The MacNeil/Lehrer NewsHour

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

MR. MAC NEIL: And I'm Robert MacNeil in New York. After tonight's News Summary, we look at President Clinton's budget with his budget director, Alice Rivlin and Republican budget chairman John Kasich. Then Charles Krause reports from Mexico on how the peso crisis is being felt. Finally, we discuss the administration's heavy trade sanctions against China. NEWS SUMMARY

MR. LEHRER: President Clinton presented his 1996 budget to Congress today. It's a $1.6 trillion proposal which includes both tax and spending cuts. It eliminates or consolidates more than 400 programs, while leaving Social Security and Medicare untouched. Mr. Clinton spoke at a White House briefing on the budget.

PRESIDENT CLINTON: My budget cuts spending, cuts taxes, cuts the deficit, and does not cut education or Social Security or Medicare. That is a good budget. It continues to reduce the deficit without undermining the things that I believe the federal government should be doing. And I wish to work with the new Congress to achievethese objectives. I hope that they will submit budgets which do the same.

MR. LEHRER: The proposal was criticized by Democrats and Republicans.

SEN. JAMES EXON, [D] Nebraska: $81 billion in deficit reduction over five years simply will not suffice. It will not give us the 1.2 or more likely 1.5 trillion that we need to balance the budget by the year 2002.

REP. JOHN KASICH, Chairman, Budget Committee: Aren't you folks just a little frustrated, yourself, that you got these exploding entitlement programs, the President sends a budget up here, and they don't do anything about it? I mean, doesn't this just infuriate you for your own family? I mean, this is a tragedy what happened up here today with this budget.

SEN. PETE DOMENICI, Chairman, Budget Committee: The President took a walk on the difficult programs and on the programs that make a difference when you try to get the budget under control. We're going to try to work with him, but essentially, this budget, while it's not dead on arrival, is surely on life supports.

MR. LEHRER: We'll have more on the budget right after this News Summary. The House today neared passage of the line item veto. It would allow a President to veto specific items in a spending bill without having to veto the whole bill. Republican leaders said they wanted to pass it this evening as an 84th birthday gift to former President Reagan, who has long supported that idea. Robin.

MR. MAC NEIL: The two sides in the Major League Baseball strike failed to meet this evening's presidential deadline to end the six- month impasse. Representatives for the owners and players met in Washington this week. President Clinton had given the parties until 5 PM Eastern Time to reach a voluntary accord or face the prospect of federal intervention. A government mediator may now propose terms for special legislation to end the strike.

MR. LEHRER: U.S. trade talks with China will resume next week. Trade Rep. Mickey Kantor said today China's trade minister had asked for the resumption. Kantor Saturday announced the imposition of a 100 percent tariff on Chinese products. He accused the Chinese of pirating U.S. copyrighted music, movies, and computer software. The space shuttle "Discovery" was steered to within 37 feet of the Russian space station Mir today. The shuttle astronauts were practicing for a docking with Mir, scheduled for June. The crews exchanged waves as they passed in space.

MR. MAC NEIL: One of the defendants on trial for the bombing of the World Trade Center pleaded guilty today to masterminding a plot to blow up several New York City landmarks. Siddig Ali's plea came a week after testimony began in the trial of Sheik Omar Abdel Rahman and 11 followers. They've been charged with planning a campaign of urban terrorism. The February, 1993 trade center bombing killed six people and injured more than a thousand. In his plea, Siddig Ali implicated the other defendants and said Sheik Rahman had approved the attacks.

MR. LEHRER: And that's it for the News Summary tonight. Now it's on to the U.S. budget, Mexico aid, and China trade. FOCUS - BLUEPRINT FOR CHANGE

MR. LEHRER: The Clinton budget is where we begin tonight, and we start with the numbers as laid out in this report by Kwame Holman.

MR. HOLMAN: Speaking at the White House this morning, the President declared his $1.6 trillion budget to be an extension of his first two years in office.

PRESIDENT CLINTON: This budget, like the two that preceded it, is based on the new covenant I advocated when I ran for President. We're creating a leaner, not a meaner, government, one which offers more opportunity to those who are taking responsibility for themselves, their families, and their communities.

MR. HOLMAN: The President's budget includes $144 billion in spending cuts over five years. $81 billion of those savings would go toward reducing the federal budget deficit. The rest, $63 billion, would pay for the President's proposed middle class tax cut. The President said the savings would be achieved largely through a continuation of the administration's downsizing program known as reinventing government.

PRESIDENT CLINTON: The budget already provides $144 billion in hard budget savings. Behind me, you can see in black and white the 400 programs that this budget will eliminate or consolidate, the terminations of about 130 programs here and over the consolidation of 270 more. Those 271 programs will be distilled down into 27. We are also restructuring five major agencies as a part of the second round of reinventing government to save $23 billion. Now. we're not cutting government blindly. We're clearing away yesterday's government to make room for the solutions to the problems we face today and tomorrow.

MR. HOLMAN: Perhaps most controversial is what the President's budget does not do to some of the largest of the programs known as entitlements. The President proposes no cuts in Medicare or Medicaid. Instead, he wants those programs to be changed within a broader health care reform plan, and like Republicans, the President would leave Social Security untouched. Together, those three programs represent 39 percent of the total budget. In addition to the "hands-off" approach to entitlements, the areas the President proposes to increase also are likely to be targets of his critics. They include AIDS research, the National Service program known as AmeriCorps, and Head Start.

PRESIDENT CLINTON: The only way to make these investments in our future is to make tough choices, and this budget makes them specifically and clearly. Every single one of these proposals is paid for with specific spending cuts. Anyone can offer a tax cut or propose investments. The hard part, of course, is paying for them. I challenge the leadership of the Congress to do what we have done, to provide the taxpayers with specific and real details about the proposals they make, and then to work with us to get a budget that furthers the interest of all the American people.

MR. HOLMAN: Overall, federal spending is projected to rise 4 1/2 percent, mostly in health care cost. The Clinton proposal also will leave the budget deficit roughly where it is today. The plan forecasts a deficit of $196.7 billion in 1996. From there, the deficit would rise to $213 billion before coming back down to $194 billion in the year 2000, still far short of the balanced federal budget many in Congress now are calling for.

MR. LEHRER: Now, an administration and Republican dialogue about this budget plan. Alice Rivlin is President Clinton's budget director. John Kasich, Republican of Ohio, chairs the House Budget Committee. Congressman, you called this, this proposal today a disaster. You said that, that it lacked courage. Would you flesh that out, please, sir.

REP. JOHN KASICH, Chairman, House Budget Committee: Jim, the problem that we have with this budget is that it essentially ignores the fastest growing item in the federal budget, and that is entitlements. And I understand from a Saturday news story that Dr. Rivlin fought to try to impact on this budget, and she lost. Frankly, I'm disappointed. I'm not disappointed because I'm aRepublican, the President's a Democrat. I think that this budget really lacks courage. I think the President's taken a pass, and frankly, when you're President for four years, you ought to be doing your best to fix the country. And what he did here is he did some monkeying around in the area of discretionary spending. He did some good things in the area of discretionary spending, clearly not enough, but we're going to look at it. What he gave a pass on is trying to do something in the area of entitlements, and I think it's tragic. The next generation's future is at risk and frankly, it's going to be up to us to do the things that ought to be done and I think the things that Dr. Rivlin, frankly, believes ought to be done.

MR. LEHRER: Is that right? Has he got it right?

ALICE RIVLIN, Budget Director: No, he doesn't have it right at all. I'd like to say a word about courage. The President had the courage in 1993 to design a plan that would bring the budget deficit down by what we then thought was about $500 billion over five years. It's turned out to be more than that. It's been very successful. It has brought the budget deficit down by an aggregate of about 600 billion. The people who had the courage were those who voted for that plan. Not a single one of them was a Republican. The one I remember was Marjorie Margolis Medvinsky, freshman Congressman from Pennsylvania, who stood up there and cast the deciding vote. That was courage, and she's not in the Congress anymore because she had the courage.

MR. LEHRER: Because she was not re-elected. But on the specific thing of this budget plan, you heard what the Congressman just said, that you wanted more -- you wanted cuts in the entitlements. They're not there. Is that -- has he got that right? You wanted something that you didn't get?

MS. RIVLIN: I don't talk about who says what to whom --

MR. LEHRER: Right.

MS. RIVLIN: -- in the counsels around the President. Everybody has ideas. The President listens to them and makes his decisions. He made courageous decisions in this budget.

MR. LEHRER: All right. Let's go -- excuse me one second, Congressman. Let me just ask her point blank, why then are there no cuts on the entitlements in this, in this plan?

MS. RIVLIN: Two reasons. One, we did not want to cut Social Security. We don't think that's appropriate. On Medicare and Medicaid, we think those programs are growing too fast; everybody thinks that. If they're not cut, we will have, if the rate of growth is not reduced, we will have continuing upward pressure on the budget, but we want to do that in the context of health care reform.

MR. LEHRER: And not --

MS. RIVLIN: We can't just cut those programs by themselves and use them to pay for tax cuts. They have to be part of the health reform package.

MR. LEHRER: You don't buy that, Congressman?

REP. KASICH: Look, Jim, I've got to run downstairs and vote, but here's the bottom line. Can you imagine a budget director saying that $200 billion deficits as far as the eye can see and $300 billion deficits beyond the five-year window is a success or a victory? I was on this program with Dr. Rivlin sometime ago, and she said, we don't need the balanced budget amendment. What we really need to do, Congressman, is to have courage. You know, what's interesting, what goes around and comes around, the bottom line here is that the director shows up with a budget that her own party thinks is lacking that has $200 billion as far as the eye can see and $300 billion if the economy continues to grow, and she's declaring victory? Let me tell you, last November, the people rejected this Clinton agenda, and you know what they served up to the Congress today? Warmed over the last two years. They don't understand change. This is a failure, and the reason I'm upset up about it is because it's starting to shaft the next generation. It's the kids -- it's the kids that need somebody to make some hard choices, and they didn't make any of them in this budget.

MR. LEHRER: Does that mean, Congressman, that you Republicans will make these choices?

REP. KASICH: Jim, let me tell you this. If we do not make them, we will be total failures, ourselves, and I will also tell you that American politics will change. We will have a third and fourth party. Let me tell you, as the Budget Committee goes around the country, you know what people are saying? Do the right thing, Congress. Do the right policy. Forget the politics. Stand up. Take these tough issues on. I hope we're going to do it. I'm going to fight like crazy to make sure it gets done. If we don't do it, I'll admit failure, but I'm going to tell you something. We're going to make every effort we can to deliver the right policy for the next generation so that we can save the kids.

MR. LEHRER: And does that mean cuts in Medicare and Medicaid, Social Security, veterans' benefits?

REP. KASICH: The budget director just said we cannot sustain 11 percent and higher in Medicare and higher than that in Medicaid. Medicare is going bankrupt. Of course, we're going to have to slow the growth. We've got to look at private sector initiatives that move this, this system into the 21st century. Of course, we've got to deal with Medicare and Medicaid and all the entitlements. If we don't, guess what? The number of people who depend on this government will continue to grow. The lobbyists and the interest groups will win, and who will lose ultimately is the next generation. We need the balanced budget amendment as a tool to force this Congress to create priorities.

MR. LEHRER: What about Ms. Rivlin's point that she can't just do it by itself? I mean, it has to be part of an overview -- health care reform plan?

REP. KASICH: Jim, we're going to do health care reform. It's already started with insurance reform. And you know what's happening in the country? Private sector companies have slowed the growth of health care and still provided quality. We've got an out- of-date, fee-for-service government-run health care system that is going bankrupt, and we need to rescue it and transform it, and we have to have the courage to stare the special interests in the eye and get the job done. I'm sorry that Dr. Rivlin lost the fights inside the White House. She should have won. It's a tragedy she didn't win. Maybe she can help us when we get out there to do the right thing to try to save this country.

MR. LEHRER: I know you have to go vote, but let me ask you finally before you leave, Congressman, do you feel that you've just been handed a political hot potato by the President, saying, okay, Republicans, you take the heat for cutting the entitlements? That's been the suggestion today.

REP. KASICH: Of course, it's a political document. What the President said is I'm not going to touch entitlements, and when you do, I'm going to try to step on your fingers, and I'm going to smash you in the face for trying to take on entitlements. You know what? We got to be bigger than partisan politics. We got to go for the right policy because, if we don't, this government, in fact, will spiral out of control, we will cheat the kids of the next generation, and I'll tell you something. As Republicans and Democrats together, our legacy cannot be that we blink. Our legacy cannot be what the special interest groups and the lobbyists want. Our legacy has got to be that we tried to make public choices so that the next generation will have a bright future.

MR. LEHRER: Congressman, I know you have to go vote.

REP. KASICH: I got to go vote.

MR. LEHRER: If you come back --

REP. KASICH: I will.

MR. LEHRER: -- I'll be glad to see you. Okay. Ms. Rivlin, a lot to answer there, but first, his final thing, that this is just a - - you're just handing -- you and the President -- if this budget got enacted -- would be handing a terrible legacy to your children, your grandchildren, and all those to come.

MS. RIVLIN: We don't think so. In the first place, we are the ones who got the budget deficit under control. We've brought it down. It was going through the roof. It was really out of control. And it was up to about $300 billion when we took it over, and now it's under 200.

MR. LEHRER: But what about his --

MS. RIVLIN: It's under control in the sense that it is gradually declining in relation to the size of the economy. Sure, it needs to come down faster. But this Congressman is just filibustering. He hasn't put any plan on the table. He criticizes us for not doing enough, but we have not seen their plan. They say grandly they're going to balance the budget, they're going to have a lot bigger tax cut, but they haven't put anything on the table yet.

MR. LEHRER: But do you agree with his basic premise that, politics aside, that there's not going to be any major future budget deficit reduction and certainly not a balanced budget unless entitlements get on the table, unless entitlements are cut?

MS. RIVLIN: Entitlements is sort of a weasel word for not saying what you're talking about.

MR. LEHRER: Okay. Social Security, Medicare.

MS. RIVLIN: Let's talk about Medicare and Medicaid.

MR. LEHRER: Okay.

MS. RIVLIN: We certainly agree that they're rising too rapidly, and if those programs were not rising as rapidly, the deficit would be coming down faster. But we can't just cut those programs indiscriminately --

MR. LEHRER: Why not? Why not?

MS. RIVLIN: Because if we do, we pass the costs onto the private sector, and other people's bills go up. We have to look at those programs as a whole, as part of a whole health care system. We did that last year. We put a plan on the table. We're still for the principles of the President's plan. He said that very clearly in the State of the Union. But he also has changed tactics. It didn't work out terribly well to put a plan on the table and say this is it last year, so we're working more cooperatively with the Congress. We're reaching out and saying, let's do it in steps, let's do it together, but let's do it.

MR. LEHRER: But you agree that there is not going to be any real major budget deficit reduction unless that is done, is that right? One way or another, it has to be done. Medicare and Medicaid have to be cut.

MS. RIVLIN: In the long run, we have to reduce the rate of growth of health expenditures not only in the federal budget but for the country generally. We certainly agree about that, and we want to do it and want to work with the Congress on it.

MR. LEHRER: What about the, the Congressman -- I asked him the question -- he agreed -- because it's been part of the commentary all day to today, that what the President really has done with this budget plan is said, okay, the really hot button political issues are cutting these various programs you and I have just been talking about, and he was talking about, and that if Republicans want to do that, let them take the heat for it. Was that part of the discussion and the decision making at the White House?

MS. RIVLIN: No. There are a lot of button issues, and there are a lot of things that are cut in our budget that a lot of people aren't going to like. We have to cut some of the things that the government has been doing to reduce the deficit. We want to do it in an intelligent way. We have put $144 billion of additional deficit reduction on the table in this budget very specifically. We haven't had any specifics from the Republicans. And we're using half of that or less than half of that to pay for the middle class tax cut to give relief to families who need it, but our specifics are all here. Now, we're waiting to see theirs.

MR. LEHRER: What about the Democrats? Sen. Exon, who's been in our News Summary clip too, he also says, and Paul Tsongas, who's a Democrat, he said this today too, I mean, he just wiped his hands clean of the President's budget on the grounds that it didn't do enough in these areas that we've been talking about.

MS. RIVLIN: Well, Sen. Exon would like to see more deficit reduction, and I don't think he supports the tax cut. We believe that average families haven't shared in the recovery that has created 6 million jobs and done a lot of good things, but it hasn't really shown up in the budget of average families. That's a reason for having a tax cut, and it is a reason for the kind of tax cut we have, which emphasizes education and training and helping people get more skills so they have higher wages in the future.

MR. LEHRER: Sen. Domenici, the chairman of the Senate Budget Committee, said in the News Summary -- you saw it as well -- that he wouldn't say this budget that you and the President sent up there today is dead on arrival, but it's on life support systems. How would you measure its viability at this point, after seeing what the reaction has been the last 24 hours?

MS. RIVLIN: Well, I think that's an exaggeration. The parties always exaggerate about each other. This budget is definitely not dead on arrival because it is the first set of cuts that have been offered, the first specifics. The Republicans are very eager to say -- to see what we put on the table. Now they've got it. Now they've got to ante up and say what they're going to do.

MR. LEHRER: Now why? Why isn't it the President -- Congressman Kasich has joined us again -- he'd gone away to vote, and he's just come back. But doesn't -- isn't it the President, whether it's a Republican President to a Democratic Congress or a Democratic President to a Republican Congress, who's supposed to be the first one, supposed to lead the way?

MS. RIVLIN: Well, we are the first one, and we are leading. We believe that this budget, if enacted, would be very good for the country. We need a tax cut. We need to emphasize education and training. We need investments in our children and our future, and we also need to keep the deficit coming down. That's what we propose to do here.

MR. LEHRER: Congressman, in your absence, Ms. Rivlin said -- and I paraphrase -- but essentially, okay, this is what we propose, the Republicans still haven't come up with any proposal; they haven't suggested cutting anything, and so how do you respond to that?

REP. KASICH: Jim, two years ago, we offered, the Republicans offered the most specific budget that had the same amount of deficit reduction as the President had without a dime in taxes. Last year we had another specific budget. This is early February. We'll come with our budget. What do you think, we're not going to do it? Of course, we're going to do it, but you know what, Jim, with this $200 billion deficits in the out years and the 300 billion beyond this calls to mind one simple thing: We desperately need the balanced budget amendment to pass in the United States Senate to force us to do the things that we've been unwilling to do. And for the people that are watching this show tonight, if you feel strongly about balancing budgets, if you feel strongly about what's going to happen to your kids, let me tell you, you better call your United States Senator, and you better get him to force us to live in a budget like you do in your families. If it doesn't happen, the pressure will be off. It will be tougher to do the job. I'm not saying we won't do the job, but it will be tougher, and that's what this budget represents, kind of caving into all this. And, you know, I'm not angry about it. I just can't believe this is happening. I just can't believe we've taken a walk on trying to get these deficits to zero. Frankly, Labor Sec. Reich said a couple of weeks ago, they don't believe in balancing budgets. And I think that's what this is all about, a reliance on government to solve problems at the federal level, rather than revolution, what I think the American people called for last November.

MR. LEHRER: Ms. Rivlin, that's tough stuff.

MS. RIVLIN: Tough stuff but it's not right. We do believe in getting the deficit down, and we've done it. We've done it without a single Republican helping us. We've gotten the deficit down. We have it on a downward path, and we want to see what the Republicans are putting on the table. I'm for more deficit reduction; everybody's for more deficit reduction. I don't think you have to write it into the Constitution. You have to do it. But they haven't said what they would do. We want to see what they would do.

REP. KASICH: Jim, I want Dr. Rivlin to work with us. When we put our ideas out on Medicare and Medicaid, she's an honorable woman, she's lost her fights inside the administration, I want her to work with us. I mean, I'm talking to Democrats every day on the floor about working together. The only way we're going to get this done is by working together, but we're off to a -- it's a non-start. We're running in place. I want her help as we get specific in the future?

MR. LEHRER: Are you going to help him?

MS. RIVLIN: Yes. You will get not just my help but the President's help. The President said today he wants to work with the Congress. You have to start somewhere. We have our budget on the table. We think it's a good budget. Now you put yours on, and we'll all work together.

MR. LEHRER: Congressman Kasich just said of the people who are watching this program tonight, if they wanted the budget reduced, they should go to the phone and call their Senators. What would you say they should do, Ms. Rivlin?

MS. RIVLIN: I would say they should urge their Congressmen and their Senators to show what they would do to balance the budget over time specifically before we start writing it into the Constitution.

MR. LEHRER: Both of you are talking about cooperating and all of that, but that, is there really that much common ground in these two budgets, I mean, in your attitude about it and what you plan to do and what the President has suggested today, Congressman?

REP. KASICH: Look, we're going to have hearings tomorrow. In fact, I'm going to see Alice tomorrow morning in the committee.

MR. LEHRER: What are you going to say?

REP. KASICH: And let me tell you what we're going to do. I've had cabinet secretaries come to my office and tell me that the revolution started in November, that they've had more ability to get more things done because tired old committee chairmen were rejecting their ability to have innovation, that the special interest groups had 'em by the throats, and what they're saying, is because you folks won, I got more leeway and latitude to move forward, and that's exciting to me, because we need to move further. We're going to look at some of the things they've suggested; vouchers for public housing, tremendous consolidation of programs in HUD, great, killing the ICC, we'll give you an "A." What we don't have is the whole job done, reinventing the landscape and dealing with those exploding entitlements. And I'm going to work with Dr. Rivlin, the President, Leon Panetta, any of 'em, and our Democrats up here on the Hill, because in order to deal with entitlements, it has simply got to be bipartisan, we've got to do it together. And what I'm afraid of with this budget is the reason they didn't deal with it is they didn't want to give us any cover, and they thought that they could play some kind of political game with us. But we're going to do the right thing. I mean, we're going to work to do the right thing. I'm going to tell you I am, just like Dr. Rivlin works to do the right thing. That's what we're going to try to do.

MR. LEHRER: But do you agree on what the right thing is, Ms. Rivlin?

MS. RIVLIN: Not entirely, but we agree on a lot of things, and I think there is scope not only for working on the budget items that are here but for looking to health care reform, welfare reform, and other things that we can work on together.

MR. LEHRER: But the President made it very clear today that he's not going to go along with cuts in Social Security, no cuts in Medicare, no cuts in Medicaid. What are you all going to talk about when you go up there and talk?

MS. RIVLIN: The President said that he was for health reform and that Medicare and Medicaid would be talked about in that context.

MR. LEHRER: That context, but not in a budget. Okay. Yes, one final word.

REP. KASICH: Well, I mean, Jim, we don't want to -- we don't want to turn medicine over to the federal government. We want to copy the private sector that's been able to reduce costs, maintain choice. We don't want to have a big government-run health care system. We rejected that in November.

MR. LEHRER: That's another whole argument. We'll get to that one too, I'm sure --

REP. KASICH: Yes.

MR. LEHRER: -- before this over.

REP. KASICH: I'm sure we will.

MR. LEHRER: Thank you. And you all have a good time tomorrow up on the Hill. Thanks for being with us tonight.

MS. RIVLIN: We're just warming up.

MR. LEHRER: Yes, right. Thank you.

MR. MAC NEIL: Still ahead on the NewsHour, the peso crisis in Mexico, and raising the trade stakes with China. FOCUS - WHAT NEXT?

MR. MAC NEIL: Next, we turn to Mexico, and the reaction there to last week's $50 billion emergency loan package. Correspondent Charles Krause reports on what Mexicans think will happen next.

CHARLES KRAUSE: At best, President Clinton's emergency loan package has bought time for Mexico to get its financial house in order and to begin to restructure the wobbly foundations of the shaken economy. But the $50 billion package will do nothing to create jobs. In fact, the aid package will almost certainly cause a severe recession, which means that for average Mexicans, the worst is yet to come. Juan Enriquez is a graduate of the Harvard Business School who was part of the government team that negotiated last year with the Zapatista guerrillas in Chiapas.

JUAN ENRIQUEZ, Former Government Official: I think this country is reaching a very serious crisis, and the issue is going to be for local management. The issue's -- what's going to get us through the next few months is on the one part putting together a coherent economic package. The other part which is essential is putting together a series of political coalitions that make sure that people are on board on this package. If people are not on board on this package, if people are heading in different directions, if you don't bring together people to fight for Mexico, and if you don't have a coherent political story, things are going to get very tough.

MR. KRAUSE: At almost every level of Mexican society, there's a growing realization that 1995 is, indeed, going to be a very difficult year. Mexico's president, Ernesto Zedillo, has already warned that the government will be forced to impose strict fiscal and monetary controls this year so that Mexico can meet its international obligations and comply with the terms of the rescue package. As a result of the conditions imposed by the U.S. and the International Monetary Fund, there will almost certainly be massive layoffs in Mexico, sharply higher prices, lower real wages, and a severe drop in the country's already precarious standard of living. Adolfo Aguilar is an opposition member of the Mexican congress and one of the country's leading political scientists. He thinks Zedillo is making a drastic and possibly even fatal mistake.

ADOLFO AGUILAR, Congressman, Mexico: What will happen is we will have to see -- to face massive unemployed people in the cities. This will increase crime. Crime will increase the outcry of the middle classes for an authoritarian solution. This will increase a social deprivation. It will increase manifestations in the streets, demonstrations. This will increase the radicalism of some opposition groups that will find the solution of the Zapatistas more in hand, a desperate last resort, and the Mexican society will tend to polarize, which is already highly polarized, it will tend to further polarize. The middle classes will be frightened and will again demand an authoritarian solution. So, unfortunately, because the lack of coherent opposition, because the lack of a government understanding of the dimension of all of these connections, and because the international opposition of conditions to Mexico of a stringent, draconian stabilization program, it is a terrible combination of ingredients. It's a terrible combination.

MR. KRAUSE: Already, the impact of the crisis that began with the devaluation of the Mexican peso in mid December is beginning to be felt. Humberto Gutierrez is a taxi driver in Mexico City.

HUMBERTO GUTIERREZ, Taxi Driver: We don't have too much people, I mean, too much customers. The money we made working as a driver is not too much. I mean, the cost of the things, they have a different level now.

MR. KRAUSE: Things are more expensive.

HUMBERTO GUTIERREZ: More expensive. Everybody wants to increase the prices, everybody. Not even coffee or sugar or bread, everything, everything is going up.

MR. KRAUSE: Shops throughout Mexico City are virtually empty, largely because the prices of imported goods, from shoes to medicine, are up sharply, and fewer Mexicans have money to buy them. Pharmacist Carolina Zapata, for example, told us that many of her customers can no longer afford the medicines they need because of the devaluation. Drug prices have shot up by anywhere from 30 to 100 percent. Marcelvia Hernandez is a street vendor who sells toys, most of them imported, in a wealthy section of Mexico City called San Anquel. She says the crisis is being felt even here. Over the weekend, Hernandez told her sales dropped to 30 pesos a day, the equivalent of about $6 worth of toys during the 13 hours she was open. It's not enough to survive and with a mother and child to support, she says if this continues, she doesn't know what she'll do. As the recession spreads, it's also affecting many of Mexico's largest companies, especially Volkswagen and the country's other automobile and truck makers. Car sales are expected to drop by anywhere from 30 to 50 percent this year, because interest rates have doubled, and almost no one can afford to buy cars. As a result, the auto companies are laying off workers, and the impact is rippling through the economy. Lars Christianson, for example, owns a medium-sized chemical company with about 150 employees in Mexico City. Although he hasn't yet had to lay off any of his workers, Christianson says his sales in January were down about 30 percent. Bank credit has dried up, and his company is now in some trouble.

MR. KRAUSE: Are there going to be a lot of bankruptcies?

LARS CHRISTIANSON, Businessman: Yes. A lot of companies are going to be in a lot of difficulties. There's no doubt about it.

MR. KRAUSE: And that means that a lot of people are going to be thrown out of work?

LARS CHRISTIANSON: It's possible.

MR. KRAUSE: And what happens in a country like Mexico when people are thrown out of work? What is going to happen?

LARS CHRISTIANSON: Let's go back to what happened in '82. A lot of family ties are very strong in Mexico. Families tend to stick together. There's no doubt that the level of poverty becomes greater. But it's not a solution to life. It's a lousy solution to life.

MR. KRAUSE: As you know, people have said there are different escape valves in a sense. One is people will try to go to the United States. Other one could be that there could become -- there could be social unrest, there could be anti-government protests, I mean, all kinds of things. What do you expect is going to happen?

LARS CHRISTIANSON: I see that you're going to have a lot of pressure in the United States. I think that's natural. That's going to happen. Charles, it's hard to answer this. I -- there's going to be social unrest -- now, at what level, I don't know, it's hard to tell. I'm worried, yes, I'm worried, very worried.

MR. KRAUSE: Despite growing concerns and evidence the economy is heading toward deep recession, the Mexican government has remained optimistic, overly optimistic according to its critics and many investors. Nonetheless, Sec. of Labor Santiago Onate told us late last week that with the Clinton loan package, he believes Mexico can avoid the kind of economic collapse and massive unemployment that might lead to social and political unrest.

MR. KRAUSE: Do you expect there to be a serious recession in Mexico within the next six or eight months?

SANTIAGO ONATE, Secretary of Labor, Mexico: Serious, no. Recession, yes. Certainly the next six months will be hard. The effects of this economic crisis of late December and all January have been significant and will hurt production during the first six months. We do hope that some sort of recovery will start in the third quarter, and certainly we still hope to have some kind of growth for the end of the year.

MR. KRAUSE: Onate's optimism is based on official government projections. Despite the tough austerity measures which is almost certain to impose on Mexico as part of the rescue package, the Mexican government is still projecting real growth this year of 1.5 percent. It also expects the current account deficit to be cut in half and inflation to remain under 20 percent. The problem is that neither investors here or on Wall Street believe the government's estimates, and investor confidence is key to any recovery. Pablo Riveroll is director of research at Bursumex, one of Mexico's largest brokerage houses.

MR. KRAUSE: Where do you see inflation this year?

PABLO RIVEROLL, Economist: Inflation I see closer to 30 percent than to 20 percent, because I think that we're going to need to keep an undervalued currency in order not to allow the current account deficit to, to grow very much.

MR. KRAUSE: Where do you see growth?

PABLO RIVEROLL: Growth, I think, we'll be lucky if we don't grow anything. We'll have a declining growth this year.

MR. KRAUSE: Do you think that the government's program is realistic, given what you've just said about your expectations for the economy?

PABLO RIVEROLL: I think the government program was -- could have been implemented if it -- if the peso had strengthened at the beginning of the year. I think we're one month too late on the program, and I think that's what the markets are telling us, that they don't believe the program very well, they don't believe the variables.

MR. KRAUSE: In other words, you don't -- the government has not made enough specifics available for the markets to understand or to see what's happening?

PABLO RIVEROLL: Yeah. I think the markets believe that the social issues and the political issues are much -- are bigger, much more worrisome, than what this plan would, would contemplate. I think that this plan contemplates a very drastic recession which I don't know if the country can take it at this moment.

MR. KRAUSE: Over the past year, Mexico has experienced two major political assassinations and a guerrilla uprising in the southern state of Chiapas. Now the economic crisis has added a new element of instability to the ongoing political crisis. Mexico's new president, just two months in office, has so far inspired little confidence. In fact, last week, there were reports that if the loan package didn't go through and if Mexico was forced to default on its international payments, Zedillo's government would collapse. Onate says he does not think the reports were accurate.

SANTIAGO ONATE: Certainly, a default on the payments could have severely affected the ability of the government to handle the internal political situation, but when you have a government that has been backed so heavily in the elections, when you have an election as the one we had, when you have the stability that you can see in the political order, it's very hard to imagine that the default on the payment of this could have brought down this government.

MR. KRAUSE: But Adolfo Aguilar says and the U.S. embassy confirms that one of the critical factors behind President Clinton's decision last Tuesday to implement his own rescue package for Mexico was concern that Mexico would default and that, as a result, Zedillo would be forced from office.

ADOLFO AGUILAR: The first consideration that President Clinton had that Monday night, before Tuesday's announcement, was that Mexico was, indeed, on the verge of bankruptcy, and the officials of Mexico had no other way to go. They didn't have reserves in the central bank in order to continue to meet any obligation Secondly, there have been clear indications and the White House has received very clear, intelligent reports from Mexico that erosion of the government of Zedillo was proceeding very fast. So the perception of intelligence indicated that the bankruptcy or the default of Mexico would probably trigger the last step of the already ongoing political crisis, and that the Zedillo government would fall down and would probably be repressed by a combination of chaos, with authoritarianism.

MR. KRAUSE: Last Thursday, just 48 hours after the $50 billion rescue package was announced in Washington, Zedillo spoke before a group of retired military officers in Mexico City, praising the army for its loyalty. The event was interpreted as yet another sign of just how fragile Mexico's economic and political situation has become. FOCUS - TRADE TANGLE

MR. MAC NEIL: Finally tonight, the United States and China at odds again over trade. Over the weekend, the U.S. said it would impose stiff tariffs on some Chinese exports to this country to punish Beijing's refusal to crack down on illegal copies of videos, compact discs, and computer software, so-called "intellectual property." The Chinese first threatened retaliation but backed off today and suggested more negotiations. The two countries do more than $40 billion in trade with each other, but China sells four times as much here as it buys from the United States. Special Trade Rep. Mickey Kantor has been handling the negotiations.

MICKEY KANTOR, U.S. Trade Representative: Let me reiterate that piracy of U.S. products is an extremely serious problem, and we expect the Chinese to come to the table prepared to address our concerns over the protection of computer software, chemical and agricultural products, pharmaceutical trademarks, audiovisual works and books and periodicals in three general areas: one, taking effective immediate measures to curb piracy, including raids on major compact disc other producers; instituting structural changes to improve intellectual property protection over time, such as creating a border enforcement regime, instituting a copyright verification system, and providing access to the intellectual property right courts; and last, providing market access for intellectual property-based product.

MR. MAC NEIL: Now for some analysis of the trade dispute and its impact on U.S. relations with China. David Lampton is a China scholar and president of the National Committee on U.S.-China Relations, a nonprofit educational organization. Robert Kapp is president of the U.S.-China Business Council, a Washington-based consulting firm which represents more than 280 American companies doing business in China. Mr. Kapp, do you agree with the administration's decision to impose these penalties?

ROBERT KAPP, U.S.-China Business Council: Well, Robin, imposition of sanctions is a big step, and it is not likely to be well received by any country on the receiving end, but the intellectual property issue is one which can't be avoided, and the business community stands with the administration in the feeling that this simply has to be dealt with hopefully through negotiation and hopefully with a rapid solution.

MR. MAC NEIL: Mr. Lampton, do you agree they did the right thing?

DAVID LAMPTON, China Analyst: Well, speaking personally, I certainly think this is a major economic issue. It'll get worse over time if we don't address it, and I guess my own feeling would be there's no time like the present to deal with this set of issues. I think we do need to be understanding of some of the difficulties the Chinese have regulating and instituting an effective legal regime for 1.2 billion people when they don't have the tradition, but basically, I think the United States is on the right track, and I think we've been a little apocalyptic. I think we probably will not have a trade war when we get to February 26th.

MR. MAC NEIL: I'll come back to some of those difficulties in a moment. Just let me ask Mr. Kapp, as a businessman interested in this, how serious is this piracy business? I mean, what, what does it amount to in terms of lost business for the holders of U.S. copyrights on CDs and things?

MR. KAPP: Robin, the way that these things are measured is that the industries in question who feel that their properties are being ripped off basically with the government come up with an estimate on what they would be selling if it weren't for the rip-off. And in the immediate sense, i.e., goods not sold in China because rip- offs are being -- knock-offs are being sold instead, they've come out with about a billion dollars. The U.S. Trade Representative's people the other day made note of the fact that in the case of compact discs and other things, which are being illegally reproduced in China, which are being sold in third countries -- we haven't even done the counting yet -- so the short answer is about a billion dollars.

MR. MAC NEIL: Just in China.

MR. KAPP: Just in China, just in China for the products that have been at the center of this particular dispute.

MR. MAC NEIL: 'Cause I gather from reading about it today, these products are very popular in China.

MR. KAPP: Well, indeed, they are, and I'm not -- I'm not a great expert on contemporary popular music, but Amb. Kantor certainly seemed well versed. As he trotted out the CD's from major and popular recording artists today, he seemed to be a real avid fan.

MR. MAC NEIL: Do the Chinese acknowledge this is a problem?

MR. LAMPTON: All the Chinese I've talked to -- and I talk to a broad range -- acknowledges it's a serious problem. They would point out that they've made substantial efforts by way of trying to destroy some of the stocks of these goods. They've done so in quite publicized ways, steam rollers going over compact discs that were illegally copied and so forth, but when all is said and done, they found it much more difficult to attack the production sites. I think there are a number of reasons. One is some of the production sites for CD's are, in fact, military-related or military-run, or have connections politically that make it very painful politically to attack the production sites.

MR. MAC NEIL: You mean influential people inside the army or inside, or in the political circles are profiting from running these factories?

MR. LAMPTON: In --

MR. MAC NEIL: They're knocking off American CD's.

MR. LAMPTON: In some cases, and then there are provincial authorities that have, because of the decentralization increasing degrees of control and much of their local revenue now is coming from these industries, and so it's a political problem. Also, there's an enforcement problem, a regulatory problem, an educational problem. The Chinese are quite honest in saying there's a problem. What they're really arguing for is more time to deal with it.

MR. MAC NEIL: I saw a suggestion today by another China scholar, Susan Shirk, that the political structure means that politicians at the center can't really get tough with local officials because of the way the political structure is set up. Is that -- do you believe that?

MR. LAMPTON: Well,I think there's a span of control --

MR. MAC NEIL: I mean, if the president of China, Jiang Zemin, wanted to force the people to stop manufacturing these CD's, could he do it?

MR. LAMPTON: Well, I think in individual cases, yes, but you have to realize Jiang Zemin, for example, is in a succession struggle, and, in fact, he's going to need the support of provincial authorities, he's going to need the support of the military to assert effectively his control in the next phase, so if the only issue we had to worry about was satisfying the United States, I think it would be rather simple, but he's involved in a complex game, and the most important game, of course, to him and others in the leadership is political survival.

MR. MAC NEIL: If you'll just spell that out, how does his political survival, presumably you mean when Deng Xao Ping finally dies -- he's 90 now and getting pretty tottery -- when he dies, how does that -- how is that connected with not doing what the United States wants?

MR. LAMPTON: Well, I think in two ways. First of all, there's a rising degree in Asia in general and in China in particular of nationalism, and one does not build power in China under current circumstance by looking weak on foreigners in the first case, whether it's the British in the case of Hong Kong, or the United States here. That's the first issue. Secondly, there are three bases of power that one has to have in order to rule China. One is the loyalty of the important provincial leaders. One is the military, and one is the party apparatus. And he cannot command that loyalty, he has to win it, so you have to pick in the Chinese political system your fights just like any other politician has to pick his fight.

MR. MAC NEIL: Can you add to that, Mr. Kapp, from the experience of you and your fell businessmen who have deal with China?

MR. KAPP: China's in transition, Robin, and the old Stalinist system is gone. The exact dividing lines between what is considered government and private, between what powers belong to the central government and to provincial and local governments is very much in flux right now even in a funny sort of way as it is in our own country as we redebate the balance of forces between the states and the federal governments here. I guess the only thing I'd say to that is that we have to understand that this dispute is -- has been caused because the commercial relationship between the United States and China has grown so well over the last 15 years. I mean, we're now fighting about whether the Chinese enforce laws which they didn't even have two or three years ago. We're now talking about whether U.S. investment might in some way be inhibited from further growth in China, because of the failure to protect intellectual property, when, in fact, U.S. investment in China has grown radically over the last 10 years, to the benefits of Americans and Chinese alike. My hunch is that we'll look back on this conflict 10 years from now and see that it was a momentary awkwardness in the course of actually a very substantial improvement in the U.S.-China economic and commercial relationship.

MR. MAC NEIL: So is this refusal of the Chinese to enforce their own laws -- you said they didn't have them three years ago -- they do now have laws against piracy -- is that refusal to enforce them inhibiting American businessmen now from investing in China?

MR. KAPP: Robin, it can. One of the reasons that the broad American business community has been largely unanimous in understanding the reasons for this, for the prosecution of this dispute with China, is that intellectual property is not just found in CD's and films and records and software. Every company that invests in China and thus speaks to the Chinese desire for a need for further foreign investment, most of those companies, I should say, are involved in the transfer of technology, the bringing to China of more advanced abilities to produce things than the Chinese, themselves, now enjoy. And much of that technology and know-how that American companies put into China and are eager to put into China is proprietary and needs to be protected from being copied and otherwise used by those who haven't paid for it as well. It's a big deal.

MR. MAC NEIL: I've seen the suggestion, Mr. Lampton, that the Republican resurgence in Washington has caused this Democratic President to stiffen his stance regarding the Chinese. I mean, he was in some political hot water with some sectors a year ago for renewing the -- and disassociating the renewal of most favored trading status from performance on human rights and things. Do you see what he did over the weekend as evidence that he's feeling the Republicans breathing down his neck?

MR. LAMPTON: Well, in all fairness to the administration I think that's a bum rap, frankly. I think the President has not been fully consistent about some areas of foreign policy but on the centrality of American competitiveness and in the end pushing American economic interests abroad, I think he's been quite consistent. And I think this administration -- I don't speak for them -- but I think the believe that our comparative advantage in China, and particularly with the high-tech revolution, their need for infrastructure investment, telephones, and so on, that it's absolutely critical that we be competitive in that market and that our comparative advantage be protected and analyzed, so I see this as fully consistent, and this is one area where I think the policy of the Bush administration and the Clinton administration has really been one of continuity, and that the current special trade representative, Mr. Kantor, is really in the same tradition as his predecessor, Carla Hills.

MR. MAC NEIL: Is this dangerous, this current flap for U.S.- Chinese relations a big crisis that could escalate, or does the fact that the Chinese have today backed down from their own retaliation and called for talks mean it can be settled quickly?

MR. LAMPTON: Well, I think it has the potential to spin out of control, but frankly, much of the commentary today I think has been a little, as I said earlier, apocalyptic. I think that first of all the Chinese have come back to the table. That's an encouraging thing. Secondly, I think if you look at the two lists of goods for which tariffs would be raised on February 26th, in the absence of an agreement, you will find actually that both sides targeted those categories of goods that not only did the least damage to themselves but also were not a fundamentally a tax on the core exports of the others, so the target lists, themselves, were very carefully calibrated. And I think it shows that neither side wants this to spin out of control.

MR. MAC NEIL: Mr. Kapp, are you confident that there could be an agreement by -- there can be an agreement by the 26th, which is the deadline?

MR. KAPP: Oh, absolutely confident that there can be an agreement, but I think it's important that both sides do their best to manage this as a finite trade dispute and not let it get mixed up with the other gripes that the two countries have about each other. The chances that this could become political fodder in either society are always there, could be mixed up with all sorts of other things that people don't like, and if that were the case, then both the administration and the Chinese trade negotiators might lose the ability to control the policy on this one issue, and we'd have a broader and more uncontrollable dispute between the two countries that we must avoid.

MR. MAC NEIL: Well, Mr. Kapp, Mr. Lampton, thank you both. RECAP

MR. LEHRER: Again, the major story this Monday was the Clinton budget. President Clinton sent it to Congress today. It calls for spending $1.6 trillion and includes a middle class tax cut. Republicans, including House Budget Chairman John Kasich on the NewsHour tonight, criticized the plan for not cutting expenditures enough. And an update on the baseball strike. This evening, President Clinton decided to extend the deadline for possible federal intervention until tomorrow. Good night, Robin.

MR. MAC NEIL: Good night, Jim. That's the NewsHour for tonight, and we'll see you again tomorrow night. I'm Robert MacNeil. Good night.