The MacNeil/Lehrer NewsHour

INTRO

JIM LEHRER: Good evening. In the headlines today President Reagan signed off on military spending cuts that satisfied Secretary Weinberger but not his budget advisers.On the economy, personal income was reported up, housing starts and the prime lending rate down. The Education Department rated the 50 states on education, and Iran said it will put the four Kuwaiti airliner hijackers on trial. Robin?

ROBERT MacNEIL: Here's your guide to the NewsHour tonight. After the news summary, our major focus section is on defense, the President's budget and the economy. Key members of Congress and leading economists debate. Then Kwame Holman has a documentary report on prisons run for profit. And, for our final focus section, Judy Woodruff explores grading the states by the quality of their schools. News Summary

LEHRER: President Reagan ended the infighting and speculation over cuts in the defense budget today by making a decision. He approved a $28-billion reduction in military spending over the next three years. It includes $8.7 billion next year, but the three-year total is considerably less than Mr. Reagan's budget advisers and many congressional leaders wanted. Defense Secretary Caspar Weinberger was more than pleased.

CASPAR WEINBERGER, Secretary of Defense: We have a very satisfactory budget result and decision announced by the President, and one that will enable us to continue the regaining of the necessary deterrent strength on which we've been engaged for the past four years. We have, at the same time, made a substantial contribution in the reduction of outlays to the deficit reduction effort. The factual figures I think you've been given, but the figures are that we would reduce budget authority by $11.1 billion and the outlay estimate reduction from that is $8.7. And those two figures are well below, over a billion below the figures that the Congress designated for the 1986 spending in the budget concurrent resolution passed just about two months ago. And so we would hope that coming in under those figures would be of some considerable encouragement to the Congress.

LEHRER: Our lead focus segment tonight is all about the wisdom, the economics and the politics of today's decision.

Also on the defense beat today, the FBI arrested a 40-year-old Northrup Corporation engineer for trying to sell secret data on the Stealth bomber to the Soviet Union. The arrested man was Thomas Patrick Cavanaugh of Los Angeles. FBI Director William Webster said the information involved was on what makes the so-called Stealth bomber invisible to radar. The U.S. has been working on the billion-dollar Stealth project for years. Webster said if Cavanaugh had been successful, it would have done irreparable harm to the U.S. national security. Robin?

MacNEIL: There was a lot of good news about the economy today -- reports that Americans are making more money, spending more money and paying less to borrow money. Another big New York bank, the Bankers Trust Company, cut the prime rate it charges for loans to its best customers from 11 1/4% to 10 3/4%. Bankers Trust is the ninth largest bank in the country, and many other banks are likely to do the same.

The government reported that personal income rose by 0.7% in November, a big increase of $25 billion over the month before. And consumer spending went up even more, by 0.9%, which was taken as a sign that the slowdown in early fall was temporary.The one sour note was housing starts, down 0.7%. Even there industry experts predicted the pace will pick up if interest rates keep going down. With all that bullish news, the stock market went up sharply. The Dow Jones average of 30 industrials on the New York Stock Exchange closed 1211.57, up 34.78 for the day. The volume of trading was very heavy.

In Fremont, California, the first product of a joint venture by General Motors and Toyota emerged from the factory today. The new car is a sporty four-door subcompact called the Nova, a name that was used once before by GM's Chevrolet division. GM and Toyota each owns half of the joint venture, which is called the United Motor Manufacturing Company. The plant was an old GM factory that was closed in 1982 and rebuilt at a cost of $250 million. By 1986 United Motors expects to be turning out 200,000 cars a year and employing 2,500 people.

Elsewhere on the business and financial beat, the price of gold continues its steep drop today, down $5.30 an ounce to $308.70, the lowest price in 2 1/2 years. Traders said gold has been going down because oil prices have been going down, and today the Organization of Petroleum Exporting Countries tried once more to do something about that. An OPEC committee, meeting in Geneva, recommended continuing the production cuts put into effect in October. The committee also called on OPEC members to stop cheating on the production quotas which are fixed at 16 million barrels a day.

LEHRER: Outgoing Education Secretary Terrell Bell took his last official shot today. He released a state-by-state comparison of how education is going out there in the 50 states. It was a mixed report card, with some good news about college entrance scores.

TERRELL BELL, Secretary of Education: It's heartening to me to see that 32 states have improved in their college entrance exam scores, and that only 10 declined.We think this is at least some evidence that we're getting the beginnings of an academic turnaround, but we don't want to be too early in declaring that we have a dramatic academic recovery. The indicators look good.

LEHRER: Secretary Bell was the first Reagan cabinet member to resign after the November election. He flies back home to Utah tomorrow to resume his teaching career. We will get reactions to today's state rankings from two educators in a focus segment later in the program.

At nother Washington news conference today officials of the self-styled citizen's lobby, Common Cause, declared Presidential counselor Edwin Meese unfit to be attorney general. They said he had violated ethical standards in his financial dealings. Meese was cleared of any criminal wrongdoing by an independent counsel or special prosecutor.

MacNEIL: Turning to foreign news, the State Department said today that the United States expected the four hijackers held by Iran to be tried in public. The statement said Washington was unimpressed by Iran's announcement that the men who killed two American hostages would be tried under Iranian law.

In the Persian Gulf, Iran's opponent, Iraq, said its planes hit another merchant ship. The ship was not identified.So far this year, 47 merchant ships have been hit by Iraq or Iran.

Israel's 97-day-old government is in crisis today and threatened with collapse. A small religious party quit the coalition, and Foreign Minister Yitzhak Shamir threatened to pull out his likud and bring down the government unless Prime Minister Shimon Peres settled the dispute.

In Lebanon today, Christian and Druse militias waged artillery battles. Three civilians were reported killed and 18 wounded.

LEHRER: The man with the hard name to pronounce, Mikhail Gorbachev, spoke to members of the British Parliament today about peace. The number-two man in the Soviet leadership finished day four of his week-long visit to Britain. He told the Parliament's foreign affairs committee the Soviet Union is ready to take radical measures to limit nuclear weapons, and he challenged the United States to be realistic in talks month week in Geneva. He also flared up when questioned about the way his country treats religious groups. "You govern your society and leave us to govern ours," he said. But Britons who were present said the meeting ended in a friendly way.

MacNEIL: In Louisville, artificial heart patient William Schroeder regained his appetite and seemed more alert today as he recovered from what doctors are now calling three small strokes. Schroeder got out of bed and resumed small arm and leg exercises. The head of the Humana Heart Institute, Dr. Allan Lansing, said that because of Schroeder's returning vigor and enthusiasm, "I am confident his memory will be restored." Yesterday Schroeder was reported having difficulty knowing what day it was and recognizing members of his family. Defense: How Deep a Cut?

MacNEIL: We return now to day's lead story, the President's decision to trim the growth of the defense budget. Our focus section hastwo parts: first, the reaction in Congress, then two economists debate the actual impact on the federal deficit and the economy.

As outlined today, the key defense numbers are $8.7 billion, the amount the 1986 Pentagon budget will be reduced. That's $700 million more than budget director David Stockman originally requested. And there's a three-year cut of $28.1 billion, well below the $58-billion cut Stockman wanted from the Pentagon. In total dollars the current defense budget calls for spending $258.6 billion. Under the plan announced today the 1986 Pentagon spending will increase to $277.5 billion. Spokesman Larry Speaks said President Reagan feels the Pentagon is doing its part to reduce the deficit.

LARRY SPEAKES, White House spokesman: The President has made his decision regarding the defense budget. The decision is based on his determination that all agencies and departments, including the Department of Defensee, will be involved in the plan to reduce the deficit.

REPORTER: Obviously you're now going to be subject to complaints that there's a double standard here and that you've cut domestic spending by one much harsher standard than you've cut defense. How do you respond to that?

Mr. SPEAKES: Well, the President has to make a decision based on the national interest. He has indicated that all departments, including the Department of Defense, should take a share of budget reductions, and Defense Department has reduced their requests substantially over the three-year period from what they originally tendered.

MacNEIL: At a Pentagon briefing, Secretary Weinberger said how the budget cuts would be made.

Sec. WEINBERGER: The reductions will come in a number of ways. There is, as you know, a government-wide civilian pay freeze and a civilian pay cut of 5%. For some of us it will be 10%. And the revised figures with respect to inflation and fuel costs and some programmatic reductions, generally in the amount of about $2.5 billion in outlays, which are yet to be identified because, of course, the decision was just made yesterday. There will be a pay increase for the troops, which I think is extremely important. It's not as much as we had originally requested, of course, but it is vital that we do our very best to keep a commitment to the troops.

REPORTER: Despite your best efforts now Congress may still try to cut the defense budget --

Sec. WEINBERGER: Well, I have not ever been very successful in predicting what the Congress is going to do and so I have given up trying. But I would certainly want to point out to them, perhaps at too great length, the importance of doing what we're doing and the fact that we did come in underneath, below, the amounts they allocated for defense in the concurrent resolution that passed the Congress, both houses, just two months ago.

LEHRER: As the Secretary indicated, the administration's explanations and pitches were directed mostly at one select audience, the Congress of the United States, because that is where it must sell or there is no sale. We sample the market now with two mmembers of Congress who will be in the thick of the debate in the weeks to come. They are Senator Jake Garn, Republican of Utah and member of the Senate Appropriations Committee and two of its defense subcommittees. Senator Garn is with us tonight from Salt Lake City. And Congressman Les Aspin, Democrat of Wisconsin, a member of both the House Armed Services and Budget committees.

Congressman, is it enough?

Rep. LES ASPIN: I don't think so. I think the point made is that the cuts that are being asked on the domestic side are greater than the defense side. For every dollar cut in the defense budget there's a $6 cut on the domestic budget. I don't think that looks fair. And, secondly, the rate of increase -- the second way to measure it -- is, has it slowed down the rate of increase in defense spending very much? And my guess is that the rate of increase in defense spending that you've got, even after the Weinberger cuts, are still excessive. They're up five, six, seven percent a year, more in the out-years. And I think it's -- I think that that's going to be seen as too much.

LEHRER: Are they real cuts to you?

Rep. ASPIN: Well, they are real cuts in the sense that they are going to be cuts in outlays, so there's clearly going to be some cuts. And it is lower than we had in the Reagan early years. We are talking about 12% real cuts in 1981, 1982; now we're down to a six, seven, eight percent real increase in the '86, '87, '88 period. So it's less than we used to have. But I would say that public opinion is certainly talking in terms of maybe a three- to four-percent real increase in defense spending.That's about the rate of inflation. And I think that we have to balance against what you really need to defend the country versus what you need, of course, to make the economy work right, and it's a judgment call. But I think most people would say that a 6% rate of growth, 7% rate of growth in defense spending, given the size of the budget, given the cuts that are being made in the domestic side, is too much.

LEHRER: Senator Garn, are you one of the "most people"?

Sen. JAKE GARN: I think that it's been cut too much, Jim, and I think we have to look at it in perspective. In all the years I've been in public office, which is now 17 and 10 in the Senate, I don't know that I've ever seen such a myth created about defense spending versus social spending. In 1960, '61, '62, when John Kennedy was president, we were spending 48 to 49 percent of total outlays for defense, out of the whole budget! And we had been reduced by the time Ronald Reagan became President to about 23% of the budget. And now, even after these increases that have occurred, to replace the decade of the '70s, which was disastrous, when we cut defense far, far too much, Ronald Reagan and Cap Weinberger, the cuts they agreed to today are a less percentage of the total budget outlays of this country than Gerald Ford had in 1975. The budget they're talking about is less than Jimmy Carter recommended as he left office for this year. And nobody wants to make that point. Defense was gutted during the decade of the '70s, and it's like you would say to somebody, well, gee. I got my income cut by 25% and I want a 10% increase, still leaving you below where you were before, and everybody says, "Hey, you can't have that kind of an increase." The social programs under Ronald Reagan have increased by 38%. They haven't been cut. The rate of growth has been cut.

Defense has become the political scapegoat for gutless congressmen and senators who are looking for some easy, painless way to solve the deficit problem. And they won't recognize that this isn't because of massive increases in weapons programs. More than half of our total military budget is just for people. It's to pay their salaries. We made a conscious national decision that we wanted an all-voluntary military rather than the draft, and that's expensive. That's where most of the defense budget goes, for people. But I really hate to see it politicized. And I was part of the Rose Garden strategy last year; I was part of the six-pack the year before. I said to the President, I said, "Mr. President, I'm superhawk. I agree with you and Cap. We need more for defense, but you're not going to get it out of Congress." So we negotiated those cuts. We went from $313 billion for defense last year to $299 out of the Rose Garden strategy, ultimately cut by the Senate and House to $292, and that wasn't enough. So now they want more. So now the President's offered another $29 billion cut and that isn't enough. We're only going to be at about 26% of the total outlay for defense. And remember, John Kennedy spent 49%. Gerald Ford had 26%. If Ronald Reagan had got every dime he asked for the last three years, we would only go to 29% of the budget for defense; that is historically low. Congress just doesn't have the guts to face the real issue. If you strip out the politics, the Republicans, the Democrats, liberals and conservatives, get an old-fashioned accountant with his green eyeshades and his black armbands and say, "Hey, what do you think about this budget?" he's going to say the real growth has come in the entitlements programs, not in defense. And I've got seven kids, Jim, and I'm a little bit tired of people taking chances with the security of this country, with the arms control process, by trying to cut defense too much for the sake of their own political futures.

LEHRER: Congressman Aspin, you've got a lot to answer there.

Rep. ASPIN: Well, I think that the comparisons between how much -- what percentage of the budget that we're spending on defense now compared to then doesn't really have much meaning. After all, the total budget has gone up an awful lot, as Senator Garn has pointed out. A lot of social spending has increased. So the budget, the defense budget is a smaller percentage, but does that mean we're spending less on defense? Certainly not what the numbers would indicate. The bottom line is, how much are we spending vis-a-vis what we need to spend to defend the country. And I would say that you need to spend to defend the country about a 5% real increase in defense spending a year.The Soviets are spending now a real increase in their defense budget, we estimate, the CIA estimates, about 2% a year.If we spent about 5% per year real increases in defense spending, that would be a very substantial response to whatever the Soviets are doing. The Weinberger cuts have left us with a real growth rate above that. Now, what has happened is inflation has come down. The numbers again, comparing where we are now compared to last year, or where we were under Jimmy Carter, don't mean anything because a rate of inflation was assumed from those days which is not true today.The rate of inflation has come down, so the real growth now in the budget is a lot more than it was under Jimmy Carter, and it's more than we anticipated when we set the numbers a year ago.

LEHRER: What about Senator Garn's serious charge that it's really those of you who are calling for more defense cuts are essentially gutless Congressmen who are afraid to take on the real issue of the federal deficit?

Rep. ASPIN: There is no easy way to cut the defense -- to cut the federal deficit. And whatever you do requires guts. If you raise taxes, that requires guts. If you cut domestic spending, that requires guts. If you cut defense spending, that requires guts. The question is to get a balance and a balanced approach to reducing the deficit, which calls upon each of the factors to make some kind of a sacrifice toward it. And ultimately, in regard to defense, you're asking to balance out two responsibilities, both having to do with national security. One is a strong military; the other is a strong economy.Because a strong economy is just as important to national security as a strong military. What you've got to do then is balance out how much do we spend on defense in every kind of a year to balance out where we are in terms of what military we've bought versus the deficit that we've bought.

LEHRER: He's right about that, isn't he, Senator Garn?

Sen. GARN: Certainly he's right, in general context, and let me say, Jim, that Les is not one of the gutless ones. Les has taken some tough positions, like supporting the MX, on the House side. He has tried to achieve a balance between defense and sociawl programs when many of our colleagues have not.

LEHRER: Well, he's the only one I had here to ask the questions of.

Sen. GARN: But I must disagree that it isn't important to make comparisons with other years, because the myth I was talking about was that somehow we are cutting into the social fabric of this country by the increases in defense.And my point was simply that it is very important to point out that the real shift and the real growth in priorities in this country during the period from 1960 to 1980 was from defense to the social programs. Now, I'm not advocating we have 40% or more for defense. That is ridiculous. But the President's request to go to 28 or 29 percent would still leave that priority dramatically changed towards the domestic and the social end of it. The other point that Les makes, if we could end up with a 5% real growth every year, he and I would have no difference at all. But when we started out with the President asking for 11, we cut it to seven; the Senate passed five, the House passes about 2 1/2, and we end up with four. That is the reality of the situation, and Les and I could agree right now that a 5% real growth over the next three years would be adequate, I would be willing to accept that, too, if he can tell me that the House of Representatives will end up with a 5% --

LEHRER: We will be back to you all in just a minute. Thank you Robin?

MacNEIL: The debate over defense spending is also being monitored by economists concerned about the impact on economic growth.As you know, today the government reported that personal income and consumer spending rebounded last month, but construction of new homes dropped to the lowest level in almost two years. The mixed economic picture, coming at a time of economic slowdown has aroused fears that another recession is possible. For the economists' perspective on today's news we have Lester Thurow, a professor at the Massachusetts Institute of Technology, the author of several best-selling books on the economy. He joins us tonight from public station WGBH in Boston. In Washington we have Herbert Stein, senior fellow at the American Enterprise Institute, and a former chairman of the Council of Economic Advisers under President Nixon. Starting with you, Mr. Stein, is the Weinberger cut today a fair compromise, given the level of domestic cuts already announced?

HERBERT STEIN: Well, I don't think we should have made any cuts in the defense program, so I don't regard it as a fair compromise. I don't think that's the problem we have, is one of making a compromise between defense programs and social programs. The defense program is our greatest social program, because without an adequate defense program, our social system would be in total disorder. I think the balance we have to look at is the balance between the U.S. military potentialities and the Soviet military potentialities. And my belief, although I'm no expert on this -- I look at an independent committee, the Committee on the Present Danger. They say we're behind and they say we're not going to catch up with even the President's proposed rate of defense spending. So it seems to me a needless risk to be taking.

MacNEIL: Mr. Thurow, what's your view of the Weinberger cuts versus domestic spending cuts?

Mr. THUROW: Well, if you really come down to the judgment that this is all we can cut out of the defense budget, and you look at even the announced cuts in the social budget, then there is a very simple bottom line, and that is the President needs to come in and ask for a very large tax increase, because even if he gets everything he wants in terms of cuts by the time he leaves office, the budget deficit is still going to be $150- to $170 billion a year, and that's unacceptable. And so I think the real thing that's wrong with today is, if you buy the defense argument that he's cutting all he can cut, then he just isn't living up to his responsibilities as the President of the United States to say, "Look, I also have to take care of the domestic economy. I've got to come in and ask for a truly large tax increase."

MacNEIL: Mr. Stein, what's your view of that?

Mr. STEIN: Well, I agree with that. I think we need a tax increase. I think the whole thing of these defense numbers are really trivial compared with the tax numbers. The Treasury recently came in with a tax program in which the rates would be 15%, 25% and 35%. If they come in with a program for 16%, 26% and 36%, that would yield four or five times as much money in 1986 as they're cutting out of the defense budget. So I think that, given our important national priorities, both to defend the country and to take care of poor people -- I think there's lots that we can cut out of the spending side of the budget -- we'd really need a tax increase.

MacNEIL: Mr. Thurow, although it won't get the budget deficit down, and you just mentioned the figures, totally, do the cuts already announced reduce the deficit enough to remove the threat it poses to the American economy?

Mr. THUROW: I don't think so, because if you think what is the nature of that threat, there are really two things wrong with a huge budget deficit in the long run. The first basically is that it's Keynesian stimulus pumped into the system, and if you're pumping $200-billion worth of Keynesian stimulus into the system over the years, eventually you get close to full employment, and that breaks out in inflation -- not tomorrow, but eventually. The second objection to a big federal deficit is it's negative savings. You're basically subtracting money from private investment and using it to finance public consumption -- defense, in this case, but nonetheless public consumption. That leves you with less investment, a little lower rate of growth of productivity, a little less competitive in international markets, and you look back five, 10 years later, and you find that you've slipped a little bit relative to the rest of the world. The real problem here is that the federal budget deficit is not a crisis. It's kind of like a slow tumor. It kills you in the long run, but on any given day you can live with it. And I think that's the real problem you have to deal with.

MacNEIL: Well, my question is, will these cuts, if the Congress were to go along with them, will they enable the country to live with the deficit for another year?

Mr. THUROW: I think we can live with the deficit for another year even without the cuts, as far as that's concerned. It isn't an '86 problem; it's what happens over a five to 10-year period of time. And if you look at the size of these cuts, they don't really make a significant difference in the size of the deficit that we'll have three or four years from now.

MacNEIL: Mr. Stein?

Mr. STEIN: Well, I agree with that. I think the only significance of these defense cuts is that they are the price we have to pay, apparently, since there are a lot of people in the Congress and others in the administration also who don't think that the defense program is that critical, it's the price that we have to pay in order to get the Congress to go along with another $30- or $40 billion of other cuts so, that you can say the significance of cutting $8 billion out of defense is that maybe it will persuade the Congress to give us another $30- or $40 billion of other cuts. But that's not a rational way to run the railroad. And I also agree with Les that the deficit problem is not a problem for 1985 or 1986. It is a long-run problem and we are just showing again that we don't have very much capability to take account of our long-run needs.

MacNEIL: Well, is the political alarm over it unwarranted?

Mr. STEIN: No. I think the fact is that the alarm ought to be greater. The alarm ought to be about what we're going to face in 1990, not about 1985; and the alarm is not really very great. The talk is very great, but, indicated by the willingness to do very much about it, the alarm apparently is not there.

MacNEIL: Let's turn for a moment to the background to all this deficit situation, and that is the state of the economy at the moment. Given the figures out today, and taking them with other figures about the slowdown in the economy, Mr. Thurow, how do you see the next year?

Mr. THUROW: Well, I think you have to make two conditional forecasts, because there is a deficit out there that's a lot more important than the one we are talking about at the moment, and that's the deficit in the balance of trade, $130 billion a year. Now, we all know that no country can forever run a deficit in its balance of trade of $130 billion a year, but nobody knows the moment when that lending permits it stops. And if you look at the economy and say, well, if we can continue to run the current trade deficit for another year and the dollar stays high for another year, then it's kind of steady as you go. You're talking about maybe a 3% real growth rate, inflation no worse than it is, unemployment the same as it is, maybe coming down a little bit. But if the rest of the world decides 1985 is the year we're going to quit lending America $130 billion a year, then you get a very different scenario. The dollar falls; that's an inflationary shot --

MacNEIL: Before you say what would happen, why would they decide that?

Mr. THUROW: Basically because they've invested as much of their money in the United States as they want to invest. We are soaking up a good fraction of the world's savings at the moment, and at some point the world simply says, "Hey, we've got enough of our assets in the United States. We don't want to put any more in that particular part of our portfolio."

MacNEIL: And then what happens?

Mr. THUROW: Then they quit lending and then the dollar falls, and when the dollar falls, that's an inflationary shot because it means the price of everything we import goes up. We import about 12% of the GNP. So if you take the standard number that the dollar is about 30% overvalued, that's about 3 1/2 percentage points worth of inflation. You leverage that on top of 4 1/2 percentage points worth of inflation, and you're crawling back towards double-digit inflation. Now, that may happen in '85, it may happen in '86. But it's somewhere -- that thundercloud of that international trade deficit is out there, and, see, that's going to show up as a real crisis. The federal budget deficit is kind of a slow tumor. The trade deficit, some day you're going to wake up and everybody is going to be saying, "Hey, the dollar is falling. How do we cope with this crisis?"

MacNEIL: Mr. Stein, how do you see the outlook for the economy right now?

Mr. STEIN: Well, I think I'm obliged to say that when you ask an economist that question he should say 10 times, "I don't know," and after he has said that, then he can say, "Well, my guess is . . ." and my guess is that we will have a period of slowness running through the first and second quarters, maybe --

MacNEIL: Slowness amounting to recession?

Mr. STEIN: Well, I don't think we're going to have an absolute decline in total output, but that output will grow very slowly, but then we will pick up again. But these dangers are out there. I think what Les is saying, and I agree with, that there are a lot of conditions here which cannot go on forever, but we don't know when they have to stop going on, and that's about the best forecast we can make.

MacNEIL: Thank you. Jim?

LEHRER: Yes, Congressman Aspin, first to you. You heard what Mr. Stein said, that your whole approach is just wrong, you cannot compromise these kinds of things -- military versus domestic, etc.

Rep. ASPIN: That assumes that these military budgets are put together with a great deal more precision and with an idea towards our national security than they really are.

LEHRER: Which is what you're assuming, right, Mr. Stein?

Mr. STEIN: Well, what I'm saying is that the argument ought to be about something different, and maybe Congressman Aspin and I would disagree about this, about the relative military balance, but that's what we should be talking about, and not about the relative military expenditures versus expenditures for the Small Business Administration and the Economic Development Administration. That is all irrelevant, in my opinion. If we are falling behind or we are behind in defense, then we ought to spend more, and if we're not we shouldn't.

Rep. ASPIN: Oh, I think then we do agree. But eventually that translates into if you're going to try to stay with them or get ahead --

LEHRER: They being the Soviets Union, yeah?

Rep. ASPIN: They -- if the United States is going to do that, that requires that we spend some money on defense in a certain pattern over a number of years. And if you have a 5% real growth in defense spending or a 6% real growth in defense spending or a three or four percent real growth in defense spending makes a big difference in these budget numbers that we're talking about. Now, we may agree on the goal, but agree to get there a little later. I mean, one of the ways in which Congress and the administration typically cut defense spending is to stretch things out a little bit, and when you have a situation where you've got a financial crunch and we've got a big deficit, we've got to do something about it, we just take a little longer to get the defenses to the state that we want them to get. If you're not -- if you do't have a crisis with the Soviet Union, you might say, well, let's take the four-year budget and stretch it out and go to five years with it. And if it looks like storm clouds are developing in the Soviet Union, we might go to war, we can speed it up again. But it's a judgment call about when you have to get to a certain degree of readiness. And I think that there is a great deal more flexibility in our defense budgets than Mr. Stein or Senator Garn were allowing. Even if you grant them the priorities. I mean, let's just grant the priorities at the outset, which I think a lot of us would question some of the defense spending that's in there. But even if you don't question the defense spending and you say, okay, we agree with everything that you want to do, there is then the question of how soon you want to get there. And so I think that there are ways to adjust this defense spending which are consistent with a strong economy and consistent with the right things that we ought to be doing about reducing the deficit.

LEHRER: Do you agree, Senator Garn?

Sen. GARN: Well, I agree with Herb Stein completely, that we ought to decide on a defense budget on the basis of the Soviet threat, and what is necessary to defend our country and to avoid a nuclear confrontation or a conventional war. That is the aim of having a strong military, to prevent war and preserve our free enterprise and our freedom in this country. So that I agree with rather than --

LEHRER: But is it possible?

Sen. GARN: -- playing with numbers. But I totally disagree that the way to solve this problem is to stretch out, because that is one of the reasons the defense budget is so big today. We've been playing that game the entire 10 years I've been in the Senate and involved on the various defense committees. It increases the cost of weapons systems every time. So we get by this little year -- that's the old congressional way. "Let's put it off 'til next year or the year after." Well, the bills will come due. And it makes all those weapon systems more effective. I would suggest that Congress ought to go to multi-year procurement, and I believe we could save 25 to 30 percent in procurement costs if we would do that. I would suggest Congress have the courage to let some of the military bases be closed in this country that they will not. Some of the ones who want the defense budget cut the most are the ones that fight for every military system in their state.

LEHRER: Senator, Senator, explain multi-year procurement. Why would that save so much money?

Sen. GARN: Well, simply, now we play the game -- let me use an F-16 as an example, not a controversial weapon system. But you decide to build -- and these are not accurate numbers, just for illustration purposes. But say you decide to build 40 per month, and the contractor hires all the subcontractors, they buy the parts, hire the workers, go through all of that scenario, and then the next year Congress comes back and says, "Oh, good heavens, we've got to cut the defense budget. And so let's slow down. Let's only build 25 a month." So then you lay off people, you increase the unemployment lines. Next year the contractor comes back and he says, "Hey, an F-16's going to cost $4 million more per year."

LEHRER: Let's stop there, Senator.

Sen. GARN: I've seen my colleagues sit there and say, "For heaven's sakes, look at that stupid military-industrial complex, look at those cost overruns. They need more money for copter, for each airplane."

LEHRER: Let me stop you right there and get Congressman Aspin's response to that.

Rep. ASPIN: Yeah, I think what he's saying is absolutely right, and I think it just reinforces my point that you can reduce that defense budget without reducing the harm to national security. Senator Garn has pointed out several important areas of waste. Multi-year procurement, he's right, would save money. Closing some military bases, he's right, would save money. Other things that we could do would save money. Waste. If you'd reduce the waste you could reduce the budget and not reduce our national security. There's a lot of ways to do this. First, there is waste. Second, there is the stretch-out, go from one year to the other; take four years of defense budgets, spread it over five years. The third way to cut the defense budget is to go through and establish priorities, and say, "Look, these are category-one priorities, category two, three," and we cut out the low-priority items. And Congress does a little bit of that, not enough, as Senator Garn was saying. We usually stretch out. But Congress can and does at times cut out the low-priority weapons. The point is, is that all of this can be done in a way that reduces the defense budget. The idea that when the Pentagon comes up with some number, that that number is etched in stone and any deviation away from that is damaging to the national security is just nonsense.

LEHRER: Mr. Thurow, what do you think of that argument?

Mr. THUROW: Well, that all sounds like a perfectly sensible way to go at it if you think about that, but it doesn't get you back to the big picture.And the big picture from an economic point of view is that if we need a defense budget at this level, then -- and you can't afford to live with this kind of defense for another 10 years, then you need a tax increase that nobody is, at this moment, proposing. Secretary of the Treasury Regan had a tax reform, but he didn't raise a nickel in that tax reform.You could, as Mr. Stein pointed out, charge higher rates and raise some money, but nobody yet has proposed that, and I think that's what we're having to sit here and wait for, if you're saying, can we run a big defense establishment and still have a health economy, the answer is yes, but not running $170-, $150-billion deficit.

LEHRER: Senator Garn, you and your fellow Republications, would you support a tax increase in order to pay for this increase in the defense spending?

Sen. GARN: Only if there were corresponding cuts in expenditures to go with it. I was lied to once, and so was the President, with TEFRA in 1982, and we were promised at least a dollar on expenditure reductions for each dollar --

LEHRER: Tell me what you're talking about. What's TEFRA?

Sen. GARN: Well, TEFRA was the big tax increase in 1982 --

LEHRER: Oh, right. Okay.

Sen. GARN: -- which was the $98-billion tax increase and we were supposed to get $98-billion of expenditure reductions to go with it. Do you know what we got? We got $98 billion of tax increase, and we spent about $106 billion more.

LEHRER: Politically --

Sen. GARN: No, I won't vote for a tax increase that takes every bit of tax increase and spends it. But if you will have a tax increase that is absolutely coupled with corresponding expenditure reductions, so that that tax increase is used to reduce the deficit, yes. I will. But that hasn't been the pattern in the 10 years I've been in the Senate.

LEHRER: Would that happen this time, Congressman Aspin?

Rep. ASPIN: I think it's going to be very hard. You're going to find all the politicians gandydance around. It's interesting that the only people who are for this tax increase unequivocally are going tobe the two economists, and the two politicians are going to duck and weave. But the Democrats have a special problem with it in the sense that the President wrapped a tax increase around our heads during this last campaign. He came down very hard against the Democrats' tax increase plans and Walter Mondale's tax increase. You are not going to see the Democrats budge on any idea of raising revenue unless it comes out o- the White House.

LEHRER: All right.Gentlemen, thank you. Senator Garn, in Salt Lake City, thank you very much. Mr. Thurow in Boston, thank you; Congressman Aspin and Mr. Stein here, thank you. Robin?

MacNEIL: Still to come on tonight's NewsHour, two focus sections. In a documentary report, Kwame Holman looks at a new concept -- prisons run for profit. And Judy Woodruff focuses on a fresh controversy in education: should states be graded by the results in their schools? Prisons for Profit

MacNEIL: Now we have a focus documentary. Conservative theorists believe that private enterprise -- business, to use the naked word -- could do a lot of things government now does and do them better and more cheaply. That theory is beginning to get a practical test in a new area -- prisons run for profit. Kwame Holman has the story.

KWAME HOLMAN [voice-over]: Bars on the windows, cameras on the ceilings, guards in the hallways. Three hundred inmates eating and sleeping in locked dormitories. This prison in Houston, Texas, has all the appearances of a minimum-security prison anywhere, but it is different from almost every other prison in the country, because this prison is being run for profit.

It was started as a money-making venture by the Corrections Corporation of America. CCA was the first company started exclusively for the purpose of building and staffing prisons. They make money by charging government agencies a fixed amount of money per prisoner per day. CCA's vice president for marketing is Travis Snelling.

TRAVIS SNELLINGS, vice president, Corrections Corporation of America: We think that going into the corrections business as a private sector entrepreneurial activity was a good business decision. There's a tremendous amount of business out there that can be done. So there is a market.

HOLMAN [voice-over]: Four hundred thousand people are now incarcerated in federal and state prisons in this country. The existing prisons are often overcrowded, and new ones are expensive. So there is no lack of potential business for CCA and the handful of other companies that want to run prisons for profit, that want to charge government agencies to take the problem off their hands.

Right now it is the Immigration and Naturalization Service that is the private company's best customer. Illegal aliens from the Caribbean and Central America have filled immigration detention centers like this one on the Texas-Mexico border, so the INS turned to the private sector to build and staff facilities like the one in Houston.

PAUL O'NEILL, Immigration & Naturalization Service: The Immigration Service at this particular time does not have the staff. We don't have the personnel to put into a facility of any size at all.

HOLMAN [voice-over]: Paul O'Neill is district director of the Immigration Service in Houston.

Mr. O'NEILL: It's much less expensive, I believe, for the Immigration Service to get into a facility like the one we have here in Houston than it would be to have built one.

HOLMAN [voice-over]: The Immigration Service and Corrections Corporation of America are satisfied with their joint venture, but former Minnesota warden Ken Schoen is not. Schoen now works in New York City for the Clark Foundation's justice program.

KENNETH SCHOEN, Edna McConnell Clark Foundation: When we remove from our citizens one of the most basic commodities of life, and that is freedom, and turn this over to the profitmakers, much like we might do garbage collection, I think raises an issue that is a difficult one to answer, and it probably shouldn't be done by the private sector.

HOLMAN [voice-over]: Dennis Bradby, the man hired to run CCA's for-profit detention center in Houston, resents the accusation that it is somehow wrong to make money off of prisons.

DENNIS BRADBY, CCA: I don't claim that we are not making a profit from human misery. However, psychiatrists make profits from human misery, psychologists. Physicians, certainly. And many other people in similar professions make profits from treating people. We consider ourselves as a corporation to provide services to people.

HOLMAN [voice-over]: These companies also insist that they can provide those services more efficiently than government. They make many other claims as well: that they can build facilities more cheaply, motivate staff better, and provide better services for inmates, like this one-hour recreation period for illegal alien detainees. But critics are concerned that services might be cut whenever the profit margin is threatened.

Mr. SCHOEN: When we're turning over the practice of operating prisons and jails for that piece of humanity which people aren't very interested in anyway, and on top of that the people in charge are interested primarily in making a profit, we have to be deeply concerned about the kind of operation, the quality of operation, and the likelihood of it becoming a poor operation, I think, is greater than the other way around.

HOLMAN [voice-over]: Bradby denies that CCA would ever skimp on services.

Mr. BRADBY: Any reduction in services may mean unrest with the people that you provide the service for, which may mean destruction of property, staff turnover and vacancies occurring very, very frequently. It is like really wasting money in the long run.

HOLMAN [voice-over]: But could profit motive lead to more prisons and more prisoners than are necessary? Ken Schoen thinks so.

Mr. SCHOEN: The problem with the private sector operating prisons is that the profits are going to accrue from the existence and the expansion of prisons. And there's all kind of room to increase numbers and increase length of stays.

HOLMAN [voice-over]: The INS insists that it is in charge of the number of prisoners and their length of stay.

Mr. O'NEILL: The corporation doesn't have any control over how many prisoners are in there. We do. We are -- obviously if we're paying on a per-day, per-capita basis, we want to move people as fast as we possibly can. If somebody is sentenced to serve X number of days or months, then when their time is up they're going to get out. I don't care who the jailer happens to be.

HOLMAN [voice-over]: But the fear persists that the involvement of the private sector will mean more prisons and hence more prisoners. Reformers who prefer alternatives to incarceration deplore this trend, but businesses like the Corrections Corporation of America welcome all the new business.

Mr. SNELLINGS: Corrections Corporation, in the next few years, sees itself as becoming involved in all sectors of corrections -- the community corrections area, the juvenile corrections area, different levels of security on adult corrections. We don't foresee that it'll take five or 10 years, but we see in the very near future, the next two to three years, this type of involvement will take place.

MacNEIL: Many of the investors in the Corrections Corporation are those behind the rapid growth of for-profit hospitals in recent years. By February the Corrections Corporation will be operating five facilities, including a 250-bed minimum-security prison in Chattanooga, Tennessee. Grading the States: Education Report Card

LEHRER: Our last focus segment tonight is on a subject of continuing importance and turmoil, the state of public education in America, and specifically how well it's being done state by state. Judy Woodruff, fresh back and refreshed from vacation, has more. Judy?

JUDY WOODRUFF: Jim, as we reported earlier, Education Secretary Terrel Bell released new statistics today, ranking the educational performance of the states. The survey included a number of measurements; among them, high school dropout rates and scores on the two major college entrance tests. The survey also covered how much each state spent to educate public school students. The statistics show that the national high school dropout rate fell by one percentage point between 1982 and '83. Average scores on Scholastic Aptitude Tests and American College Tests improved over the past two years in 32 states, declined in 10 and stayed the same in eight states. The idea of ranking the educational performance of states has stirred some controversy among educators. Last month a council of chief state school officers voted to come up with its own measurement system. One of those who endorsed the idea is Bill Honig, superintendent of public instruction for California. He joins us tonight from Los Angeles. But the idea also has its critics; among them, Robert Benton, superintendent of public instruction for the state of Iowa. He joins us tonight from public station KDIN in Des Moines.

First of all, Mr. Honig, let me ask you, what do you think of Secretary Bell's findings?

BILL HONIG: Well, I think it's important that we do set goals for the country, because it'll galvanize effort among the states and it will get us pointed in the right direction. Now, the question is what are the proper standards and what are the proper measurements for our schools, and I think the secretary's are too narrow and that's why the chief state school officers wanted to take the initiative and start to work on which measures are proper.

WOODRUFF: Before we go any further on that, how well did California come out in all of this?

Supt. HONIG: Well, we were up on the dropout rates.We've managed to lower that, and we were a little bit down on the SATs. So from our standpoint we've got some work to do. Interestingly enough, we have set our own targets for California. They're broader, they include dropouts and the college-bound, but they also include something that's missing in the secretary's program, and that's measurements for the average student. I think from an educational philosophy standpoint it's very important that we measure how well we're doing in getting that average student into a more demanding program -- more math, more science, more history, more English and literature -- and how well that student is achieving. So it's important for us to broaden these measures, and that's why the chiefs made their statement.

WOODRUFF: All right, Mr. Benton, in Iowa, what do you think of Secretary Bell's measurement and the findings?

ROBERT BENTON: Well, I think those measurements that can be compared favorably or compared across the board have been pretty good. The problem is that any time you start comparing states you've got to recognize that you have 50 different educational systems. And so when you start to measure that, if you measure it by some kind of a standardized test form, the inputs don't always match the outputs. In other words, the inputs are there; the tests should try to measure those. But what happens here when you've got such a variety of educational systems, that doesn't always happen. And I think that that's the thing that I'm objecting to more than anything else. I think we're building an expectation that if you do compare states that these are accurate measurements. I don't think they are and I don't think they have been in the past, and I don't think they will be in the future until we come to grips with trying to reach some kind of a national consensus on what the outputs of the educational system ought to be.

WOODRUFF: Before we go any further, how did Iowa come out in this?

Supt. BENTON: Well, we always rank near the top in any kind of a national -- of a standardized test type of thing. I think we were number two in the ACT; we were one-tenth of a point behind the state of Wisconsin.

WOODRUFF: All right. Mr. Honig, you were saying that you think there should be some ranking system, but not necessarily the way Secretary Bell did. Can you expand on that just briefly?

Supt. HONIG: Well, I think he's got two measures that are important. As the student that's prone to drop out, we do have a moral obligation to hold students in school. I think it's also important to measure how much progress we make on the SAT scores for the college-bound. But there are many more measurements. For example, advanced placement courses. We are -- we have included those in our measurements in California. I'd like to see us push in that direction nationwide and set targets for this nation.We'd like to increase the amount of students that take advanced placement. There's a test, it's a strong course. We know there's some achievement, so that should be included.

WOODRUFF: But why --

Supt. HONIG: I'd like to see us measure the amount of students who take physics or chemistry or algebra or four years of English. I'd like to see us measure the amount of writing or homework or attendance. So there's a broader range of measurements that are educationally sound, hit all the students in the system and I think will point us in the right direction.

WOODRUFF: Why do you think any measurement is necessary at all, though?

Supt. HONIG: Oh, I think it's important to keep faith with the public. We've got broad public support for these reforms. We're getting substantial increases in the funds for education. In California it's been nearly $2 billion in the last two years, and I think we have an obligation to the public to say here's how you'll know if we're making any progress.So setting targets for the nation and each state going to bat and trying to improve, even though circumstances are different and we have different populations, and California certainly has one of the highest minority populations, so it's tougher for us in some of these areas, but we have -- we can set our goals and we can make progress, and if we all do that collectively, I think we'll see some results.

WOODRUFF: Mr. Benton, what's wrong with that argument?

Supt. BENTON: Well, I don't think there's anything particularly wrong with the concept that you should measure the outputs of education. I agree with that. I think that's that always been a part of the educational system. It's a question of whether you take those measurements then, in Iowa or California or New York or Pennsylvania, and try to draw a similar conclusion. And I think that's where your biggest problem is. Bill is absolutely right. His minority population, as I recall, is somewhere in the neighborhood of 32%. Ours is about 4%. So you take a look at the makeup of our two states and it's considerably different. And yet, if you're going to use one national measure to compare California to Iowa, it's not a valid measure.

WOODRUFF: But how else is the public going to know where the better schools -- which state is doing what correctly and what better than others?

Supt. BENTON: Well, I don't know that there's any one correct way to do education; education is a very complex process. And so I think, you know, it's rather frivolous, in my opinion, to have that kind of a concept involved in it at all. I think the better issue is, how well are you doing at your local school district level, and then if you want to deal with that on a state level, that's another thing. And I suppose if you want to deal on a national level it's another thing, but I think we've got to not build an expectation that it's a very valid comparison, because it really isn't.

WOODRUFF: Mr. Honig, do you agree with him about that?

Supt. HONIG: No, I don't, because I think we can measure growth. And wherever we start, if we all look at how much growth we've each made, that is a legitimate measurement. And so it's not just level or rankings, it's how much we've grown, and I think we can take a look at that, and it's a valid way of keeping this faith with the public.

WOODRUFF: Does that really, in the last analysis, though, improve the schools and improve the education children are getting?

Supt. HONIG: Well, then it's up to each of us in our states to try and organize a coordinated attack on the problems of quality. And we're trying to do that in California. We're putting more money into the schools. We've got a strong reform program. And we have our own state accountability system where we set goals for the state, we give each local school and district a profile where they stand in relationship to these particular goals. And I think we've got enough good will in the system where they'll push hard for making improvements and figure out how to do that at the local level. It's not going to happen without broad support, technical support, in curriculum, in training and organizing that kind of help. But that's for us to organize and deliver; at least this gives us a common direction that we're trying to reach.

WOODRUFF: Mr. Benton, let me just ask you briefly if you buy any of that last point, those points that Mr. Honig made?

Supt. BENTON: Oh, I don't disagree with him at all that one of the best use of tests is to measure growth, and I think that may be one of the values of that, but how you do that on a national level and then how you make comparisons, I think, is really the bigger issue.There are a number of ways to do that, and I don't disagree at all that we should set goals, but the point I'm making is that our goals in Iowa may be quite different than the goals that Bill is going to set in California, and yet, if you're going to use some kind of a national testing program to measure both the goals in Iowa and in California, you perhaps are measuring two different things. And so those kinds of things don't really have that much meaning on a national level.

WOODRUFF: Well, gentlemen, I know this is an issue we'll be hearing more about, and we thank you both, Mr. Benton in Iowa and Mr. Honig in Los Angeles, for being with us. Robin?

MacNEIL: Once again the main stories of the day. President Reagan approved cuts in the defense budget by less than many congressional leaders want.

Good news about the economy sent the stock market up sharply.

The federal Department of Education issued a report card on how the state public schools are doing. Most of them are improving.

Iran said it will put the four men who hijacked a Kuwaiti airliner on trial, and the State Department demanded the trial be public.

Good night, Jim.

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