The MacNeil/Lehrer NewsHour

MR. LEHRER: Good evening. The Middle East crisis again leads the news. Pres. Bush said he saw no quick diplomatic solution to the crisis. He defended U.S. Naval interdiction forces in the Gulf, but said he would consider putting them under a joint U.N. command, and King Hussein of Jordan flew to the United States with a letter from Saddam Hussein to Pres. Bush. We'll have the details in a moment. Robin.

MR. MacNeil: In tonight's program, the State Department's spokesman on the Kuwait crisis, Undersecretary Robert Kimmitt, joins us [FOCUS - DIPLOMATIC SOLUTION?] for a News Maker interview. Then an in-depth look at the impact of the crisis [FOCUS - ECONOMIC IMPACT] on the U.S. economy and budget. Business Correspondent Paul Solman tells us why this isn't like the oil crisis of the '70s. But will it push the U.S. into recession? To answer, we have four White House economists, Alfred Kahn and Lyle Gramley from the Carter White House, Martin Feldstein and Murray Weidenbaum from the Reagan administration. To close, Essayist Roger Rosenblatt [ESSAY - ANY LIKENESS?] looks at Saddam Hussein. NEWS SUMMARY

MR. LEHRER: Pres. Bush spoke out again today about the crisis in the Middle East. He said he saw no quick diplomatic solution and defended U.S. interdiction forces in the Persian Gulf. He held a White House news conference this afternoon after his return from his vacation home in Maine.

LAURENCE McQUILLAN, Reuters: Mr. President, is there any hope at all of a diplomatic solution to this crisis?

PRES. BUSH: I don't see it right now, but as the sanctions begin to take effect, and it's going to take a while, I would hope there would be a diplomatic solution to this crisis.

MR. McQUILLAN: Sir, like the other day when Saddam Hussein offered his proposal, which I realize was totally unacceptable to you, I mean, could that serve as a basis for perhaps some type of negotiation?

PRES. BUSH: I don't think just any proposal serves as a basis for negotiation. No, I don't see enough positive elements there to think that that would a basis for a negotiation at all. It was bringing in extraneous problems and it did not address itself to the fundamental problem, which is that they took over Kuwait and that they got to get out of Kuwait and they've got to let their rightful rulers return to Kuwait, so I don't see that as a possibility to negotiate from that, those proposals at all.

WYATT ANDREWS, CBS News: Mr. President, you have ambassadors coming to the State Department presumably to discuss a U.N. multinational quarantine or interdiction, whatever word you want. Is it now the policy of the United States to potentially submit to a joint U.N. command, or to reflag U.S. ships under a U.N. command?

PRES. BUSH: That is not the plan right now, but we are talking to see how we can make this Naval presence most effective. But that what you said there is not the policy of the United States.

MR. ANDREWS: Well, sir, may I ask, do you consider in any, there are reports out of the U.N. that there is some criticism that you have acted unilaterally and perhaps outside your legal authority in the de facto blockade that's going on, do you consider that you've had your hand slapped?

PRES. BUSH: No, I don't think so at all and I think we're acting legally, so this little meeting that was called by Cuba yesterday doesn't disturb me in the least. I mean, there can be differences, people can discuss them, but I'm convinced we're acting properly and we're determined to continue to act in that manner, and I have no intention to change at all. I think it's important that others join in and do their part, which most of them are doing in their determination to see that commerce does not continue.

GERALD SEIB, Wall Street Journal: Do you think it will be necessary at some point to shop ships going into Aqaba because that is a potential lifeline?

PRES. BUSH: I think at some point it might well be. If it's a hole through which commerce flows in an otherwise tight net, I would certainly think that Aqaba should be closed to Iraqi commerce.

MR. LEHRER: Aqaba is Jordan's port on the Red Sea. The Iraqi government newspaper called the Naval blockade of Iraq "flagrant piracy" and said it would be broken by military action. Another Iraqi freighter was turned away from a port in the Persian Gulf. Authorities in the United Arab Emirates refused the ship's request to enter the harbor at Dubai. Earlier in the day a mine alert was issued after a U.S. Navy ship spotted an Iraqi freighter moving suspiciously. Officials later cancelled the alert. No mines were found. Iraq mined Gulf waters during its eight year war with Iran. Italy, West Germany, Spain, and Belgium may add their ships to the Gulf fleet. The Italian foreign minister said representatives of the four countries will meet next week in Paris to decide. Seven nations, including the United States and the Soviet Union, have already committed military forces to the region. Robin.

MR. MacNeil: And Syrian troops began arriving in Saudi Arabia today to join U.S., Egyptian, and other forces. It's not clear how many Syrian troops are there or where they're deployed. They arrived as the U.S. troop build up in the area continued. The Pentagon announced that more Marines and Air Force planes arrived in Saudi Arabia today, including an AWACs radar plane and tanker and reconnaissance planes. Kwame Holman narrates this report with pictures of the U.S. force in Saudi Arabia taken by the official news media pool.

MR. KWAME: This was the view last night seen by arriving U.S. troops and the press pool accompanying them. The Pentagon won't release troop locations, nor characterize the size of the force moving into Saudi Arabia, but there clearly is a substantial growing U.S. presence augmenting Saudi forces at their bases. Soldiers said whatever the mission, they're ready.

SOLDIER: We've got a job to do and we might as well do it and do the best we can.

SOLDIER: We'll just sit by and we're waiting right now.

MR. KWAME: Daylight brought customary 100 plus degree temperatures and a broader view of the U.S. operation in the vast Saudi desert.

SOLDIER: I'm from Southern Utah, and it's about the same temperature out there in the desert, about 105 degrees in the summertime, dry heat, so it's not too bad.

MR. KWAME: The Americans are here to protect Saudi Arabia and its massive oil reserves. At the entrance to one military outpost, U.S. soldiers took precautions against an Iraqi military or terrorist attack.

SOLDIER: Any time that a vehicle comes on the post we want to ensure that there is no foreign objects placed in that vehicle the owner may not even be aware of, just normal procedures that we take to counteract any type of terrorists. Of course, we can't completely stop it, but we can minimize its effect.

MR. KWAME: American soldiers also reinforced Saudi positions. A commander maintained the armed forces careful silence about most details of the U.S. mission.

SOLDIER: The rules of engagement obviously are sensitive. I mean, this is a Saudi installation, we're assisting them, and the rules might be a little different if it were U.S. forces and U.S. installations, because it would be very clear what we had to do.

MR. KWAME: In addition to preparing to weather the desert heat, soldiers are getting ready for the possibility that a confrontation with Iraq could mean encountering chemical weapons. Troops might have as little as 10 seconds to react to a chemical attack.

MR. MacNeil: Defense Sec. Dick Cheney talked today about the threat of chemical weapons from Iraq. He spoke to reporters after visiting the 24th Light Infantry Division at Ft. Stewart, Georgia. The unit will soon be heading to Saudi Arabia.

DICK CHENEY, Secretary of Defense: I think from the standpoint of our forces, their training, their equipment, that we are, indeed, prepared to deal with a chemical attack should that occur. I would not want to speculate on exactly how we might respond over and beyond our defensive measures. Obviously, the U.S. military has a wide range of capabilities that could be brought to bear against Iraq should Saddam Hussein be foolish enough to try to use chemical weapons on American forces. That range of options is available to the President. He's the one who would make the decision about what kind of response would be appropriate.

MR. MacNeil: Cheney will go to Saudi Arabia on Friday to visit U.S. troops and confer with King Fahd.

MR. LEHRER: Jordan's King Hussein is on his way to the United States for a meeting with Pres. Bush. They will meet at Pres. Bush's vacation home in Kennebunkport on Thursday. White House Spokesman Marlin Fitzwater said the meeting was requested by King Hussein in a phone call to Pres. Bush last night. Jordan today did allow more trucks with supplies to pass to Iraq in defiance of the embargo. The trucks were loaded at the Jordanian Port of Aqaba, driven to Amman and then on to Baghdad. We have a report on Jordan's role in this crisis narrated by Roderick Pratt of Worldwide Television News.

MR. PRATT: King Hussein left Amman for Washington with what government officials say are new proposals to end the Gulf crisis. The King has just returned from Iraq, and it's believed he's carrying a message from Pres. Saddam Hussein. The ground swell of support for the Iraqi leader is welling up across the Gulf region. In Amman and other cities around Jordan, there were anti-American demonstrations. In this Town of Zaqa, several thousand Egyptian workers marched in support of Iraq and the King. The name of Saddam Hussein is on everyone's lips and his face appears everywhere. Jordanian newspapers don't try to be impartial. They run pro-Saddam articles on their front pages. Saddam fever has reached as far South as the Sudan, where several thousand people demonstrated in the capital Khartoum. They marched to the American embassy and demanded the withdrawal of foreign troops from Arab lands. It was the second pro-Saddam demonstration there in the last few days.

MR. MacNeil: The U.S. government today issued a warning for Americans stuck in Kuwait. The Voice of America urged them not to try to cross into Saudi Arabia because of the danger. It said when an orderly evacuation of Americans is possible, they'll be contacted by phone or radio. Twenty-five hundred Americans are still in Kuwait. FOCUS - DIPLOMATIC SOLUTION

MR. LEHRER: We go now to an official U.S. update on the crisis in the Persian Gulf. It comes from the No. 3 man at the State Department, the Undersecretary for Political Affairs, Robert Kimmitt. At Pres. Bush's request, he convened a meeting today of officials from China, France, Great Britain, and the Soviet Union to discuss ways of protecting ships in the Gulf from possible Iraqi attack. Mr. Secretary, welcome.

ROBERT KIMMITT, Undersecretary of State: Thank you, Jim.

MR. LEHRER: Was anything decided at this meeting today?

SEC. KIMMITT: Well I think at the meeting the five representatives reaffirmed our desire to continue to actively implement the UN economic sanctions. We discussed the Soviet suggestion of the UN Military Staff Committee playing an appropriate role particularly in regard to Navel forces that are assembling in the Gulf and the decision that was reached is that these discussions should continue among experts in New York.

MR. LEHRER: So no decision was made to set up a joint UN Command that the United States forces and all the others would serve under?

SEC. KIMMITT: No I think the general understanding was that we are looking for the most effective way to enforce these sanctions. Certainly we would like it to be through individual and collective implementation far short of the use of any form of force. I think that you mentioned earlier in your segment ships being turned away from ports. I hope that continues to happen because so long as there is no Iraqi trade on the high seas you don't even reach the question of Naval intradiction . I think where you go beyond this point is a question of practical means to enforce these sanctions.

MR. LEHRER: Based on the meeting today are you convinced the best way and the most practical way to do it is through a unified UN command?

SEC. KIMMITT: No. As is said we are willing to discuss that. Certainly I think that we want to maintain the unprecedented solidarity that we have among the international community in general. The permanent five members that you mentioned in particular and if a UN Command or any other devise retains that solidarity and leads to implementation then certainly we would want to explore it.

MR. LEHRER: We are talking about the permanent members of the UN Security Council, the UNited States and the other four that I mentioned. Did they say to you Mr. Secretary it would certainly help the situation a lot if the United States got of the unilateral thing and we did it under a UN Command structure?

SEC. KIMMITT: Not at all. What I explained was our position that under article 51 of the UN Charter that any nation like Kuwait that is attacked may request assistance in its collective self defense and in this case including implementation of UN resolution 661 on economic sanctions. That gives us a very sound basis for proceeding. Those that are there including ourselves have committed forces to this effort.

MR. LEHRER: But the Soviet Union said very specifically they would not involve their ships in any kind of intradiction effort unless it was under UN Command. Did they repeat that position to you today?

SEC. KIMMITT: They did not at this meeting. The Soviets have made clear to us in fact what Foreign MInister Schevernadze mentioned to Secretary Baker last week they want to explore if the Military STaff Committee of the United Nations could play a role to make this implementation more effective. This was all the detail that we got into today. I think the detailed discussions will take place in New York.

MR. LEHRER: But for a practical matter will that happen?

SEC. KIMMITT: I think that at this point I would like to say that we are pointing toward the goal of an effective implementation of these sanctions. We want to cut off revenues to Saddam Hussein that are not being used to feed his people but to fuel his war machine. We are going to take all necessary and proportionate measures to that but again if we continue to see effective implementations by others through out the World I think this question of Naval interdiction will begin to pale in comparison. Are we prepared to do it yes. Is there an appropriate role for the UN to play. Certainly we will continue the discussions.

MR. LEHRER: Why is King Hussein coming to Washington tomorrow?

SEC. KIMMITT: Well he asked to come to see the President. The President welcomed him. I think that he would like to discuss the situation in the Gulf generally. Jordan's views specifically. And we have seen reports from Amhan from Jordanian Spokesman that he has a message from Saddam Hussein. As the President indicated we are prepared to listen to a friend of the United States like King Hussein at any time.

MR. LEHRER: he is a friend of the United States and yet he is not abiding by the embargo is he?

SEC. KIMMITT: he has stated that Jordan will abide by the embargo. We have had detailed discussions with Jordanian Officials about appropriate implementation. I think those discussions will continue with the King.

MR. LEHRER: And yet there are convoys of trucks going through Jordan as we speak to Iraq in violation of the embargo?

SEC. KIMMITT: As the President said if that was taking place it would be in violation of the embargo but I think that we would want to talk directly with King Hussein and other Jordanian Officials about that subject.

MR. LEHRER: Is the United States prepared to say King Hussein you have to make a choice. You are either with us or against us on this. You can not play it both ways against the middle?

SEC. KIMMITT: I think that we will make it clear to King Hussein that there is a right side on this issue. The right side is not with Saddam HUssein and Momar Khadafi and other people who have supported the Iraqi aggression. Rather it is on the side of the international community which has come together in a virtually unprecedented fashion to condemn this aggression and call for an unconditional withdrawal from Kuwait and that is the side that we think King Hussein is on and will want to be on.

MR. LEHRER: But is the United States prepared to put some muscle behind those words. For as we speak Jordan gets a lot of aid from the United States. Is the President prepared to say you have to fish or cut bait on this one.

SEC. KIMMITT: I think what the President will say to the King is that he is a member of the UN. The UN has vote unanimously to impose economic sanctions against Iraq as a responsible member of the World community and the UN Community we expect him to live up to that.

MR. LEHRER: And yet as we just saw in this report the Jordanian Newspapers which are controlled by the Government meaning the King are pro Saddam Hussein, there are pro Saddam Hussein demonstrations all over Jordan. That must be terribly upsetting to you and the rest of the US Government.

SEC. KIMMITT: Well I think that I would like to let the King speak for himself when he is with the President on THursday. Let me say, however, that Saddam Hussein is responsible for more Moslem on Moslem violence than we have seen in decades. There are horific stories coming out of Kuwait in terms of the violence being visited on Moslems including women and children. That is the real focus of the debate the brutal aggression, the brutal occupation of Kuwait. That is a story that I think has to get out to the people of the Arab world particular since Saddam is now trying to put on the veil of a Holy Man urging a Holy War. This is a secular leader, always has been. Never had much time for religion in his war with Iran. Now he finds it convenient. I would ask how religious is it to Kill men, women and children unarmed in Kuwait. That is where I think the focus of the Arab Anger should be.

MR. LEHRER: But it isn't it. Is it?

SEC. KIMMITT: I think that it is not quite to the extent that it should be but I think that is something that not only we but the vast majority of the Arab Nations who voted to condemn Saddam Hussein's actions are working on right now.

MR. LEHRER: What is the latest on how Saddam Hussein and his people are treating the American citizens still in Iraq and Kuwait?

SEC. KIMMITT: We have no evidence whatsoever of mistreatment of American citizens.

MR. LEHRER: Do we have good information on that?

SEC. KIMMITT: I think that we do. Our people in Kuwait and Baghdad that is our diplomatic personal really have as their principle mission right now the welfare of those American citizens. They are in touch with them to the extent that they can.

MR. LEHRER: Do they have access to them or are they being prevented in talking to them?

SEC. KIMMITT: I have no reports of any refusal of access to Americans. But the fundamental fact is the Iraqis have an obligation to let those people leave and their own spokesman said they are free to leave. I think that it is high time for the Iraqis to live to their obligations and own statements and let people leave.

MR. LEHRER: As a practical matter what happens when an American citizen says I am ready to leave. What happens. Who tell him that he can not go?

SEC. KIMMITT: I think that as a practical matter he applies or she applies for an exist visa from the Iraqi authorities and thus far they have just not been processing those very expeditiously, given all sorts of bureaucratic reasons for not doing it. We are told that they are going to make yet another announcement about guidelines effecting the withdrawal of foreigners from Baghdad and from Kuwait tomorrow. It remains to be seen. But I would note this is not something just against Americans but all foreigners. But I think that we and other nations are working very hard to get our citizens out.

MR. LEHRER: The Voice of America warned American in Kuwait to sit tight and play it cool and not try to escape. What was that all about?

SEC. KIMMITT: Well as you know there was a British subject killed at the Kuwait Saudi border trying to leave, not flea trying to leave the country as any person should be free to do. I think there was concern and it was reflected in the VOA Broadcast people had to understand the danger of trying to move out without that written permission. So I think the suggestion was if people were doing it they were moving in to a dangerous circumstance.

MR. LEHRER: There was a report in the New York Times that the UNited States had asked Israel to quote keep its head down and its gun holstered. Is that the United States position toward Israel right now.

SEC. KIMMITT: I have never heard that statement made. I think that our relationship is well known throughout the World. I think that we have had a good set of exchanges with the Israelis during the course of this matter but I think that they and we are striking the appropriate posture.

MR. LEHRER: Which is for them to keep their head down and gun holstered?

SEC. KIMMITT: Well that is your characterization. I think I would say the Israelis have responded appropriately to a dangerous situation in the region.

MR. LEHRER: Is there any sign that Saddam Hussein is any closer to leaving Kuwait than the day he went in their last week?

SEC. KIMMITT: I would say that although the proposals that he has made bear no relation to reality. That is some of the diplomatic suggestions that he has made. At least he is talking about something other than annexation, unification over Kuwait. So I think that in a diplomatic sense he is at least thinking of other options. And we are open to diplomatic solutions he has to understand that necessary preconditions are his withdrawal complete from Kuwait and restoration of the Kuwait Government. Saddam Hussein has over 8 divisions in Kuwait over a 125,000 men. I don't think in a military sense he is any closer to withdrawal.

MR. LEHRER: What the American people always want to know and have always wanted to know as long as this crisis goes on are we any closer today to a military confrontation or are we further away can you give us a temperature for that feel today?

SEC. KIMMITT: I think that the President made the deployment decision that he did to deter war and to be able to respond if attacked. I think that as each day goes by and we get additional U.S. and other forces on the ground. You might say there are forces from 15 nations in Saudi Arabia, in the Gulf or on the way. I think that as each day goes by our deferent capabilities rise significantly and with that I hope the risk of aggression would diminish. Saddam, however, is some one who has lied before about his intentions. In my own view until we start seeing withdrawal of those forces, those 125,000 plus men that he has there. I think that we have to keep our guard up and that is what I think the men and women of the armed forces are doing.

MR. LEHRER: Mr. Secretary thank you.

SEC. KIMMITT: Thank you Jim. FOCUS - ECONOMIC IMPACT

MR. MacNeil: Now the economic side of this. Pres. Bush turned to partisan budget politics today. He challenged the Democrats to come up with a proposal to cut the deficit without cutting into the nation's national security interests. But the budget deficit is only one of the economic worries that's front and center now. The high price of oil has a lot of experts predicting a recession. In a moment we hear from four past Presidential advisers about whether or not there are tough economic times ahead. First this report from Special Business Correspondent Paul Solman about the dangers of oil crises past and present.

MR. SOLMAN: The Yam Kippur War of 1973, Egypt attacks Israel, which is backed by the West. OPEC retaliates by cutting production roughly 10 percent. The governments and consumers of the West panic and bid up the price of oil to triple its former level. It rises to $14 a barrel from $3.50. High priced oil means that consumers have less discretionary income to spend, but it costs more for companies to do business. The results, the industrialized world plunges into the recession of 1974/'75, the worst since World War II. In late 1978, the Shah of Iran is overthrown and Iran's oil stops flowing. The Ayatollah and OPEC dictate another price hike, the West panics again, and again the price triples from around $12 a barrel to 35. Billions of dollars in wealth is transferred from the West to the Middle East, and the recession that follows turns out to be even worse than '74/'75. It was with these grim memories in mind and warnings of recession blowing in the wind that we arrived at the gate in New York today to ask one question, is history about to repeat itself, will the Iraqi oil crisis plunge us into recession yet again? In the twin recessions of the '70s, the transportation industry was hit hard. We asked one of New York's Russian cab drivers how things were this time around.

CAB DRIVER: Business is very slowly and I hope it will get better.

MR. SOLMAN: How is business at LaGuardia these days?

CAB DRIVER: Most of the planes the way they used to come, they still arrive at the same time, except they almost half empty.

MR. SOLMAN: And half empty planes often means wholly empty cabs, of which New York today seems to have more than its fair share. Okay, so transportation and tourism are turning down much as they did in the past two recessions. To see if this was deja vu all over again, we'd arranged to meet an expert in Central Park. How worrisome are transportation and tourism compared to '73 and '79?

BERNIE PICCHI, Oil Analyst: Well, they are worrisome. They are certainly indications of the fragility of the economy, and the concern the people have about their purchasing power, but I think compared to those earlier times, the situation isn't quite, at least so far, it's not as serious as it was then.

MR. SOLMAN: Can you put it in dollar terms?

MR. PICCHI: Well, the best indicator anybody has of that sort of thing is price, you know, the price of oil, and so far, we've seen oil prices rise to about 27 or 28 dollars a barrel, which is certainly pretty serious compared to what oil prices had been, but nowhere near the magnitude of the price increase that we saw back in '73 and '79/'80, at the time of the Iranian revolution. In fact, in inflationadjusted terms, we'd have to have oil prices today approaching $70 a barrel to equal what they were back in '79/'80.

MR. SOLMAN: It's the same percentage drop in supply as it was in '73. How come price hasn't tripled this time?

MR. PICCHI: Well, I think two things are different. The first is that this is the first of the three oil shocks that we've had since the early 1970s when we have had in existence a fairly large, unused surplus of production capability in other OPEC countries, and the belief is that if the situation becomes serious enough or if the price rises high enough, it will provide an inducement to countries such as Venezuela, and obviously the Emirates in Saudi Arabia to increase their production. That's one issue. Another issue too is that today we have a much greater diversity of supply than we did back then. Back in the early '70s, there were only at that time, only about fifty or fifty-five countries in the entire world that produced oil. Today there are about 200 countries in the world that produce oil.

MR. SOLMAN: Oil analyst Bernie Picchi of Salmon Brothers was extremely reassuring, but we still wondered what about other sectors of the economy damaged by the past two recessions. The automobile industry, for example, was nearly totaled on those occasions. So we crossed the street to the General Motors showroom. From all the ads you see on TV these days, it seems clear that American auto makers are desperate to sell their cars and were even before the oil price rise, and as higher oil prices increase the costs of manufacturing throughout American industry, we figured that most manufacturers would be similarly anxious. So back we trucked to Bernie Picchi.

MR. PICCHI: Auto manufacturing will be affected certainly, but U.S. auto manufacturers are going to be less severely impacted than they were in '73 and '79, because they are able to produce automobiles to compete in quality and in terms of fuel efficiency with their Japanese counterparts. The entire U.S. economy today is much less fuel and oil dependent than it once was, and it's because of the shifted manufacturing outside the United States, we are today, as a result by default, much more of a service sector than we were back then.

MR. SOLMAN: How will that help us?

MR. PICCHI: Because the service sector doesn't use fuel. It's not as oil or as raw material intensive as manufacturing is.

MR. SOLMAN: Fortunately, there were representatives of the service sector close at hand and they didn't seem to be feeling the pinch. Is her business hurting from the recession do you figure?

CONSUMER: No, not at all.

MR. SOLMAN: How come?

CONSUMER: Well, she has great doughnuts and it's very inexpensive.

MR. SOLMAN: Is business okay?

STREET VENDOR: Yeah.

MR. SOLMAN: Business not bad?

STREET VENDOR: No, it does good.

MR. SOLMAN: Okay. So the service sector seems to be doing all right for the moment based on our modest sample, but we were still not totally convinced. Just one week ago we visited the New York Mercantile Exchange where they were buying and selling oil and pandemonium rained as never before. But to Bernie Picchi, there's a method to this madness, and the net effect is beneficial.

BERNIE PICCHI, Oil Analyst: Actually, the markets today are much more quickly capable of adjusting to changes in supply and demand as a result of the existence of the futures and spot markets in crude oil and product that didn't exist in '73 and '79. In addition, we don't have government price controls interfering with the market mechanism. That more than anything else was responsible, than as government price controls for the long lines at gasoline stations, and finally there is another element that we haven't even talked about, which is the existence of the government strategic petroleum reserve. There are 570 million barrels of oil under government control that can in the event of a truly sharp spike in oil prices or cut in supplies can be brought into the market to ease the shortage.

MR. SOLMAN: And that's why the price hasn't gone up as much as it might have?

MR. PICCHI: That's correct, that's right.

MR. SOLMAN: At last, we'd pretty much calmed down and since Bernie Picchi had been such a good sport, we asked him to join us as we headed back to the office. In the spirit of the times, we'd chosen the most energy efficient form of transportation, and as we followed the scenic route, we did have one last question. So I guess you're saying there's just nothing to worry about?

MR. PICCHI: Oh, on the contrary, we have a lot of things to worry about. There are some terrifying scenarios out there if you really want to use your imagination. For example, if you could imagine Saudi Arabia being blobbed directly into the war, it could be quite a frightening scenario.

MR. SOLMAN: That's because Picchi says Saudi Arabia and the Middle East in general have become an even more important supplier of oil to the world today than they were during past oil crises, just as the region's becoming more hostile to America. But even if the Saudi nightmare doesn't materialize, Bernie Picchi still has a last and a very immediate concern.

MR. PICCHI: Finally we're concerned obviously about the fragility of the U.S. economy. We were teetering very close to a recession. In fact, the Department of Commerce had reported that 16 of the 50 states were in a recession at the time that this oil crisis struck.

MR. SOLMAN: And this could push us deeper?

MR. PICCHI: Yes, it could certainly push us much deeper.

MR. MacNeil: To discuss how much deeper it could push us, we have four former Presidential economic advisers. Martin Feldstein was chairman of Ronald Reagan's Council of Economic Advisers from 1982 to '84. He's currently a professor at Harvard University and head of the National Bureau of Economic Research at Cambridge. He joins us from public station WGBH in Boston. Murray Weidenbaum also chaired the Council of Economic Advisers under Pres. Reagan and earlier served in the Nixon Treasury Department. He joins us from St. Louis, where he's currently a professor and the director of the Center for American Business at Washington University. Lyle Gramley was a member of the Council of Economic Advisers in the Carter administration and later a member of the Federal Reserve Board. He's currently chief economist at the Mortgage Bankers Association, a Washington, D.C. trade group. And with us from Cornell University is Alfred Kahn, a professor and former economic adviser to Pres. Carter. During the 1979 oil crisis, Prof. Kahn was chairman of the Council on Wage and Price Stability. Let's ask each of you four gentlemen, starting with you Murray Weidenbaum, just give us in a word, is this crisis, and then we'll come back for your reasons, is this crisis going to tip the economy into a recession? Murray Weidenbaum.

MURRAY WEIDENBAUM, Reagan Economic Adviser: The answer is yes. We are in recession, in my judgment.

MR. MacNeil: I'll come back to you in a moment. Martin Feldstein, is this going to tip us into a real recession?

MARTIN FELDSTEIN, Reagan Economic Adviser: It shouldn't.

MR. MacNeil: Alfred Kahn.

ALFRED KAHN, Carter Economic Adviser: I think it will have a marginal effect in that direction. We may be in the beginning of a mild recession.

MR. MacNeil: And Lyle Gramley, is it going to?

LYLE GRAMLEY, Carter Economic Adviser: I think we'll probably have one, possibly two quarters of negative real GNP, but it's going to be a very mild decline, certainly not a severe recession.

MR. MacNeil: Okay. Back to you, Murray Weidenbaum. What's your reasoning for being so definite on a recession and how bad will it be?

MR. WEIDENBAUM: First of all, for months, the economy has skirted the outer edge of recession. It wouldn't take much to push us in. I think a 50 percent run up in oil prices did just that, especially because we import 1/2 of our oil, which means the run up in world oil prices is the equivalent of a large OPEC tax increase on the United States.

MR. MacNeil: Excuse me interrupting, but you're referring to the price increase that's already happened.

MR. WEIDENBAUM: That's right. And as that works its way through the economy, affecting transportation, utilities, and manufacturing, I think we will see about a 1 to 2 percent decline in the real GNP during the rest of this year and a rise in inflation of about 1 percent, not the end of the world to be sure, but certainly a mild situation. Should the situation not worsen or improve in the Middle East, I would see in the first half of 1991, the beginnings of an upturn.

MR. MacNeil: Martin Feldstein, why do you disagree with that?

MR. FELDSTEIN: I think that the increase in oil prices this time is much less relatively speaking than it was before, and therefore while it will slow the economy down, I don't think it has to push us into recession. And I put it that way because, of course, you can only say whether it's going to create a recession or not if you can something about how the Federal Reserve is going to handle the situation. I think that they are not going to crunch down on the economy and allow it to drop into recession because of an overly tight monetary policy.

MR. MacNeil: I'll come back to what government and the Federal Reserve Board can do about this in a moment, but just so what effect do you see on growth and unemployment and inflation resulting from the oil prices that have already happened?

MR. FELDSTEIN: I think perhaps 1/2 percent decline in the growth rate which would mean that instead of having roughly 1 1/2 to 2 percent real growth over the next year, we'll see something at 1 percent or a little tiny bit above that over the next 12 months as a whole.

MR. MacNeil: Alfred Kahn, you said you saw it probably moving in the direction of recession. Give us your reasoning and how bad will it be, do you think?

PROF. KAHN: Well, the trouble is you've got a whole bunch of very moderate people. The economy seems to be growing at a 1, 1 1/2 percent rate. The effect of this --

MR. MacNeil: Can't you be the extremist here then if --

PROF. KAHN: Qualitatively, it's exactly the kind of situation as it was in '79 and '80, when it was a tidal wave, but quantitatively, it's so much smaller. We're not getting an increase in the price of oil from 11 or 12 dollars to $40. We're getting maybe from 18 to 28. We are much less dependent on oil than we were before. You know, we've had an 11 percent reduction in the last 11 years in our total consumption of oil in the United States. We don't have the price controls that we had before and the allocations. We've got much bigger inventories and this inflationary effect is now coming on top of an underlying rate of inflation of maybe 4 percent. When I was in the happy position of being inflation czar, our underlying rate was near 8 percent, and we got this much larger increase in price. So quantitatively I don't think it's anything like -- the final thing of course is we've got big inventories and we can very quickly fill the gap in production if the Saudis who have at least 2 1/2 million barrels a day of excess capacity simply rise to the occasion.

MR. MacNeil: So Lyle Gramley, finally, what's your reasoning for predicting that we're not going into recession?

MR. GRAMLEY: Let me give you a couple of numbers. In 1973/'74, the increase in our oil bill amounted to about 3 percent of our Gross National Product. The increase in our oil bill in 1979 and '80 amounted to over 4 percent of our Gross National Product. If oil prices now stay at around $28 a barrel, an increase of roughly $10 a barrel, the amount of our oil bill will rise to about 1 to 1 1/4 percent of our Gross National Product. So it's a much smaller impact. To be sure, consumer spending is growing quite slowly and will grow still more slowly because of the rise in oil prices, but I think Marty Feldstein is right, that we'll get down to a growth rate 1/2 to 1 percent less than we had. So we'll have a small decline in real GNP perhaps, but not a large one.

MR. MacNeil: That doesn't convince you, Murray Weidenbaum?

MR. WEIDENBAUM: First of all, I hope these other fellows are right, however, I think the Fed, the Federal Reserve really is walking a tight rope; if it eases the economy much, off to the inflationary races, and of course if it tightens, deepens the recession. So I think we're going to see the mildest recession of perhaps the post war period.

MR. MacNeil: So you disagree with Martin Feldstein. You think that Alan Greenspan and the Federal Reserve Board is going to persist in trying to keep inflation down and not loosen up on credit and the money supply enough to prevent a small recession, is that correct?

MR. WEIDENBAUM: That's right.

MR. MacNeil: Yeah. Martin Feldstein, you disagree with that?

MR. FELDSTEIN: Well, I think the point is that the Fed is not going to tighten the way they did in 1973. When we had our very big, serious reaction to the increase in oil prices, the Fed had cut the growth of money supply almost in half. That is not what the Fed is going to do now. I think that they're going to continue to pursue the policy that they have been pursuing of allowing the economy to grow overall in terms of total spending in the economy at about 6 percent. Now before the oil price increase occurred, that meant that we would see roughly 4, 4 1/2 percent inflation and roughly 1 1/2 to 2 percent real growth. Now we'll get a little more inflation and a little less real growth. But the Fed is not going to try to sharply turn the economy down in order to prevent any increase in inflation, because as somebody said a couple of minutes ago, we're not starting with the kind of near double digit, underlying inflation rate that we had in '79 or back in '73.

MR. MacNeil: Alfred Kahn, do you have a view of what you think the Fed's going to do and how it'll affect this?

PROF. KAHN: Well, I agree that the Fed is not going to engage in the really extreme tightening of money policy that they did in '73/'74, and then you remember that Paul Volcker did, I think quite properly, because inflation was of really frightening proportions beginning in late '79 and 1980, I don't think that's going to happen now, and part of the reason is that the inflationary consequence, while troublesome, of the oil price increase is going to be a good deal less. And ironically, the absence of oil price controls is going to help. I just got back from Czechoslovakia, where they had a reduction of about 15 percent in their oil supply from the Russians. Their finance minister immediately decreed a 50 percent increase in oil prices, which will certainly play a major role in curtailing demand. That was one of our problems in '78/'79. We had allocations. We had oil too short in some places, and too much in other places.

MR. MacNeil: You're saying, as Bernard Picchi did in that piece by Paul Solman, that you did it all wrong in '79?

PROF. KAHN: I think we did. I think that it was a mistake to hold on to allocations and oil price controls. And it's not surprising that the oil problem has been less important as we deregulated the price of crude oil.

MR. MacNeil: Yeah. Mr. Gramley, let's talk about, you've all been talking sort of high economics here, but whether you call it a recession or not, how are the American people going to feel the impact of this thing? I mean, there's some impact of inflation and there's some impact on employment and industrial production and everything. How are they going to feel it?

MR. GRAMLEY: Well, the first place they will feel it is at the gasoline station. They're noticing that already. They will feel it with less rapid employment growth. They will feel it through a rise in unemployment as time goes on.

MR. MacNeil: How much would you predict unemployment going up if oil prices stay what they've become?

MR. GRAMLEY: Oh, I think we might get up to somewhere in the range of 6 to 6 1/4 percent by the end of 1991.

MR. MacNeil: That's about 3/4 of a percent more than now.

MR. GRAMLEY: Yeah, about 3/4 of a percentage point higher than we have now.

MR. MacNeil: And how many people is that out of work?

MR. GRAMLEY: It's a little less than 1 percent out of labor force of about 120 million.

MR. MacNeil: Yeah.

MR. GRAMLEY: I do think that Martin --

MR. MacNeil: Can you give me a number? What does that represent?

MR. GRAMLEY: Somebody has to do better mathematics than I can do in my head --

MR. FELDSTEIN: I think a million is the number that you're looking for.

MR. MacNeil: About a million --

MR. GRAMLEY: That's right.

MR. MacNeil: -- people out of work and in which industries would you say particularly?

MR. GRAMLEY: Well, it'll be quite widespread. The auto industry will get part of the impact, but consumer spending quite generally will slow. The housing industry will slow also because of the higher interest rates that are prevailing now and industries that are supplying goods to the housing industry.

MR. MacNeil: Yeah.

MR. FELDSTEIN: Remember though that that is still in a context which employment is growing. It won't be growing as fast as it's been growing, but the economy will be creating more jobs along the way.

MR. MacNeil: So in other words, while you may have a million people out of work, more jobs will be created, so the net effect would be what? I mean, if you subtracted the new jobs from --

MR. FELDSTEIN: Well, maybe we will have an increase in employment of I don't know the exact number, of a couple of million people instead of 3 million people during the next year.

MR. MacNeil: I see. Murray Weidenbaum, since you're the pessimist here, how do you see people being affected in the practical, real terms that people feel?

MR. WEIDENBAUM: Robin, appreciate the role reversal as the father of rosy scenario.

MR. MacNeil: I'm coming to that. What happened to you onyour way to academe?

MR. WEIDENBAUM: A tough of realism of course.

MR. MacNeil: You mean, one isn't a realist in the White House?

MR. WEIDENBAUM: You're a political economist when you're there, but seriously, when I look at the major sectors of the economy, and nobody has talked about the continuing decline in defense production, the rise in unemployment in the major defense production areas, I see widespread unemployment and a continued decline in the expectations of consumers. Now this is not a doom and gloom situation. A 1 percent reduction in real GNP would qualify by American standards as a very mild recession, but I see nothing in the situation, certainly nothing that any of my colleagues has mentioned, that would offset the report this morning by the Department of Commerce that in real terms retail sales have taken a tumble.

MR. MacNeil: So is this rise in oil prices going to make consumers less confident?

MR. WEIDENBAUM: That's right.

MR. MacNeil: And what do they do when they're less confident? What won't they be buying and doing?

MR. WEIDENBAUM: The key postponable item are hard goods purchases, automobiles, housing, durable goods, the items that have on the way up the most powerful effect on the economy and also unfortunately on the way down.

MR. MacNeil: Alfred Kahn, how do you see ordinary people feeling this oil crisis, small oil crisis impact?

PROF. KAHN: Well, I think that it clearly is going to have a negative effect. I think one of the main reasons for the differences, they're not enormous differences between the predictions of Murray, let's say, on the one side, and Martin Feldstein on the other, is a slightly different view about where the economy was going before this happened. Remember, the economy had been slowing down, unemployment blipped. Corporate profits have been going down for many quarters now so that there already was a good deal of weakness. In the 2nd quarter of this year for example, housing expenditures went down, business investment expenditures went down, consumption went down. It was only government expenditures that went up and inventory accumulation. So if you think of the economy as already perhaps moving into a recession, then add to that the effect of these oil price increases, and the effect on consumer confidence, sure, it can well have the effect of giving us a mild recession.

MR. MacNeil: Okay, let me ask each of you, Pres. Bush came out today and beat up on the congressional Democrats for, as he said, not playing seriously in the budget talks. Martin Feldstein, how is this oil crisis going to affect the big budget summit and the need to cut the deficit?

MR. FELDSTEIN: I hope it won't affect it. I hope that they will go ahead and reduce the budget deficit. I think what it will do is give them reason to emphasize a multiyear plan, a plan that makes cuts not just for the coming fiscal year but for several years into the future as well.

MR. MacNeil: The President called for a five year plan today.

MR. FELDSTEIN: And if we get that, then I think we can get lower interest rates, which will help to offset the usual effects of cuts in government spending and increases in personal taxes.

MR. MacNeil: Murray Weidenbaum, is this new crisis going to frighten the negotiators both White House and congressional anti- tax Republicans and unwilling pro-tax Republicans into more serious talks, or what's it going to do to them do you think?

MR. WEIDENBAUM: Unfortunately, I'm afraid it will frighten them but not into serious action. For one thing, I think the centerpiece on the revenue side, that is, a large increase in gasoline taxes, is dead for 1991. It may be a stick in the closet off in the future. On the spending side --

MR. MacNeil: That's dead because it would have to come on top of the price increases already?

MR. WEIDENBAUM: Precisely. And on the spending side, I think the future cuts in defense will be much more modest than had been anticipated just before the Iraq invasion of Kuwait. I think people realize no matter how improved our relations are with the Soviet Union, the United States in the military sense must retain overwhelming power over any third nation such as Iraq.

MR. MacNeil: Lyle Gramley, how do you see the budget and the deficit reduction situation being affected?

MR. GRAMLEY: I think the first thing that will happen is that we'll have less budget deficit reduction in the first year, fiscal 1991, than otherwise would have been contemplated.

MR. MacNeil: Why?

MR. GRAMLEY: Well, with the rise in oil prices already imposing a tax on consumers, bringing us perilously close to the edge of recession, if not into one, it wouldn't make much sense to reduce the budget deficit by a full 50 billion right away. But I certainly agree with Marty Feldstein that it's very very important for them to keep their eyes peeled on the need for budget deficit reduction over the longer-term. I would hope also that Congress and the administration begin to push for a more sensible energy policy. We ought to be raising energy taxes, not right away, but in the future. It would be good economic policy, good budgetary policy, good energy policy, good environmental policy. It would even be good foreign policy.

MR. MacNeil: Alfred Kahn, the budget talks, is an energy tax out this year?

PROF. KAHN: Well, I think it's out, but I think the way to solve this problem of practically no credibility on the part of Congress or the President on making any progress on the budget and the fact that it doesn't make much sense when the oil price increase has already taken 25 to 30 billion dollars out of our pockets to do a lot this year is not only to take the multiyear tact which everybody seems to be advocating, but perhaps link it in some way to the way the economy behaves. Gramm-Rudman ceases to be effective when the economy moves for two quarters into a decline in GNP. My own inclination would be to put these in on a multiyear basis, these budget deficit cuts, but suspend them if the GNP ceases to rise for the quarter.

MR. MacNeil: Okay. I just have one question to come back to for one word each. If the crisis turns bad and the oil prices go up above $28 in a word, Martin Feldstein, are all bets off, I mean, if it goes way up to 30 or 35 or 40 dollars?

MR. FELDSTEIN: There will be a bigger slowdown. But we're still at this point not looking at anything like 1973 or even 1979.

MR. MacNeil: Murray Weidenbaum, if it goes up another $10?

MR. WEIDENBAUM: I think the recession would last longer, would be deeper, but still late 1991, I would expect the upturn to start.

MR. MacNeil: Alfred Kahn.

PROF. KAHN: I think -- I agree with that, but the most important thing is that we'll perhaps increase our desire, our determination to have a sensible national energy policy, which we don't have today.

MR. MacNeil: And Lyle Gramley, another 10 bucks on oil?

MR. GRAMLEY: Another 10 bucks on oil and we ought to begin pumping from the strategic petroleum reserve to offset some of the impact.

MR. MacNeil: Okay. Well, gentlemen, all four, thank you. ESSAY - ANY LIKENESS?

MR. LEHRER: Finally tonight our Tuesday night essay, Roger Rosenblatt of Life Magazine on comparing Saddam Hussein to Adolf Hitler.

MR. ROSENBLATT: The likening of Saddam Hussein to Adolf Hitler may be exaggerated in some respects, but it's on the money in terms of Saddam's attractiveness to his people. How does a ruthless, murderous, megalomaniac manage to persuade millions of normal citizens that he is their savior? That, after all, is what has happened in Iraq, and in other places in the Arab world that support Saddam. Here is a man who started an eight year war that cost a million lives. He used poison gas not only against the enemy Iranians, but against 7,000 Kurds in his own country. He had 30 members of his own party executed as soon as he came to power, including one of his closest friends. He menaces the life of every Iraqi. Now he has invaded and annexed a weak neighbor country. This is the man millions of Arabs cheer as their leader. Hitler too had a mysterious popular appeal, deriving from a similar personality and similar activities. Like Saddam, the Fuhrer strode into neighboring nations, claiming they had begged for his deliverance. Like Saddam, he gassed to death a minority in his midst, nearly wiping out an entire population. Like Saddam, he terrorized his associates and citizens. Like Saddam, he sought worship as a demagogue, staging great, public rallies for himself. Like Saddam too, he won the worship that he sought. Why? How is it that a person who seems crazy and devoid of normally humane instincts can win the overheated affections of people who one certainly assumes are not devoid of humane instincts themselves, and who, indeed, in their private lives both condemn and abhor brutality? In the cases of both Hitler and Saddam, there are historical answers to that question. Both Germany after World War I and the Arab world after the founding of Israel were made to feel like international castaways, however much they may have brought such reactions upon themselves. The resentment felt by Arabs towards the West mirrors the resentment felt by Germans toward the World War I allies who humiliated them. Whatever repulsion most Arabs may feel about Saddam pales in comparison with that resentment. If Arabs are wary of Western military help against Iraq, this is why. The psychological answers may be closer to the truth. Like Hitler, Saddam engenders fear, lots of fear. Ordinary Arabs, dazed and frightened by a thug in power, may convert their fear to loyalty as a form of self-protection, or they may be driven by feelings of personal inferiority. Saddam may be crazy and cruel, but his power lust gives the common man uncommon stature, makes him feel as tall in the placards in the street that bear Saddam's face. When the beleaguered Germans of the 1930s wanted to feel like big shots, they looked about for small shots to hate. With Hitler's encouragement, they found the Jews. Saddam too has his eye on the Jews. The analogy is not lost on Israel. The worst and most dangerous psychological appeal men like Hitler and Saddam make is to human evil, itself. This appeal may finally answer our question, though it is the answer we'd least like to hear. Hitler said to his people as Lucifer said to his in Paradise Lost, "I will make a hell of heaven, a heaven of hell". Saddam has said the same, has proved he can do it, and the people go wild with enthusiasm. How do evil men win the hearts of millions? Because from time to time, the hearts of millions ask them in. I'm Roger Rosenblatt. NEWS SUMMARY

MR. MacNeil: In other news today, forest fires continued to burnin other Western states. Firefighters battled three major blazes in Yosemite National Park. Seventeen thousand acres of the park have burned. The flames were threatening a grove of giant Sequoia trees. Forest fires have also scorched parts of Idaho, Utah, Oregon, Washington, and Alaska. Again, to recap today's developments in the Middle East crisis, Pres. Bush said he saw no quick diplomatic solution to the situation. He defended U.S. unilateral Naval actions in the Persian Gulf, but said he would consider a Soviet plan to put American Gulf forces under a U.N. command. Meanwhile, King Hussein of Jordan was on his way to the United States to talk to Mr. Bush and to deliver a letter from Pres. Saddam Hussein. Good night, Jim.

MR. LEHRER: Good night, Robin. We'll see you tomorrow night and as King Hussein comes to Washington, we'll look at the role of Jordan in this Middle East crisis. I'm Jim Lehrer. Thank you and good night.