Jon Huntsman on New Hampshire Chances; Sens. Kyl, Durbin Talk Pakistan, Super Committee Clean Up

Written by Chris Wallace / Published November 27, 2011 / Fox News Sunday

Special Guests: Jon Huntsman, Sen. Jon Kyl, Sen. Dick Durbin

The following is a rush transcript of the November 27, 2011, edition of "Fox News Sunday With Chris Wallace." This copy may not be in its final form and may be updated.

CHRIS WALLACE, HOST: I'm Chris Wallace.

With just over a month when the votes are cast one candidate is going all in, in New Hampshire.

Will the Granite State deliver for a long shot? We'll continue our 2012 one-on-one interviews with Republican presidential candidate Jon Huntsman.

Then, the super committee fails. Now, there's a legislative mess to clean up.

What's next for Congress as it tries to put country's fiscal house back in order? We'll ask two Senate leaders: Illinois Democrat Dick Durbin and Arizona Republican Jon Kyl.

Plus, Newt Gingrich's front runner standing takes a hit. We'll ask if a possible misstep on illegal immigration could cost Gingrich in Iowa.

And our power player of the week offers a patriotic idea for Christmas shopping

All right now on "Fox News Sunday."

And hello again from Fox News in Washington.

Well, we are finally entering the home stretch and the run up to real people casting real vote in the Republican presidential race. Continuing our 2012 one-on-one series of interviews, we are joined by former Utah Governor Jon Huntsman, who comes to us from Whitefield, New Hampshire, a state where he's been spending a lot of time.

And, Governor, welcome to "Fox News Sunday."

JON HUNTSMAN, REPUBLICAN PRESIDENTIAL CANDIDATE: Chris, it's an honor to be with you. Welcome from Coos County, New Hampshire.

WALLACE: There you go.

Let's start, Governor, if we can, with the polls. Looking first nationally, you are still trailing the field all the way back as you can see there at 2 percent in last place. But in New Hampshire, you are starting to make gains, in fourth place, at 9 percent, though you are still -- according to this poll at least -- far behind Mitt Romney.

You say that defeat is not an option in New Hampshire. You've held more than 100 events in that state. Don't you have to win there?

HUNTSMAN: Well, we have to beat market expectations and we have a message that will allow us to beat market expectations, Chris. People here want to talk about our economic deficit and they want to talk about our trust deficit. Yesterday, we had two town meetings here in the western far reaches of the state. Today, we'll have three town hall meetings. Preseason is over and we're now on the final stretch. I like our position, I like where we stand in the polls.

More importantly, the people of this great state, they love an underdog. And I am an underdog right now. If you can be an underdog and have a message that begins to connect with people on the ground, you can make things happened.

Do I believe we're going to beat market expectations in New Hampshire? I absolutely believe we will. And that will translate down market to South Carolina and then ultimately to Florida.

So, I like our position here, Chris.

WALLACE: Well, you talk about market expectation and perhaps the Huntsman stock took a hit today because the New Hampshire "Union Leader" -- perhaps the most influential, the biggest newspaper in the state of New Hampshire has this morning endorsed Newt Gingrich. Isn't that a set back for you, sir?

HUNTSMAN: Well, no. You know, it once again it proves, Chris, how fluid and unpredictable New Hampshire is. People are just beginning to pay attention and coalesce around the candidates. I think, more than anything else -- I mean, a month ago for Newt Gingrich to have been in the running to capture the Manchester "Union Leader" endorsement would have been unthinkable.

So, I think it reflects, more than anything else, the fluidity, the unpredictability of the race right now. But if you're talking about stocks and I like the free market -- you know, I just have to refer you from Intrade where we've gone from the back of the pack to number three, which I think they do a pretty good forecasting what the future trend is going to be in this race.

So, we are in a solid position here in New Hampshire. But you've got to have a message that resonates with the voters here. We have a message that resonates. We have a background that people have looked out. It's a background that speaks to job creation and the ability to expand our economy and a background that speaks to addressing the trust deficit as well.

WALLACE: Let's talk about message and we're going to get to the specific issues in a moment. But your record -- let's big picture -- your record as governor of Utah was not of a strong conservative. But your strategy in this race has been to run -- and I put this kind of in quotes -- as a "relative moderate" -- you are the one who was saying that we need to pull, not all, but most of our troops out of Afghanistan sooner than anybody else on the stage, except for Ron Paul. You are the one who's been tweaking the other candidates, saying that you believe in science issues like global warming and evolution.

When the Republican Party is moving -- and I think it clearly is -- to the right, perhaps fueled by the Tea Party, does it make practical political sense to position yourself as the most centrist candidate in the race?

HUNTSMAN: Listen, I'm not positioning myself at all. I'm simply drawing upon where I have been as a leader. I'm not going to contort myself into a pretzel and become something that I am not. I have an established record as governor of the state of the Utah. I have a record for my service overseas.

When people look at my record as governor, they're going to find what may surprise some people when they begin to reflect on it. I am pro-life and I always have been. I am pro-Second Amendment and I always have been. I am pro-growth.

I delivered tax cut in the history of that state. We delivered health care reform without a mandate. I signed the second voucher for education in this entire.

So, people begin to look at my record, they may have discounted us early on, you know, when I worked for this administration as U.S. ambassador to China. Some people may have, you know, thrown us to the back of the pack. But now, they're saying, I get the part of the Huntsman guy who puts country first. I think we can relate to that.

And then further reflection on my record, I think there's no surprise there for the people who are giving us maybe a first look finally. And as they look at our record and say, look at our track record of service and my years as governor, they're going to come to the conclusion that I am -- I've got a conservative record on the issues that are absolutely applicable to this country and where we need to go.

WALLACE: But let's talk about some of the issues. Newt Gingrich, a lot people thought got into trouble this week when he said that he would support legal status for some long-time illegals in this country. Rick Perry got in trouble a few weeks ago for saying that he supported in-state tuition for the children of illegals.

In fact, you support both of those positions, don't you, sir?

HUNTSMAN: Well, I support first and foremost securing the border. I don't think this discussion has any credibility or intellectual honesty at all until we can actually take --

(CROSSTALK)

WALLACE: Wait, wait -- wait a minute, Governor. I mean, records are records. And the fact is, that you are long on record supporting the idea, which was a fact in Utah, of in-state tuition for children of illegals?

HUNTSMAN: That's right. That's right. That was supported by the people of my state. That was supported by the legislature and I supported that as well. I'm not running from that at all.

All I'm saying that, you know, we got to be honest about the first step as it relates to illegal immigration, and that is to secure the border. And I would work for the four border state governors and insure that between fencing and technology and boots on the ground, we can get the job done. It's completely doable, and once that is established, and once we build a little credibility with the people of this country, we can then move on in addressing the needs, the reality of 11 million or 12 million people who are living in the shadows in this country.

WALLACE: All right. Let's turn to the budget issues. In the wake of the failure of the super committee, you now say that the road map to debt reduction is the Bowles-Simpson Commission, which had a $4 trillion dollar fix over the course of the next decade.

Let me ask you about one aspect of that, because the Bowles- Simpson Commission called for $1 trillion in increased tax revenue. They said, let's lower all of the rates as low as 28 percent as a top rate, but let's also eliminate almost all of the deductions and loopholes and they were going to take $1 trillion or rather, $100 billion a year for 10 years, $1 trillion in total, and use that as added tax revenue to try to shrink the deficit.

Would you support that part of Bowles-Simpson?

HUNTSMAN: Well, my plan is not Simpson-Bowles. I took their text tax measure which I thought was a good one. But my plan for debt spending is the Ryan plan.

I'm the only candidate in the race who's actually embraced in total the Ryan plan. I think the super committee is a joke for the simple reason that they are targeting $1.5 trillion over 10 years, 2.5 percent of our total spending in 10 years. I mean, that's not even a serious attempt at all.

I think what Ryan is talking about with $6.2 trillion cut out of the budget over 10 years is exactly where the country needs to be. We've got to get down to 19 percent spending as a percentage of GDP to get anywhere near a sustainable level.

So, the Simpson-Bowles report I thought represented a pretty good body of work. I don't agree with the tax increase portion. I've looked at their tax reform proposal, which I've taken and I combined with some of what I did. I delivered a flat tax as governor.

WALLACE: But, Governor, if I may, and I hate to interrupt but we have just limited time -- their tax reform proposal, yes, it called for lower rates. But it also called for taking some of the eliminated deductions, what they call tax expenditures and using them.

HUNTSMAN: That's right.

WALLACE: You are sort of a truth teller or you position yourself as that on the stage saying some of your candidates -- some of your rivals are engaging in political theater. Isn't it political theater to say, I want a solution -- particularly, just given the political realities in this country -- that has no tax revenue increase?

HUNTSMAN: Well, what I'm calling on tax reform, Chris, is a phasing out of all the loopholes and deductions on the individual income tax side, and the phasing out of all the corporate welfare and subsidies on the corporate side.

HUNTSMAN: Which allows us to lower the rate, broaden the base and to simplify -- which is exactly what I did as governor of the state of Utah.

WALLACE: But you'd be revenue neutral on that, wouldn't you, sir?

HUNTSMAN: It would a revenue neutral exercise, absolutely. I think raising the revenue, which some people might be against. But reinvesting it into the tax code, which would lower the rate, both on the individual side and on the corporate side, is exactly what this country needs.

WALLACE: I want to --

HUNTSMAN: We haven't touched tax reform in meaningful ways since 1986. And it's high time we get busy doing it.

WALLACE: Sir, I want -- we've got three minutes left. I want to get to two issues with you. First of all foreign policy, which obviously is one of your strong suits.

The Pakistan military says that NATO airstrikes hit two border checkpoints this weekend, killing at least 24 of the soldiers. In response, they ordered the U.S. to shut down one air base, drone operations at a key air base, and closed the two main supply routes into Afghanistan, which supply about 40 percent of NATO equipment and supplies.

What would President Huntsman do in this very serious situation with Pakistan?

HUNTSMAN: Well, first of all, I offer condolences on the losses of the 25 Pakistani soldiers. Second of all, I would recognize exactly what the U.S.-Pakistani relationship has become, which is merely a transactional relationship. I would figure out what the contours of the relationship really are and what we can expect from the Pakistani government, realizing full well that the politics playing out domestically in Pakistan are very complicated between the Islamist side, between government, between military, between the ISI.

And I think our expectations have to be very, very low, in terms of what we can get out of the relationship. I think we thought we could get more and we've proven wrong time and time again.

And then I would tie whatever aid money we are giving to Pakistan, if they deserve any at all -- to access drone base, keeping the supply lines open, working rigorously with us on counter terrorism.

WALLACE: Right.

HUNTSMAN: And if that isn't going to work, I'm going to look for a new partner in the region, because we do have an interest in Southwest Asia and that is a counter-terror effort, a robust counter- terror effort, we need to be collecting intelligence, we need to fortify our Special Forces capability, and knock them down where they stand up. This is clearly in America's interest to do it right.

WALLACE: Governor, finally, a political group called American's Elect is bound to determine to put a third candidate on the ballot in the 2012 election. Have you talked to any member of that organization?

HUNTSMAN: I haven't talked to any member of the organization. I am a Republican. I am running as a Republican and I fully intend to be running as a Republican.

WALLACE: Well, you have been very critical of President Obama's policies, and you've been very critical of Mitt Romney's, what you call, flips on issues, not to say that that's going to be the race. But the question is, can you flatly state right now and some say this is the game we played -- but can flatly say right now that you will support the Republican nominee and that you will not run as an independent?

HUNTSMAN: Well, I'm running as a Republican and that's where I am today. That's where I've always been, and that's where I fully expect to be during this race.

WALLACE: Well, just to play the game one last time. "I'm running as a Republican" is not a denial, sir. Can you flatly state that you're going to support the Republican nominee?

HUNTSMAN: Chris, I am running as a Republican and I will support the Republican nominee. I've stated that before and I state it again for you.

WALLACE: Thank you, Governor. We're going to leave it there. Thank you so much for coming in and talking with us on this holiday weekend, sir. Safe travels on the campaign trip.

HUNTSMAN: Thank you, Chris. I appreciate that.

WALLACE: Up next: the super committee fails to make a deal to reduce the nation's debt. What happens now? And we'll Congress extend the failure tax cut and unemployment insurance?

We'll get the answers from two Senate leaders after the break.

(COMMERCIAL BREAK)

WALLACE: With the super committee failing to make a deal to reduce the country's debt, a number of spending cuts and tax increases are set to take affect unless Congress acts. Joining us now are both parties' second ranking leaders in the Senate: Illinois Democrat Dick Durbin is in Chicago, and Arizona Republican Jon Kyl who's in Phoenix.

Gentlemen, before we discuss Congress and the debt, I want to ask you both about the foreign policy issue I was just discussing with Governor Huntsman. And that is the latest breach in relations with Pakistan. As you both know in response to the killing of two dozen Pakistani soldiers, Pakistanis say U.S. and NATO have to stop drone operations from one air base in their country and they're also cutting off the two major supply routes for NATO into Afghanistan.

Let me start with you, Senator Kyl -- what would you do about it?

SEN. JON KYL, R-ARIZ.: Well, there's a lot of diplomacy that has to occur and it has to be tough diplomacy in the sense that they need to understand that our support for them financially is dependent on their cooperation with us. But it's not the kind of situation where you just cut off all assistance because we do need their in the region.

If I can just tell you one quick story. About two weeks before 9-11-2001, I was part of an intelligence trip to Pakistan. And I'm visiting with President Musharraf.

We made the point that because we cut off relations before, military support and other economic support before, that the officer corps that was coming up behind him have not been educated in Great Britain or the United States as he had and his fellow senior officers. And he was very concerned about the Muslim influence, the radical influence of those young officers as they were coming up the ranks.

He said that was a mistake. A couple of weeks after, we got back. We helped to restore those military to military contacts.

The point being that it's very important to maintain a relationship for the long haul.

WALLACE: Senator Durbin, what should we do?

SEN. DICK DURBIN, D-ILL.: First, I'm deeply saddened 24 or 25 Pakistan soldiers were killed by NATO drones and I think we've expressed those condolences. Imagine how we would feel if it had been 24 American soldiers killed by Pakistani forces at this moment. Secondly, keep in mind that as difficult as it is to find our way through this diplomatic morass between the incompetence and maybe corruption in Afghanistan and the complicity in parts of Pakistan, our soldiers are caught right in the middle of this.

At a time when they're trying to bring peace to this region, I think it's an argument, from my point of view, of moving us toward the day when our American soldiers come home.

This is a terrible theater that we have been unable to find a clear path toward reducing terrorism. We've got to leave it to the Afghan forces to meet the challenge and bring American forces home.

WALLACE: All right. Gentlemen, let's go back to the debt. And let's start with the items that run out at the end of this year, not 2012. Let's take a look at them. This is unless they are extended.

First, the payroll tax cut costs $112 billion to extend. If it lapses, a family making $50,000 will pay 1,000 more in taxes.

Senator Durbin, Democrats plan to bring this measure, to extend the payroll tax cut up this week. But you're going to pay for it by -- with a surtax on millionaires. That maybe a smart political move, but there's no chance it's going to pass.

DURBIN: Well, it should pass. I mean, look at the bottom line here. You say $1,000. I think it's closer to $1,500 for the average family. If we don't provide the tax relief that President Obama has asked for, families are going to see an increase in taxes.

These are working families, lower and middle income families. And those at the very top who have enjoyed tax cuts that have been very, very generous for a long period of time can afford a slight increase in their tax burden so that we don't add to the deficit. Let's help the working families who are struggling paycheck to paycheck, and ask those who are the most well off in America to pay a very small percentage of increase taxes.

WALLACE: Senator Kyl, Republicans are demanding -- and that's the reason that the Democrats are putting this millionaire surtax are demanding that an extension of the payroll tax cuts, be paid for. But you haven't done that in the past for the Bush tax cut. And one, I would like to know why, the difference between paying for one and not paying for the other, and what do you think are the chances for a deal for the end of this year? Because it runs out this year to extend the payroll taxes.

KYL: Well, we have to deal with the unemployment insurance, with payroll taxes and a lot of other items before the end of the year. The problem here is that the payroll tax doesn't go into general revenue, it supports Social Security. And you can't keep extending the payroll tax holiday and have a secure Social Security. That's the first problem.

The second problem is that by taxing the people who provide the jobs, you put off the day we have economic recovery and job creation in this country. And that's precisely what the Democratic plan would do. It would hit those people, the small businesses who we all acknowledge are the ones who create the jobs coming out of economic difficulty.

And that we think would be a big mistake in --

(CROSSTALK)

WALLACE: If I may, Senator Kyl, just to cut this short, are you saying no deal on extending payroll tax cuts?

KYL: The payroll tax holiday has not stimulated job creation. We don't think that is a good way to do it. Before the end of the year, we will have discussions about what we're going to do on all these different programs.

WALLACE: Go ahead, briefly, Senator Durbin.

DURBIN: I can't believe that at a time when working families in this country are struggling paycheck to paycheck, when we need them to have the resources to buy thing in our economy, to create wealth and profitability and more jobs, that the Republican position is, they'll raise the payroll tax on working families? I think that just defies logic.

What we should do is to help these working families struggle through. President Obama has showed leadership on this. And now, the Republicans are walking away from lower and middle income families because they don't want to impose a small, small tax on the wealthiest people in America.

Listen, we can save Social Security. I agree with Jon Kyl. Let's be serious about it. Let's pay for this payroll tax cut by imposing the slight increase in taxes on the wealthiest people and replenish the Social Security trust?

WALLACE: Let me if I can Senator Kyl. I want to give you a chance to respond to that. I also want to ask you, if you will, briefly, the response to this, because economists say there's a real impact if you don't extend payroll tax cuts and employment insurance. And let's put it up on the screen.

They estimate and again both of these run out January 1st, that failure to extend the payroll tax cuts and unemployment benefits will cut GDP growth 1 percent to 2 percent next year, and cost more than half million jobs.

You say you question the stimulative affect. But according to these economists, there's a real danger if Congress doesn't extend both of those, put the country back into a recession?

KYL: Chris, I don't know who those economists are. I just read a piece by Art Laffer, who is a respected economist, who say that isn't true.

Here's the problem, when you are in a recession and you're in difficult economic time, as we are, and you need to put people back to work, as well as dealing with our deficit, how do you do that? You do it by enabling the economy to grow.

The best way to hurt economic growth is to impose more taxes on the people who do the hiring. And as a result, the Republicans have said, don't raise the existing tax rates on those who do the hiring. Instead, I hope we can get into this, explore the kinds of things that we did during the deficit reduction committee work to reform the tax code, eliminate preferences, credits and deductions, or reduce their value significantly on the upper income taxpayers, so that they end up paying more, but not through a tax increase on the rates either on capital gains, dividends or upper marginal rates.

(CROSSTALK)

WALLACE: Let me ask you -- let's pick up on that. You have a short-term problem, which is you've got to deal with these -- the payroll tax cut on employment insurance, the AMT or alternative minimum tax, the doc fix, all of which run out at the end of this year. You've also got the long-term debt issue. And I would like to briefly address that.

Bowles-Simpson and a lot of people say that the presidential commission which the president basically walked away from had the basic idea, the right idea. And, of course, Senator Durbin, you are a member for that. You voted for it.

Two aspects to it: one, they said, let's lower the rates dramatically, as low as 28 percent of the top tax rate, but let's eliminate the deductions, the loophole. We'll take $1 trillion in tax expenditures and we will contribute that to the $4 trillion fix of the debt reduction.

And the flip side of that is they said, we want to see half trillion, $500 billion in entitlement reform, cutting some benefits, raising eligibility ages.

Let me start with you, Senator Durbin -- would you go for all of that again?

DURBIN: I can tell you that that is the basic guidelines as I see it to reaching the kind of stable growth situation, creating jobs now, and reducing our long-term deficit.

To paraphrase one of our former colleagues, I know Erskine Bowles and Alan Simpson, I've worked with them on the committee. And what was proposed by the super committee by the Republicans on the super committee was not even close to the Bowles-Simpson proposal.

What we've got to do is establish the basics: $2 in cuts for every $1 in revenue. Now, let's do this in thoughtful way that creates jobs now, does not handicap or damage Medicare or Social Security or Medicaid in the long run, and creates a kind of approach that is balanced. We didn't get that out of the super committee --

(CROSSTALK)

WALLACE: Let me just ask you directly. One of the hang ups is the Bush tax cuts. Would be willing -- Simpson-Bowles basically forgot about the Bush tax cuts. They said, you know what? We're going to lower all the rates and the top rate maybe down to 28 percent, but we're going to get $1 trillion in tax expenditures.

Are you willing to say, "Forget about ending the Bush tax cuts, we'll lower our rates if we get these tax expenditures"?

DURBIN: Chris, you have to look at it in the total context. And I'm not dodging the question. The Bush tax cuts are overly generous to highest income Americans. Going back to our early point, we don't want to disadvantage those who are working families, the middle class families across America. Let us put tax reform together to give them a fighting chance.

There was a commitment in the gang of six, there was a commitment in Bowles-Simpson to at least maintain if not improving the progressivity of the tax code. That means giving working families a fighting chance. I hope we can establish that as one of the principles in future deficit reduction.

WALLACE: Senator Kyl, I want to go at this with you a slightly different way, because there is a narrative out there that you and other members and Republicans on the super committee were scared of an outside player and that's Grover Norquist, and his anti-tax pledge. And that basically, you just wouldn't give on the Bush tax cuts.

Norquist, a couple of weeks ago, said that he had to yank you into line. I want to put up what he said. And I repeat -- it's what he said.

"So, I call Kyl. 'What did you say? What do you mean? How can we work together on this?' Norquist said, adopting the tone of a teacher scolding a second grader as he recalled the conversation."

Two questions, one, is that story true? And, two, are you and other Republicans somehow cowed by Grover Norquist and his anti-tax pledge?

KYL: The answer to both questions is: absolutely not. And the proof in the pudding is the fact that the so-called Toomey Plan, which Republicans, all six of us, offered to the Democrats, would specifically have raised tax revenues. It would have raised $250 billion more than the tax reform that would be necessary to reduce the rates and would have applied that to debt reduction. Grover was not happy with that, we did it anyway.

And this is the point. The Bowles-Simpson Commission said: raise whatever revenue you can and apply it to reducing rates. We did that in the Toomey plan by reducing the value of all this tax credits and deductions, the kind of thing you spoke of. And Toomey Plan scored by the Congressional Budget Office, would have reduced the top rate to 28 percent and every other rates by 15 percentage points. As a result of which, we could accomplish both goals.

What you can't do is raise more than $250 billion. And that's why that was the amount that we raised above that necessary to reduce the tax rate.

WALLACE: And, finally, Senator Durbin --

KYL: We accomplished that in the Toomey Plan.

WALLACE: And we've got only have 30 seconds left. To answer this -- an awful lot of people say, you know, we talk about Grover Norquist. A lot of people say that President Obama was missing in action during the key negotiations here. Wasn't that a failure in leadership on his part?

DURBIN: Not at all. Those of us who know the facts realize that Vice President Biden, the president made an overture, which Congressman Eric Cantor walked out on to a deficit reduction, and twice, the president negotiated directly with Speaker Boehner to a deficit reduction. Speaker Boehner walked away.

WALLACE: I'm talking about the super committee, sir. You're talking about last summer.

DURBIN: The point I'm making is this was a congressional undertaking and the Republicans made it clear that if President Obama weighed in, it would become another presidential issue. They don't want to give the president any credit for achieving things. We knew that if he came into the super committee negotiations, it would not be constructive on the Republican side, but we know where the president stands. He wants substantial deficit reduction, but first get America back to work.

WALLACE: Gentlemen, we're going to have to leave it there. Thank you both so much for coming in. We'll stay on top of the story. Obviously it isn't going away.

Up next, Newt Gingrich takes the lead in the polls and promptly creates a problem for himself on immigration. Our Sunday panel assesses the damage and where things stand in Iowa when we come right back.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

FORMER SPEAKER OF THE HOUSE NEWT GINGRICH, REPUBLICAN PRESIDENTIAL CANDIDATE: I'm not for a path to citizenship for any of the people who got here illegally, but I am for a path for legality for those people whose ties are so deeply into America that it would truly be tragic to try to rip their family apart.

(END VIDEO CLIP)

WALLACE: Newt Gingrich doing damage control this holiday weekend after saying he supports giving legal status to some illegal immigrants.

And it's time now for our Sunday group. Bill Kristol of the Weekly Standard. Charles Lane from the Washington Post. Former State Department official, Liz Cheney, and Jeff Zeleny, political -- national political correspondent for the New York Times.

Well, just to review, in a debate on Tuesday, Gingrich said that he favors allowing some long-time, law-abiding illegals to have some legal status and not to split up families. Now, he's had this view for a long time, but quite frankly, now that he is the front runner, people are starting to pay attention.

Jeff, as someone who's almost living in Iowa these days, how much damage did Gingrich do to himself with that immigration stance in Iowa?

JEFF ZELENY, NEW YORK TIMES: I was in Iowa the day after the debate, and Republicans were talking about that almost exclusively, and a lot of the conservative activists and leaders think that he did considerable damage to himself, that that is not the position that he wants to stake out. But other, you know, more long-time supporters of Speaker Gingrich will say, look, he can do a better job explaining his position than Governor Perry, so it is not apples to apples here, comparing his immigration comments to Governor Perry's comments in terms of how it's worked out for him.

But I still think at the end of the day, he needs to get to Iowa and explain this position. He did it in Florida over the weekend, where he happened to be spending the holiday.

But the bigger problem for Gingrich is that he doesn't still have an organization. I know I keep talking about this, but at the end of the day, you have to get people to come to the Iowa caucuses. People like him. They watch him in debates and things, they think he's a great debater, but he still is operating without much support around him. And in a case like this, the Romney campaign, you can be sure, is going to hit him with direct mail pieces, phone pieces on immigration. So we'll see how he responds to it.

WALLACE: Let me ask you about that, Bill, because Gingrich's opponents are clearly treating this as a major blunder. Mitt Romney said that this idea of giving legal status to long-time, law-abiding immigrants, illegal immigrants is amnesty and it is a magnet that encourages more people to come across the border. And Michele Bachmann, who's got everything riding in Iowa, said that this shows that Gingrich is the most liberal Republican candidate when it comes to that issue. They clearly think it is a weakness.

BILL KRISTOL, WEEKLY STANDARD: Yes, Mitt Romney does -- I believe he had the exact same position four years ago, so he can explain why Newt Gingrich is now wrong to take a position that he himself took four years ago.

Newt Gingrich knew what he was doing. I was at the debate Tuesday night. He said I am going to get attacked for this. He went out of his way, I would almost say, to propose this, I think showing, because he doesn't want to run as a presidential nominee of a party that looks ridiculous, honestly, on the immigration issue.

Is the Republican -- is Michele Bachmann's and Mitt Romney's position -- let's put aside Michele Bachmann, she's trying to stay alive in Iowa -- is Mitt Romney's position really that we are going to send back 11 or 12 million people who are in this country illegally, including the one million or two million or however many there might be who have been here for 20, 25 years, whose kids are citizens, et cetera? I don't really believe Mitt Romney believes that. I don't believe Romney believes that for a minute. And I think Gingrich is willing to run the risk--

WALLACE: But with all due respect, there are a lot of times that politicians don't believe things, but they say it because it is politically convenient and helpful. And the question really is to a certain degree, not what's good policy but is it going to hurt Gingrich? And is it a fight that he didn't need to take on at this particular moment?

KRISTOL: It shows a certain amount of confidence, that he was willing to take it on. He's never been one to play it safe. But I sort of admire him for saying what I think he believes to be the right policy on this issue, and I think he thinks he is doing the Republican Party a favor by moving it into a more sustainable position in the general election, and in terms of the actual -- being serious about public policy.

WALLACE: Charles.

CHARLES LANE, WASHINGTON POST: Well, you used the term politically convenient, and this whole discussion shows the distance we have traveled in terms of what Republicans think is in their political interest to say about immigration. This position Newt staked out way back when was in a letter supporting President Bush's policy toward illegal immigrants who have been in this country for a long time. And the theory was that Republicans had to build a Hispanic voting base. That was one of Karl Rove's big projects. But here we see what happens to that philosophy when it runs up against an Iowa caucus electorate.

WALLACE: But in fairness, Liz, I mean, it was not just the Iowa caucus electorate. Bush did push immigration reform, comprehensive immigration reform in the second term. It went nowhere. Republicans opposed him right then.

LIZ CHENEY, FORMER STATE DEPARTMENT OFFICIAL: Look, I think that this is not going to be a major issue for Newt. I think -- major damage done here. I think that his immigration policy is something that he's been laying out now for over a year in front of conservative audiences. I think they have responded favorably to it.

I also think on the organization side, you are going to see in the coming days new offices opening up. He has got a larger operation in South Carolina now than any other candidate.

At the end of the day, I think what's really interesting is it looks pretty clearly now like the Republican contest is going to come down to a battle between Mitt Romney and Newt Gingrich. And as a Republican, I feel really good about that. I feel very proud that these are the two people, both of whom have very interesting and extensive backgrounds, very different backgrounds. Both bring much more experience to this race and potentially to the job than President Obama had in 2008 when he was elected, and either one of them would bring much better policies, in my opinion, in terms of bringing us out of this economic crisis.

WALLACE: OK, let's talk -- let's switch topics off Gingrich -- actually we're going to stay on Gingrich now that I think about it. The endorsement this morning by the New Hampshire Union Leader. Now, in the old days when it was the Manchester Union Leader and William Loeb was the publisher, it had enormous influence.

WALLACE: You can tell me. How much influence does the paper have and how big a deal that they endorsed Gingrich and not Romney, who's got so much riding in New Hampshire?

ZELENY: I think we always knew that they wouldn't endorse Romney. This is the newspaper that, four years ago, ran front-page editorials every day for, I believe, seven days against him. So we knew he wouldn't get it. But I think it's great for Newt Gingrich. I mean, look, this is something that could really -- it separates him from the rest of the field, like Liz said.

I mean, it looks like it is, sort of, narrowing to a Romney- Gingrich fight. And what I'm watching for is when does the Romney campaign begin engaging Speaker Gingrich?

They've ignored him for months. They didn't really think it would come to this, but I think it is a big deal, important for him in the short term. Endorsements don't win elections, of course, but it helps give him credibility.

WALLACE: You know, it's interesting, Joe McQuaid, the publisher of the Union Leader, says, "We don't just endorse one day; we endorse every day," which means that, day after day after day between now and January 10th, they will be pushing Newt Gingrich.

How big a deal do you think it is in New Hampshire?

And let's face it. Romney cannot afford to lose New Hampshire.

KRISTOL: I mean, the voters do seem, this year, to have decided to make up their own minds and ignore elite opinion, both mainstream and liberal elite opinion and conservative elite opinion.

And they decided they liked Herman Cain for a while, and then they fell off Cain. I think the voters, a lot of Republican voters, seem to have decided for now that they are open to the case for Newt Gingrich. Some of them have decided they prefer Newt Gingrich. An awful lot of them -- an awful lot I have talked to personally in the last week or two -- I've done some traveling -- are uncertain. They, sort of, have a sense it's coming down to Romney versus Gingrich and they don't know who they're going to vote for, in whichever state they're going to vote, and I think that's probably true of a lot of Iowa voters.

There will be more debates. There will be a chance to see the Romney attack ads on Gingrich -- Gingrich has less money, so there will be fewer Gingrich attack ads, I suppose, against Romney, but each will be able to make his case.

I just think, though, that the idea that Romney -- there are legitimate criticisms of Gingrich, but the idea that Romney is going to attack Gingrich from the right and make Newt Gingrich less of a conservative than Mitt Romney -- I think that's not going to be credible. I think that's going to look desperate if he attacks him on something like...

(CROSSTALK)

WALLACE: All right. We have to take a break here. We should point out that one of those debates that Bill was talking about is the Fox debate in Sioux City, Iowa on December 15th. It will be the last debate before the Iowa Caucuses on January 3rd, so be sure to watch.

We're going to take a break now. When we come back, a super- failure as legislative gridlock once again rules the day in Washington.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIPS)

PRESIDENT BARACK OBAMA: Don't vote to raise taxes on working Americans during the holidays. Put the country before party. Put money back in the pockets of working families.

SEN. PATRICK J. TOOMEY, R-PA.: To this day, they have never given us their proposal for the kind of structural reforms that we need to bring the entitlement programs under control.

(END VIDEO CLIPS)

WALLACE: President Obama arguing to extend the payroll tax cut and GOP super committee member Senator Pat Toomey calling for serious entitlement reform as both sides try to frame the debate going into the 2012 election.

We're back now with the panel.

So, Charles, let's start with the immediate problem, what runs out at the end of this year and what Congress is or isn't going to do about extending the payroll tax cut and unemployment, insurance benefits.

I was a little surprised that Senator Kyl, in the preceding segment, was as tough as he was and seemed to indicate he's going to oppose extending the payroll tax cuts.

LANE: I was surprised by that, too. And you saw Dick Durbin pounce on that point because the politics -- let's put the budget and the economics to one side -- I do think the politics favor President Obama and the Democrats. Their position is "We want to give the average guy $1,000. The Republicans don't."

And in politics, I think it's generally safer to be on the side of giving money away, notwithstanding the fact that we do have this big deficit. And, you know, the Democrats have maneuvered the Republicans, strangely enough, into the position of being -- looking like they're against a tax cut.

Jon Kyl's explanation is we don't want to offset that by raising taxes on job creators, but the Democrats can portray that as protecting millionaires and so forth, and I think, on net, this creates a dilemma for the Republicans.

I will be curious to see if the line that Jon Kyl staked out here today is really going to hold up. Because it was, as you say, the most definitive thing I've heard them say so far.

WALLACE: Liz, let's talk about that. I mean, do the White House and Democrats -- and I agree that Dick Durbin looked like the wolf devouring the lamb, not to say Kyl is a lamb, but -- but he clearly thought it was a political advantage for him to portray the Republicans as fighting for the Bush tax cuts for the wealthy but willing to let the tax cuts -- payroll tax cuts for the middle class disappear.

Is that a problem for Republicans?

CHENEY: Look, I think it is exactly what we have seen President Obama and the Democrats do now for many, many months, and particularly with the super committee, which is play a cynical political game here.

The president of the United States has put no serious plan on the table for dealing with entitlements, which is the biggest challenge that we face economically right now.

The president of the United States, I don't think, made a single phone call to the people on the super committee. I talked to one Republican member of the super committee who said he reached out numerous times to the White House to say, "We want a deal; we need a deal," and was completely given the back of his hand.

There was no effort here. The president basically seems to have made the calculation that he's going to let the next 13 months of the American economy slide for the sake of his own, you know, political...

WALLACE: I'm not asking whether it's cynical. I'm asking, will it work?

CHENEY: I don't think it will work. I think that you've got a different kind of an atmosphere in the country now. I think people understand absolutely the kind of crisis that we're facing.

And I think, when you've got a president of the United States who has walked away, who has refused to deal with something that both Democrats and Republicans have come together to say this really matters, I just -- it's very difficult for me to see that the American people are going to buy into it and give him another term.

What I'm concerned about is what happens in the next 13 months here and whether or not we'll be able to actually stop the slide that we're seeing in the economy with the lack of leadership from the White House.

WALLACE: Jeff, you know, this is -- and you can argue it's cynical; you can argue it's principled. Obviously, that depends on your political view. But the White House has, over and over again, presented various jobs bills and let the Republicans vote them down. Now it looks like they are going to put up -- and they are this week -- extending the payroll tax cut and let Republicans kill that.

Who has the political high ground there? Political high ground, not policy high ground?

ZELENY: Well, I think the political high ground is to be determined. And that's what 2012 is going to be fought over. I mean, we now know -- I guess we knew before, but this specifically frames the argument very tightly for the president and for Republicans, but it also -- you know, it trickles down to House and Senate races. So all of 2012 will be, sort of, framed on this.

I think, in the short term, the Democrats feel that they're in a good position here and they feel that they've boxed Republicans in. We'll see what happens this week. I don't know if Senator Kyl was speaking for himself or speaking for all Republicans. He did say we, as Charles mentioned earlier, so I think that will be interesting to see.

WALLACE: I don't think he would have gotten out there and said what he said if Mitch McConnell wasn't along with him on this.

ZELENY: Probably not. I think he's a disciplined guy, of course. But it is a vacation, they've all been sort of apart from each other--

WALLACE: It may have been the turkey talking.

ZELENY: I think that the Democrats think they have the high ground, but Washington is the big loser in all of this. People just are absolutely frustrated and think that the super committee, that Congress, the president, they can't do anything. It's mucked up.

WALLACE: It's mucked up. Thank you for saying it that way.

Bill, let me ask you about a different aspect of this, which I think maybe favors the Republicans over the Democrats, and that is the automatic trigger. If they don't do anything about this $1.2 trillion in deficit reduction by a year from now, the end of December 2012, the automatic trigger kicks in; 600 billion in cuts to the Pentagon spending, which the president's own defense secretary says would threaten our national security. The president says I will veto any measure that undoes this. You have got to find $1.2 trillion in deficit reduction somewhere. Is that conceivably a problem for the Democrats, that they are in a position of seeming to jeopardize national security?

KRISTOL: It is a problem insofar as until January. The president will have to present a budget which I suppose, according to his current rhetoric, will encapsulate, will embody the $45 billion I think it is to Pentagon cuts for fiscal year 2013, which is a massive one-year slash in the Pentagon budget, one that Panetta, the secretary of defense, has said it would be devastating or damaging I think at least to our national security. So that is the president's choice. Is he going to show those cuts in January 2012, or is he going to say we don't need to do this if we do other things to reduce the deficit. But on unemployment insurance, I want to make a prediction, Republicans will not go the way Jon Kyl indicated. The Republicans are not going to get in a position of casting a party-line vote for raising taxes on working Americans. There is no chance of that happening. Speaker Boehner is not going to do it. I don't think the Senate Republicans are going to want to do it. They may split on the issue, but I think Republicans are not going to be the party that votes for -- given that we may have been foolish to do this payroll tax cut 10 or 11 months ago, but I don't believe the Republican Party in Congress is going to vote to raise payroll taxes.

WALLACE: Let me just bring one more thing into this, Charles, and that is the support of the country or faith of the country for Washington, Congress and the president couldn't be much lower. Now you've got the possibility that we're talking about here of 13 months more of pointing fingers at each other and accomplishing nothing. Does this increase the viability -- and I talked about this briefly with Governor Huntsman -- of a third-party candidate?

LANE: There are plenty of people out there who think it does. I have to say I have always been skeptical of third parties. I'd be especially skeptical of one headed by Jon Huntsman, simply because I think he is a kind of a -- he is not a very dynamic, charismatic type of person. If you wanted to have a third party take off, I think you would need sort of a headliner, somebody like Ross Perot, who made a splash last time it was tried. And I don't see a leader out there so far who would head it up.

WALLACE: All right, we're going to have to leave it there. Thank you, panel. See you next week. Don't forget to check out panel plus, where our group picks right up with a discussion on our web site, foxnewssunday.com. We'll post the video before noon Eastern time. Up next, our power player of the week.

(COMMERCIAL BREAK)

WALLACE: With Thanksgiving over, now the Christmas shopping season gets serious. Last year we told you about one of Washington's special women, who makes items folks across the country love to give and receive. Once again, here is our Power Player of the Week.

(BEGIN VIDEOTAPE)

ANN HAND, JEWELRY DESIGNER: I am a designer at heart, and it just was something that seemed like an easy thing for me to do.

WALLACE: Ann Hand is talking about the beautiful jewelry she has created over the last two decade, celebrating American patriotic symbols like the Liberty Eagle and our flag. She calls it wearable history. But what's remarkable is how often her pins and necklaces, earrings and cuff links have been part of history.

HAND: I didn't know about a lot of these things until I actually see it on, like, your show or in the newspaper. So of course, when that happens, we are just ecstatic.

WALLACE: When Madeleine Albright was named secretary of state, she wore the eagle pin.

HILLARY CLINTON: The vast right-wing conspiracy--

WALLACE: When Hillary Clinton defended her husband in the Lewinsky scandal, she wore a similar one. But Hand crosses the partisan divide. Laura Bush wore her necklace at a White House dinner. Sarah Palin wore her pin to talk with Barbara Walters.

HAND: I started in my basement, actually, at a table right next to the washer and dryer.

WALLACE: Ann and Lloyd Hand came to Washington in the '60s. Lyndon Johnson named him chief of protocol.

HAND: It was a fairy tale. I was 31 years old, he was 35. We had the responsibility of the diplomatic corps, and I've never met an ambassador.

WALLACE: They were one of Washington's golden couples until 1988, when their 27-year-old son Tommy was hit and killed by a car. She turned to making jewelry as a kind of grief therapy.

HAND: I would find myself beading, you know, working with beads and patterns long into the night. And I would shut out the rest of the world.

WALLACE: Friends started buying items out of her home. In 2001, she opened this store. But for all the power players that wear her creations, some are surprisingly affordable.

How much does this cost?

HAND: The sterling silver version costs $150.

WALLACE: You can get a pin very much like what Secretary Clinton or first lady Laura Bush, for $150.

HAND: Yes, absolutely.

WALLACE: Hand has a special feeling for the military.

HAND: Does that please you?

UNIDENTIFIED MALE: Everything in here pleases me, that's the problem.

WALLACE: The day we were there, she and her granddaughter Ashley were helping a member of the Air Force.

HAND: What did you fly?

UNIDENTIFIED MALE: F-15s.

HAND: Oh, great.

WALLACE: She has created special pins for each branch of the armed services. She says she never planned to do an American collection. It just worked out that way.

HAND: All of the sudden, I realized it was, and I thought, this is what I want to do. And so I tell the story of America in silver and gold.

(END VIDEOTAPE)

WALLACE: If you are interested in checking out what Hand has for sale this Christmas, go to her website, annhand.com.

And that's it for today. Have a great week. And we'll see you next "Fox News Sunday."

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