The MacNeil/Lehrer NewsHour

MR. LEHRER: Good evening. Leading the news from the Persian Gulf War this Monday, the President of Iran offered to mediate between the United States and Iraq. Allied planes bombed targets in Baghdad again and the battleship Missouri shelled targets in Kuwait. We'll have the details in a moment. Judy Woodruff is in New York tonight. Judy.

MS. WOODRUFF: On the NewsHour tonight, Charlayne Hunter-Gault interviews the man in charge of Operation Desert Storm, Gen. Norman Schwarzkopf. Then Business Correspondent Paul Solman looks at a company that has scored a big hit in the Middle East, and finally Budget Director Richard Darman explains what is and is not in the administration's new budget, and Governors James Florio and John Ashcroft weigh the merits of one of its key proposals.NEWS SUMMARY

MR. LEHRER: The President of Iran offered today to mediate and end the Persian Gulf War. Hashami Rafsanjani said he was prepared to meet with Iraqi President Saddam Hussein and to talk directly with U.S. officials, something U.S. and Iran have not done officially since 1980. Iraq and the United States have been Iran's two biggest enemies for the past decade. Iran and Iraq fought a bitter eight year war. White House Spokesman Marlin Fitzwater said only, "Iran is not directly involved in this conflict and our interest is in getting Iraq out of Kuwait." Pres. Bush said today he remains satisfied with the progress of the war. He briefed the nation's governors at the White House this morning.

PRES. BUSH: We are going to set the timetable for what lies ahead and not Saddam Hussein. I have confidence that we're doing the right thing and I have confidence that it is going the way we planned, and there have been no surprises and there will not be any quick changes, nor will I try to tie the hands of the military because I just feel we have to go forward and prosecute this to a successful conclusion.

MR. LEHRER: This afternoon, Sec. of Defense Dick Cheney assessed the strength of Iraq's military forces. He spoke to reporters at the Pentagon.

SEC. CHENEY: And it clearly, if you look at the pieces of his capability, his air force has been for all intents and purposes neutralized; it's been totally ineffective against us. A significant portion of it's been destroyed or has fled to Iraq, but he still remains some capability there. He's still got some Scud capability. He's got chemical weapons that he's not yet used. He's got a navy that is virtually non-existent now. You still worry a little bit about an Exocet or Silk Worm attack on our shipping of some kind, and he's still got a very large army, and this was the world's fourth largest army, and a big portion of it is in Kuwait. We will not have achieved our objectives until it's out of Kuwait, and so I would not at this point underestimate the amount of work that remains to be done.

MS. WOODRUFF: There were more skirmishes between the U.S. and Iraqi forces today along the border with Saudi Arabia. U.S. military commanders said four Marine Harrier aircraft attacked a column of 30 Iraqi tanks in Kuwait. At least 25 were destroyed. U.S. and Iraqi forces also traded artillery and small arms fire across the board. No casualties were reported. U.S. officials disclosed today that the Battleship Missouri fired its 16 inch guns for the first time since the Korean War. The Missouri's gun can fire a 2000 pound shell about 25 miles. Military officials said they were used against prefabricated Iraqi command and control bunkers being moved into place in Kuwait. The U.S. central command also confirmed today that the Iraqi military is using civilian buildings in an attempt to escape allied attack. At this morning's briefing in Saudi Arabia, Marine Gen. Robert Johnston said that Iraq has managed to hide some of its forces and equipment in civilian areas.

GEN. ROBERT JOHNSTON: That happens to be a true fact and I think even in some of the air fields we find them try and move the aircraft into residential areas. I'm not sure that he can somehow put 1/2 million troops and five thousand tanks in a residential area. I'm not being flip about it, but he can hide a select part, I guess, of his military capability but he can't hide it all, and we will continue to scrupulously adhere to our policy is that we will not target civilian areas, so I guess you could conclude that he has protected some of his assets.

MS. WOODRUFF: Allied bombers renewed their attacks on Baghdad early this morning. U.S. military officials in Saudi Arabia said air force B-52s continued to pound Republican Guard positions in Southern Iraq. They confirmed that one airman was killed Saturday when a B-52 crashed into the Indian Ocean as it returned to continue to its base in Diego, Garcia. Three crewmen were recovered; two others are still missing. And in another side of the air war, U.S. pilots were coming to grips with the news that seven Marines had been killed by friendly fire. A missile fired by U.S. jets. Network pool reporter Scott Pelley spent today with airmen of the Fourth Tactical Fighter Wing in Central Saudi Arabia.

MR. PELLEY: The night fliers were saddened but not surprised. In Arabia, word spreadquickly among U.S. pilots when an American jet killed seven Marines during night combat. For these men, it is the worst of battlefield tragedies.

SPOKESMAN: At night you're not going to tell one vehicle from the other. That's why we have to go to such extremes and make it very specific about exactly where we can be and where we can bomb.

MR. PELLEY: The first defense against so-called "friendly fire" is to restrict combat in areas with allied forces. These F-15s, for example, are not allowed to bomb certain predetermined zones. Those restrictions are loaded into the plane's computers.

SPOKESMAN: That gives us an idea on our radar scope or any of our other displays exactly where they are so we avoid those areas.

MR. PELLEY: But increasingly, U.S. pilots are being ordered to fly close air support, bombing missions to help ground troops already engaged with the enemy. It was during such a mission that the Marines were killed last week. Pilots who fly close air support are trained intensively on the size and shape of American tanks and vehicles. Some are drilled with flash cards that bear the silhouettes of American weapon systems, but those who fly the mission at night say that after dark sorting out the targets is extremely difficult. In the end, pilots are dependent on enemy positions radioed in by forces on the ground.

SPOKESMAN: There are people in the immediate area of the target that give us current, updated information on where a target might be, and that's what we rely on heavily. When we start to roll in on a target and it just doesn't look right, we don't drop.

MR. PELLEY: As Desert Storm moves toward a land war, more U.S. planes will switch to the defense of ground troops. Many pilots believe the battle will demand the most complex air support ever flown with more tragedies of friendly fire inevitable.

MS. WOODRUFF: At the allied command in Saudi Arabia today, British officials released videotape of a recent Royal Air Force bombing run. The target was a railway bridge. An RAF spokesman said the attack was carried out by a group of planes. The first targeted the bridge with a laser, while a second dropped so-called "smart bombs" to destroy it. The spokesman would not reveal the bridge's location.

MR. LEHRER: Iraqi newspapers said today Iraq would retaliate for allied bombing raids with a fierce hit and run ground war. One report said the country would use its mechanized units and commando forces in coming battles. Iraq's foreign minister today criticized the United Nations for ignoring what he called the crimes being committed against Iraq. Teraq Aziz said the U.N. has been silent on the issue of allied forces bombing Iraqi civilians. Iraqi television today showed more pictures of damaged civilian areas, this time in the City of Hila, located in the Southern part of Iraq. Residents of the city claimed there had been civilian casualties from the bombing. Iraqi television also showed pictures of life returning to normal, with shopkeepers reopening their stores in the town Mamudia. There were two possible terrorist actions against Americans today. In Saudi Arabia, a gunman fired at a shuttle bus carrying two American military personnel. The incident happened in the port city of Judah. The Americans were injured by flying glass. The gunman escaped. In Norfolk, Virginia today six pipe bombs were found attached to two separate million gallon methanol tanks. The area was evacuated while officials removed the bombs. The tanks were located about 10 miles from the Norfolk naval base. More than 35,000 sailors have been sent from Norfolk to the Gulf region.

MS. WOODRUFF: Refugees fleeing Iraq continued to cross into Jordan telling tales of the devastation of allied bombing raids. Some of those arriving from the Southern Port City of Basra said residents had been reduced to collecting drinking water from puddles. Others have reported heavy damage to civilian areas. We have a report from Glenn O'Glaza of Independent Television News in Jordan.

MR. O'GLAZA: Many of these Indian refugees have been trying to escape from Iraq since the war began. As they waited at Amman Airport for a special flight to Bombay, they described the devastating effects of the allied bombardment on the Southern Iraqi City of Basra.

REFUGEE: Two bombardment -- and about three kilometers -- two houses completely smashed.

MR. O'GLAZA: The injured refugees have arrived in Jordan over the weekend to be processed for their flight home.

REFUGEE: In Basra and in other area where we were residing, there is no petrol, no diesel, on gas, no water, no electricity.

REFUGEE: Nothing is there.

REFUGEE: So many trucks --

REFUGEE: We have seen one ammunition factory --

MR. O'GLAZA: These Iraqi television pictures purport to show the damage at Basra, which is Iraq's second largest city, and headquarters of Saddam Hussein's seventh command and of the Iraqi navy. The Iraqis claim that this hospital suffered blast damage when allied missiles exploded nearby. They say patients were showered with broken glass.

MS. WOODRUFF: The State Department warned all U.S. citizens to leave Jordan as soon as possible. The warning cited increasing tensions in that nation as a result of the war. All non- essential State Department personnel and dependents have already been ordered out.

MR. LEHRER: Pres. Bush sent a $1.45 trillion 1992 budget to Congress today that does not include money for the Persian Gulf War. That will come in a supplemental request later. Today's budget includes increased funds for anti-drug programs, space, education and highways, but cuts other domestic programs. It also proposes turning over money for a large number of federal programs to the states. We'll have more on this story later in the program.

MS. WOODRUFF: That's it for the News Summary. Just ahead, America's top gun in the Gulf, cashing in on the Patriot, and adding up the Bush Budget. NEWS MAKER

MR. LEHRER: We go first tonight to a Newsmaker interview with the Commander of the U.S. Military Forces in the Persian Gulf, Army General Norman Schwarzkopf. Charlayne Hunter-Gault did the interviewing early today at the General's Headquarters in Riyhad, Saudi Arabia.

MS. HUNTER-GAULT: General Schwarzkopf thank you for joining us. have you concluded that the 11 soldiers killed heading to Kafhji were in fact killed by friendly fire as was the marine who died from a cluster bomb yesterday.

GEN. SCHWARZKOPF: I think that although the investigation is not yet completed it looks pretty conclusive that 7 marines not the 11 but 7 of those marines in one vehicle were probably killed by an air to ground munitions delivered by a U.S. aircraft. Also we have one marine that died of wounds as a result of a cluster bomb attack.

MS. HUNTER-GAULT: Is this the down side of the highly touted accuracy and speed of new technology and can we expect things to get worse or better as time goes on?

GEN. SCHWARZKOPF: I think that it is first of all the downside of inexperience. You know, we haven't fought this kind of war in a very long time and as a result you generally will have more mistakes made in the very early stages. People gain experience. I think that it is also a downside in that we have allowed the expectation that we are so precise in the way that we do business that this sort of thing can not happen. Of course that is just not true. You know, this is not a surgical business even though surgical is the term being used quite often. It is a poor word for this type of warfare. You have to understand that there is all sorts of rules in place and had those rules been followed we would never have had these accidents. Unfortunately you have to sympathize with the young Air Force Pilot who is up in the air, who is in the heat of battle. He is being shot at, he is shooting, he is flying around at hundreds of miles an hour and he is trying to pick up targets on the ground at night. This is a very high stress environment. Mistakes are going to made.

MS. HUNTER-GAULT: But you think they will be minimized as the young pilots gain more experience?

GEN. SCHWARZKOPF: As they gain more experience and of course, we are trying ridgedly to adhere to the rules that we have to avoid this sort of thing. I think Charlayne another thing that you have to think about. When you consider the number of flights of aircraft that we have had out there now. I mean we are getting up to 35,000 or 40,000 air strikes. That is an awful lot of air strikes and it is reasonable to expect, although, I never accept the lose of a friendly life to our fire but it is reasonable to expect that there is going to be mistakes out there and what we are doing is everything we can to minimize it.

MS. HUNTER-GAULT: That brings up another point because the ground casualties over a couple of days were twice that of the casualties that took place when there was only air strikes involved. Is that the kind of escalation that we can expect from the ground war and if so why can't the Allies continue with out a land war?

GEN. SCHWARZKOPF: Well I have said all along that once you get in to a ground battle you could probably expect a higher percentage of casualties and than you have in an air battle. Although I will tell you to date that we have been very surprised that the casualties are not higher than they are. We have expected them to be higher than they are. Having said that secondly remember one of the objectives of this entire thing is the United Nations Resolutions which to say get the Iraqis out of Kuwait. If the Iraqis don't chose to leave Kuwait by continuous air bombardment then one of these days the only way you are going to get them out is go in and force them out and the way that you do that is on the ground.

MS. HUNTER-GAULT: But why not continue bombing and blockading and wait them out of their bunkers, I mean, especially reports are that they are low on food and other necessities. There is some sense that their moral is flagging. I mean what would be the hurry?

GEN. SCHWARZKOPF: There isn't any hurry. I think that is exactly in the process that we are doing. Although a lot of people have said why don't you get the ground campaign on right now and I keep saying, you know we are going to execute the campaign plan according to our objectives. The President has said that we are going to do on our time and not his. So despite those that are saying why don't you come out and fight I think that is exactly what we are doing. We are waiting until we accomplish what we need to accomplish so we can minimize casualties.

MS. HUNTER-GAULT: Do you have any idea when that will be?

GEN. SCHWARZKOPF: [shaking his head no]

MS. HUNTER-GAULT: There is a school of thought that with the number of factors like the fact that by March the weather is going to starting turning hot again. Fed Chairman Alan Greenspan said this past week that if the war goes much past April it is really going to hurt the U.S. economy. The Hodge which is the holiest time of the year in Saudi Arabia when millions of pilgrims come from across the World to travel to Mecca begins in June and there has been some speculation that some terrorists might try to infiltrate when they come in. There is a whole possibility of a political activity against the war increasing here and in the Arab World. Do you feel the hot breath of these kinds of events and things breathing down your neck. Do you feel a time table when this has to end?

GEN. SCHWARZKOPF: Absolutely not. I feel no hot breath breathing down my neck. We have said repeatedly that we are not on a time schedule. We are conducting a strategic military campaign here. There is certain goals and objectives that we are going to establish at each stage of the campaign before we go to the next. All of those things that you have mentioned are important and all of them we are obviously taking in to consideration. But the one thing that is more important than anything else is the fact that we accomplish our objectives with the minimum loss of human life. And when you balance the lose of human life against all those other factors I don't think there is anybody in the World that would say they are more important than human life. Therefore we are going to do this thing the way that we have been doing it in such a way that we minimize lose of human life.

MS. HUNTER-GAULT: Well in terms of your plan. Are you being to see daylight? Do you see a near end?

GEN. SCHWARZKOPF: There is no question about the fact that everyday this campaign continues from the strategic standpoint we are getting closer and closer and closer to accomplishing the objectives for each phase. I think in my briefing last week I showed three phases. Obviously in the very first day of the campaign we didn't get up and start talking about three phases. We only talk about our accomplishments after the fact to demonstrate that there is a strategic plan out there that we are following.

MS. HUNTER-GAULT: One Pentagon Official said that it is not a question of if but when Saddam Hussein will start to use chemical weapons on Allied troops. You have destroyed over half of Iraq's nuclear, biological and chemical facilities and you have promised a relentless attack on the remaining ones. Will you commit your forces to a land war before those facilities are all destroyed and if so how do you estimate the risk?

GEN. SCHWARZKOPF: I think that we will ever destroy all of them. I mean, he has got huge storage areas of chemical munitions and many of them we probably don't know where they are. So I would say there is a high likelihood that in the event there is a ground war chemicals will be used. I would also say that we are very well trained for that contingency and I hope to take other steps and I don't want to go in here to, any other steps to minimize the effectiveness of those weapons of they are used.

MS. HUNTER-GAULT: Well if Saddam Hussein did in fact use those weapons would one of your options be tactile nuclear weapons and on the scale of one to ten what do you think the chances of us using them are?

GEN. SCHWARZKOPF: Those aren't my options. I think that question has been answered very well by the President, the Vice President and the Secretary of Defense over the weekend. Which says those are options that are reserved for the President of theUnited States.

MS. HUNTER-GAULT: Have you discussed that option with the Allies and if so what has been their response to that approach?

GEN. SCHWARZKOPF: I haven't discussed it with the Allies.

MS. HUNTER-GAULT: So you don't know how they would react?

GEN. SCHWARZKOPF: I think frankly that, you know, many of our Allies would like to get this thing over as quickly as possible and would welcome the use of any force that we have. But of course they are not the ones that have to bear the ultimate responsibility for the use of nuclear weapons, the introduction of nuclear weapons in to war and therefore it is easy. You know, a lot of people can recommend a lot of things when you are not the one that has to do it. I guess that is what I am saying. That is why it is the President's decision and it is a tough decision for any body to make.

MS. HUNTER-GAULT: You and of course the other senior military people we have been hearing from have played down the battle of Kaifji as being militarily and otherwise insignificant but Arab and other media are calling it the first major land battle heralding the start of a land war and I think that it has taken on a kind of symbolic significance in the mind. Was something like this taken in to account in the master plan and was Kaifji Saddam Hussein's way of drawing a line in the sand. Have the Allies now entered Saddan Hussein's phase of the war?

GEN. SCHWARZKOPF: I played down Kaifji as militarily insignificant and I still say that but subsequent results show that politically it was very significant. Everybody said the Arabs wouldn't fight and the Arabs fought and they fought very well. They equated themselves very well and it turned out I think Saddam tried to start out for a great propaganda victory and in fact took a bad licking. So that may have backfired on him.

MS. HUNTER-GAULT: But there is a school of thought summed up by the London Independent just this week that it succeeded in showing the fighting spirit of the Iraqis and a willingness to face up to heavy loses. I mean does Saddam Hussein win by not losing?

GEN. SCHWARZKOPF: If you consider the fact that 400 people in had a few shots fired over their head and immediately threw up their hands and surrendered is a demonstration of a fighting spirit and I hope the London paper what ever it was is correct. I hope that it did demonstrate the fighting spirit of the Iraqis because that is what happened.

MS. HUNTER-GAULT: Do you have any concern that the longer he hangs in there regardless of his situation that just hanging in there touches something in the Arab world that says he stood up to the technology of the Western Imperialists and so on. I mean it is a political question, I guess, but it is starting to resonate in the Arab World?

GEN. SCHWARZKOPF: There are a lot of other things that are starting to resonate in the Arab World and one them is that he has made all sorts of promises ahead of time of all the terrible things he was going to do to every body who fought him. He hasn't done any of those things yet. And I will tell you right now that some of the reports that we get that are resonating around downtown Iraq are the fact that Holy smokes we have bitten off a lot more than we can chew here and they have once again miscalculated. Saddam Hussein is not a military man. He thought of this war in tactile terms, okay, at the lowest level. He never thought of it in strategic terms and what is happening all of a sudden he is finding that he is taking a terrible licking strategically and he has no capability to react to that.

MS. HUNTER-GAULT: You were quoted in today's issue of U.S. News and World Report as commenting on Saddam Hussein's mental state. Do you have any information on that you can share with us?

GEN. SCHWARZKOPF: Oh we have had a lot anecdotal reports, you know, that one time he was totally out of control. That they had to call in doctors and give him tranquilizers. Other people have noticed how serenely calm he is at the present time. Others have noted that he has taken to pulling out his pistol and shooting people which isn't necessarily calm by my definition. I don't know. We will never know Saddam's mental state until this is all over and first hand reports start coming in.

MS. HUNTER-GAULT: Well how close do you think the Allies are to breaking the will of Saddam Hussein's military?

GEN. SCHWARZKOPF: I don't think that we are close to breaking Saddam's will. I don't think that is breakable. But I certainly we have the capability of breaking the will of his military and I think that we are making great progress in that area from all the reports that we get.

MS. HUNTER-GAULT: Well General Schwarzkopf thank you for being with us?

GEN. SCHWARZKOPF: You are very welcome.

MS. WOODRUFF: Ahead on the News Hour the patriot success story and the federal budget from Washington and from State Capitols. FOCUS - SUCCESS IN THE SKY

MR. LEHRER: Now Paul Solman looks at what the high tech achievements of the Gulf War have done for the American defense industry. He does so by zeroing in on one company that has scored a big hit in the war. [Patriot Missile Promo Video]

MR. SOLMAN: Back in the 1950s, a newer idea for knocking enemy aircraft out of the sky occurred to the folks at the Raytheon Company. [PROMO VIDEO]

MR. SOLMAN: Thirty some odd years and $12 billion later, Raytheon, a typical member of America's much maligned manufacturing sector, has scored a major hit. Its top of the line weapon has intercepted Iraqi missiles, suggesting to some that American industry is again flying high, though at first few observers knew that the flash in the sky was a million dollar U.S. product hitting its target.

JACK SHANLEY, Raytheon: I just said to my wife, that's a Patriot. They don't know what it is, but that's a Patriot.

MR. SOLMAN: Jack Shanley managed the development of the Patriot at Raytheon. We wanted to know if the missile's success is as encouraging a sign for American industrial competitiveness as it might seem and publicity shy Raytheon is certainly proud of the product, even striking a Scud buster pin to mark the accomplishment.

MR. SHANLEY: What we're doing here is we're engaging incoming missiles very fast and the Patriot missile going out is very fast, and so when you put this down on a piece of paper, it's about two and a half times faster than two high powered rifle bullets intercepting each other in mid air. Put another way, if you were to blink, these two things have closed more than a thousand yards, which is like 10 football fields.

MR. SOLMAN: Raytheon's success in the sky meanwhile has lit up the company's bottom line. After decades of investment, the Patriot is now paying off handsomely with a profit margin estimated at 20 percent or more. In the lingo, Raytheon is now in the harvest mode, reaping huge profits on its earlier investment. And investors in the stock market seem well aware of the fact. In the first week of the war, Raytheon's stock climbed from 60 dollars to 77 per share. Lately, Raytheon's share price hasn't risen quite as fast as other defense stocks, but stock analyst Cai Von Rohmer of Cowan & Company thinks that's only because Raytheon's stock is being undervalued.

CAI VON ROHMER, Stock Analyst: I think in part the market is missing the point, which is that Raytheon has a system with foreign sales potential, which none of these other manufacturers have.

MR. SOLMAN: Jeff Ubben of Fidelity Investments agrees.

JEFF UBBEN, Investment Manager: Today you have a proven weapon and you obviously have a threat. The international prospects for this weapon are substantially improved, and I can give you names, Egypt, Turkey, Saudis, of course, Israel, Britain, Poland is also looking at it, because it's a successful weapon, proven.

MR. SOLMAN: Armaments is the only category of manufacturing products which America exports far more of than of imports. Arms is the big industrial plus in our trade balance, along with airplanes, a spin off from the military. So products like the Patriot may help the U.S. trade deficit and will certainly help the companies that make them, but is there much for the non-military sector to learn from Raytheon's Patriotic success? We put the question to Jeff Ubben.

MR. UBBEN: The lesson to be learned from Raytheon's success is stick to your knitting. They took a known technology and pushed it further. They did not try to invent a new technology.

MR. SOLMAN: Raytheon claims it has learned another industrial lesson from Patriot as well, to tear down these so-called "Chinese Wall" between the people who design a product and those who manufacture it.

MR. SHANLEY: We instituted what is now religion in Raytheon, what we call transition to production, whereby the design people who actually design the product in the first place go live with the factory people and make sure that the two people are agreed on what the design should do and how it should be made, that it's manufacturable and will still do it's job, and will have a high reliability.

MR. SOLMAN: There was a wall between design and manufacturing in the Patriot program and it almost killed the entire missile system. Only when Raytheon removed it in 1983 did the system take off and the company says it's now tearing down the wall in its other businesses, its Amana Home Appliance Division, for example. But to political economist Robert Reich, what works for the military doesn't always work in commercial production.

ROBERT REICH, Political Scientist: When it comes to a complex weapon system, when we can spend any amount of money, when we're only producing a relatively small money, when it's highly complex engineered, when we don't have to worry about mass production at all, chances are we can do it pretty well. American consumers like the consumers of any country want basically two things from the products they buy. They want those products to be reliable and they want them to be cheap. The American military basically wants one thing from the products they buy. They want them to be reliable. They don't care how cheap. We are very good in this country at producing reliable products, but they're not cheap.

MR. SOLMAN: Now all this is not to say that the super high tech Patriot isn't worth the price even against the relatively inexpensive Scud. But you'll have to factor in political and moral judgments, not just economic ones. How do you evaluate whether the Patriot is cost effective or not?

TED POSTEL, Defense Analyst, MIT: It's cost effective if you think the psychological value of being able to defend against these relatively inexpensive weapons is important and you're willing to pay for it. It's not cost effective if you recognize that these missiles cost fifty or a hundred thousand dollars each, they have not done much damage and the interceptor you're using to go after this military costs a million dollars, so there's a ten to one cost exchange ratio that's not in your favor.

MR. SOLMAN: The point is the U.S. attitude of damn the costs, full speed ahead, may work when you throw money at military problems, but to Robert Reich and others that doesn't make U.S. industry more competitive. If anything, it reminds them of industry in the Soviet Union.

ROBERT REICH: If it's research intensive, if they're willing to spend billions of rubles, it has nothing to do with commercial competitiveness or high volume production, very often he can do it, like we.

MR. SOLMAN: In fact, even as the Soviets were wowing the world with Sputnik back in 1957, they were following the news over antique radios, an apt symbol of their commercial ineptitude. In other words, military manufacturing is one thing, production for the mass market quite another.

MR. REICH: Like most Americans when I see the Patriot missile hit the Scud in the sky, I feel good, I say, we did it. But I try to remember at the same time that the American economy, itself, is not doing well. Average real wages continue to fall. Non-supervisory workers are now about 15 to 16 percent poorer than they were in 1973. The economy is not competitive. We can't make it on Patriot missiles.

MR. SOLMAN: So even with technical achievements like the Patriot missile system, and remember there have been plenty of high tech failures as well, it's probably prudent to restrain our enthusiasm for what it says about America's industrial future. FOCUS - GUNS & BUTTER

MS. WOODRUFF: With all eyes on the Persian Gulf, the country gripped by recession, and only a few months now since the last budget battle, the President today submitted his new federal budget. It totals $1.45 trillion in spending for fiscal year 1992. That is up almost $200 billion from last year, but also up to recordbreaking levels is the budget deficit. The forecast for this year is $318 billion. And for next, 281 billion. Some other budget highlights, defense spending in 1992 will $295 billion. That's down almost 4 billion from current spending. But that does not include the cost of Operation Desert Storm. On the domestic side, the most controversial change would be a cut of $25 billion over five years in Medicare spending. Finally, $15 billion or more in federal money would go directly to the state to pay for a variety of programs with no strings attached. In a moment we will talk to two governors about the federal package and their own fiscal problems, but first Budget Director Richard Darman. He joins us from a studio on Capitol Hill. Mr. Darman, thank you for being with us.

MR. DARMAN: Thank you. It's nice to be with you.

MS. WOODRUFF: Aren't you a little bit embarrassed to be submitting a budget with a deficit of $318 billion so soon after this budget agreement that was supposedly going to bring down the deficit?

MR. DARMAN: Well, the reality is the reality. We have a war going on. We've suffered the adverse effects of that in a much weakened economy, revenues have fallen off, and we're still paying a price for deposit insurance coverage. $111 billion of that 318 is for nothing but deposit insurance coverage. In time, that problem will be behind us and in time, the economy will recover, so the underlying what economists call "structural deficit" is nowhere near as bad, but still you're right, 318 for fiscal year '91 and 281 for '92 is certainly not a pleasant prospect, but that's the reality.

MS. WOODRUFF: Why did you not include the cost of the war in this budget?

MR. DARMAN: Your premise is incorrect. The budget agreement reached last year said that the costs of Operation Desert Shield wouldn't be subject to the caps that were written into the law on defense spending, that is, the cost of Desert Shield can be added. In this budget, we added $15 billion of U.S. funding for the war and we said that's just a placeholder. We can't know what the full cost will be. But in the 318 is an assumption of 15 billion in defense budget authority for Operation Desert Storm. It's already in there.

MS. WOODRUFF: But you're not saying that's the full cost of what the war is going to be for this country?

MR. DARMAN: No, we're not saying. We can't know at this point. If you could tell me reliably exactly how and when the war would end, I could give you a reliable estimate. I can tell you this, that for the period through December 31st, costs have already been covered by foreign contributions and last year's Congressional appropriation. But if those were now in, we already have foreign contributions in very substantial measure. Last year plus this year we're already up to $51 billion. And that's enough to cover in all probability through March 31st, although we can't be sure.

MS. WOODRUFF: Is that contributions or pledges of contributions?

MR. DARMAN: Those are pledges of contributions, but the performance to date has been pretty good. Of the amount that was pledged last year, almost all is delivered, not all, but almost all is delivered, and if we can keep up that rate, we should have coverage of our cost let's say by foreigners on the order of 75 to 85 percent or perhaps even more.

MS. WOODRUFF: The other thing you do in this budget is portray the recession in what most people would say a very rosy light, that it'll be over, it'll be short, it'll be over by the quarter, the April to June fiscal quarter. How do you expect the budget to be taken seriously when you send it to Capital Hill under those circumstances?

MR. DARMAN: Gosh. I really have to respectfully disagree with the premise there too. Our economic forecast is right in the dead center of most private economists, the forecast. It is not at all rosy. In fact, the group that is frequently turned to at this time of year as supposedly more objective, the Congressional Budget Office, has a rosier forecast than we do at this point. Some people are saying ours may be a little pessimistic. Now if the war were to go on longer than is conventionally assumed, then perhaps the forecast would have to be revised downward, but for the moment, it's right in the mainstream of outside private economists' thinking and it's a little more pessimistic than CBO's. That doesn't mean it's right, but it certainly can't be accused of being too rosy relative to the others at the moment.

MS. WOODRUFF: You say in the director's introduction to the budget that one of the principal causes of the weak economy was too tight a monetary policy. To what extent do you think the Federal Reserve and its chairman, Alan Greenspan, are responsible for this recession?

MR. DARMAN: Well, I said that there were three causes, and that it was the combination of the two that tipped us into recession. One was two years of monetary policy which was on the tight end of the Federal Reserve range. That limited the potential for real growth in the economy and kept us growing more slowly than we should have been used, near in the zero to 1 percent range. Then the regulatory crunch was the second one I alluded to where banks and bank regulators had to some degree themselves tightened up too much on lending. Third, Saddam Hussein's invasion and the associated effects of that, high oil prices, high interest rates, fears of inflation, uncertainty, consumer confidence falling, the third one is by far the most important, but the other two are contributors as well. To fix the situation we're in we need all three to get fixed probably.

MS. WOODRUFF: Well, to what extent -- I mean, could you answer to what extent you think the Fed was responsible?

MR. DARMAN: The Fed was a contributor along with the other two causes that I've referred to. The most significant cause, however, by far was the war.

MS. WOODRUFF: Well, if Mr. Greenspan --

MR. DARMAN: Saddam Hussein's invasion, not the war per se, but the invasion and the effect on oil prices and uncertainty and confidence.

MS. WOODRUFF: Well, I think some people would wonder why if the administration is critical of Mr. Greenspan and the Fed's performance are you all putting Mr. Greenspan in charge of this committee to study the feasibility of a capital gains tax reduction.

MR. DARMAN: Well, Mr. Greenspan is very well respected as a neutral and fair minded person. He has performed mediating roles in difficult problems before. He did so very well in '82/'83 with respect to Social Security. He and we differ from time to time on many issues, but we never question his professionalism or his integrity or his sense of responsibility or his fairness. We have honest intellectual differences from time to time.

MS. WOODRUFF: On the capital gains proposal which we were just discussing, we know what the administration's arguments are. Those have been made before. The Democrats are saying, some of them, that even if you're right and if it does give the economy a boost, which they dispute, the benefits will go disproportionately to the wealthy and they would like to counter that potentially with a surtax on millionaires. What would be wrong with that?

MR. DARMAN: I'm not aware that the Democrats have, in fact, decided to propose once again to raise taxes.

MS. WOODRUFF: Some of them are discussing that.

MR. DARMAN: I see. I would not have thought that the American people would like to see us restart a debate about raising taxes. We certainly would not like to do so within the administration. I think the political system pretty well exhausted itself on the subject of taxes only a few months ago. I don't think it would be good for the economy or public confidence to suddenly reopen a broad tax debate as any proposal to raise taxes would do.

MS. WOODRUFF: Another proposal, another thought -- the proposal that's been put forward that relates to the capital gains tax -- you say that it would stimulate the economy, but wouldn't a cut, for example, in the Social Security payroll taxes, which many Americans would welcome, be an even bigger boost for consumer confidence in this country?

MR. DARMAN: You can get an argument among economists on that point, but let me raise a non-economic argument with respect to Social Security. If you start playing around with Social Security taxes, the next question to ask is what will you have done to the ability to pay benefits in the future? Are the people who proposed to cut taxes also proposing to cut benefits? They find that question to be an awkward one. If they're not, are they proposing to tax other people to pay for their tax cut? How are they going to keep the ones solvent? If you start the Social Security debate, it's not atall clear that you come out the other side with something so popular as the idea that you go in with and the President a year ago said what I think is probably the wisest thing with respect to Social Security, don't mess with Social Security.

MS. WOODRUFF: On your proposal to transfer some $15 billion in funds to the state, one of the Democratic governors, in fact, one of those who's going to be interviewed on this program in a few minutes, Gov. Florio of New Jersey, has said, "Gee, thanks, but is that all there is? The goods just aren't there. What good is discretion over spending, when there is so much less to spend? There's not enough to meet the country's needs."

MR. DARMAN: Well, I'm not sure I understand. I haven't heard Gov. Florio speak directly to this point yet, and perhaps he's an enthusiast for the idea, but he would just like to have more money associated with it. Actually, we've said to Gov. Florio and to all of the governors that if we could agree with their man, with the Congress on additional programs to include we'd be happy to transfer those as well possibly to the state for more efficient management by the states closer to the people. We think the states can be more innovative and we think that it may well be that we should go beyond the $15 billion we have proposed. The President said that's a minimum to make the idea worthwhile. He's not setting it as a maximum.

MS. WOODRUFF: Well, Mr. Darman, we thank you for being with us.

MR. DARMAN: Thank you.

MS. WOODRUFF: Jim.

MR. LEHRER: Now some governors' reactions to that one piece of the administration's budget, the proposal to turn over $15 billion in federal programs to the states, the White House has identified a range of those programs in job training, rural health, education, highways and law enforcement. John Ashcroft is the Republican governor of Missouri and vice chairman of the national Governors Association. Jim Florio is, in fact, the Democratic governor of New Jersey and vice chairman of the Association's committee on human resources, the Association is meeting in Washington today. Gov. Florio, is that your position, good idea but not enough money?

GOV. FLORIO: Well, I guess the real response is we don't know how much money is involved with it. I just got some information today, and I haven't shared this with other people, but one of the programs that's supposed to be in this block grant proposal is something called the educational opportunity grant, which is tuition assistance. There's a $173 million cut in that. I think what I sense from the White House folks and Gov. Sununu yesterday was that the hope was that the programs that we've put into this block grant category would not be reduced. I guess the concern that many of us have is that means other domestic discretionary programs which were under the imposed cap by virtue of the budget agreement will inevitably have to be reduced. I don't have any difficulty --

MR. LEHRER: Like what? Like what?

GOV. FLORIO: Well, as I understand it, what the administration was talking about was giving us some say in what programs we're doing. That means, of course, the ones that are not in are out and the ones that therefore are out will inevitably have to be reduced.

MR. LEHRER: In order to keep the other ones from not being cut.

GOV. FLORIO: Because they want this new imposed tax. And, of course, all of these programs are the ones that in the last decade have really been reflected dramatically because defense was not cut, entitlements were not cut, Graham-Rudman resulted in reductions and these are the programs that had been eliminated. Discretion is good. The problem is if it's discretion to preside over the corn, that's not so good and we're going to be looking forward to getting more specific information out of the administration. All of us at the governors' level all know what it's about to be cutting. We're all cutting, we're all going through difficulties. What we don't want to see I suspect is just sifting of course from the federal government back to the state level, but the piece you had about the Medicare cuts, I mean, the cuts in Medicare result inevitably in increases on the Medicaid side. My budget for Medicaid alone is $1.2 billion, roughly 10 percent of my budget. If you're going to be economizing in Washington and in a sense not tightening your belt but tightening my belt, that just means the problems at the state level are going to go up, and that's not I don't think what's comfortable.

MR. MacNeil: Gov. Ashcroft, how do you analyze this?

GOV. ASHCROFT: I think it's an excellent idea. While there are certain items that were listed as examples in the budget that we might come to an agreement on and have the flexibility to spend the resource in ways best to serve our people. The White House has made it clear that they aren't specifying which program it has to be and I don't think putting some of those programs in the hands of states for flexibility will reduce other programs. It's my understanding that any item in the budget is the same amount, whether it's kept under the federal bureaucratic system or whether it's sent back to the states for flexibility, and so I think sending 'em back to the states for flexibility is a very good idea. I'll give you an example. One of the governors today from a Western state with low population complained about a drug program which required a certain portion of the drug program to address the needs of intravenous drug users. He said in the United States we don't have the problem with intravenous drug use. It's a wide open state. We've got other kinds of drug problems, but we have to try and find a category of problems to address that's been specified by the legislation instead of being able to devote the resource to meeting the needs of the people. It's different. Hannibal, Missouri, is different than Harlem, New York, and we ought to be able to adapt and tour the programs we have so that we serve the citizen instead of serving the system, and the bureaucratic overload. I'm told that about a thousand pages of Federal Register contain the regulations, and the estimate is on the suggested items that about 4 million bureaucrat hours are spent every year complying with the paper work in those regulations to free us from that and let us serve the people with the resource, even if it's a limited resource. Gov. Florio says that he's presiding over the allocation of pain, it's not a good thing. Well, if there is going to be a short supply, then let us use that short supply as efficiently as possible, rather than trying to force our meeting of the needs into some cookie cutter or bridge of me tricks that's been established here in Washington.

MR. LEHRER: Governor, do you have any problems with that?

GOV. FLORIO: Absolutely none, but we have to acknowledge the fact that we're talking about a supply and the environmental grant program is being cut by $100 million. That means we will have the discretion apparently to make the determination as to which component of that grant program we want to use, but make no mistake about it, this is not the euphoric feeling that somehow there aren't any difficult decisions.

MR. LEHRER: Has there been any mechanism suggested to you all as to how the White House and you governors are going to sit down and make a deal on which programs get in there and which programs don't get in there? Let's say you want one set of programs in there and you want another. How's that going to work?

GOV. ASHCROFT: Well, I think it's very likely that we'll ask the committees of the National Governors Association to look at all these programs. There are I think 450 categorical grant programs, $200 billion worth of programs, and we'll try and think of which ones we can best use more efficiently by decoupling from the regulations, and so I'd expect the governors to work on this together to try and develop a consensus. The administration's indications to me and to the governors appears to be that they're not particularly concerned which ones. They like the concept of giving us flexibility, and in that respect, I think we ought to pick ones where flexibility will help us the most.

MR. LEHRER: Do you agree with that, there's not going to be a problem, you all, you will take what you can get, because the key thing here is flexibility?

GOV. FLORIO: Well, the other part is, of course, the Congress has to do this.

MR. LEHRER: Yeah.

GOV. FLORIO: So it's not sufficient for the governors and the administration to sit down, the Congress has to be involved as well. The concept of discretionary authority is certainly desirable, but I just think it's important to keep emphasizing we're having discretion over lesser amounts of money totally because these discretionary programs that we will by some consensus arrive at as being the key ones are a portion of the total domestic discretionary budget.

GOV. ASHCROFT: That's not a factor of whether or not they come to the states. That's a factor of the condition of the cap which was imposed in the agreement last October. Yes, there are some programs in which there's going to be less money, but that's because we made a judgment last year in a decisional circumstance totally unrelated to this that there was going to be a limit on what we would expend this year, and in that context, we have to decide do we want flexibility or not, and I think that when a governor really makes that decision he has to decide that he can really tailor and focus those scarce resources best with that flexibility.

MR. LEHRER: Let me ask you each a general question. As the governor of New Jersey, Mr. Florio, you looked at the budget that the President submitted today. Understandably, you couldn't have read the whole thing. It's huge. But did you as the governor of New Jersey say this speaks to the problems that face the people of New Jersey?

GOV. FLORIO: I said that it speaks to the problems that face all of us. These are austere times and we really do have to tighten things down a bit. I guess what I was most concerned about was this shifting, of course, transportation programs. There is a changing of the formulas so the states are going to have to come up with more money to be able to qualify for the moneys that are going to be available for us. Changing the rules, particularly at this time, is very difficult, because some of us have relied upon what the formulas have been and what we're doing, therefore, is cutting the federal responsibilities, but we're telling the states that they're going to have to have increased responsibilities. It's not like the states haven't been doing things in this area. The states are all stretched to their limited capacity to make contributions.

MR. LEHRER: Gov. Ashcroft, in Missouri, knowing what life is like on the ground in Missouri and then overlaying the federal budget on it, did you say hey, they understand what's going on, there are problems in this country and this budget speaks to those?

GOV. ASHCROFT: A couple of things in specific. First of all, as vice chairman of the association in behalf of the governors, I asked the President for relief in the area of the workers compensation, unemployment compensation administration costs, and he included $100 million on an emergency supplemental basis. The only other emergency supplementals are the costs of the war. He was very responsive to our needs there. Secondly, he continues to help us with funding for education, not the least program of which is the Head Start program for youngsters. That's up 33 percent in the last two years. That's a major plus. The highway program is very important to the country. It builds infrastructure, the kind of frame work upon which we can grow economically and while there may be a change in the match requirements which will challenge the states to do a little bit more on their own, it's significant that while we were at a $12 billion cap in terms of the federal government participation, that we moved that cap to $14.5 billion this year and that cap goes up to 16.8 billion I think for next year. That's a major infusion of resource into the construction of our highways as infrastructure. Those three areas were areas that I was deeply grateful for.

MR. LEHRER: Do you have in a recession in Missouri?

GOV. ASHCROFT: Yes, we do.

MR. LEHRER: How bad?

GOV. ASHCROFT: Well, we are -- I've had to cut about $100 million out of the state's budget which was appropriated this last year.

MR. LEHRER: How bad is it in New Jersey?

GOV. FLORIO: It's not as bad as it could have been. We made tough decisions last year to deal with a $3 billion deficit last year. As a result of those actions --

MR. LEHRER: You raised taxes.

GOV. FLORIO: Raised taxes, cut $2 billion out of the budget -- this year we have a six to eight hundred million dollar shortfall which is serious but manageable.

MR. LEHRER: Gentlemen, thank you both very much. RECAP

MS. WOODRUFF: Once again, today's major developments in the Persian Gulf War, Iran's president offered to mediate peace talks between the U.S. and Iraq, the White House reacted cautiously, saying it expects no changes in its military efforts to drive Iraq from Kuwait. Allied planes again pounded targets in and around Baghdad, and at least 25 Iraqi tanks were destroyed by Marine fighter bombers in Kuwait. Finally, here is a list of U.S. servicemen identified by the Pentagon today as having been killed in the war this past weekend. [KIA: LANCE CPL. ELISEO FELIX, U.S. Marine Corps, Avondale, Arizona; MAJ. EUGENE McCARTHY, U.S. Marine Corps, Brooklyn, New York; CAPT. JONATHAN EDWARDS, U.S. Marine Corps, Terrace Park, Ohio]

MS. WOODRUFF: Good night, Jim.

MR. LEHRER: Good night, Judy. We'll see you tomorrow night with an interview with former secretary of state George Shultz. I'm Jim Lehrer. Thank you and good night.