The following is excerpted from a speech by Felix G. Rohatyn before the National Conference of State Legislatures in New York.

As we come up to a presidential election which seems to follow the last one by no more than five minutes, we are flooded with different but predictable themes about the state of the nation.

The administration tells us that things are bad, that the root cause of our problems lies beyond our control, that things would be worse with their opponents at the helm and that, in any case, things will get better next year.

The Republicans, naturally enough, tell us things are terrible and will get worse unless we put them in office -- at which point they will get better. Government will be smaller, taxes will be reduced and we will have a stronger defense posture as well as a balanced budget.

This is sufficiently normal election-year rhetoric so that one should not get too upset about it. However, the facts is that we really are in a mess and unless we look reality in the face and do something about it, the mess will get worse.

What we need is not rhetoric or election-year posturing. We need a functioning economy with private sector jobs and stable growth. In a democracy, a nongrowing economy is a prescription for disaster; since population growth continues, it requires continuously allocating less to various constituencies. It cannot be done. Growth and participation by all elements of society are required for this country to be viable. . .

We keep trying to find simple answers to excruciatingly complicated problems -- preferably simple and painless answers. In our obsessive search for these instant cures, we leap at fashionable slogans which, for a while, become the wisdom of the day and disappear to be replaced by the next. . .

A new concept is entering the area: reindustrialization. Tied to the supply-side tax cut, to the operation of the free market, to "backing the winners instead of backing the losers," it also holds out the promise of the grand solution without pain or sacrifice. But so far it is all talk and no action and, until we stop talking and start doing, it will be a sham.

Truth, as in "Rashomon," is many-faceted, and all the notions here have some element of value. However, none of this makes any sense or holds out hope for anything more than another ride on the inflation-recession roller coaster until there is a fundamental, dispassionate examination of our economic and social structures, followed by a set of inter-related, long-term economic strategies. . .

The United States, today, in its basic industries needs a second industrial revolution. The notion of "backing the winners instead of the losers" is as facile as it is shallow.

The losers today are automotive, steel glass, rubber and other basic industries. The thought that this nation can function while writing off its basic industries to foreign competition is nonsense. Nothing is more inhuman than unemployment, nothing is more inflationary than unemployment coupled with trade-adjustment payments on top of benefits on top of welfare.

What we have to do is turn the losers into winners, restructure our basic industries to make them competitive, and use whatever U.S. government involvement is necessary to accomplish this goal.

This is a national security necessity since we should not have to depend on foreign steel any more than we should have to depend on foreign oil. It is an economic necessity since the notion of the postindustrial service society is a myth: Who will service whom if no one makes anything? It is a social necessity since millions of people in the urban ghettos have yet to make it into the blue-collar class, much less aspire to be the white-coated electronic technicians lionized by the "back the winners" school of economics.

We must also, however, be realistic about how badly our basic industrieis have slipped when judgements are made about such issues as protectionism, government regulations, tax relief. . .

With the automotiive industry, our government shares a large part of the guilt but not necessarily because of mileage or emission regulations. Our government shares guilt because by keeping gasoline prices at artificially how levels, it discouraged the creation of a real market for fuel-efficiennt cars until it was too late for American companies to make the changeover. If decontrol had been effected years ago, if a stiff gasoline tax had been imposed after the embargo of 1973, the market would have demanded from U.S. manufactures those cars now produced by the Japanese, (West) Germans and French where the price of gasoline was double what it is here. Management and labor must bear their share of blame. . .

A similar indictment can undoubtedly be made in the steel industry, the rubber industry and others. Inbred management and short-sighted unions combined to price themselves out of the market. A weakened work ethic and an "I'm all right, Jack" attitude resulted in our making junk while overseas they were making quality.

This is not, as yet, true in our high technology industries. In computers, semiconductors and microprocessors, we still hold the lead. But the Japanese are coming fast. In looking at the next decades to the year 2000, we must have an industrial policy that restructures our basic industries while encouraging our growth industries, if that restructuring is to be effective, it will be painful.

The largest and most expensive bandaid in industrial history was just applied to the Chrysler Corporation. However, the basic disease was left untouched. The capital structure was further burdened with high-cost debt; the union gave up very little while negotiating a three-year, 35 percent wage settlement; the management structure remained untouched. It is obvious to everybody that the inevitable was simply postponed because reality was too hard to face. . .

And the fact of the matter is that some protection for our basic industries is inevitable. The steel industry cannot be allowed to operate for long at 50 percent of capacitiy; the domestic auto industry cannot much longer operate at a level of 5 million cars annually.

The recession will be long and hard and people will have to be put back to work. For economic, social and security reasons, our basic industries will have to be given temporary shelter. Hopefully through voluntary negotiations with our main trading partners, alternatively on a mandatory basis.

Any protection, however, afforded to our older industries should be temporary in nature and should be conditioned on their fundamental restructure. The managements and the unions are going to have to do things differently; costs are going to have to come down; work rules are going to have to change; innovation will have to be rewarded; attitudes will have to be different; quality will be required; major infusions of equity capital will be required for retooling and reequipment. The motto cannot be "back the losers" but rather "turn the losers into winners."

We should by now have learned that we do not, on a long-term basis, cure inflation with unemployment. The only way to cure inflation is with greaer employment, greater productivity and stable growth. The "no growth," zero sum "society scenario is a prescription for disaster.

The need for capital will be immense. Of the many shortages and bottlenecks that have been identified in recent times, the shortage of capital has been least recognized and many turn out to be one of the most troublesome.

If we are to seriously pursue a doubling in coal production during this decade, as promised by the president in Venice, and build the railroads and harbors to go with it; if we are going to rebuild the auto and steel industries, finance synthetic fuel plants and rebuild our older cities, we will have to do two things: Create the capital and get government bureaucracy out of the way to let it go to work.

There is enough to build and to make in the United States over the next two decades to keep everyone who wants to work permanently and productively busy.

Tax cuts are desirable, without question. But, by themselves they will not be sufficient and will not carry with them the muscle to restructure old and ailing structures into viable, competitive industries.

To begin with, our industries in greatest need of help pay little or no domestic taxes. Tax benefits will be of relatively little help to the ones in greatest need.

For that purposes, as well as for accelerating certain large and needed programs like coal production and related support industries, I have argued for the creation of a 1980 version of the Reconstruction Finance Corporation of the 1930s. Only an independent organization free from political pressures, will be able to negotiate the difficult long-term changes that are absolutely necessary to bring some of our biggest industries into the last part of the 20th century.

These consessions -- from union, lenders, management and suppliers -- must be obtained in exchange for large amounts of permanent, equity financing sufficient for these industries to modernize and retool. If temporary protection has to be part of the package to buy turnaround time, so be it. But only as part of a plan to cure, not as a permanent form of industrial welfare.

Management, unions, investors, the executive and legislatures must understand that basic restructuring, improved quality and real productivity are matters of national survival . . .

Where is the capital coming from? First, part of it will have to come from a shift from consumption to production. A nationwide gasoline tax has to be a key part of such a program.

Over the long run it will be impossible to lower interest rates meaningfully at home and simultaneously protect the dollar abroad without reducing oil imports. The choice is between a large gasoline tax or rationing. The gas tax is prederable since its revenues can be recycled into the economy . . .

We need to achieve greater productivity, improved international security and greater use of manpower to reduce social costs. This requires noninflationary growth and some shift from consumption to investment. The proceeds of the gas tax, a minimum of $50 billion per annum initially, could be the key part of such a program. Part of the proceeds would fund additional military programs, part would fund investment-oriented tax credits and part would reduce social security taxes for lower income groups. A stronger dollar would permit the lowering of interest rates and other taxes required to produce noninflationary stimulus.

Secondly, some of the capital must come from the Organization of Petroleum Exporting Countries.

In 1980 our payments to OPEC approach $100 billion, nearly 10 times what they were 5 years ago. The value of all companies listed on the NYSE is about $900 billion. The notion that, over the next 5 years, we will mortgage to OPEC half of our productive capacity, built up over 200 years, to pay for a product we burn every day, is obviously unstainable.

Negotiations with OPEC or some of its members will have to be engaged for the purpose of bringing part of this capital back on a long-term. basis. Payment for oil in the form of long-term bonds, participation in the capital of structures like the Reconstruction Finance Corporation and many other variants will have to be explored.

But the final result will have to be long-term reinvestment of OPEC funds for new production and jobs, and not simply as interest-bearing bank deposits.

Lastly, readjustment in national shifts of wealth will have to be explored seriously. From 1980 to 1990 oil-producing states like Alaska, Texas, California and Louisiana will collect increased tax revenues amounting to $115 billion as a result of the oil price decontrol.

Like a domestic version of OPEC, these states can use their vast revenues to lower other taxes, increase service, attract industry by almost unlimited means; their economies as well as the economics of surrounding states will get significant boosts.

And -- like a domestic version of the Third World -- The Northeast and Midwest, importers of fuel, already in financial difficulties and needy for additional federal assistance, will bear the burden, creating greater risk of further social and economic distress. . .

The reconstruction of our older cities will have to take place alongside the restructuring of our basic industries. Like Siamese twins, the disease of one inevitably infects the other.

As the industrial effort needed over the next two decades begins to take hold, a deliberate effort will have to be made to funnel private activity into the urban areas. A genuine partnership between business, labor and government must create the industrial parks where private business will find it economical to produce (initially) on a government-subsidized basis,) where the labor unions will commit themselves to encourage minority entry and training, where the community leadership will involve itself and the local school system to become part of a process. . .

It is critical today that we face these realities. We do not have a recession in the United States today; half this country is in a depression while the other half is properous . . .

Whoever the next president may be, he will have to face these realities. He should have an agenda for his first 100 days that is both comprehensive and bipartisan . . .

I have argued for the immediate creation of a Temporary National Economic Commission which would be bipartisan and draw its members from business, labor, academia and government. It could, by Inauguration Day, recommend an economic strategy for the United States for the next two decades.

We have a mixed and complicated economic, political and social structure and we are now at a turning point. It has been coming for a long time and it will take a long time to adjust to the new realities. There is a clear danger that continued deadlock over many of these issues, as a result of the scattering of political decision-making power, may create social and political upheavals of unforeseeble dimensions . . .

This is not time for narrow ideology. From 1945 to 1960 the United States was the unquestioned leader of the world -- industrially, militarily, economically and, most important, spiritually. I know of no dominant power which so rapidly and relentlessly dissipated its dominance, across the board, as our country has done over the last 20 years. It cannot be permitted to continue . . .