If you're using a PVR-x50 and recording to MPEG2, the default settings under Transcoders is to transcode MPEG2 to RTJPEG (a higher-quality format which is great for frame-accurate editing but as you discovered is a lot less compressed than MPEG2).
If you want to do all your transcoding via MythTV's interface, you just need to change your Transcoder settings to transcode MPEG2 to MPEG4, instead of to RTJPEG. Pick appropriate bitrate settings to get your files down to the sizes you want. Then start viewing your recording, load your commercial cut list, adjust cuts if necessary, and start transcoding. As someone mentioned in this thread, the latest version of nuvexport (a command line utility, not part of MythTV's GUI) can do MPEG2->MPEG2 cuts-only transcoding, but only after loading the cut list via the MythTV front end, and only after installing more things than just nuvexport (lvemux and avidemux for sure, probably other things too).
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