day debating limited sanctions against South Africa's racial policy of apartheid. Conservative Republicans finally ended a four-day filibuster to allow an expected vote late today. The Senate bill would ban sales of computers used to enforce apartheid and block bank loans to the South African government. The House has already passed an even stricter bill. Jim?

LEHRER: Vice President Bush said today only an international effort can stop international terrorism, and he called on the other nations of the world to join the United States in doing so. The Vice President is heading a U.S. task force to find ways to conduct the battle, and today he selected retired Admiral James Holloway to be executive director of the task force. Holloway served on the Joint Chiefs of Staff in the mid-1970s. Vice President Bush made the announcement and spoke of the terrorism threat in a speech to the National Press Club in Washington.

Vice Pres. GEORGE BUSH: International terrorists are nothing, more or less, than common criminals who assault innocent men, women and children. And we will see an end to their war on open and democratic society only when we and other democracies join in to meet this challenge in a cooperative way. International terrorism requires an international response. I remember when I was ambassador to the United Nations back in '71 and '72, and it was very hard to get even a rational discussion going about terrorism, because today's terrorist is, you know, one man's terrorist, another man's freedom fighter. To some degree that still exists, but there has been a quantum sea change in the -- in public opinion in many countries since those days that makes me feel -- and some of it's been heightened, incidentally, by the TWA thing -- makes me feel that we can be successful.

LEHRER: There was more news today on one of the most grievous recent acts of suspected terrorism. The second flight recorder from the crashed Air-India 747 was recovered in water off the coast of Ireland. It contains detailed instrument readings from the plane that went down June 23rd with 329 persons aboard. It was recovered by the same robot submarine that picked up the cockpit voice recorder yesterday. Investigators hope the data from the two so-called black boxes will establish for sure whether a bomb planted by Sikh extremists caused the disaster.

WOODRUFF: Mexico, which is the United States' biggest foreign oil supplier, announced last night that it's making a sharp cut in the price of its crude oil. Officials said the cut of as much as $1.24 a barrel was in response to OPEC's failure to shore up sagging oil prices worldwide. Oil industry analysts said they didn't expect the reduction to have much of an impact at U.S. gasoline pumps, but predicted it would put significant pressure on an already saturated world oil market. And from Moscow, word that China and the Soviet Union have signed a new five-year trade agreement that will eventually double annual trade between the two countries to over $14 billion. The pact is said to be one more piece of evidence that the two countries are trying to smooth out relations with each other.

LEHRER: Another U.S. spy case broke into the open today. The FBI arrested and charged a woman CIA clerk and a male friend from the African nation of Ghana with espionage. The American, Sharon M. Scrainage, was passing on secrets about CIA activities in Ghana to Michael Soussoudis, a relative of the leader of Ghana, Jerry Rawlings. The maximum penalty on conviction is life in prison. In Sri Lanka, the island nation off the coast of India, a plot to assassinate the president was foiled today. The government said police found 260 pounds of dynamite in a van parked where President Junius Jayewardene was due to come. A group of Tamil separatists were charged with the conspiracy. One thousand people have died in violent conflicts between the Tamils and others in the last two years. We will have a full focus report on what is behind the turmoil in Sri Lanka, formerly known as Ceylon, later in the program tonight.

WOODRUFF: At least five people were killed and nine injured in two explosions in Kuwait tonight. A crowd at a seafront restaurant in Kuwait City and a densely populated residential district nine miles south were hit simultaneously by apparent bomb blasts. Police said they feared the death toll would rise even higher. The restaurant was filled with families when the blast occurred, injuring a number of women and children. Ever since 17 Shiite extremists were imprisoned in Kuwait for a series of bomb blasts there in 1983, Shiite militants throughout the Middle East have carried out acts of terrorism and demanded their release.

New Zealand says that it was a bomb that caused last night's sinking of the ship belonging to the environmental group Greenpeace. One crew member was killed when an explosion hit the ship, called the Rainbow Warrior, while it was anchored at New Zealand's Aukland harbor. The ship has been used by the Greenpeace group for the past 14 years in its protests against nuclear testing and the killing of whales and seals. We have a report from Graeme Booth of TV-New Zealand.

GRAHAM BOOTH, TV-New Zealand [voice-over]: Today it was found that the explosive devices had been attached to the outside of the hull. They'd been placed on the side of the ship nearest the wharf, according to divers, who also found damage to the wharf piers. They've seen at least one hole, measuring about two by two and a half meters, but there could be others. Salvaging the Rainbow Warrior is going to be a long and difficult job. A full assessment of the hull is expected to be made tomorrow.

LEHRER: The head of Coca-Cola said today it was a problem with passion. He and his fellow company officials underestimated the passion many people felt for the old Coke formula, so now they are bringing it back. The old will be sold as Coca-Cola Classic; the new, which was introduced in April, will continue to be sold as Coca-Cola. Coke president Donald Keough spoke at a news conference today in Atlanta.

DONALD KEOUGH, president, Coca-Cola Company: What on earth brought us to the decision to bring back the classic taste which we so calmly abandoned back in April? Well, there is a twist to this story, which it seems to me will please every humanist and will probably have Harvard professors puzzling for years. The simple fact is that all of the time and money and skill poured into consumer research on the new Coca-Cola could not measure or reveal the depth and abiding emotional attachment to original Coca-Cola felt by so many people. It's a lovely American enigma, and you can't measure it, you can't measure it any more than you can measure love or patriotism or pride.

LEHRER: We will talk more about the Coca-Cola story right after the news summary. And in another food item, the Food and Drug Administration today warned consumers to beware of a Mexican-style cheese made by Cacique Fine Foods in California.That's spelled C-A-C-I-Q-U-E. The FDA said the cheese may contain a deadly bacteria similar to the one found in another California cheese company's product last month. Sixty-one deaths and 187 illnesses were blamed on that bunch. Cacique products are sold in 13 states. The FDA warning said stores should remove them from their shelves and consumers who have the products should destroy them.

WOODRUFF: The Union Carbide Corporation today formally closed its pesticide plant in Bhopal, India. The plant became the site of history's worst industrial disaster last December when more than 2,000 people died as a result of the leakage of fumes from the chemical methyl isocyanate. Employees put out of work by today's closing occupied the plant and held a mock funeral for the U.S.-based chairman of Union Carbide. Here is a report from Rod Stephen of Visnews.

ROD STEPHEN, Visnews [voice-over]: Protesting the closure, hundreds of workers gathered outside thechemical plant. Union leaders told them they must fight for compensation or new jobs. Workers began their sit-in more than 24 hours before the plant was due to close. Six hundred employees will have to find more jobs in a market that is already overcrowded. They wanted the factory to remain open to produce soya-based products, but the government refused to block the company's decision. Posters on the factory walls show Prime Minister Rajiv Gandhi promising that those affected by the deadly gas will be given all the help they needed. That has a hollow ring in the nearby slums. Many people are still seriously ill. Chest infection is one of the most prevalent symptoms, seven months after the gas poisoning. Children are suffering eye infections. The closure of the Bhopal plant is not the end of the disaster. Those poisoned by the gas are still fighting for compensation, and now the workers who have lost their jobs begin another fight to survive. Coca-Cola: About Face

LEHRER: We look first and foremost tonight at the Coke story, the official announcement today there will now be two kinds of Coke: the old, to be called Coca-Cola Classic, the new, to be called Coca-Cola. Company officials said they had heard the voices of the people and of history and as a result the old Coke was born again, the latest act in a most remarkable consumer and marketing drama.

[voice-over] They introduced the new Coke with a human bomb and much hoopla in Atlanta last April, and the top brass of Coke insisted the new formula was now the real "real thing.'

DONALD KEOUGH, president, Coca-Cola Company [April 23, 1985]: As of tomorrow there's one Coca-Cola, and it's being shipped out of our syrup and concentrate plants to bottlers all over the United States and Canada. That's Coke.

LEHRER [voice-over]: But hundreds, perhaps thousands, of old Coke loyalists disagreed and expressed their vehement opposition to the change in a number of ways.

SINGERS: Please don't change the taste of Coke. Why do you want to fix it? It ain't broke.

LEHRER [voice-over]: They did not want to give up a tradition.

COKE DRINKER: I'm 46 years old and I bought my first Coke with a nickel when I was five years old. I helped build this multinational corporation. My oldest daughter is 22. Her first word was "Coke." Her second word was "Mommy."

LEHRER [voice-over]: Coke fans formed clubs. Drinkers began stocking away cans and bottles of the old-formula soft drink.

GAY MULLINS, Old Coca-Cola Drinkers of America: It was sweeter and it was not our original drink, our Coke. So only, though, when I found out that they were going to take it off the market, the old, and I would never be able to buy it again, did I start into action; I said they can't do that. And it made me angry and it hurt, and I felt injured. I couldn't tell you why at the time, but since then I feel it was because they took away my power of choice.

LEHRER [voice-over]: And they wrote lots of letters.

Mr. KEOUGH: But now for a bit of a humility lesson. Let me read you a few letters. Here's one from Michigan. A nurse writes: "My history with Coke covers a lifetime. I cut my teeth drinking Coke. I went to the drive-in restaurants and ordered Coke. I drank Coke for morning sickness while pregnant. I drank Coke, not coffee, studying for the final exams in nursing school. I still drink Coke for pickups and enjoyment of taste. We have brought Coke in our home by three cases at a time to be sure we don't run out."

And here's another. "Changing Coke is like God making the grass purple or putting toes on our ears or teeth on our knees."

And here's one. "Dear Sir: You have fouled up by changing the only perfect thing in the world. Before the courts fouled up by breaking the phone company, there were two perfect things, and now that you've changed Coke there are none."

Here's one that starts: "Dear Chief Dodo:" Well, I passed that along to Roberto unopened. But he told me what it said. "What ignoramus decided to change the formula for Coke? The new formula is unexciting and it's as bad as Pepsi. Burn it."

Here's a letter from California. "I don't think I'd be more upset if you were to burn the flag in our front yard."

And a real patriot writes: "Changing the flavor of Coca-Cola would be like tearing down the White House."

Here's one. "Dear Sirs: Coke has always been like apple pie and Mom, something you could count on. I'm glad the person who came up with this dumb idea wasn't around when the Mona Lisa was painted. He probably would have said that her smile wasn't big enough."

Well, these people and thousands like them have gone public with their love affair for Coca-Cola. What we want them to know is, it's mutual.

LEHRER [voice-over]: Was Coke responding hastily to unexpected consumer pressure, or maybe to a most clever and secret marketing plan?

Mr. KEOUGH: Some critics will say Coca-Cola has made a marketing mistake. And some cynics say that we planned the whole thing. The truth is we're not that dumb and we're not that smart. I wish that we had understood the deep emotions of so many of our customers. But now at least they know how deeply we care, and the truth has become self-evident. And so we hope will another truth: by the end of the year, as Brian said, we expect more than one out of every two cola drinkers -- cola drinks consumed in this country will be part of the Coca-Cola brand family. And worldwide, the Coca-Cola brand family will be enjoyed by people in 155 countries, well over 300 million times a day. So ladies and gentlemen, let the critics say what they will: the love affair goes on. In April we changed Coca-Cola and that upset many of our loyal Coca-Cola drinkers. They told us they were upset and we listened. We're bringing back the classic original formula as Coca-Cola Classic, and it'll be available soon and it will share the stage with Coca-Cola and Diet Coke and Cherry Coke, our caffeine-free versions as well as Tab and Sprite and our other products. We will always listen to the consumer. That's our business.

LEHRER [voice-over]: They accompanied the return of the old Coke with yet another multimillion-dollar ad campaign.

Mr. KEOUGH [commercial]: I'm Don Keough, president of the Coca-Cola Company. To the millions of people who've made the new taste of Coke a success, thank you. And to the millions of people who love the classic taste of original Coca-Cola, who've called us and have written, we'd like to say we hear you. We're bringing it back. The original taste of Coca-Cola returns as Coca-Cola Classic. And soon America will have a real choice: the new taste of Coke or the original taste of Coca-Cola Classic. Thank you.

LEHRER [voice-over]: And in Atlanta, home of Coke, the return of a 90-year-old taste was greeted with enthusiasm.

2nd COKE DRINKER: We saved a case of the old Coke. We've been drinking on it. We finished our last one yesterday. So I'm glad they're bringing it back.

3rd COKE DRINKER: I like the old Coke. I'm glad it's back.

TED TURNER, Turner Broadcasting: I'm glad they did it.

REPORTER: Why?

Mr. TURNER: Well, because it was a very popular drink. It was a winner. You don't cancel a winner.

LEHRER: We get more on all of this now from Martin Romm, who monitors the beverage industry for the First Boston Corporation, a Wall Street investment firm.

Is there any reason to believed that Coke intended this from the very beginning?

MARTIN ROMM: I really don't think so. I think that Coca-Cola sincerely believe that they were delivering to the consumer in the new Coke the best taste that they could make. I don't believe the cynics that feel that they were actually planning this all along. You don't upset a 99-year franchise, throw your chips up in the air, hope that they fall back in your court and then all of a sudden change the product back again.

LEHRER: But what about those who I read today were saying, well, but it's a great deal for Coke -- they end up with one Coke that tastes like Pepsi, and another Coke that tastes like Coke. It's a great deal.

Mr. ROMM: Well, the soft-drink industry has been segmenting themselves over the last several years. There have been a tremendous amount of new varieties of colas that have been introduced -- caffeine and decaffeinated, diet and decaffeinated diet products. I think that Coke sees that as an opportunity, and with the delivery of two Cokes, one to satisfy the old constituents and the other one to satisfy those that prefer a sweeter drink, they're delivering that product.

LEHRER: In other words, your analysis is, by doing what they did today they're trying to make the best out of a really bad deal, is that right?

Mr. ROMM: I think that that's probably right. The company has gone from point A before they introduced the new Coke to point B and will probably be better off for it.

LEHRER: In other words, you think this will be a beneficial thing in the long run for them?

Mr. ROMM: I think that they will enjoy an improvement in their unit volume had they had just a stand-alone product. Yes, I do.

LEHRER: In other words, if they had just stayed with new Coke, they would have lost business that they would never have gotten back, that they will get back now by putting classic back, putting the old back in, is that what you're saying?

Mr. ROMM: Coca-Cola had disenfranchised a portion of their loyal Coke consumers, and by bringing back Coca-Cola Classic they will re-enfranchise, they will bring back those consumers who were very angry and had a visceral reaction to the new product. By keeping the new product on the market as Coca-Cola, they will appeal to a broader segment of market, and net on balance, I think, be ahead.

LEHRER: President Keough and others from Coca-Cola said that they didn't anticipate this public reaction. Well, the immediate question is, why didn't they?

Mr. ROMM: The research that they conducted was almost 200,000 samples of the product. What they did was they asked people to register their preference for the taste. As you're probably aware, soft drinks are consumed in not a static environment but rather a dynamic environment, whether you're at work or at play, at home or wherever.

LEHRER: Dynamic environment meaning what?

Mr. ROMM: Dynamic means that there are all kinds of associations that are accompanying the consumption of soft drinks, and in the marketplace, where the consumer actually makes the choice, those conditions were such that the consumer had to choose with only one product. They only had one product to sample. In this instance, now they have two products. And I think that the research only showed what the preference would be if it was only one product.

LEHRER: In other words, somebody made a huge mistake at Coca-Cola, right?

Mr. ROMM: There was a mistake made in the emotional attachment that people had to the old product. And I think --

LEHRER: You mean in estimating --

Mr. ROMM: In estimating what that product's emotional attachment really was. And what has happened here is that Coca-Cola saw a window of opportunity whereby they could bring back the old product without really tampering with what the strategy is, which is to appeal on a longer-term basis to a broader segment of the market with what is now called Coca-Cola.

LEHRER: Is it such a blunder that we might see some corporate heads roll as a result?

Mr. ROMM: I think that Coke has made a bit of a blunder perhaps in a public relations sense. I think strategically their purpose for bringing out new Coke still remains very viable and very correct. In essence what may happen here is that they may have created a butterfly out of a moth, that they may in fact wind up being better for having divided the Coca-Cola product into two segments than they might have had they had a stand-alone Coca-Cola product.

LEHRER: We had a marvelous report on all of this last week. It was done by the CBC, the Canadian Broadcasting Corporation. And the president of Pepsi-Cola was on that piece and he said where Coke made their mistake in this was making such a big deal over the change in flavor. They might have gotten away with it if they had done it quietly over a period of time. Is that a correct analysis?

Mr. ROMM: I think Coca-Cola expected that they would get some public relations benefits from the announcement, and therefore they decided to do it with a great deal of coverage and splash. Perhaps they might have done better by just keeping it to themselves. However, I think at this point, having come back, brought the old product back, they really endear themselves to their consumer base. They actually say that they've heard the consumer and now they're responding to what the consumer wants. I think that has a -- says a tremendous amount for the marketing prowess of the company.

LEHRER: So don't look for any corporate heads to fall is what you're saying.

Mr. ROMM: I would suspect that there will be no corporate heads to fall from this particular action.

LEHRER: I noticed yesterday and again today the stock, the Coca-Cola stock went up. I think it was over two points today. What does that say to you?

Mr. ROMM: It says that investors are making the judgment that this overall will give Coca-Cola greater improvement in market share and a greater improvement in both their sales and earnings over the next several years.

LEHRER: So they think it's a smart deal.

Mr. ROMM: They think that it was a good judgment on the company's part, yes.

LEHRER: Now, where does Pepsi-Cola rest after all of this? Better or worse?

Mr. ROMM: Well, Pepsi-Cola actually comes off looking pretty good. I think Pepsi in fact may have some bragging rights to being number one in the cola segment for having kept their product constant. However, you know, they are faced with some challenges at this point. They have to make some determinations as to how to respond to the division of the Coca-Cola trademark -- one the classic product and one the Coca-Cola product itself. And I suspect we'll hear something from the people in Purchase over the next several weeks.

LEHRER: That's where the headquarters of Pepsi are. In fact, they said that they've got Coca-Cola on the run. Would you agree?

Mr. ROMM: No, I don't agree with that. I happen to feel that they're both very smart companies. They both enjoy substantial improvements -- substantial positions in their competitive positions. And over time, I would hate to be competing against either one of these companies.

LEHRER: Why?

Mr. ROMM: I think that they have a tremendous control of shelf space. The product segmentation seems to be going in each company's favor. Both Coke and Pepsi have tremendous distribution systems and have innovative marketing departments, which I think is evident by the recent events.

LEHRER: So the war goes on.

Mr. ROMM: So the war continues.

LEHRER: Yes, sir. Mr. Romm, thank you very much.

Mr. ROMM: Thank you.

LEHRER: Judy?

WOODRUFF: Still to come on the NewsHour, a look at how members of Congress are reacting to the recent wave of terrorism, a documentary report about an island paradise in trouble, and a debate about whether big budget deficits were deliberately created by President Reagan and budget director Stockman. Fighting Terrorism

WOODRUFF: Next we focus on the latest Washington reaction to the recent wave of terrorism. It came with today's House passage of a $25 billion foreign aid bill. It was the first time in four years that the House and the Senate both have been able to agree on foreign aid language. The House version was sponsored by Democrats and opposed by the Reagan administration. But many Republicans spoke in support of the bill. And as Cokie Roberts of National Public Radio reports, by the time it was amended the bill looked very different from how it had started.

COKIE ROBERTS, National Public Radio: "The House is ready to march on Moscow." That's the message of the foreign aid bill, according to one congressman today. He was talking about provisions in the measure which permit U.S. funding for anti-communist rebels in Angola, Afghanistan, Cambodia and Nicaragua. Republicans who started out opposing the bill ended up as its biggest supporters.

Rep. HENRY HYDE, (R) Illinois: I don't know when I started out disliking a bill as much and ending up with an almost sentimental attachment to it.

Rep. ROBERT DORNAN, (R) California: I'm going to support this bill for several reasons. It's below budget, and since they computerized the printing of money at the Bureau of Engraving, that becomes almost miraculous in this body. It has made stronger statements about communism than I've seen come out of this body in many years, while still hitting full on the racism of apartheid. It attacks narcotics in as strong a way as I've ever seen. And it helps, helps this fight against terrorism that is barely starting.

ROBERTS [voice-over]: Republicans were happiest about the decision to repeal the so-called Clark amendment, a nine-year-old ban on aid to the rightist guerrillas in Angola. Democrat Bill Gray called on the Congress to continue the ban to show its disapproval of the South African regime.

Rep. BILL GRAY, (D) Pennsylvania: If you want to prevent communism from expanding in that area, vote no on the repeal of the Clark amendment.

VOICE: Will the gentleman yield?

Rep. GRAY: And therefore clearly identify ourselves as not willing to provide military aid to the same troops that are being provided military aid by the South African apartheid regime.

ROBERTS [voice-over]: But Gray's argument was countered by another Democrat. Claude Pepper remembered Churchill's response to joining with Stalin against Hitler.

Rep. CLAUDE PEPPER, (D) Florida: Churchill said, "I think the world knows about my attitude about communism. I have the same attitude about the devil, but I'd say a few kind words for the devil if I knew he was against Hitler."

ROBERTS [voice-over]: After the vote, supporters of the Angolan rebels praised "Rambo" Pepper as their champion, and the House went on to approve one amendment after another, which made the bill more and more acceptable to conservative Republicans.

Rep. ROBERT SMITH, (R) Oregon: My amendment would tie aid to support by declaring that we will deny any requests from any nation which fails to follow our voting position in the United Nations General Assembly less often than the Soviet Union.

Rep. TRENT LOTT, (R) Mississippi: This amendment requires the Soviet Union to submit to arbitration regarding U.S. claims for damages in the construction of the new U.S. Embassy building in Moscow before the Soviet Union occupies their own embassy here in Washington.

ROBERTS [voice-over]: Even so, liberal Democrats stayed behind the foreign aid bill, mainly because of the $4.5 billion earmarked in it for Israel. They hope to get a better bill out of conference with the Senate.

Rep. HOWARD BERMAN, (D) California: And I think my colleagues on this side of the aisle can take some confidence in the fact that that will be a conference committee that will be headed by our distinguished chairman, Dante Fascell, and will contain experts and people coming from a perspective that I think represents the view of our party. There is no question that on balance and looked at in toto, this is a piece of legislation that deserves your strong support.

ROBERTS: Democrats hope a conference committee will eliminate some House-passed foreign aid provisions, such as the ones which prohibit any funds going to international family planning agencies which provide abortions. But the Senate has already decided to lift the ban against the Angolan rebels and to provide funds for the anti-communists in Cambodia. Lawmakers in both houses of Congress want to send a signal to their voters: they're ready to get tough on communists and terrorists all over the world. Sri Lanka: Separatist Revolt

LEHRER: Sri Lanka. It is not a name that falls easily from the American lip or frame of reference. And yet there is continually news from there about violence, revolution and death. Today the story was of a foiled assassination plot against the president. Police found 260 pounds of dynamite wired to a timing device in a parked van, and members of an antigovernment Tamil separatist group were arrested. The Tamils are Hindus who want their own state in the northern and eastern sections of the island country that would be separate and apart from the current government run by Singhalese, who are Buddhists. More than 1,000 people have died in the last two years in violence spawned by the separatist effort. We have a focus background report on what is happening there and why from David Devoss of the Australian Broadcasting Corporation.

DAVID DEVOSS, Australian Broadcasting Corporation [voice-over]: Sri Lanka's long history has had many influences. Most recently the Portuguese, Dutch and British came as empire builders. They left behind their names, buildings and Christianity. Before them the Arabs had come to trade, given Islam a foothold on the island. But since independence, these small minorities have been bit players in a drama where Tamil Hindus and Singhalese Buddhists have taken the main roles. Twelve million Singhalese, three quarters of the population, now have what they reckon is their proper place at the top. The Tamils, about 18 , claim discrimination in education and jobs and that they're victims of state-inspired violence. Out of this bitterness has come Tamil Elam, the creation by force if necessary of an independent Tamil state in Sri Lanka.

Dr. A.S. BALASINGHAM, Tamil Liberation Tigers: For the last 35 years our people have been pleading for a rational, civilized form of political settlement. They have sought federal system, regional autonomy, and various other forms within a unitary state. Unfortunately all the successive Sri Lankan governments have refused to accommodate the basic demands of the Tamils.

DEVOSS [voice-over]: Now that demand is just Tamil Elam, which strikes at the unity of Sri Lanka. And if the country does split, there'll be implications for India, with her own minorities, including 50 million Tamils in Tamil Nadu. What the militants want are Sri Lanka's northern and eastern provinces. There'd be two independent states and, on past performance, the Tigers will do anything to get it.

Dr. BALASINGHAM: The violence will certaily escalate unless the Sri Lankan government withdraw its armed forces from our homeland.

DEVOSS: They won't do that?

Dr. BALASINGHAM: If they don't do it, then the violence will continue. The violence will continue until and unless the Sri Lankan armed forces are thrown out from our homeland.

DEVOSS [voice-over]: To the militants, known as the Tigers, these are the enemy, Singhalese soldiers of the Sri Lankan army. Today, as usual, the army is patrolling the northern town of Vavonia. Because this is inside Tamil territory and because they're fighting guerrillas, the soldiers never know who's going to shoot at them or when a land mine will blow them to pieces. To them, every Tamil is the enemy, and likely as not a member of one of half a dozen Tiger groups that operate with freedom in Sri Lanka's north. In dealing with suspects and civilians, the army has been accused of torture, murder and rape. Many cases are documented by international civil rights organizations, but they're rejected outright by the government. There are no Tamils serving with the army at Vavonia. We were told that's because the military command here neither likes them nor trusts them.

To the Tamils, the president's track record on human rights is woeful. After the '83 riots, they say, he has done nothing to track down and punish those of the security forces who were involved in the killings and burning. The Tamils see him as trapped by the Buddhist chauvinism of his Singhalese ministers. The president fears that if he gave major concessions to the Tamils, the Buddhist clergy would give their support to his opposition. As for Tamil opposition in Sri Lanka, there is none. Those Tamil politicians who stood for Elam were thrown out of Jayewardene's Parliament and found refuge in India. The man who must defeat the separatists sits today at the right hand of his president.

LALITH ATHULATHMUDALI, National Security Minister: I have said repeatedly that as far as we are concerned, we seek a political solution acceptable to all the parties of Sri Lanka. However, we are aware that the terrorists do not want a political solution. They want a military solution, they want a terrorist solution. They have said so publicly. In such a situation we have no alternative but to prepare for that threat.

DEVOSS [voice-over]: The east coast has some of the best tourist country in Sri Lanka. This is what the foreigners pay to see. But although it was nearly high season, the hotels were empty, the tourists frightened away. The people here are either Tamil or Moslem, and they share a province that's known peace for centuries. But for three weeks in April, communal violence worked its way north, village by village. For the first time, Sri Lanka's Moslem minority was set against their Hindu Tamil neighbors.

[on camera] If you ever needed proof that they expected big trouble in this area, look at the police stations. In the eastern province, every police station that we've seen looks like this, an armed camp with barbed-wire, no man's land, sandbags and gun emplacements. Here in the town of Eruval, the police station sits between the Moslem and the Tamil communities. Behind these fortifications are about 70 men. Forty are policemen. Thirty are special task force commandos that are so feared by the Tamils.

[voice-over] Despite the jungle greens and the armor lights, the commandos are not army. Unlike their fellow police, they're controlled directly from Colombo. The commandos were reluctant to cooperate, though one did say there were as many as 400 guerrillas in the jungle out west. He said the best way to get rid of them was to surround the area and bomb. He admitted that civilians might be killed during such operations, driving Tamil youth into the arms of the Tigers. When we arrived at the Tamil village of Kharatuvu, we began to understand what was happening to these people. George, our Singhalese driver, translated.

[interviewing] What did he say?

GEORGE: He says, "Now, this problem occurred on Friday and it was continuously for three days."

DEVOSS: What do you mean by problem, what was happening?

GEORGE [translating]: "It is the fight between two races, Tamil and Moslems.

DEVOSS: Whose village is this?

GEORGE [translating]: "There are Tamils on one side -- is two villages, where these people are living together. Last Friday they have this fight among themselves for three days. This is the hour about 10, 15 people were burned to death."

DEVOSS [voice-over]: It was also in Kharatuvu, in the ruins of a vandalized Hindu temple, that we heard the first stories of police involvement -- accusations that the special task force commandos had helped the Moslems launch their attack.

[interviewing] They bombed the temple and did all this damage to the temple?

GEORGE [translating]: "Yeah, yeah. Two bombs, and they helped set fire later on. And after, people run away."

DEVOSS: And who did this?

GEORGE [translating]: The Moslemalga. Commandos.

DEVOSS: The commandos did this?

GEORGE [translating]: "The commandos and Moslemalga get together."

DEVOSS: You're saying the police did this?

GEORGE [translating]: "Commandos."

DEVOSS [voice-over]: From the temple on the main road we were taken into what remained of Kharatuvu itself. Because of the extent of the damage to their homes, people were camped in school buildings, refugees in their own village. Already along the east coast, there were 25,000 of them. From these people time and time again we heard the same story about the commandos.

Dr. BALASINGHAM: Of course in a war of this nature, killing is unavoidable, and I think we have succeeded in demoralizing the armed forces.

DEVOSS: What's the bottom line for your particular movement? What's the least you will accept?

Dr. BALASINGHAM: We have come to a stage that our minimum demand is Elam, that is, we will never opt for any other alternative other than the establishment of an independent state. That is our final demand.

DEVOSS [voice-over]: Since making this report, 47 Tamils were murdered at Jaffna by a Singhalese mob. Here at Anarajapura, 146 Singhalese were murdered by Tamil Tigers. And the killing goes on.

LEHRER: That report by David Devoss of the Australian Broadcasting Corporation. Since his report was made there have been talks between the government and representatives of five Tamil organizations. A ceasefire has been in effect for four weeks during those talks, but it is not yet clear how today's failed presidential assassination attempt will affect matters now. The Deficit: Plan or Ploy?

WOODRUFF: Tonight's final focus segment looks at a new dispute about an old problem: the federal deficit. On Tuesday, budget director David Stockman submitted his resignation, reportedly frustrated by Congress' failure to make major cuts in government spending to combat the growing deficit. Yesterday, one member of Congress who was a longtime friend of Stockman's, Democratic Senator Daniel Patrick Moynihan of New York, charged that Stockman had confessed to him several times over the past few years that the Reagan administration deliberately let the deficit grow by cutting taxes, in hopes of forcing a major cutback in government programs. Stockman issued a statement afterward that did not deny the Moynihan charges but said simply that he, Stockman, has a reputation for candor and Senator Moynihan has a talent for embellishment. Senator Moynihan is with us tonight to explain his charges, and so is a close associate of Stockman's, Lawrence Kudlow. Mr. Kudlow served under Stockman from 1981 to '83 as chief economist and associate director at the Office of Management and Budget. He is now an economics consultant here in Washington.

Senator Moynihan, let me begin with you. Mr. Stockman says that you have a talent for embellishment. Is that what happened here?

Sen. DANIEL PATRICK MOYNIHAN: Well, as you said Dave didn't deny the proposition, and let me say, let's go to the President's words and let us also remember we're going back to early 1981 and a kind of strategy which the administration in good faith within itself brought to Washington. On the fifth of February, 1981, the President spoke to the nation on television, his first address since his inaugural. And these are his words. He said, "There are always those who told us that taxes couldn't be cut until spending was reduced. Well, you know, you can lecture your children about extravagance until you are out of voice and breath, or we can cut their extravagance simply by reducing their allowance." That's the President of the United States. And the plan was to have a moderate deficit. The point was the revenue projections weren't real, and Mr. Stockman said that at the end of the year to Mr. Grieder in the Atlantic Monthly.

WOODRUFF: So you're saying the President himself said initially we're going to be cutting taxes and we know that's going to mean an increase in the deficit?

Sen. MOYNIHAN: That's right.

WOODRUFF: You're saying he acknowledged that right away?

Sen. MOYNIHAN: He said so. And having -- being short of revenue, you would then say you had to cut programs. What happened was the shortage went out of control, and from maybe a $40 or $50 billion planned deficit, it got suddenly to what David Stockman has said is a $200 billion as far as the eye can see. A different situation now, but if we're going to understand the situation today, I think it helps to see how it began.

WOODRUFF: So what is it that you're saying that Mr. Stockman said to you over that time, that he wasn't saying publicly?

Sen. MOYNIHAN: Well, the issue was, you surely don't believe this proposition that if you cut taxes you're going to raise revenues. And the acknowledgment from not just Dave Stockman but people around him in the Treasury was that we know better than that.

WOODRUFF: Private acknowledgment.

Sen. MOYNIHAN: A private acknowledgment. We know better than that. You do not get increased revenues from decreased taxes.

WOODRUFF: But publicly they were saying supply-side was going to lead to growth -- rather that cutting taxes, a supply-side philosophy, was going to lead to growth in the economy and was going to help reduce the deficit. That was the public line.

Sen. MOYNHIAN: That was the public line.

WOODRUFF: You're saying he was putting out a different line privately.

Sen. MOYNIHAN: And the projections of revenue, which my friend Larry Kudlow was involved with in the President's first statement here in 1982, in March of '81 for '82, show us that here in '86 we would have about $940 billion in revenue. If we did, we'd practically have a balanced budget.

WOODRUFF: Let me ask you, though, about what you said. Why did you choose to make this public at this time?

Sen. MOYNIHAN: Well, Dave spoke to the New York Stock Exchange last week, and I think he said the right thing. He said, "The basic fact is that we are violating, wantonly, badly, even wantonly, the cardinal rule of sound public finance, which is that governments must extract from the people in taxes what they dispense in benefits. He said that the way we've been doing it, if the FCC had jurisdiction over us, some of us in the executive and the legislative would be in jail."

WOODRUFF: But Senator, regardless of what he's saying now, you're pointing out something that he was saying privately back then -- why say it now, just after he resigns?

Sen. MOYNIHAN: I don't think we can understand the -- what we have to do about the present deficit if we don't see that it arose from basically a hidden agenda to have a moderate deficit that would be used as the way to force -- to shrink government. And it didn't work out that way.

WOODRUFF: Mr. Kudlow, was there a hidden agenda back then? You were there at OMB.

LAWRENCE KUDLOW: Yeah, really, this is an interesting tempest in a teacup, I think, but I suppose as a historical footnote it deserves some clarification. I don't really agree with Pat's synopsis or analysis at all, and I think there's a lot taken out of context here. First of all, on the matter of the deficit estimate, you really give us too much credit. If we could have controlled it to our liking, we would have met our original objectives, which was to have a balanced budget by 1984. And never at any moment did we suggest either publicly or privately that we actually wanted a wider deficit. We showed a steady narrowing.

WOODRUFF: Well, he is saying -- Senator Moynihan has said that's what David Stockman told him.

Sen. MOYNIHAN: I think I have to interject. I didn't say a wider deficit. Larry's quite right. They never in any -- in their wildest dreams thought they would get to $200 billion, nor did we in the Congress.

Mr. KUDLOW: And that raises a second point on this matter of the deficit. The largest factor influencing the deficit in the early 1980s -- '81, '82, '83 -- was really not any part of the Reagan fiscal program. Ironically enough, it was the large recession that the economy experienced. And on this point, and I think this is worth looking at a historical footnote, it's impossible -- I hope there's a lesson in this for the future -- you can't go from the kind of hyperinflation we had in the 1970s under the Carter administration and then try to make a correction, which is what the whole country and the whole world wanted the United States to do, without paying some economic costs. And really the particular analytical issue here was that going from high inflation to low inflation pushed the economy into a recession, and the effects of this disinflationary adjustment were wider and deeper and longer than anybody thought. And this caused a substantial shrinkage in the revenue base that nobody, I mean nobody in the economics profession, neither the CBO nor the OMB nor the House and Senate budget committees, imagined would happen. And then this is really what was driving the shift in revenues, in GNP.

WOODRUFF: If that's the case, why did Mr. Stockman not come out and acknowledge what Senator Moynihan said? He just said the senator has a talent for embellishment.

Mr. KUDLOW: Well, look, I think Dave is now buttoning down the last details, closing the desk, moving the papers around. I don't think he wants to get into a slugfest over what is at best really a historical footnote. But I think there's another question here, and I do want to try to make this clear, at least for the record in terms of the policy. I was there at the beginning of the formation of this thing. The fact remains that the Reagan administration always sought to reduce spending and tax rates at the same time. In the original white paper published in February 1981 and subsequently in future budget documents, we always argued the need for simultaneity -- that's the catchword we used. We never suggested for a moment that we would cut taxes first, enlarge the deficit and then force spending cuts.

WOODRUFF: But Senator Moynihan, aren't you saying that they knew good and well that cutting taxes might not --

Sen. MOYNIHAN: What does the President say on February 5? He said you can -- "We are told you can't cut taxes until you cut spending. But I say what do you do with a child's extravagance? You can talk 'til you're out of voice and breath, or you can cut his extravagance by cutting his allowance."

Mr. KUDLOW: But this is --

Sen. MOYNIHAN: Larry, can I just agree on one point here, agreeing with you and see if you wouldn't follow me; that when the Federal Reserve looked at these revenue projections, they didn't believe them, and they tightened money very sharply in 1982 and that helped --

Mr. KUDLOW: '81.

Sen. MOYNIHAN: Eighty-one. And that brought on the '82 recession to a real degree, and so those -- that was a depression; it was the sharpest drop since the '30s. And indeed that cut revenue, but it was these revenue projections which were not believed, and in my view weren't believable --

WOODRUFF: Weren't believed within the administration.

Sen. MOYNIHAN: Weren't believed in the Federal Reserve.

WOODRUFF: What about within the administration? Is that your point?

Mr. KUDLOW: At the time, and again, I'm not sure what the value of this debate is, but at the time there were disagreements about revenue estimates. There are always disagreements about revenue estimates. But the point I'm making is there were not major disagreements about revenue estimates. All the forecasters, including the Federal Reserve, expected a soft economy in 1981, not a major recession. And what we all miscalculated at the time was moving from this hyperinflation to disinflation. That's really the major issue.

WOODRUFF: Senator Moynihan, let me get back to your basic -- one of the basic points you raised. If what you are saying is true, doesn't David Stockman turn out to be a rather duplicitous person? I'm asking. Because if he was saying one thing --

Sen. MOYNIHAN: No, he does not. I think we just --

WOODRUFF: -- publicly -- then what exactly --

Sen. MOYNIHAN: He was saying, when you asked him, as one did, what did the President mean when he said if you cut their allowance, you will end their extravagance? Did he mean we will reduce -- this tax cut is not going to increase revenues, as many people said, it's going to cut revenues. He said, "Of course."

Mr. KUDLOW: Yeah, but look, here, too, I think you're taking this way out of context. As I said, the idea was to cut spending and tax rates at the same time, not to shift one after the other. And that's why I think you've taken this out of context. But let me make another important point. At no time did Ronald Reagan to my knowledge, in any of our official documents that he signed off on, or David Stockman, argue that we were essentially presenting a Laffer curve on a napkin. I mean, that may have been around, but that wasn't our view.

WOODRUFF: The Laffer curve being the supply-side theory.

Mr. KUDLOW: Well, no, the Laffer curve being one particular exaggeration of a classical economic view. You see, the administration's position was, marginal tax rate reduction is a good idea. Not because we think it's going to generate massive new revenues, but because it'll make the economy more efficient and create growth. There's a difference.

WOODRUFF: For those out there who don't understand sophisticated economic policy, you're saying that the administration was saying one thing publicly and it was believing and saying the same thing privately?

Mr. KUDLOW: No, no. Yes, I'm saying there was an internal consistency. That is to say, the reason you cut tax rates is not to expect tax revenues to go up. You cut tax rates in order to create some incentives for growth. And then the growth creates a revenue increase throughout the economy.

Sen. MOYNIHAN: Larry, in the campaign the President would say we will take the increased revenues that come from the decreased taxes and use that to build up our defenses. He kept saying it.

WOODRUFF: All right. But just again -- we've got just a short period of time left. Your original point was that the administration had a hidden agenda.

Sen. MOYNIHAN: That's right, and it got out of control.

Mr. KUDLOW: I strongly disagree. I strongly disagree, and I think we were quite consistent, externally and internally.

WOODRUFF: Well, how do you account for what the senator said, then?

Mr. KUDLOW: Well, because I think the senator has taken a lot of this out of context, and I don't think anyone expected any revenue miracles.

WOODRUFF: Have you taken it out of context?

Sen. MOYNIHAN: I'm quoting the President on 5 February, 1981.

Mr. KUDLOW: That's why I love historical footnotes.

WOODRUFF: Gentlemen, thank you both for being with us, Lawrence Kudlow, Senator Patrick Moynihan.

Sen. MOYNIHAN: Thank you, Judy.

WOODRUFF: Jim?

LEHRER: Again, the major stories of this day. The second black-box flight recorder from the crashed Air-India jumbo jet was found in the Atlantic off the coast of Ireland. Vice President Bush said only an international effort can stop international terrorism, and he selected retired Admiral James Holloway to run a U.S. terrorism task force. And the House voted to repeal the ban on aid to antigovernment guerrillas of the African nation of Angola.

Good night, Judy.

WOODRUFF: Good night, Jim. That's our NewsHour for tonight. I'm Judy Woodruff. Thank you and good night.