The MacNeil/Lehrer NewsHour

MR. LEHRER: Good evening. I'm Jim Lehrer in Washington.

MS. WOODRUFF: And I'm Judy Woodruff in New York. After the News Summary, we'll focus on the dropping interest rate, see who's hurt and who's helped by them, and ask if theyshould be lowered more. then seeking support in Russia, Correspondent Charles Krause reports on Boris Yeltsin's visit to a town coping with the change from defense to a peacetime economy, then a look at a fight in Hawaii over a different source of energy, and finally Essayist Roger Rosenblatt with some thoughts on the melting pot. NEWS SUMMARY

MR. LEHRER: The Commerce Department reported today retail sales were up .7 percent in 1991, the smallest increase in 30 years. A slow Christmas season was a key factor, retail sales falling .4 percent in December. That followed a .5 percent drop in November. Sales in all categories of goods, from cars to clothes, either fell or remained flat during those two months. The news had no effect on Wall Street today. Heavy buying helped send the Dow Jones Average up more than 60 points to a new high. Judy.

MS. WOODRUFF: Magic Johnson went to the White House today to discuss the AIDS epidemic with President Bush. The President appointed Johnson to the National Commission on AIDS after the basketball star announced he had contracted the virus and was ending his professional playing career. Johnson said today he wanted Mr. Bush to allocate more money and get more involved in the fight against the disease. Earlier in the day, Johnson took part in his first Commission meeting. At a news conference, he was asked what he planned to do as a member.

EARVIN "MAGIC" JOHNSON, National AIDS Commission: First, let me get educated, let me find out what the gays need, what the blacks, Hispanics, other people need, poor people, this people, that people. You know, I've got to find out what the Commission that, what the President hasn't been doing and so on. Then, when I'm ready, I will take my fight right to whoever, which is the President on down, you, the media have to help too as well, and then I'll be ready. But I can't go in a battle and not know what I'm fighting for, who I'm fighting and who the enemies are.

MS. WOODRUFF: A former top official at the Department of Housing & Urban Development was indicted today on charges of fraud, conspiracy and making false statements. Lance Wilson was executive assistant to former HUD Secretary Samuel Pierce during the Reagan administration. He is charged with steering housing grants to the projects of a Texas real estate developer. The scheme allegedly took place after Wilson had left HUD and joined a Wall Street investment firm.

MR. LEHRER: Gunmen attacked a bus carrying Jewish settlers in the occupied West Bank today. Seven people were injured. The ambush prompted some settlers to call for a halt to peace talks with the Palestinians. We have a report narrated by Vera Frankel of Worldwide Television News.

MS. FRANKEL: The bus full of Jewish settlers was attacked by Palestinian gunmen without warning. It was on its way from Jerusalem to the settlement of Shiloh, traveling along the main highway which cuts through the Northern West Bank. Seven Israelis were wounded. Two of the victims, including a six-year-old boy, suffered serious wounds in the stomach. It was the third time in three months that Israeli buses have been attacked. Leaders from Jewish settlements in the occupied territories responded by calling on Israel to withdraw its delegation from the Washington peace talks. Meanwhile, in East Jerusalem, there was a response of a different kind. Jewish settlers held a peace demonstration outside the house of Palestinian leader Faisal Husseini. Both settlers and radical Palestinians have urged an end to the peace talks. The settlers fear it might lead them to surrender land where they now live.

MR. LEHRER: At those Washington talks, Israelis and Palestinians met face to face for a second day at the State Department. Earlier in the day, Israeli negotiators met with Jordanian delegates. One Jordanian raised the possibility of normalizing relations with Israel. The Israelis are expected to leave Washington tomorrow.

MS. WOODRUFF: Iraq today acknowledged for the first time that it had built a uranium-enrichment program big enough to produce nuclear bombs. Until now, it had admitted only to carrying out a small research program. Iraqi officials made the admission to United Nations nuclear inspectors. We have a report from Glenn O'Glaza of Independent Television News.

MR. O'GLAZA: Iraq, it's emerged, had 10,000 highly sophisticated gas centrifuges designed to enrich uranium for use in nuclear weapons. United Nations inspectors confronted the Iraqi authorities yesterday, but were told that the parts had already been destroyed. The German government plans to prosecute the German companies who sold the highly sensitive equipment to the Iraqis in violation of international agreement. It's believed the centrifuges were not in use. Had they been, Iraq could have built several nuclear weapons a year. British experts say the Iraqis were far more advanced than anyone had realized.

JOHN HASSARD, Imperial College, London: What's really shocking is the scale of things and also this is the first concrete evidence for technologies beyond simply trying out the various ways of enrichment. It is definitely production line technology and with numbers sufficient to make a very serious arsenal in a short base of time.

MR. O'GLAZA: Despite the efforts of the United Nations' inspectors, it now seems certain that between the end of the Gulf War and the first inspection of Iraq's nuclear site Saddam Hussein was able to conceal the full extent of his nuclear capability.

MS. WOODRUFF: President Bush charged today that Iraq still has large numbers of undeclared ballistic missiles. He made the statement in a report to Congress released just two days before the first anniversary of the Gulf War. The report said Iraq may still be trying to produce copies of SCUD missiles, which it bought from foreign suppliers. Mr. Bush called for more investigation into Iraq's nuclear and ballistic missile program.

MR. LEHRER: Russian President Boris Yeltsin today dismissed a call for his resignation. Yeltsin said during a tour of a Russian industrial city his radical reforms would continue. He was responding to attacks on his policy by the Speaker of Russian Parliament. Yeltsin's free market reforms sent prices skyrocketing. Former Soviet President Gorbachev said today he agreed with some of the criticism of Yeltsin's reforms. But he also said the lifting of price controls needed more time to work. He said it after a Moscow meeting with Henry Kissinger. It was Gorbachev's first day at work as the head of a private think tank in Moscow. Russian prosecutors today formally charged 12 leaders of the August coup against Gorbachev. Among them are the former Soviet prime minister and the former heads of the KGB and the defense ministry. All were accused of conspiracy to seize power. They could get the death penalty if found guilty.

MS. WOODRUFF: The first contingent of what could become a 10,000- member United Nations peacekeeping force arrived in Yugoslavia today. The 50 unarmed men will help enforce a fragile truce in the country's six-month-old civil war. They will take up positions in Croatia, Serbia, and the republic of Bosnia-Hercegovina. There was final agreement today on the terms of a peace accord between the government and rebels of El Salvador. The pact will end 12 years of civil war that cost 75,000 lives in the Central American country. Among other things, the two sides agreed to a 50 percent cut in the Salvadoran military and the complete elimination of the rebels' military structure. The accord will be formally signed in Mexico City on Thursday.

MR. LEHRER: And that's it for the News Summary tonight. Now, it's on to interest rates, Yeltsin's troubled people, volcano power, and a Roger Rosenblatt essay. FOCUS - INTERESTING STORY

MS. WOODRUFF: The economy is first tonight. The new retails sales figures for 1991 show that retailers made their slimmest gains last year in three decades. Today's figures offered no evidence that we are pulling out of the recession, this despite the fact that the Federal Reserve Board has tried to boost the economy by dropping its interest rate to a 27 year low. In a moment, we will ask three economists if t his strategy will bring a recovery, but first, a look at how some people's lives have been affected by the lower rate in this backgrounder by Tom Bearden.

MR. BEARDEN: Lois Green works for a community college near Denver.

LOIS GREEN: [on phone] And you know tuition is due Monday? Okay.

MR. BEARDEN: She's been thinking about retiring, but recent bank statements have put those plans on "hold."

LOIS GREEN: I found one here that last year was paying 6 percent. And now it's down to 3, 4, 5. That's quite a bit. And then my tax deferred annuities which I'm going to rely on more all the time, which I hadn't planned when I first took it out, I thought it'll just be an extra savings. That started out at 11 percent, and then went down to 9.4 percent and 8.5 percent, and now it's down to 8 percent. I was thinking at first I was going to retire this year in June, but I think with interest rates going down I'll be losing about $400 a month, so I really can't afford to do it for another year. I'm hoping I can extend my position for another year.

MR. BEARDEN: Are you in any sense worried about the future?

LOIS GREEN: Oh, yes. You sure do, because you're so afraid that if, if you're not working, and then this is a set income and then something happens that your interest is going to be affected, why then that would make a difference.

MR. BEARDEN: Those already retired are facing even fewer options. Floss and Chris Nicoloff sold their townhouse and put the $35,000 proceeds into a Certificate of Deposit. They were counting on interest to supplement their retirement and Social Security income.

CHRIS NICOLOFF: The interest went from 230 to 170.

MR. BEARDEN: Per month?

CHRIS NICOLOFF: Yes. So it was about 65/70 dollars a month less.

MR. BEARDEN: What sort of impact does that have on your lifestyle?

FLOSSIE NICOLOFF: That means that maybe we can't go to dinner or maybe there isn't as much money there to cover some bills that we may have, dental, medical, and so forth.

MR. BEARDEN: Did you ever think five, ten years that you'd get to the point where 50, 60, 70 dollars a month would make that much difference to you?

FLOSSIE NICOLOFF: No. I really thought everything would keep getting better and better.

MR. BEARDEN: Are you frightened?

FLOSSIE NICOLOFF: Yes.

CHRIS NICOLOFF: The greatest fright for me is in terms of health that I think we can always, if necessary, live in a less comfortable place. You know, we can do that and maybe make our cars last longer, but the health thing is the big thing, because it can go down the drain so quickly.

JOHN STAIANO: [talking to woman in office] We don't know what interest rates are going to do obviously. What I like about some of the features that we're looking at is the ---

MR. BEARDEN: For people on fixed incomes, young and old, the only alternative seems to be to put their money in higher yield and riskier investments. Diane Archer was widowed four years ago and uses the income to support herself and her 12-year-old son. When the income started to drop, she consulted broker John Staiano. He recommended she move some of her money to mortgage-backed bonds.

JOHN STAIANO: [talking to Diane Archer] You have to understand that there's always positives and negatives. The negative here is if interest rates start to go back up, the mortgage bonds, principle, could actually decrease.

MR. BEARDEN: Wanting to maintain her income, Archer agreed, but was somewhat nervous.

DIANE ARCHER: And you know how I am about the safeness of my --

JOHN STAIANO: I know. And I don't want to take that safety away from you at all.

MR. BEARDEN: Staiano, who teaches classes in investment at a senior citizens center, says more and more people are being forced to take on additional risk.

JOHN STAIANO: Senior citizens, for example, that have had this particular income say the last five to ten, even fifteen years, they may have CD's, treasuries coming due that they had twelve, fifteen percent on. That same money is going to get more like a four, five or maybe six percent return now, which is literally cut in half. Some people earn anywhere from 30 and 50 percent of their bulk income that's coming from their investments.

MR. BEARDEN: So we're talking about a big hit?

JOHN STAIANO: Sure. You're talking a substantial decrease in their annual income.

MR. BEARDEN: But for people more worried about debt than investment income, like Pierrette Ray, lower interest rates are a major windfall. She manages the insurance and employee benefits programs for the City of Westminster. Her husband, Hal Pote, is the service manager for a Boulder car dealer.

PIERRETTE RAY: We have experienced several benefits, not the least of which is that we're in the process of refinancing our home from an 11 percent, 30 year mortgage to an 8 percent 15 year mortgage. This will give us an opportunity to build equity a whole lot faster and we're very pleased with that. That has definitely been a benefit.

MR. BEARDEN: What's going to happen to your mortgage payment?

PIERRETTE RAY: They will change less than $3.

MR. BEARDEN: To pay off in half the time?

PIERRETTE RAY: That's correct. That's one of the reasons why this is such a good time.

MR. BEARDEN: How about you, how's business down at the car dealership?

HAL POTE: Business in service is great.

MR. BEARDEN: Why is that?

HAL POTE: People are fixing the family car much more than they used to because they can spend a thousand, even two thousand dollars on a car, and still have 10 percent or 12 percent of the cost of a new car, which is barely a down payment.

MR. BEARDEN: The down side is that the couple's investments aren't paying off as well as they used to, but they say they'll accept that.

HAL POTE: I think the two balance out pretty well.

PIERRETTE RAY: I think overall it will be positive for the nation as a whole and for us, it will be all right. We're not disappointed. We're just dealing with it.

MS. WOODRUFF: We are joined now by three economists to discuss what effect lower interest rates may have on the economy. Richard Hoey is chief economistat Dreyfus, a mutual fund management company. Jerry Jordan is senior vice president and chief economist at First Interstate Bancorp, which has banks in 14 Western states. He joins us from Los Angeles. And Gary Schilling is president of Schilling & Company, an economic consulting and investment advising firm. He joins us from San Francisco. Richard Hoey, we've just heard in that taped report that some people are not pleased that interest rates are down; others are helped by it. What are you seeing? You're in the mutual fund business. What are you seeing?

MR. HOEY: We're seeing several things. We have over a hundred funds. And we're seeing people come in and shift toward the higher yielding, but somewhat riskier bond funds in order to maintain their income. The other thing we're seeing is with funds flowing into stock mutual funds, there's a tremendous flow of companies coming into Dreyfus, trying to raise money, with new issues or companies that have been in existence, trying to raise money either to pay down debt or to hire new workers. We're seeing two, three, four companies a day. And many of these companies are getting the money they're after. They haven't yet hired the new workers, but as we move through the coming months over the course of '92, this huge explosion of financing is going to create new jobs out in '92.

MS. WOODRUFF: So you're seeing individuals come in for their reasons and you're seeing companies, corporations, come in for others. But you're seeing, in effect, people are already, this has just happened a few weeks ago, but you're already seeing people responding.

MR. HOEY: Yes. They're already responding and it's increasing every day and every week.

MS. WOODRUFF: Gary Schilling, how do you see people, families and so forth responding?

MR. SHILLING: In actual fact, the decline in interest rates is contrary to past recessions is deepening this recession, and the reason is that those who are getting the advantage of lower rates because they're refinancing mortgages or whatever are using the money to pay off debt. As a matter of fact, the only major area of debt that's increasing is credit card borrowing. And I think that's desperation borrowing by people who are really short of funds. But basically people are paying down debt. They're not spending the money. The weakness in retail sales shows that. And on the other side those who receive interest income -- and by the way, 1989, the IRS shows that the interest paid by consumers was 188 billion. The interest received was 255 billion, 36 percent more. And those who receive it, obviously, have less income, particularly the pensioners that we saw earlier, many of them have 25 percent or more of their income coming from interest. They are obviously, have less to spend, and at the same time they're moving out to riskier investments. So net, it actually reduces spending in the economy, in the recession, although long-term it helps to work down debt.

MS. WOODRUFF: Well, I want to ask you about that. But what about Richard Hoey's point, that people are coming in, seeking to move their money into higher yield, even though somewhat riskier funds?

MR. SHILLING: Oh, absolutely, and I think that's got a lot to do with the tremendous strength in both stocks and bonds, since the Fed moved to cut the discount rate on December 20th.

MS. WOODRUFF: Okay. Gary Shilling, why are you so convinced though that the debt is the overwhelming piece of this, that that's what people are doing with their money?

MR. SHILLING: Well, the evidence shows that, Judy. I mean, for example,mortgage debt was growing up until about a year ago at about a 14 percent annual rate. Now, it's inching along at just a couple of percent. And if we look at installment debt, which is auto loans, credit card loans, mobile homes, appliances and so on, that's actually declining so far in this recession and the only area that within that is growing is for credit cards, and I think that's desperation borrowing. So if we look at the evidence so far, it shows pretty conclusively that people are using their interest rate saving and anything else they can to work down debt. And that's no surprise, because they ran up debt to an unbelievable extent in the 1980s and now they're scared. They're risking losing jobs and they want to work it down.

MS. WOODRUFF: But if they're paying off a debt, isn't that going to help the economy in the long run?

MR. SHILLING: Oh, sure, absolutely. And that's what I mentioned earlier. Long-term this is what we need. We've got to work out this huge debt. I mean, this is a different recession. It's a balance sheet recession. It's debt driven. It's unlike anything we've seen since the thirties. And working down that debt is necessary, but this is a matter of years. It has nothing to do with the recession right now in terms of getting it out of the way. In fact, as I mentioned, it's actually a negative because unlike past recessions, when people didn't have a lot of debt, they're not using the saving to go out and spend.

MS. WOODRUFF: Richard Hoey, what about all that?

MR. HOEY: Well, I think that's a good description of what has been happening, but it's not a good description of what's going to happen next. There are two really crucial things that cutting the discount rate and the Fed Fund's rate has accomplished. No. 1 is it started to stabilize house prices. And it's crucial for people's confidence that house prices not go down, but, in fact, we have some new buyers entered the market and with lower mortgage rates we're starting to see that. The second thing is that there is a debt problem that is in the system, but the fact that the stock market has risen so high means that companies with a lot of debt can come to Dreyfus and similar companies and seldom stock and seldom equity and pay their debt down.

MS. WOODRUFF: And then begin to invest in higher --

MR. HOEY: Well, in some cases they are expanding so they will invest in higher. In other cases, they're taking back those funds and reducing their financial risk. They're reducing the risk of bankruptcy. Many of the LBO's were right on the edge of bankruptcy, have since --

MS. WOODRUFF: Leveraged buyout.

MR. HOEY: -- come to leveraged buyouts who were right on the edge of bankruptcy, have since been able to come to market, get equity money, pay down their debt, and now they're in a much more solid positions. So we're building a base for recovery later this year.

MS. WOODRUFF: So should rates be cut even more to move this process along faster?

MR. HOEY: My guess is that the Federal Reserve will probably cut rates again in the first quarter, probably out in February, they're going to wait a while to make sure that they haven't done enough. When they get the evidence, and I think the evidence in the next couple of months will be that we're really not rolling out of the recession quite yet, I think you'll see them cut rates again.

MS. WOODRUFF: Let me bring you into this, Jerry Jordan. You heard Mr. Shilling say the lower rates are going to bring a recovery. You hear Mr. Hoey making a different argument. Where do you come down on this?

MR. JORDAN: I think the economy is going to be surprisingly strong in early '92. Gary was describing what was going on in '91, which we know the economy was weak, people weren't spending, but now interest rates have dropped dramatically and the key reason those interest rates have dropped so sharply is because inflation has fallen to very low levels. Throughout the country, households and businesses alike have decided interest rates are low as they're going to get. Mortgage refinancing applications skyrocketed last year, something like a 60 percent increase in the final months of the year, corporations issuing new debt, rolling over old debt, refinancing it lower, since they don't think interest rates are going any lower. From this point forward I think we're going to be very surprised at how strong the economy is.

MS. WOODRUFF: So what are you saying, that lowering interest rates has had what effect?

MR. JORDAN: Well, first of all, it reduces the debt burden of all of the young households that were absorbed into the working age population in the 1980s. The so-called "post war baby boom" came of age in the '80s. They went into debt at very high interest rates. And they've been burdened with that debt through the '80s.

MS. WOODRUFF: And this is helping them?

MR. HOEY: This is helping them enormously. It's giving them hundreds of dollars a month in relief in debt burdens. Those people that were out of the housing market because they simply couldn't meet the test of affordability, they didn't have the down payment, they couldn't make the payments with high interest rates, now find they can. So we have the highest percentage of first-time home buyers applying for mortgages ever in our history. That's a very encouraging sign for the future. It's basically an inter- generational phenomenon. What we're seeing is a reverse of what happened in the '80s. The older generations in the '80s were getting high interest rate at the expense of the young generation that was paying it. Now, it's the older generations that have the savings, they're getting less interest income, they're the savers. It's the younger age groups that pay the debt, they're getting some relief.

MS. WOODRUFF: What about Mr. Hoey's point that he expects rates to come down even more?

MR. JORDAN: I don't think it's necessary. I think that the move by the Fed in December was essentially an insurance policy to make sure that they had already done enough to jumpstart the economy so fiscal action isn't necessary. The primary motivation of what they did was not because anybody believed necessarily that it was absolutely essential, but, rather, they wanted to make sure that when Congress came back, the economy would already be picking up so that we wouldn't get a foolish tax policy.

MS. WOODRUFF: But if you say things are getting better, when are people going to start feeling -- I mean, we're still saying retail sales down in December and I don't want to belabor this point, but when are people going to feel that the economy has gotten better, as you say?

MR. JORDAN: Well, we had a surprising increase in employment in December. Most people thought it was going to be 50,000 workers or more. It was up 30,000. Now we know for January we're going to get a much bigger increase. We're going to see a pick up in home sales, both new homes and existing homes are going to sell because of lower mortgage rates. That's going to help confidence. Business plans for investment spending are picking up already. So within a month or two we're going to see a lot of signs of improvement.

MS. WOODRUFF: Gary Shilling, that doesn't sound like what you're predicting.

MR. SHILLING: Well, no, it doesn't. And first of all, bear in mind in terms of interest rate declines, it's true. And that helps people with mortgages. We've had declines in the bank prime rate and that helps smaller businesses and individuals with loans tied to prime. But we've seen no decline in credit card rates. We've seen no decline in auto loan rates. And these are ones that a lot of particularly lower income people are very much saddled with. Also, I think as far as the whole spending pattern, with the huge debts that people built up for really two decades and certainly intently in the '80s, it's going to take a long time for them to get those debts down to the point that they feel comfortable. All the idea that we have a big pick up in the economy immediately ahead, I mean, that's what many people were saying a year ago, and it didn't work. And I think the reason is because of this huge debt overhang.

MS. WOODRUFF: What about that --

MR. SHILLING: Easier -- I'm sorry.

MS. WOODRUFF: I just want to give Mr. Hoey a chance to --

MR. SHILLING: Sure, sure.

MR. HOEY: Well, I think for the next several months you'll see a combination of the symptoms that our bullish and bearish economists have talked about here. In the very short run people are still pretty down in terms of consumer confidence. The jobs haven't been there. There wasn't really much growth in jobs. It was all seasonable adjustment last month, and the foreign economies are weak. Germany's weak. Japan's weak. So I think it's going to be very disappointing for the next few months. But the Fed has said very clearly they're going to cut rates as much as is necessary to get a recovery going and we've got people in Washington on the tax side. If necessary, they will do whatever it takes to create an economic recovery, even if they have to fly over New York City and drop dollar bills from helicopters over New York.

MS. WOODRUFF: Well, speaking -- we've just got a little over a minute let, but speaking of tax cuts, do you all think that that would help, or hurt? We're hearing talk from both Republicans and Democrats about a tax cut for the middle class?

MR. HOEY: I think the most helpful thing would be an investment tax credit or something that would add to our capital spending and our future supply. I think that would be the most positive element if we could get that in. In terms of a middle class tax cut, it just shifts the time when you have strength in the economy. That's all it does. It really doesn't add to your longer-term growth rate in the economy.

MS. WOODRUFF: Gary Shilling, tax cut?

MR. SHILLING: I think we'll get tax cuts, but they've got to be very careful that they don't spook the bond markets, in other words, make people worried about inflation, as for example Jerry Jordan is, and that could run up interest rates and negate the effects of more stimulus in terms of lower taxes for individuals.

MS. WOODRUFF: Jerry Jordan, what about the tax cut scenario? contributor to the arms race, but ow an acknowledged leader in the race to convert from military to civilian production, so important, in fact, that this weekend Stanford University sent a team of experts to study what's been done so far and to make recommendations. Interviewed at the Moscow Airport, John Battilega told us that Saratov is viewed as a model for conversion throughout the old Soviet Union.

JOHN BATTILEGA, Science Applications International, Corp.: It's of tremendous significance on a scale met by very other fewthings. If this kind of a program is successful in cutting through the problems associated with both defense conversion and operation of a market economy. It indicates that the trend toward demilitarization, toward a more stable world in terms of traditional East-West relations, and also the potential of economic relationships in a meaningful way is on a very strong road.

MR. KRAUSE: Until three years ago, at least 50 percent of Saratov Aviation's production was military, missiles and fighter planes for the Soviet air force and navy. Now many of the workshops once devoted to the arms race are being refitted, converted to make machine tools and parts for civilian aircraft. The driving force behind the change is Saratov Director Alexander Yeramishin, whose title is now CEO, after several trips to the United States last year to meet his future competitors at Boeing and McDonnell- Douglas. Young and affable, Yeramishin is a former high ranking Communist Party member who's now energetically, and it appears quite sincerely, leading his company toward conversion, competition, privatization, and the world economy. While there's no way to independently verify Yeramishin's claims he says that since he became CEO three years ago, Saratov Aviation's military production has dropped from half to just 6 percent. We asked him why he has moved so quickly.

ALEXANDER YERAMISHIN, Saratov Aviation: [speaking through interpreter] For one simple reason. Nobody needs this many weapons anymore. In the economic sense, the military will end up having a very much less potential budget than what they used to. And in the social sense that we may end up needing more and more aircraft, people will start to fly more, communication and contact not only inside the country but with Europe we'll be come more and more intense. Here we are giving an interview to an American television company. Taking all that into consideration, we have decided to quit production of the military-oriented products.

MR. KRAUSE: Saratov has always made civilian aircraft. Now to compensate for lost military sales, it's hoping to expand production of its Yakt 42, a passenger jet in some ways comparable to a Boeing 737. At the moment, Saratov produces only 18 of the planes a year. To increase that number and to become more efficient, Saratov is moving toward privatization, that is, turning what was a state-owned enterprise into an employee-owned company. In fact, Saratov was theoretically privatized last year. But the reality of employee ownership reprises shares of stock and the other basics of a market economy are still concepts foreign to most workers in what was Soviet Russia. Even at Saratov, many workers say privatization hasn't meant very much so far.

WORKER: Had we actually been the owners of this plant we would have been more engaged in the decision making procedure. But so far, it's not like that at all.

MR. KRAUSE: Are there any incentives for you to work hard, or to do better work, you get paid more if you do?

WORKER: [speaking through interpreter] No incentive at all. We haven't yet switched into this system, which is incentive-oriented.

MR. KRAUSE: But other workers told us employee-ownership has made a difference.

WORKER: [speaking through interpreter] For the salary, yes, the salary has gone up. We started to see the beginning of something good happening in the plan, but we don't know what will it lead us to. As for the fact that we manage the factory, ourselves, we have elected the delegates to represent the shop, represent the shop body. We have full trust in those people and we believe that they will be standing on guard of our interest.

MR. KRAUSE: Yeramishin said he wasn't surprised by what we'd found.

ALEXANDER YERAMISHIN, Saratov Aviation: [speaking through interpreter] I suppose that people who you were interviewing this morning, particularly show the proportion of people who realize or do not realize the nature of this change. About 50 percent of people are into this thing, another 50 are still very ignorant of what's been going on. I suppose by the end of February, people will get a better idea of what's happening when for the first time they will get the dividends of their shareholding. For the first time they will get profit on their capital, not on their labor. And then it will be time to assess these people what sort of dividends can he expect from the property that he has in possession at this point, or what may happen if he decides to increase his participation in owning the factory.

MR. KRAUSE: But Yeramishin told us his biggest immediate problem isn't privatization; it's keeping his factories running. Saratov Aviation has 1600 suppliers, many of them in Ukraine and other now independent countries. The old system of state orders and fraternal cooperation has clearly broken down. The ruble is virtually worthless. So in a building next to the main plant Saratov Aviation produces consumer goods, everything from spoons -- to teapots -- to toy trucks are used instead of money to barter for steel and other raw materials needed to produce airplanes. Barter is the way much of the Russian economy now works. Vladimir Sychov showed us through the plant. He's director of consumer products.

MR. KRAUSE: Has the percentage that's being bartered increased as the economic problems in this country have grown over the past year?

VLADIMIR SYCHOV, Consumer Products Director [speaking through interpreter] Yes, you can put it this way.

MR. KRAUSE: What do you see in the future? What do you see happening in terms of the economy and in terms of this plan?

VLADIMIR SYCHOV, Consumer Products Director [speaking through interpreter] It's a very complicated question.

MR. KRAUSE: Do you have any answers at all?

VLADIMIR SYCHOV, Consumer Products Director [speaking through interpreter] Not so far. I am in strong doubt if I could say anything specific. It seems like things are getting worse and worse. I don't see the light up ahead.

MR. KRAUSE: With its heavy industry in nearby farms, Saratov is clearly important to Russia's President, Boris Yeltsin. He was here last week, the first stop on a nationwide tour to try to stem growing opposition to his new economic programs. But Yeltsin's short visit illustrated his problems. Crowds were small and Yeltsin appeared ineffective. It seems he's more adept at defying tanks than explaining his policies to everyday people. Even though two of Saratov's three bakeries are shut down, causing long bread lines everywhere, Yeltsin reportedly said bread wasn't his problem. It was a remark that didn't help his cause in Saratov.

WOMAN ON STREET: [speaking through interpreter] Maybe if he came down to look around and see how come we are not on strike yet, we are hungry though, and we can expect eventually we'll start fighting each other, killing for food. We've spent all our life living under socialism. This is the way we were brought up. We used to believe in the good ideals, in justice, and now there is not a trace of justice left in this country.

MAN ON STREET: [speaking through interpreter] He should have shown to the world that he displays an initiative, that he still has control over the situation, which he does not have. I keep remembering these words of his in the newspaper, we shouldn't raise prices. He did quite the opposite. He didn't talk to the people on the street. All he talked to was the bosses or to factories. We saw his cars rush down the main thoroughfare and then he was gone.

MR. KRAUSE: For his part, Yeramishin is still sympathetic to Yeltsin.

ALEXANDER YERAMISHIN: [speaking through interpreter] We are in dire straits and there is no trying to conceal it. I understand that you have seen a lot of our difficulties, but, believe me, this is just a tip of an iceberg. Nevertheless, we just have to grant our government a vote of confidence down below, down here, because if that's not so, Yeltsin just will not get through.

MR. KRAUSE: What worries Yeramishin and many others is that food over the next several months could determine the outcome of Yeltsin's reforms. The fear is that hunger could bring down the government and with it, an end to Russia's historic experiment with democracy and the beginnings of a market economy. Saratov Aviation is today a model for military conversion and privatization. But the old symbols are still in place. FOCUS - HEATED ISSUE

MS. WOODRUFF: Next, a story about politics and geothermal energy. For 13 years, government officials and private interests have been trying to convert the power of a volcano into electricity. The project remains stalled, despite the more than $150 million already spent. Correspondent Jeffrey Kaye of public station KCET-Los Angeles reports from Hawaii. [SONG ABOUT HAWAII AND PALM TREES]

MR. KAYE: Palm trees, maitai's at sunset, images like these propel Hawaii's major industry, tourism. Visitors have fueled the state's economic development. Growth is requiring increasing amounts of electricity and that's the source of a dispute involving millions of dollars of federal funds and powerful political forces.

GOV. JOHN WAIHEE, Hawaii: We are more dependent on foreign sources of energy than any other state in the union and we have no choice but to pursue alternative energy options in Hawaii.

MR. KAYE: In question is an ambitious project to use geothermal energy, heat stored beneath earth's surface and converted to electricity. The Kilawea Volcano on the big island, the island of Hawaii, is the most active volcano in the world. To this day, lava eruptions are threatening homes and creating new land. Government officials and private interests want to tap this awesome power. Geothermal steam would drive turbines to create electricity. Two sets of geothermal wells have been drilled on the island, but they have generated more controversy than energy. Environmentalists usually endorse the use of geothermal energy as a relatively clean power source. But in Hawaii, activists have mounted political and legal challenges. They claim geothermal development is destroying a rain forest at one site, effecting the health of neighbors at another, and desecrating the religion of native Hawaiians. U.S. taxpayers have invested almost $35 million in the project. State and private sources have spent another 115 million. But after 13 years, the project is at a standstill and has been since a well blew out in June 1991.

RESIDENT OF HAWAII: It sounded like a jet engine, like breaking the sound barrier. The sound was just unbelievable and the whole house shook.

RESIDENT: I almost threw up a couple of times. It's scary.

MR. KAYE: The relief of noxious gases resulted in the evacuation of more than 80 residents. The blow-out was caused by human error. An independent investigation found the well was not properly lined. Officials admitted they hadn't monitored the drilling carefully enough and they ordered the well shut down until they could institute safeguards. Then, two weeks after the blow-out, another setback for geothermal developers, a judge ordered the U.S. government to stop its participation in geothermal development until it completes an environmental impact study. That will take at least two years and will cost U.S. taxpayers millions more. Attorney Skip Spaulding of the Sierra Club Legal Defense Fund filed the lawsuit which resulted in the Judge's order.

SKIP SPAULDING, Sierra Club Legal Defense Fund: Hawaii is right now the endangered species capital of the world and if you put geothermal power plants and wells in the rain forest, you're going to create corridors for an invasion of alien plant species throughout the rain forest, ultimately dooming it.

MR. KAYE: But supporters contend opponents are exaggerating any potential harm. Hawaii political and corporate leaders have enthusiastically backed geothermal development.

SPOKESMAN: [in meeting] This map shows the area in Hawaii where the search for geothermal energy is ongoing.

MR. KAYE: Business groups and geothermal developers have formed an advocacy group called the Pro Geothermal Alliance. They argue geothermal development makes environmental sense.

CLINTON CHURCHILL, Geothermal Advocate: Hawaii is about 90 percent dependent upon burning oil, a fossil fuel, for the generation of our electricity. We need to get off of fossil fuel and onto some other alternative that doesn't release carbon dioxide, which is the main contributor to global warming. It's occurring every day.

MR. KAYE: Geothermal advocates propose to send electrical power 150 miles by undersea cable from the Island of Hawaii to Oahu where the city of Honolulu is located.

SPOKESMAN: The Senator from Hawaii.

SEN. DANIEL INOUYE, [D] Hawaii: I rise this evening to speak on Hawaii's geothermal energy development efforts.

MR. KAYE: Hawaii's Senator, Daniel Inouye, crusaded for federal funding of geothermal development in his state. Inouye and Washington lobbyists persuaded Congress to spend $25 million on the cable project alone. The funds were appropriated over the objections of officials from the Department of Energy. They wanted private funds, not tax money, to pay for the cable development. Deputy Assistant Secretary Robert San Martin.

ROBERT SAN MARTIN, Department of Energy: The Department of Energy has consistently felt that developments that are unique to only one location that don't have national impact or developments that are the direct commercialization of inactivity is best left to the private sector.

SEN. DANIEL INOUYE, [D] Hawaii: That table testing had international impact because many other countries are looking at that possibility. And we would have been first among all nations.

MR. KAYE: But now, with the entire project stalled, the cable development is also on "hold" and geothermal opponents vow to keep up the pressure. Among the protesters have been native Hawaiians, members of the Pele Defense Fund, named for their volcano goddess. They say geothermal drilling desecrates their religion.

PALIKAPU DEDMAN, Pele Defense Fund: It changes the foundation of geology of your religion. If I was to take pages out of a bible or Testament and said you pass that on down, it'd be incomplete. If I was to turn Buddha on its head, it didn't stop me from praying but I did somethingdesecrating to that whole tradition beneath. That's the same with drilling into what we feel is sacred.

MR. KAYE: But Gov. John Waihee, himself a native Hawaiian, sees nothing sacrilegious in using geothermal energy.

GOV. JOHN WAIHEE, Hawaii: There are other people who feel that Peles' power is a gift to the people. It really ultimately comes down to whether you see volcanic activity as the form of destruction or form of creation.

MR. KAYE: It's a form of destruction, say many geothermal opponents, who contend the drilling is harming the rain forest. Some 20 acres have already been cleared out of a total of 300 acres that could be cut back. Environmentalists fear that clearing allows alien plants to penetrate throughout the forest, changing the eco system. Drilling proponents point out that non-native vegetation invaded the rain forest long before geothermal development began and Rod Moss of True Mid Pacific Geothermal argues drilling is leaving the vast majority of the rain forest intact.

ROD MOSS, Geothermal Developer: I mean, that's a 60,000 acre forest. We're going to use about 300 acres of it, which is a half of 1 percent of the forest. Our experts, you know, that we use, our botanists, consultants, say that the type of impact we have there is minimal and it's acceptable. I mean, it certainly is an impact, but it's a trade-off.

MR. KAYE: While one geothermal developer fends off environmentalists, the other battles neighbors with health complaints.

NEIGHBOR: And they have made my family sick. They have made me evacuate from my home and business.

MR. KAYE: Charges that geothermal drilling has caused adverse health effects multiplied after the blow-out.

RESIDENT: After the first couple of months, we started to notice an increase in the frequency of headaches and feeling nauseous and sort of chronic energy loss, generally feeling unwell.

MR. KAYE: The head of Hawaii's State Health Department, Dr. John Lewin, feels that geothermal drilling is more of a nuisance than a serious health threat.

DR. JOHN LEWIN, Hawaii Department of Health: And I think that this issue, the geothermal issue in terms of health, a lot of it has to do with a "not in my backyard" feeling that people, some of the people there just don't want geothermal near them. They live in a rural, beautiful area. They want it to stay that way.

OTHER RESIDENT: Of course, it's easy to say if it's not in your backyard, but put it in the governor's backyard and then see what he says.

MR. KAYE: Geothermal opponents say the state has yet to conduct a thorough study of the health effects of geothermal drilling. They also contend that if Hawaii conserved energy more efficiently, geothermal development would be unnecessary. Proponents counter the state needs more electricity. So a new power plant is under construction hear Honolulu. Ironically, it has drawn no vocal opposition from environmentalists, even though it will burn coal from an Indonesian Rain Forest. ESSAY - BLACK & WHITE

MR. LEHRER: Finally tonight, a few words about black and white. They come from Essayist Roger Rosenblatt, editor at large of Life Magazine.

MR. ROSENBLATT: Even the chaotic world of racial bigotry reveals a theme once in a while, a terrible theme, but a theme, nonetheless. On this street, in the Bronx, New York, a black 14- year-old boy and his 12-year-old sister were attacked on their way to school by a group of white teen-agers. The white kids roughed up the black kids, kicked them, punched them, shouted racial epithets, all the usual weapons of this sort of assault. One of the thugs pulled out a scissors and cut the girl's hair. That was an original touch. But then the gang did something really special. They sprayed the two black children with white paint. They painted them white, adding, you all turned white today. The black brother and sister survived. There was much ado in the New York papers and then the incident began to pass, disappearing into the rivers of a million such incidents, many of them deadly, that fill the bloodstream of this country like poison. The white gang was not aware of it, of course, but they were striking an old theme in American bigotry. The idea that blacks ought to turn white -- "You all turned white today," said the gang, echoing a longstanding effort to turn black people white today, tomorrow, forever. If blacks were to be made white, after all, they would, in a sense, disappear. Painting black people white would be like deporting them to Liberia or knocking them all off. Their difference from whites would no longer be noticeable, thus, no menace perceived. Satirical novels and movies by black writers have often hit this theme directly. Confessional autobiographies by blacks who passed for whites had hit it indirectly. Those who pass have spray painted themselves out of existence, usually with deep regret. The thrust of the theme is exile, the hypothesis -- if blacks would only go away, then America could be whole and complete. The idea is not only hateful, of course, it is entirely cockeyed. America is only America because the country is black, white, tan, beige, yellow, red, pink and all shades not accounted for. What would happen if the bigots got their wish is that we would be stuck in a country unrecognizable to ourselves. To be sure, an all white America would be recognizable to the bigots, but then they would be stuck with themselves, a punishment they probably deserve. The rest of us would have to get out of here, go off in search of a new world, where differences make strength. We might call the place America. I don't know if such words offer any consolation to the two black children who were spray painted white. My unhappy guess is that they will be scarred by more than paint for a while. Sticks and stones can break your words, but a malicious intent can eat at one's heart. On behalf of other whites, however, who are furious, ashamed, and revolted at the spectacle of pure, ignorant meanness the two of you endured, allow me to reassure you, you are America. You are our spouses, our lovers, our parents, our colleagues, our friends, and our kids. I'm Roger Rosenblatt. RECAP

MR. LEHRER: Again, the major stories of this Tuesday, the Commerce Department reported retail sales were up .7 percent in 1991. It was the smallest increase in 30 years. And basketball star "Magic" Johnson took his place on the National AIDS Commission. He said he wanted President Bush to allocate more money and get more involved in the fight against the disease. Good night, Judy.

MS. WOODRUFF: Good night, Jim. That's our NewsHour for tonight. We'll be back tomorrow night with some proposals for fixing the health care system in this country. I'm Judy Woodruff. Thank you and good night.