"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.