This is a rush transcript from "The Beltway Boys", December 27, 2008, that has been edited for clarity.

MORT KONDRACKE, CO-HOST: Coming up on the "The Beltway Boys," President-elect Obama's New Year's resolution, get the economy back on track. We'll tell you if he has the right plan to do it.

FRED BARNES, CO-HOST: Team Obama exonerates itself from the Rod Blagojevich scandal. End of story? Not quite.

KONDRACKE: Dick Cheney has some choice words for the man who will take his job in a few weeks.

BARNES: And as Joe Biden seems to shrink his role in the administration, Hillary Clinton's looking to increase hers, big time!

KONDRACKE: All that's coming up on the "The Beltway Boys" right now!

I'm Mort Kondracke.

BARNES: And I'm Fred Barnes. And we're "The Beltway Boys."

Hot story, Mort, is Obamanomics. That's Obama's economic policy. Look, as we enter into 2009, there's nothing that matters more at the beginning of the Obama administration than how he's going to deal with the recession. Watch this and you'll see sort of broadly what he's thinking about. Watch.

(BEGIN VIDEO CLIP)

PRESIDENT-ELECT BARACK OBAMA: We can create millions of jobs starting with a 21st century economic recovery plan that puts Americans to work building wind farms, solar panels and fuel efficient cars. We can spark the dynamism of our economy through a long- term investment in renewable energy that will give life to new business and industries with good jobs that pay well and can't be outsourced.

(END VIDEO CLIP)

BARNES: Mort, the last president who faced this kind of an economic crisis when he entered office was Ronald Reagan in 1981. I covered his White House when he was going through this. He obviously had rising unemployment and negative economic growth. In other words, the economy was shrinking. He had a couple of problems that Obama does not face, one of them was sky high interest rates and the other was rising inflation. They're roughly similar.

KONDRACKE: The problem that Obama faces coming in is there are 10.3 million people out of work at the moment, 6.7 percent unemployment rate, which is not as high as it got to be during the Reagan administration, which was 10.8 percent in 1982. But there are lots of people who think it's going to get up to double digits.

The reason that President Bush got off of free market economics to fight this thing was that he was warned by Hank Paulson that this could be a depression worse than the Great Depression. The Fed and Treasury Department have thrown, so far, $8 trillion at the banking system. What Obama was elected to do was to help the people of this, the people who are unemployed, losing their houses and so on.

There are some conservative economists, like Martin Feldstein, who thinks what Obama's got to do is have stimulus that's equivalent to the Great Depression — I mean to World War II, which is what got us out of the Great Depression. The Great Depression did not end until World War II started.

BARNES: Indeed. Here's how President-elect Obama's plan differs from Ronald Reagan's plan back in the early '80s. First of all, Obama wants to increase spending on infrastructure, aid to states and so on. Ronald Reagan cut spending except defense spending. Mort, I'm surprised Obama's given his advisers, people like Larry Summers, is devoting his stimulus package almost entirely to government spending aimed at creating jobs. This is what Franklin Roosevelt did in the depression in the 1930s. The truth was, you end up at the end of the 1930s about where you were when Roosevelt took over the economy, after FDR used his approach of just government spending. It didn't work. As you said, the depression ended in World War II.

KONDRACKE: Look, I don't know for sure whether the Obama plan is going to work. But, Fred, Ronald Reagan did not cut spending net. It went — much anyway. It went from 21.7 percent of GDP when he took office to 21.2 percent of GDP when he left. And some years, it was as high as 23 percent. So there was not a lot of net spending cuts. And he did spend a lot more on defense, that's true. But what is the difference in terms of economics just between spending on bombs and planes and ships and stuff like that and spending it on roads, bridges and wind farms. I don't think there is a lot of difference.

BARNES: That's not the important distinction, Mort. Because secondly, Obama want to cut taxes mainly just for the middle class. For people who pay no tax at all, they'll get a check. Ronald Reagan fought for across-the-board tax cuts for individuals, including the rich and wealthy, and also for corporations and gave them accelerated depreciation. That's the difference.

What Obama's relying entirely on government spending, Reagan relied on the jobs that were created by the private sector. He applied incentives, you know. You heard the word "incentive." You haven't heard that word much from Obama's lips. He rarely mentions it and never in connection with tax cuts. There's a great difference. Obama, it's government spending, and Reagan, it's tax cuts to spur investment and economic growth. And it worked.

KONDRACKE: When Reagan came in, the top tax rate was 70 percent. That's practically confiscatory so there was every reason to cut across the board.

(CROSSTALK)

KONDRACKE: I will stipulate right now that Obama should, and he has not done this, say right now I am not going to cut taxes — I mean raise taxes on anybody in the midst of a recession. I mean, it clearly — it's counter-Keynesian even.

Now, I'm sure that there — or I would like to think anyway, there would be some tax breaks in this package for private investment in wind farms and solar panels and even nuclear, I would hope. Ronald Reagan's tax cuts didn't decrease government revenues by a great deal. What he did was expand the deficit. The deficit went way up as a percentage of GDP. And I would argue what Ronald Regan ultimately did was give the economy a Keynesian kick in the pants. It was deficit spending.

BARNES: Mort, what he did was, with his tax cuts, was expand the economy. That's what we're talking about right in the beginning in '81, '82. By early '83 or late '82, the economy was booming. We had one of the great...

KONDRACKE: It was a short, shallow recession — a short, deep recession. And this one looks to be a long one.

BARNES: And why was it short? Because Reagan's policy worked almost instantly.

The next area where the two, Obama and Reagan, disagree, is this. Obama has shown he favors more unions, more unionization, while Ronald Reagan was famously anti-union. One of the things he did in 1981 was kill the air controller strike and bring in private people, non-union people to run it. It had a tremendous impact.

Mort, the simple fact is over the last 25, 30 years, as unions have declined, we've had more productivity and greater economic growth. The two go together.

KONDRACKE: This is one area where I completely agree with you. I'm afraid Obama's going to cave completely to unions on car check, which will make it impossible not to have a union. and unions do reduce the efficiency of an enterprise. I think he's going to give on free trade. And we're going to have more than prevailing wage rates. In other words, union rates for all these infrastructure programs, which is going to mean that you're going to build less roads and less bridges as a result of it. On that point, I completely agree with you.

BARNES: I'll put you down in the anti-union camp.

And finally, President-elect Obama is signaling he wants more regulation. Former President Reagan was for deregulation. Regulation makes it tougher for business. Look, at Sarbanes-Oxley, what that did after the Enron scandal. It just filled up these poor corporations with huge paperwork obligations. Anyway, more regulations.

The truth is that the financial markets are self-regulating. It took a huge financial meltdown to get them to do it, but they are.

KONDRACKE: Look, deregulation is partly what got us into this catastrophic mess that we're in. Even you will admit that the Democrats failed to go along with regulation of Fannie Mae and Freddie Mac contributing to this. There's a lot more that should have been regulated. And the SEC and other regulators should have been much tougher enforcing the regulations that there were. So that means there should be more regulations, just not too much.

BARNES: Simply put, Mort, Reaganomics worked. Got us out of that recession. The FDR model, which Obama seems likely to follow, didn't work.

KONDRACKE: Bottom line, there were both Keynesian and we'll see if they work.

BARNES: Coming up, Hillary Clinton makes a power grab at State? And Team Obama swears there was no funny business between his staff and Rod Blagojevich. We'll give you our take, next.

(COMMERCIAL BREAK)

(FOX NEWS BREAK)

KONDRACKE: Welcome back to the "The Beltway Boys." It's "Ups and Downs" time.

Up, President-elect Obama and his incoming White House chief of staff, Rahm Emanuel. They've both been cleared by their own internal investigation of any wrongdoing in the Rod Blagojevich pay-to-play scandal.

BARNES: The press has rolled over and this probably won't be brought up again when we get back to business in January after New Year's.

Now, look, they're clearly — even from what they've released, there was more involvement in whoever is going to be selected as the Senator to replace Barack Obama, the Senator from Illinois. there's more involvement by Rahm and by Obama than by indicated at first, that's for sure. Rather than answer questions, they release this report when both Obama and Emanuel are off, away from the continental U.S. There's been very little transparency.

I ask you this question. Mort, if this were a Republican president coming in, and that president's lawyer, say, Fred Fielding, had done this report, would the press be rolling over like they have for Obama?

KONDRACKE: They'd be asking for more information. Or if Bill Clinton had come in.

BARNES: Even Bill Clinton, but neither are a Republican.

KONDRACKE: Right. OK, but there were a lot of questions about Bill Clinton and they did get asked in the beginning. I think, in general, it's a very bad policy for an administration to conduct an internal review and not put this in the hands of somebody else. It would lead to a lot more general satisfaction, including for you.

But — but Patrick Fitzgerald, the U.S. attorney in Chicago, stipulated there was no evidence whatever that the Obama transition team engaged in any trading or anything else with Blagojevich. And the ultimate authority on this whole thing is Rod Blagojevich himself, who said that the Obama gang wouldn't play. So — and he did it in foul language. So far there is no evidence of any wrongdoing.

BARNES: I agree with that. But then why act like you're hiding? And they are.

KONDRACKE: They wanted to get it past them. And if there's something more there, it will emerge.

KONDRACKE: That's why we gave them the up arrow, because they probably achieved that.

Up, secretary of state-designate, Hillary Clinton. She's signaling she wants to expand the reach and influence of the State Department. On Hillary's wish list, a bigger budget, high-profile special envoys to troubled spots and an expanded role in dealing with the global economic crisis. I can say is, whoa!

KONDRACKE: This is going to be an administration given to diplomacy as opposed to military force, if at all possible. And I think that Bush has handed off to the Obama administration so many international crises that one secretary of state can't fly all over the place and handle them all. The idea that Dick Holbrooke, former U.N. ambassador, is going to handle Pakistan, India, and maybe Dennis Ross will be back doing the middle east account, and somebody else doing Iran, all under her supervision and Obama's supervision, I think it's a good idea.

BARNES: Blame Bush first? Mort...

(CROSSTALK)

KONDRACKE: You have to admit, this is a troubled world.

BARNES: It was a pretty troubled world that Bush inherited from Hillary's husband, Bill Clinton. Remember what he inherited? He inherited this bursting at the scenes al-Qaeda, which he had not deterred, a middle east where there had been really no improvement, the North Korean — a nuclear treaty with North Korea that was being violated by the North Koreans.

Look, all presidents, when they come in, in recent years, have inherited a very tough world to deal with. Hillary's a tough person. I'm all for making the State Department very big. And it certainly will be. Special envoys, fine. I guess her husband will be one.

KONDRACKE: Well, you know, that's a question. You know, I wonder whether Bill Clinton could be sent around to do something like negotiate with Iran? Maybe — humanitarian missions.

(CROSSTALK)

KONDRACKE: Humanitarian missions.

BARNES: All right.

KONDRACKE: Coming up, is the bloom off the Caroline Kennedy rose already? And Vice President Cheney and his successor, Joe Biden, scuffle over executive power. We'll tell you who we think won the fight.

(COMMERCIAL BREAK)

BARNES: Welcome back to the "The Beltway Boys." We're continuing our "Ups and Downs" for the week.

Up, Vice President Dick Cheney. He got the better of his successor, Joe Biden, in the spat over the role of vice president and the broader issue of executive power. Biden thinks Cheney dangerously expanded both.

Here's Cheney's response.

(BEGIN VIDEO CLIP)

DICK CHENEY, VICE PRESIDENT OF THE UNITED STATES: If he wants to diminish the office of vice president, that's obviously his call. I think that President-elect Obama will decide what he wants in a vice president. And apparently from the way they're talking about it he does not expect him to have as consequential a role as I've had during my time.

(END VIDEO CLIP)

BARNES: Well, I think that say. , look, on executive power it goes up in wartime. I expect Obama, who will be fighting this war in Afghanistan, will want to maintain all that power.

Look, Cheney was influential in the Bush White House and with the president because President Bush valued his advice and thought he was a particularly good emissary in his role in dealing with congressional Republicans.

From what we know so far at any rate, Barack Obama, who may have muzzled Biden during the late stages of the election campaign, does not regard Biden in exactly that exalted way that Bush did with Cheney. Biden was bragging the other day about, well, when he got Obama to agree that when big decisions were made, Biden would be in the room. I doubt if he'll be asked to say much.

KONDRACKE: Joe Biden not say much? No, Joe Biden will say much but the question is whether he'll get listened to. It depends on the quality of the advice.

I don't begrudge Dick Cheney his role. That's what George Bush wanted him to do. I question some of the positions that Dick Cheney took. I think Dick Cheney had minimum high regard for any institution in the government or in the society, except the government, the executive branch of the government, to the point, for example, what they wanted to do with terrorist detainees was lock them up, hold them, try them and execute them without any judicial review. This was not going to happen in modern America. I just think his view of the executive was exaggerated.

Down, Caroline Kennedy. The chorus of critics is growing, including some Democrats, who say she's not qualified to be a Senator.

What it really depends upon is whether David Paterson, the governor of New York, says whether she's qualified to be Senator. I think the key qualification she's got to meet is can she help him get elected, their ticket get elected in 2010. Clearly, she can raise a lot of money.

Now, when she's a Senator, we will see whether she's qualified. I mean, her basic background is as a socialite and, to some extent, as a scholar. Does that translate to being a politically effective Senator that can get herself reelected? I don't know.

BARNES: Don't you think Governor Paterson is going to pick her?

KONDRACKE: Yeah.

BARNES: I think he is. But there — three things have cropped up that I think has cause aid problem for him. One is, it's clear that the clout of the Kennedy family is not quite what it was. Remember when they got Patrick? They all invaded Rhode Island and got Patrick Kennedy finally elected to the House of Representatives. It's just not quite — I mean, Teddy Kennedy's sick and so on.

Caroline made these campaign appearances in upstate New York. They did not go well. She wasn't exactly Bobby or Jack or Teddy campaigning.

KONDRACKE: Or Hillary.

BARNES: Or Hillary, for that matter, campaigning. Then, you know, people — the longer she's out there, they sort of resent this Kennedy family insatiable lust for public office. Now we know, of course, that Teddy Kennedy, who does he want to replace him in the senate? His wife. Geez.

All right, down, big bankers. An Associated Press investigation found that some of the banks of that received billions in federal bailout money say they don't know how or if they have spent the money. and the banks say they don't have to tell anybody either.

KONDRACKE: Look, I think this is an outrageous scandal. The idea that the banks are taking this money to save themselves and they're not going to even tell the Treasury how they're spending it? They say that money's all fungible so they can't tell.

Look, they were given this money with the idea that they were going to lend it. And they're not lending it. What they're doing is they're husbanding it and using it to buy other banks. And that is not what was intended.

I guarantee you, on a bipartisan basis, bipartisan, Congress is going to see to it that they fess up.

And furthermore, the idea that these, who sank their banks, are getting $150 million in pay? That is obscene.

BARNES: Mort, have you ever heard this word? Privacy? You know, should they tell the government exactly who they're leading to and how much?

(CROSSTALK)

BARNES: Should they? You want that? Look, it's the same problem when Obama talks about we're going to use all this medical technology to computerize all medical records for everybody. You know what the problem there is? Privacy. These records are private. The idea the banks was, they were going to straighten out their balance sheets, they've done that. And they have begun to lend some. Do you want the banks to be a past- through for this money, lending to the same people that got us in trouble in the first place.

(CROSSTALK)

KONDRACKE: They got the money to lend and they better lend.

Don't go anywhere. "The Buzz" is coming up next.

(COMMERCIAL BREAK)

BARNES: What's "The Buzz," Mort?

KONDRACKE: As Hillary Clinton takes over the State Department, she should have a long talk with Jim Glassman, who's the undersecretary of state for public diplomacy. If she's not going to keep him, and it's probably a long shot that she would, she ought to at least adopt his innovations which include, above all, not just defensive image protecting for the united states, but actually pushing back against the forces of extremism in the world, and using all kinds of modern social networking techniques, Internet and stuff like that to do it.

BARNES: I think we agree she should keep him.

You want to hear a couple of my pet peeves, which are pet peeves of other conservatives around town? One, Joe Biden says, you know, that trillion dollar bailout or stimulus package and no pork. Of course, there will be pork. And then we see who's fighting to see what jobs will be created. On one hand, labor wants infrastructure jobs. Greens want so- called green jobs. What a tacky debate.

All right. That's all for the "The Beltway Boys" this week. Join us next week when the boys will be back in town. And happy New Year!

KONDRACKE: Happy New Year!

Watch "The Beltway Boys" Saturday at 6 p.m. ET and Sunday at 1 and 6 a.m. ET

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