Balance the budget in 5 years, give $91 billion in net tax breaks and change Medicare. The Congress and the White House appear to have a deal. Following a background report, John Kasich (R-OH), House Budget Committee Chairman, and Gene Sperling, the White House National Economic Advisor, discuss the merits of the plan. Economists then scrutinize their analysis, after which Kasich and Sperling return to rebut criticisms.

MARGARET WARNER: And for a more critical perspective on the budget deal we're joined by William Niskanen, chairman of the Cato Institute and former chairman of President Reagan's Council of Economic Advisers; and Robert Kuttner, economics writer and editor of the American Prospect. Mr. Niskanen, your overview on this budget deal.

WILLIAM NISKANEN, Cato Institute: In the name of balancing the budget, our political leaders have done what they most like to do, which is to increase spending and reduce taxes for favored constituencies. It's much more important for the American public, however, to realize what is not in this budget deal. It does not reduce the deficit faster than if there were no deal.

It does not increase economic growth. It does not control entitlements. In fact, it added two new entitlements: one for kiddie care and one for college education. It does not restructure defense to reflect the realities of the post Cold War world. And it does not move toward tax reform. And it does not limit the relative size of government in the United States. Those are major objectives that most Republicans have shared for a long period of time, none of which they have even moved toward in this agreement.

MARGARET WARNER: All right. Mr. Kuttner, briefly, your overview on this deal.

ROBERT KUTTNER, American Prospect: Well, I think it's a very Republican deal, and I think Mr. Clinton played a weak hand rather well tactically, but his hand was weak because he had embraced so much of the Republican program going in, so that to mix the metaphor, when the other shoe dropped, it was hardly a surprise that the Republicans have gotten--had gotten most of what they wanted.

Clinton did succeed in a few things: defending Medicare, making sure that some of the tax benefits went to lower income people, as well as higher income people. But when you realize that he embraced the goal of budget balance a year ago, as well as significant cuts in capital gains, and cuts in entitlements, and estate tax relief, this was a mostly Republican budget, and he did so at the expense of his own party.

It contrasts rather dramatically with Ronald Reagan's presidency, where Reagan for much of his term had the Democratic Congress. But he succeeded moving the ball in his direction, and Clinton really moved the ball in the direction of the opposition party.

MARGARET WARNER: Okay, Mr. Niskanen, back to you and the conservative critique. Now, you said--let's go into a couple of these specifics--does not promote economic growth. We just heard John Kasich say these tax cuts are going to stimulate investment and move power away from Washington.

WILLIAM NISKANEN: Well, you have to reduce marginal tax rates to increase economic growth. And some elements of this package actually increase marginal tax rates, like the phase-out provisions of the child credit. The capital gains cut by itself is not likely to be very helpful if you don't correct other features in the tax code. It's important to cut capital gains taxes but only as part of the general tax reform. Cutting capital gains taxes, itself, can lead to a mis-allocation of capital and will be perceived as being an unfair tax cut to the rich.

MARGARET WARNER: All right. Now, another critique you made was that you said it essentially doesn't balance the budget faster than would have happened with nothing. Explain that.

WILLIAM NISKANEN: If Congress went home, the budget would be balanced faster than with this deal. The budget this--the budget deficit this year will be in the order of 40 to 50 billion dollars. It would be easy to balance the budget next year, not in the year 2002, if either the President or Congress, or preferably both, were at all serious about it.

In fact, what this budget deal does--it puts--the budget until the year 2002, rather than what would be an easier task if they were serious about it to balance it in the year 1998. I tend not to pay much attention to promises by politicians that are two congressional elections and one presidential election away in which most of the presumed budget cuts will be made in the years 2001 and 2002, years beyond that of many existing politicians.

MARGARET WARNER: You also said it doesn't control the growth of entitlements; yet, we just heard Gene Sperling and John Kasich say it's a 360 to 400 billion dollars worth of savings in Medicare.

WILLIAM NISKANEN: Those Medicare savings, those presumed Medicare savings are a consequence of continuing to squeeze the providers.

MARGARET WARNER: Doctors and hospitals.

WILLIAM NISKANEN: The doctors, nurses, hospitals, orderlies, medical assistance, and so forth, who provide medical care for the aged--under the Medicare program. I think that process cannot continue very long without either physicians and hospitals withdrawing from the service of Medicare people, or moving one way or the other to providing second or third class service to this group.

You have to change the benefits structure of Medicare in order to preserve it over a longer period of time. They backed away from that at the last minute. This is not a serious reform. They're going to have to balance--address the reform again in a matter of a few years. They have--by accounting conventions they have extended the life of the Medicare trust fund, but in no way that particularly affects the budget.

MARGARET WARNER: You also said--I didn't jot down those words--but essentially it doesn't control the growth of government. Now, again, John Kasich, this is a big Republican ideal and goal--said this helps transfer power and money away from Washington.

WILLIAM NISKANEN: I don't understand how they do that. It increases spending even relative to what President Clinton proposed earlier this winter. And the federal budget typically falls alot,after the end of each military buildup. It did not do that after the Vietnamese War-- we spent that money on domestic programs. It has done that with the big draw down of the Reagan build-up , we were down maybe $100 billion from the Reagan peak, that money is being spent, rather than returned to the people.

MARGARET WARNER: All right. Mr. Kuttner, your critique. Tell me--I mean, we heard Gene Sperling say a lot of this was designed to help low and moderate income, hard working, ordinary Americans, these tax cuts, for instance, the tax credit, the education credit. You don't see it that way.

ROBERT KUTTNER: The big ticket item is capital gains, and almost 50 percent of the stocks and bonds in this country are owned by the richest 1 percent of families. So I think the administration really gave the store away, after fighting for decades and decades against the idea for the capital gains relief. This is an economy in which the stock market has doubled in two and a half years. It's doubled again in less than a decade, and if there's any group that doesn't need icing on the cake, I mean, it's people who have large capital gains.

MARGARET WARNER: But what about--I mean, if you look at the--in the aggregate--the child tax credit is going to cost the government a lot more than this capital gains cut, at least in the early years. Are you saying that's not useful to low and moderate income?

ROBERT KUTTNER: I think especially for the working families that Gene Sperling talked about that's a very good thing. The standard deductions and exemptions have not kept pace with inflation, and working families certainly deserve more tax relief. I don't think it was necessary to go all the way up to $110,000 family income. And neither did the President, but he gave that one away too.

MARGARET WARNER: All right. Now, on the spending side, what do you make of the spending priorities?

ROBERT KUTTNER: Well, I think a lot of educators justifiably criticized a tax credit for college in the sense that it goes to people whether or not there's a financial need. Some people think that this is just going to result in higher tuitions. Some people think that it's just going to replenish state budgets because they'll just turn around and raise junior college tuition. Most educators I've talked to said it would be much better to target this money by increasing Pell grants to people who really need the money.

MARGARET WARNER: I see. And then also Gene Sperling pointed to--and the White House has actual new spending programs for low and moderate income people, such as the 24 billion dollars for additional health insurance for poor kids or kids from poor families. What about that?

ROBERT KUTTNER: Well, I think that's a very worthy objective. I think it's unfortunate that this particular program creates an even more fragmented health system. If you look at a low income working family, one year the breadwinner may be a job that provides health insurance, the next year that person may lose a job, and be in this new program.

The third year they may be still poor; they may be in Medicare, so that the child is shuttled from one health insurance system to another. It would be much better to simply have a comprehensive program that covered all kids, but this does at least provide health insurance for kids from poor families. Give the President some credit. He did fight for priorities that made this less of a tax program for the rich. I'm just concerned that he gave away a lot of principles going on. And in that sense, most of the outcome was foreordained.

MARGARET WARNER: All right. Thank you both very much.