This is a rush transcript from "The Journal Editorial Report," May 17, 2008.

PAUL GIGOT, FOX HOST: Up next on the "Journal Editorial Report," forget West Virginia. The big election story was in Mississippi this week.

Republicans are reeling after losing another congressional seat. Is it a sign of trouble to come?

The Middle East five years after the Iraq invasion. President Bush pays a visit and warns about the dangers of appeasement.

Following the largest immigration rate in U.S. history, can a case be paid for open borders? Find out after these headlines.

(NEWSBREAK)

GIGOT: Welcome to the "Journal Editorial Report." I'm Paul Gigot.

Hillary Clinton's lopsided victory over Barack Obama in West Virginia on Tuesday isn't the only election outcome making headlines. In a major blow to the GOP, Democrats in Mississippi picked up a seat in a congressional district that president Bush won by 25 points in 2004. It was the third time this year Republicans lost at so-called safe house seat in a special election. Earlier in month they Democrats won a seat in Louisiana the GOP held since 1974. Back in March, Democrats in Illinois took the seat long held by former Republican House Speaker Dennis Hastert.

Joining us the panel this week, Wall Street Journal columnist and deputy editor Dan Henninger, Washington columnist Kim Strassel, and editorial board member Steve Moore.

Kim, I will start with you. I talked to a Republican on Capitol Hill this week and asked him to describe the mood after Tuesday and his word was "cataclysmic." Is it that bad?

KIM STRASSEL, WASHINGTON COLUMNIST: You know I think it is. The thing about this Mississippi race is that it highlighted everything the Republicans are up against this fall. You know they have not redefined themselves. They are not addressing the issues most Americans see as the main day-to-day problems. They are not getting as much traction as they would like to lead Democrats to a liberal national candidate like Barack Obama. And the Democrats are being smart and running smart candidates in these areas. This particular Democrat, pro-life, pro gun.

GIGOT: Steve, the point about the strategy is an important one because the Democrats tried to link this candidate to Barack Obama. Just like Republicans in 2006 tried to link their Democrats that year to Nancy Pelosi. You can't scare people in this environment anymore. Particularly if you are running against somebody who says he is pro gun and pro — and against abortion rights.

STEVE MOORE, EDITORIAL BOARD MEMBER: Yes, Democrats have a new strategy, Paul, causing Republicans a lot of trouble and that is in these kind of battle ground conservative districts, the Democrats are running as social conservatives and economic populist. Republicans don't have a really good response to that.

If you look at this district in Mississippi, this was about as Republican a district as you can find in America. It was a 60 to 2 percent district. George Bush won it by 25 points.

The problem, as Kim said, if Republicans don't start coming through with a very positive message on things like health care, and things like taxes and food prices, I think this is just the start of a really bad run for Republicans in November.

GIGOT: Dan, Tom Davis, a Virginia Republican who has run their congressional campaign committee in the past, issued a memo to Republicans in which he laid out the dire scenario including talking about money and the way Democrats are dominating money raising race this year for congressional seats. Business which used to split its money now is leaning toward Democrats as a kind of protection money because they think they will be in the majority again. And of course labor always gives to Democrats.

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: Yes, the Davis memo was really I believe quite honest. I think that the Republicans have found themselves in a kind of vicious circle here. Take the money. The base is the depressed, right? The Republicans don't seem to be doing well. If you are a Republican contributor, why give money if you are going to lose? There is no incentive to give money to a party who is losing.

There's another thing Davis noted that was bleak, which was registrations for the two parties. Democratic registration is up. Republican registration is flat or down in many places. He mentioned California. Ventura County and Stanislaus County have both flipped from Republican to Democratic now. You are talking about turnout in the election and money. If you can't compete on those two bases, you are really going to have a hard time winning congressional seats.

MOORE: But, Dan, the Republicans have an especially big problem, Paul, because not just the unions but the business community is giving their money now, not all of it but a big share of it, to the Democrats. The Republicans I talk to say, well, we are going to be OK in November because we will have John McCain at the top of the ticket and we'll be running against Barack Obama. But as you showed, Paul, the forecasts against Barack Obama so far are not working. And I don't see that tactic being very effective.

GIGOT: Kim, a lot of Republicans would say on Capitol Hill look. The main problem is brand identity. That's because President Bush is the head of the party. He is a Republican. The strategy we should pursue is to separate ourselves from George Bush on issues like the housing bail out, for example, or oil prices or taxes or something else and try — and vote with the Democrats to get cover. Is that a sensible strategy?

STRASSEL: No. This is what got landed Republicans in the problem in the first place. In 2006, they wanted to pretend their elect material failures were because of Bush and the Iraq war and, in fact, voters were mad at them. They were mad they deviated their principles, their spending, earmarks and corruption. By having the scapegoat they didn't look within. They ought to look at themselves coming out with the message.

GIGOT: Are they coming out, Kim, with a message? Is there any silver line here where can you see Republicans kind of shocked into recognition that they have to stand for something?

STRASSEL: The thing about this Davis memo is it came a little late actually came a little late. A couple months ago the Republicans started to figure this out. This week House Republicans started to roll out the first part of an election agenda. and the good news is that it's dealings with health care and energy and dealing with all of these issues that are really the day-to-day concerns for Americans that they have not been speaking to up until now and we will see how it plays. They have six months to redefine themselves. They were late. But they are at least starting.

HENNINGER: In the absence of that, Kim, they said they will default to a local election. They will run on local politics. It will be every man for himself. If they do that, I think they will really lose big because there is no reason for the Republicans, in those districts, to get excited about their candidates.

GIGOT: All right, Dan, thanks.

Up next, President Bush returns to the Middle East, five years after the Iraq invasion. Is the region more stable? Where do U.S. interests stand? We will take stock after the break.

(COMMERCIAL BREAK)

GIGOT: President Bush arrived in the Middle East this week for what may be his final visit to the region as president. Amid signs of real progress in Iraq, some signs of trouble in other parts of the region including violent clashes in Beirut last week between his Iran-backed Hezbollah and Iran's pro-West government.

Where does the democracy agenda stand? Here with a closer look is "Wall Street Journal" foreign affairs columnist, Bret Stephens.

Bret, let's do a quick summary of the region. The president immersed so much time and capital in the Middle East, this presidency. Where is it going well?

BRET STEPHENS, FOREIGN AFFAIRS CORRESPONDENT: Basically the answer is Iraq where it is going surprisingly well. After the Sunni awakening, the success of the surge, in defeating al-Qaeda, Anbar province, Prime Minister Maliki is stepping up. It looks like he has had a huge success in taking control of Basra, second largest city in Iraq. Doing the same with the Sadr City, neighborhood of Baghdad, which was a Shiite militia strong hold.

GIGOT: He controlled some of the Shiite radicals, also having made progress earlier against the sonnies.

STEPHENS: Yes. And he's distinguishing himself from the Iranians who are running these Shiite militia groups run by Muqtada al Sadr. That's the good news.

GIGOT: Where else? Particularly the Lebanon region was in the news the last week. You wrote a column where you described it as a Hezbollah stand, the Iran-backed radical group, coming close to running that country.

STEPHENS: In fact the news from the rest of the region looks bad. We have no policy in Syria. The Iranians are ramping up to an industrial level uranium enrichment program. Lebanon, as you said, is becoming a Hezbollah stand by the day, bred riots in Egypt. It is a very unstable situation there.

And also with the Palestinians, you have in Mahmoud Abbas, an extremely weak leader. You have Hamas still firmly in control of Gaza after nearly a year and no sign of any abatement there. So the picture — the picture really looks bad for the president on this trip.

HENNINGER: And I think one reason is we are seeing the price George Bush is taking for taking so long to get it right in Iraq. He started to get it right in 2007. He wasted three years. Now there is only nine months left in his presidency. He has no capital left. Places like Syria understand that. They move into Lebanon. What is George Bush going to do? He is a lame duck. They will still be there. This is the moment for them to move.

STEPHENS: It is absolutely true. There was a moment there in 2005 when the Lebanese got up and got rid of the Syrian army with the help of the French and United States, the so-called Seder Revolution, where the United States was on the offensive. The sort of freedom agenda was on the offensive. What he needed to do was capitalize on that by penalizing the Syrians. Instead, no one can describe to me what American policy is. No administration officials can explain to me what American policy is for Lebanon, in supporting the forces of freedom or certainly whether supporting Syria, which is supporting the forces that are opposed to freedom.

GIGOT: One argument made by critics of this administration, particularly regarding Iraq, is that going into Iraq made it more difficult for us to contain Iran. Because the struggles we have had there have bogged us down and meanwhile Iran said you know what? You guys are paper tigers. Respond to that.

STEPHENS: Well, it is a strain argument. In 2003 we faced two major adversaries in the region, Saddam Hussein in Iraq and mullahs in Iran. We got rid of one of those adversaries. It is not clear to me we would have been able to deal better with the Iranians with Saddam Hussein there. And you know, you will remember the NIE that came out in December saying that the Iranians halted their nuclear weaponization program sometime in 2003. They halted that weapons program because they were terrified of what the Americans might do to them in the wake of the destruction.

GIGOT: It is hard to show progress in stopping Iran, its nuclear weapons program. It is hard to show, I mean, they are, in fact, helping kill Americans in Iraq. So where is the progress against Iran?

HENNINGER: But Paul, we know Saddam Hussein did have the wherewithal to resume his own nuclear weapons program. If he were still there and he was watching Iran build their nuclear weapons, do you think he wouldn't be resuming that program? The problem would be doubled.

GIGOT: OK, Bret, let's move to the assertion this week by President Bush at the — when he was in Israel that talking to terrorists is akin to appeasement. It is created an uproar among Democrats including Barack Obama, saying it is unfair to criticize him. He didn't say he would talk to terrorists. He said he would talk to Iran and some other countries.

STEPHENS: I think it's an amazing comment by Barack Obama because who do you think supports Hezbollah in Lebanon? Who does he think supports Hamas in Gaza? It is the Iranians and it is the Syrians. It is a distinction without much of a difference to say that it is OK to talk to the mullahs and to Bashar Assad, but he will make this great distinction with their proxy armies in Palestinian and Lebanon.

GIGOT: I think this is going to continue to be big debate, probably right through November.

All right, Bret, thanks.

Still ahead, federal officials say it was the largest raid in U.S. history and has put the issue of illegal immigration in the headlines once again. When we come back, is there a case to be made for open borders?

(COMMERCIAL BREAK)

GIGOT: Nearly 400 suspected illegal immigrants were arrested this week in a raid on a meatpacking plant in Iowa. Federal officials say it was the largest operation of its kind in U.S. history.

Wall Street Journal editorial board member, Jason Riley, is author of the new book "Let Them In, A Case for Open Borders." He joins me now.

Jason, a lot of Americans will say, looking at a raid like this at a plant and finding 400 illegals, why should these people have a right to break the law and come and work in this country?

JASON RILEY, EDITORIAL BOARD MEMBER: I think the real lesson to take away from this is — well, there are a couple legislation ones. Do we want our homeland security resources be put to use this way? Is this the best most efficient use of them?

The case for open borders is a case for moving our immigration policy in a more market oriented direction. The workers at the plants were coming to this country to work. Why not let them come legally? And therefore our homeland security forces would be able to focus on real threats, which are not meat pack first Iowa.

GIGOT: You are not saying they weren't with breaking the law?

RILEY: Of course they were breaking the law. The reason they were breaking the law is because we have a policy in which too many immigrants are chasing too few visas. I believe the best way to reduce illegal immigration and to prevent illegal workers working in factories is to give people who come here to work more ways to come legally. The best way to decrease illegal immigration is to provide more legal ways to come here to work.

And we know that this is an effective because we tried it before. We had a program after World War II to take care of a shortage of farm workers. When that program was in effect, illegal immigration from Mexico was reduced to a trickle.

Now there are all kinds of problems in terms of worker exploitation with this program so I wouldn't recommend resurrecting it in the exact form. We would have to tinker with it. But the fundamental principle is sound. If you give people some more legal ways to come, you get less illegal objection.

GIGOT: Other objection is the social costs of illegal immigration. They are here. They use our emergency rooms, health care emergency rooms. Their children get educated in our schools. We have to do deport them because of a Supreme Court ruling, Plyer v Dough. Why should the hard working American taxpayer have to support the social service costs for people who are here illegally?

RILEY: There are a couple of answers to that. One, is a lot of people are unaware that immigrants, illegal immigrants, can't receive federal welfare benefits. That cuts that out right there.

GIGOT: But they do go to emergency rooms.

RILEY: They do go to emergency rooms. And they can get Medicaid at the state level and so forth. But you have to keep in mind into immigration benefits both parties. It benefits not only the immigrants themselves but people in the recipient country. Immigrants are also consumers. They don't just take. In other words, they buy cars. They buy homes. They get their haircut.

GIGOT: Economically, they are a net plus?

RILEY: They create more economic activity. And creating more economic activity helps our economy grow and in the long run creates even more jobs. So the studies — and interesting studies have been done at the state level. Texas has done a study in which the controller of Texas found that illegal immigrants were a net plus for the state.

GIGOT: Let me raise another issue which is a simulation because people think that — you compare this waive of immigrants, Hispanic mostly, to the Italians and Irish of an earlier era. A lot of critics would say look those folks did assimilate. The Hispanics, in fact, in this country are so numerous they can form these enclaves in parts of the country where they do not learn to speak English, where they do not assimilate. What's the evidence that they are assimilating?

RILEY: There is plenty of evidence. We usually measure this in terms of English language skills, homeownership rates, (inaudible) and so forth. People look at the Europeans who came 100 years ago and it is 20-20 hindsight so of romanticized who was coming at the time. There is every indication immigrants are learning English today and increasing income and so forth. They are assimilating.

GIGOT: Thank you, Jason.

We have to take one more break. When we come back, our "Hits and Misses" of the week.

(COMMERCIAL BREAK)

GIGOT: Winners and losers, picks and pans, "Hits and Misses," it's our way of calling attention to the best and the worst of the week.

Item one, California Governor Arnold Schwarzenegger is trying to balance the books and it pinning his hope on the state's gamblers — Dan?

HENNINGER: California, la, la land, faces a $20 billion deficit. Governor Schwarzenegger came up with the idea of floating $15 billion in bonds based on revenue streams from the state's lottery. The lottery. Bonds are usually related to real work, the real economy. Now we're going to elevate compulsive gambling to the level of real work. When a states starts bonding out its lottery revenues, the end has to be near.

GIGOT: Betting on a real balance. Thanks, Dan.

Next, actor Sean Penn perch takes on Barack Obama — Bret?

STEPHENS: Yes, amazing. It's nothing short of courageous in calling for the impeachment of George Bush while making friends with unimpeachable Democrats like Hugo Chavez. This week he had something interesting to say about the presumptive Democratic nominee, something that took people by surprise. He called Mr. Obama's voting record, quote, "phenomenally inhumane and unconstitutional." I don't think Michael Savage has said that about Barack Obama. Then he went on to say that I hope Barack balance will understand if he is the nominee, the degree of disillusionment that will happen if he doesn't become a greater man than he will ever be. Huh?

Well, all I can say is that it is good. They don't hand out Oscars for logic and grammar.

GIGOT: Finally, the long-suffering polar bear — Kim?

STRASSEL: There are 25,000 of these bears in the Arctic, perhaps an all time high. Yet the Bush administration was nonetheless bludgeoned into listing them as threatened under the endangered species advocacy this week. This is politics. You know when the environmental groups sued to have them listed, the goal was more importantly to get a finding that it was global warming destroying the bear's habitat, because then the government will be forced to regulate cars and factories and everything else. This was a back door attempt at a climate program.

Now the administration didn't fall for that part of it. They decoupled the listing from the global warming part. But this is another example of how these environmental laws, they really are giving courts an unelected bureaucracies, control over democratic decisions.

GIGOT: All right, Kim, thank you.

That's it for this edition of the "Journal Editorial Report." Send your e-mails to jer@foxnews.com and visit us on the web at www.foxnews.com/journal .

Thanks to my panel and to all you have you for watching.

I'm Paul Gigot. We hope to see you right here next week.

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