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                                                                                NATION, Page 16

COVER STORIES

"Now That We're Face to Face . . ."


By MICHAEL KRAMER and JOHN F. STACKS/CHICAGO, Paul Tsongas and
Bill Clinton


    Q. Would each of you state briefly your prescription for
fixing the American economy?

    GOVERNOR CLINTON: The country is in the grip of two
economic crises. The one that most people are preoccupied with
is the three-year slowdown, the slowest three years of any
presidency since before World War II, coming at the end of a
decade of productivity decline. The result is the loss of a lot
of our economic leadership, the collapse of a number of our
high-wage jobs and the concomitant disintegration of a lot of
the important parts of our society: more children living in
poverty, more people working below the poverty line. Everybody
concedes that somewhere between 40% and 60% of the people lost
economic ground over the past 10 to 12 years. Maybe as much as
80% of the electorate had no real net gains. So we are suffering
from slow growth. There is also wildly unfair distribution of
the pain.

    A central failing is that we were the only major economy
in the world that had no national economic strategy. That is
one thing Senator Tsongas and I agree on. We didn't have an
automobile strategy, a strategy for maintaining a high wage
base, a strategy for revitalizing our cities. We didn't have an
overall strategy because Presidents Reagan and Bush believed
that the Federal Government would mess up anything it got into,
and that the main thing to do was to keep taxes low, especially
on upper-income people and corporations, and basically to let
the market take its course.

    That course does not work. We need a national economic
strategy as well as a human-development strategy that recognizes
we are living in a world in which what people earn depends
largely on what they can learn and whether their economies are
organized for change.

    So the three central ideas in my economic policy are:

    One, emphasize education and training, not just of our
children but also of our adults.

    Two, give new incentives to the private sector to invest
in this economy. The 1986 Tax Reform Act took too many of them
away. I have enumerated them: an investment tax credit that is
broader for small or medium-size businesses but gives heavy
industry at least machinery credits in ways that will cost in
the ball park of $5 billion a year; and the new business tax
credit recommended by the Venture Capital Association.

    Three, think a lot about organizing to make change our
friend instead of our enemy. The most depressing problem in
America today is the fact that we are reducing the defense
budget with no conversion plan. The one area where we had an
industrial policy in the '80s was in defense. We targeted
specific investments. We had an agency to convert ideas from the
lab to the marketplace. We put all kinds of technicians,
scientists, engineers and factory workers to work and put
servicemen and -women in the implementation stage, and now we
are just laying them off with no conversion plan. If it were me,
I would be organizing a strategy to maintain and develop a
high-growth, high-wage base so we can adapt to change instead
of being punished by it.

    SENATOR TSONGAS: You just took the first four pages out of
my plan.

    CLINTON: We agree on our general approach.

    TSONGAS: Well, I got into this race because I think the
U.S. is in a long-term economic decline. I serve on seven
corporate boards, and to serve on those boards is to just sit
there and watch Japan and Germany like a tidal wave coming in.
I saw it as my task to go out and sound the economic alarm --
what I used to call the economic Paul Revere stage.

    If you wish to live well, you must produce well. That's
the core, so the entire focus of my effort basically is, How do
you end up with a viable, profitable, competitive manufacturing
base? There is no other foundation for economic growth, long
term. If you lose manufacturing, everything else falls apart.

    So you either have an investment strategy or a consumption
strategy, and this is where we have different views. George
Bush's economic philosophy is purist laissez-faire: Go out and
compete; good luck; I hope you make it. The purist laissez-faire
approach does not work.

    You have to understand where the engine is. The engine is
manufacturing. So you take whatever bullets you have and you
expend them to get the engine running. When the engine runs,
then you go on to other kinds of things. Now, the components for
me would be:

    First, basic science. If you don't have the ideas, you
don't get products. The fact is that basic science in this
country is devalued. So I would increase the National Science
Foundation and the basic life-science agencies, in essence say
to young people around this country, "Science and technology is
the future. If you have a bent in that direction, stay there.
We are going to assure you a future."

    Second is to provide funding for research into process
technologies. Where we do well is we come up with ideas. What
the Japanese do well is they take those ideas and take them to
market. So we end up with a Nobel Prize, they end up with a cash
cow of production. Once you have those ideas, you have strategic
technologies in which the government is going to have to come
in and help finance in the predevelopment stages.

    Then you get down to the great problem in this country,
which is venture capital. I have been involved with two start-up
companies, and the venture-capital situation is a nightmare. And
that's why my capital-gains tax cut is targeted and is meant for
long-term investments. Not only do I want capital to be
available for this sector, but it would be patient capital. So
if you were a speculator, in fact, we would charge you a higher
tax. A research-and-development tax credit is basic. The
temporary investment tax credit, the same kind of thing. Japan
has half as many people as we do, and they have greater capital
investment, and now they have surpassed us in research and
development. The long-term result of that is inevitable. They
are the superpower. We are the also-ran.

    Go to any small businessperson trying to expand and ask
them, What do you need? The answer is always the same: I need
credit, need capital, I need skilled workers.

    If we don't end up with a national ethic that values
investment over consumption, we are not going to survive against
nations that are resolute in their commitment to savings and
investment. We need a President who recognizes that absent a
viable manufacturing base, there is no U.S. economy.


    Q. Governor Clinton, what is the matter with the Senator's
plan?

    CLINTON: Nothing is the matter with it. I agree. I think
we have to have investment as opposed to consumption-based
strategy. In the '80s we tripled the deficits of the government
and our public investment went down, largely because we had big
increases in defense and insufficient revenues. We exploded the
deficit, and we refused to control health-care costs. And we
didn't have a government that was oriented toward investment.

    I agree we have got to have a manufacturing base. I agree
that we ought to have an investment tax credit that extends to
all manufacturers without regard to size -- and I am not sure
it should be temporary if it's properly structured. I fully
agree that we need a venture-capital tax credit. The issue --
it may be a difference of emphasis, and it may be a whole
difference of direction -- is what mechanisms work best. I agree
that you can't be a great country if you don't produce.

    We need to have a system that focuses on continuous
education and retraining and small-business development
strategies for people who lose their jobs because of
productivity. I wish we could go back up to 22% to 25% of GNP
coming from manufacturing. We are losing entirely too many
manufacturing jobs because we have no strategy to deal with the
productivity problems and the competition problems.

    The issue is, What do you do besides provide more venture
capital? And the difference between Paul and me is that I favor
more targeted incentives. And even if you give lower rates in
long-term capital gains held in stock traded on the New York
Stock Exchange, you may be rewarding people moving jobs offshore
anyway. I prefer almost every one of the same targeted tax
exemptions that Paul does, but I think what happens if you have
another across-the-board cut in the capital-gains tax [which
Tsongas advocates] is that you will be spending money that you
ought to be spending on people. The stock market continued to
rise in the '80s without regard to whether there was or wasn't
a capital-gains tax. So that is really a difference between us.

    TSONGAS: In the last analysis, the future of America is
determined in Japan and Germany as well as by what we do here.
To go back to the '60s, the percentage of the work force in
manufacturing, in all three countries, was around 30%. And now
in the U.S. we are down to the 17-18% area. And the argument is,
That's inevitable, because of the productivity gains.

    Well, it's not true in Germany and Japan. The difference
between the U.S. and Germany and Japan is you have in the U.S.
productivity gains and corporate death notices. But what they
have that we don't is corporate birth notices. So in their case,
they didn't go from the 30s down to 17; they stayed pretty much
at the same level, because they regenerated. As old companies
began to have problems, new companies came along.

    CLINTON: I agree with that, but let's look at why . . .

    TSONGAS: Let me just continue.

    CLINTON: I'm sorry.

    TSONGAS: The difference between us is that you have a
certain number of bullets. I put my bullets, all of them, into
growing the economy. By adopting the middle-class tax cut and
tax credits for children and that type of thing, the number of
bullets allocated to the engine is reduced. So it's a matter of
us all having the same number of bullets in our holsters. The
question is, What do you shoot those bullets at?

    CLINTON: Let's look at some of the things that I advocate
spending this money on. No. 1: Nobody gets on out of high school
without a system for further training on the job in either Japan
or Germany or any of the other high-wage countries. That's a
gap we have got to fill.

    No. 2: As Paul pointed out, when people lose jobs in
Japan, they are not allowed to wander around for a year on
unemployment and then take a job making half what they used to
make. In other words, Japanese and Germans lose jobs too. What
they do is they train people to move them up. You have to keep
finding new avenues for manufacturing.

    No. 3: The Germans have a much better organized market for
small and medium-size businesses to engage in exports, including
export finance. There are all kinds of things at work here apart
from tax incentives.

    And finally, in different ways, both countries have
genuine investment banks, which either take equity positions or
permit long-term heavy debt. We have to figure out a way to take
our best ideas and to move them to market in America, which we
are lousy at, and I have offered a specific strategy for that:
taking the technologies now identified by the Commerce
Department, setting up an advanced research agency to work the
way the Defense Advanced Research Projects Agency did, and then
developing in that way.

    I do not believe that in a global economy where money is
totally mobile, cutting the overall cost of capital is nearly
as important as helping families to raise their children and
investing in education and training and targeting the
job-generating growth of the economy. I think that is the
central difference between us.


    Q. Isn't Senator Tsongas' point that you are really
wasting money with a mere $400 tax cut?

    CLINTON: First of all, that assumes this is a zero-sum
game. I don't agree. I think some things will produce higher
growth than others. Second, as I have said, there are people who
believe you can have growth now and fairness later. We tried
that in the 1980s. We thought we could starve our consuming
class and get growth and everything would be great. And it
didn't work out very well.

    We basically had a veiled class war in the '80s. I don't
accept the proposition that we cannot afford to make a down
payment on fairness. There is a whole different argument for the
children's tax credit. It is very much harder to raise a child
for a middle-class family today than it was 40 years ago. Our
country used to take the position that the way to build strong
families was to enable the working people to have enough money
to raise their families. We have totally abandoned that now in
the tax changes of the '80s. We have murdered middle- and
lower-middle-class working people and made it very much harder
for them to raise successful children, which is, in the end, the
test of the success of any society.


    Q. Senator Tsongas, you have called that pandering. Do you
want to do it again?

    TSONGAS: It's not a very good economic approach. You would
spend $30 billion on the middle-class tax cut, and you spend $25
billion on the tax credit for children, so you have taken $55
billion you could have used to gin up the engine, and you used
it for consumption. That is a consumption-based strategy. I know
the value of a middle-class tax cut in terms of the political
appeal it has, but that's $55 billion that could have been used
to stimulate investment and new jobs.

    CLINTON: If I can just say this . . .

    TSONGAS: Let me finish. You know, you said some things
will produce more growth than others. You are exactly right. We
both came to the same crossroads. You can either go down the
consumption approach or the investment-based approach, and to
the extent you allocate those $55 billion to consumption, you
are not investing.

    CLINTON: Well, to the extent that we have four more years
where all the real net tax burdens go to the lower-middle-class
or middle-class people, which is what you propose to do, I
think it is bad economics. And it is bad human policy.

    I did not come to this conclusion on the basis of a poll.
We raised the Social Security tax seven times in the '80s, and
we know who that hits, don't we? Middle- and lower-middle-class
people and small-business people. The Social Security fund is
now $70 billion in surplus. That is why the deficit isn't worse
than it is. So we made a policy decision as a nation that we
were going to take middle- and lower-middle-class people and
make them make this huge contribution, keeping our deficit from
becoming bigger than it is.

    The way I came to the across-the-board middle-class tax
cut didn't have a relationship to the polls. I was trying to
figure out how to stop the class warfare of the '80s and how to
quit punishing the people who played by the rules and got the
shaft. So I came back to the middle-class tax cut as a down
payment on fairness. I never thought it was very good politics.
If you look at the complexion of the Democratic electorate in
the early-primary states and the fact that there was no
organized support for any kind of across-the-board program, just
like there never is, it's a lot better politics to come out for
capital gains and enhanced IRAs where there are upscale voters.

    I am not in this thing to pander. I have watched the
rank-and-file people of this country whom I represent get
murdered in the '80s. You talk about this middle-class tax cut
as if it is, A, the centerpiece of my program; B, pandering; and
C, going to bring down the economy. After what we just did in
the '80s, I think it is wrong.

    TSONGAS: The New York Times referred to the middle-class
tax cut as fool's gold. The Democratic strategy is middle
class, middle class, middle class. That is the mantra. And the
middle-class tax cut is a way to say to the middle class, We
care not only for the poor, but we care for you too. But it
seems to me our responsibility is to get people jobs.

    Now, part of the reason I was endorsed by so many
newspapers in the South on this issue was that they understand
the difference between a maximal investment strategy and one I
think is politically based. I am not arguing that the Democrats
should not appeal to the middle class. I think we have to. But
the reason I have survived in this campaign is that I think
people perceive that we are going to put our money into that
engine. My feelings on this are very strong because when the
middle-class tax cut idea came up, every adviser said to me,
"Look, they are all going to do this. You are going to be left
out there in the cold. It's just not good economics." And the
reason I feel that way is, unless we get serious about returning
to being competitive, there is no future.

    CLINTON: This is a campaign speech against a middle-class
tax cut, as if it were the main issue in this election. It is
not the main issue in the election. It was never the main part
of my economic program. There are a thousand other things in
both of our programs.

    I don't blame Senator Tsongas. He would rather beat on the
middle-class tax cuts because we know all the upscale people who
write editorials think it is frivolous. It is not, and I will
say again, We are waging class warfare. I think a great country
can afford to be more just. Let's quit making these political
speeches and talk about how you are going to change people's
lives.


    Q. A lot of the election is or should be around another
aspect of the economy, deficit reduction. Isn't Senator Tsongas
right when he begins to talk about the possibility of cutting
entitlement programs?

    CLINTON: Well, the question is, How do you do it and under
what circumstance? Entitlements are now more than 40% of the
annual budget. So anybody would be right to say we can't let
entitlements increase at the rate they did in the '80s and hope
to get control of the budget.

    What are your options for doing that, and when do you
bring them in? Why have entitlements increased? Because we have
cost of living increases, and everybody gets them. You also
have to say entitlements increased because poverty exploded,
and the more poor people you have, the more entitlement
spending there will be, which is why we need an antipoverty
strategy, which is why I have called for investments in welfare
reform and the earned-income tax credit to lift the working poor
above the poverty line. There is also the untrammeled growth of
health-care costs, which are ripping back through the
entitlement programs. They are breaking the bank on Medicare and
Medicaid.

    So how are we going to control health-care costs? I have
no problem with asking upper-income Medicare beneficiaries to
pay more for their Medicare premiums.

    George Bush puts out a health-care program that is
pandering. If we had instead a national health proposal that was
going to control costs, was going to lead us to a comprehensive
long-term-care program, and if we had to have some more money
to pay for it, in the context of controlling the entitlements,
then should upper-income Medicare beneficiaries be asked to pay
for it? Absolutely! Should we ask them to pay more premiums when
we are not doing anything to the health-insurance companies,
when we are not doing anything on the drug companies that are
charging more for drugs in America than they are overseas, when
we are not doing anything to reduce the health-care bureaucracy?
No. It will be putting more money down the same rathole.

    TSONGAS: My position is that if you make more than
$125,000, you are going to have to help pay for Medicare, and
that down the road, if we don't have a handle on the deficit,
I would go to people above that income level and say you are
going to get less in cost of living increases on Social
Security. The negative ads saying that I wanted to cut it across
the board is exactly what your position was in 1986.

    CLINTON: No. My position was for the one-year freeze.
That's what the resolution was. The same thing you were for in
'84, what your book says you are still for. It doesn't say just
high-income people. You even say it's not even very much to
lower the cost of living on an annual basis to everybody, but
it's a good beginning, implying that there might even be more
coming.

    TSONGAS: The book was written over a year ago, and I have
taken a very detailed position on that, as you know.

    CLINTON: So that's no longer your position that's in the
book?

    TSONGAS: A lot of changes have taken place.

    Now, the deficit. You have to deal with it. It is
everybody's non-issue. The attitude in Washington is that a $400
billion deficit is baseline. The question is do you go above or
below that. It's not baseline. It is killing us.

    There are two components. You have a revenue line that is
going up in a de minimis fashion. You have an expenditure line
that is going at a higher rate. So in that sense, the message
to the market is very clear. These lines are diverging. So
anybody who calculates long-term interest rates puts them very
high. This government hasn't demonstrated that it has the will
and discipline to finally get these lines to start converging.
With that signal, long-term interest rates will by definition
come down, so you have to affect both lines. You have to affect
the revenue line by having an investment-based strategy so your
revenue line gets deflected upward, and then you put a freeze on
your expenditures.

    A budget agreement with fixed categories makes no sense.
The cold war is over. So let's take some of the monies
available in the Defense Department, move them into things like
Head Start, so you cap the budget. You are not going to balance
the budget right away. No one is going to.

    CLINTON: There are two huge problems here that will keep
Congress from ever being able to deal with the deficit and the
President from being able to explain it to the American people.
The reason it got up to $400 billion, to be fair to the
President and the Congress, is not so much because of spending
but because the bottom dropped out of the economy.

    I would like to see the Congress and the President present
a budget to the American people every year that was divided in
three ways: what we spend on the past, that's the deficit,
cleaning up the savings and loan mess and all that; what we
spend on current consumption, including good things, the parks
and all of that; what we are investing in the future,
infrastructure, education, research and development,
environmental technology, economic development. O.K.? Then look
at the deficit, and basically you wind up with three deficits.

    The budget agreement that was signed dealt with only one
of our deficits, basically the permanent deficit, what you
might call the one that was written into the Tax Act of '81,
where we are taking in too little money and spending too much.
In addition to that, there is the financial-institutions
deficit -- the savings and loan mess -- and there is the
recession deficit. Now, you can't solve all three of them with
the same approaches. You have got to have a strategy for growing
the economy, and you have got to have a strategy for dealing
with the permanent deficit.

    On the permanent deficit, the most important things that
you can do are to, one, reduce defense in a sensible way and,
two, get control of health-care costs. Those are the elements
that are choking us.


    Q. What about Social Security? The Senator answered that
question. You didn't.

    CLINTON: The way to do it is to make upper-income people
pay in proportion to their ability to pay, so if you had
upper-income people with a lot of income on Social Security, and
you raised the tax rates, they would pay more.

    TSONGAS: I would raise the tax on the wealthy, and it's
not only a matter of fairness, which I think is a real issue,
but I have to give the wealthy in this country a real incentive
to invest in America. I have to set up a pain-gain, risk-reward
relationship, where the wealthy in this country understand that
if they invest in America, they are going to do very well. If
they consume and don't invest in America, they are going to get
hurt.

    Let me raise one other issue. Every instinct in corporate
America today is short-term -- shareholder dividends as opposed
to long-term research and development, capital investment, that
kind of thing. If you don't change that mind-set, all of these
other things that you are talking about are not going to be as
effective as they must be.

    CLINTON: I spent most of my political capital as a
Governor trying to raise money for improved education. I spent
most of my time with businesspeople, with little bitty companies
and with Wal-Mart, which is one of the most successful
companies in the world. The best companies know exactly what we
are supposed to do. They put their customers first; their
interest is in quality management. They are always trying to
restructure themselves. They want help in education and
training, and they want targeted incentives to make it more
profitable to be investing in this country than in other
countries.

    That's why I think the whole laundry list of business
incentives I have laid out, including the investment tax credit,
are far better for this economy than a capital-gains cut focused
on the securities market, which will benefit investors who will
invest anyway.


    Q. Aside from people who are rich, will any group of
Americans get less under either a Tsongas or Clinton presidency?
Farmers, welfare recipients, anybody? Or is this a free ride?

    TSONGAS: No. I have a gasoline tax that says we need an
energy policy. The fact is that you have to have energy
policies, you have to pay for your mass transit. I have paid the
price politically for that. Who else would be hurt? Dan Quayle
would be hurt. I don't think he could make that kind of money
in the private sector.

    CLINTON: I would ask you not to set false dichotomies.
It's not who gets less or more. My plan will create more
millionaires, but they will only make money the old-fashioned
way -- by investing in our people and our products. What I want
to do is offer everybody more opportunity and demand more
responsibility.

    If you are in business and you run a big company, I will
say, "We are going to give you more incentives to invest in
this country, fewer incentives to move your plants overseas or
to have unwarranted executive compensation unrelated to
corporate performance."

    I want to say to workers, "I want to give you affordable
health insurance, lifetime training and education, sensible
economic policy. You have got to change the work rules, and you
have got to be willing to continually educate yourself, or
there is nothing I can do for you. You will still lose your jobs
or have lower income." I want to say to people on welfare, "I
want to give you more education and training, but you have to
go to work when you can."

    So it's not, Are you going to get less or more?; it's, How
are we all going to get more? And the answer is, You have got
to have opportunity and responsibility, and you have got to
have policies that recognize the global economy.