This is a rush transcript from "The Journal Editorial Report," February 21, 2009. This copy may not be in its final form and may be updated.

PAUL GIGOT, FOX HOST: Up next on "The Journal Editorial Report," a closer look at the administration's $275 billion home foreclosure plan. Will it stem mortgage defaults or is it just buying time?

And if you're worried about the ballooning federal debt, wait until you get a load of the states', where multi-billion dollar deficits could spell big trouble for taxpayers.

Obama's Afghan surge. Is 17,000 more troops enough?

"The Journal Editorial Report" begins right now.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: I want to be very clear about what this plan will not do. It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans. And it will not reward folks who bought homes they knew from the beginning they would not be able to afford.

(END VIDEO CLIP)

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

That was President Barack Obama unveiling a plan that he says will help between seven and nine million struggling homeowners avoid foreclosure. The president promised the $275 billion program would help families of that "played by the rules and acted irresponsibly." But will it?

Joining the panel this week, Wall Street Journal columnist and deputy editor Dan Henninger; columnist Mary Anastasia O'Grady; editorial board member, Jason Riley; and senior economics writer, Steve Moore.

Mary, there's no question, you're one of the struggling homeowners on the receiving end of this mortgage relief, it will help you. But is it going to help the larger economy?

MARY ANASTASIA O'GRADY, COLUMNIST: Well, it helps you for a while anyway. What Obama's trying to do here is stop the downward spiral in home prices. He thinks that the home prices are the problem with the financial system and until you fix that problem, you cannot see the economy recovering.

GIGOT: So fewer boarded up homes in neighborhoods.

O'GRADY: Fewer foreclosures will mean stability, fewer failures in banks. The banks' assets will not be declining. Therefore, you'll stabilize the banks. They'll start lending again.

GIGOT: Dan, is that logic sounding?

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: Partly. I mean, some of these, like these — not these conforming loans that Freddie Mac held are going to be — principal will be paid down on some. That's a good thing. It will begin to stabilize the market.

The problem, however, is that there is simply too much housing. There is a glut of housing. The easiest way is to think about ethanol or corn. If you had another commodity like that you would take the glut off the market and let prices drop. They're not going to do that in this instance. They're not going to reduce the housing stock.

GIGOT: Jason?

JASON RILEY, EDITORIAL BOARD MEMBER: Exactly. Nationwide, last year, foreclosures were up 81 percent from '07. That's what this plan is meant to address, that issue. That political issue, too, frankly. But as Dan said, you have a housing glut out there. You have too many people in homes they can't afford. And the market can't clear. And if we're going to subsidize them, continue to subsidize housing in this way, the market will not clear. That's the fundamental problem.

O'GRADY: The problem with modification of loans is that, so far, we haven't experienced where when loans are modified like this, people don't get a healthier balance sheet. The office of the comptroller of currency in December released a report that shows...

GIGOT: This is an office of the Treasury Department.

O'GRADY: Right. They showed that 55 percent of mortgages that were modified in the first quarter were 30 days delinquent after just a number of months. And the number of loans that were delinquent after six months was 37 percent.

GIGOT: But, Steve, let me get you into this and ask you about it. Would Americans rather have a foreclosed home next to them or maybe pay a little more on their tax bill through this subsidy to avoid that happening? Most Americans I know don't want their neighborhood blighted by a bunch of foreclosed homes.

STEVE MOORE, SENIOR ECONOMIC WRITER: Well, you're all going soft on me or something. I certainly agree nobody wants a boarded up home or foreclosed next to them. But the real issue here that I think has a lot of Americans angry is you got 55 million mortgages out there. About 48 million Americans are paying their mortgages on time.

GIGOT: About 92 percent of all mortgages payments are on time right now.

MOORE: That's right. And here's the real issue. Barack Obama, in the sound bite you just played, said this isn't going to bail out people that made that decision. That's precisely what it's going to do. People, who overinvested, made risky decision in terms of buying houses they couldn't necessarily afford, are now basically asking for a bailout. A lot of Americans are asking the question...

GIGOT: Steve, one minute.

MOORE: One point. A lot of Americans are asking the question, why should I pay my mortgage if the guy next-door to me isn't paying his mortgage and he gets a federal bailout.

GIGOT: Steve, you haven't answered the question about what you do with the boarded up homes potentially next-door. Do you want that next- door or is that just the risk you have to take?

MOORE: It's a terrible problem. Those losses, there's no way getting around them. The question is, who is going to absorb the losses, is it the people who made the bad decisions, the banks and the borrowers, or should it be all American taxpayers? I think most people don't want to pay for people's bad mortgages.

RILEY: Let me say something though in the sense of these homeowners. For years, we had a subsidy for credit in this country, easy-money policies from the Fed. And it created incentives. And rational people took advantage of those incentives. I think Obama also wants to address that issue. Were people wrong to take advantage of the incentive put out there by the Fed?

O'GRADY: But the thing is this is not free. Somebody's paying for this. In fact...

GIGOT: Jason and me.

(LAUGHTER)

O'GRADY: Not only that, future homeowners are paying for it. Because if you let markets clear, as Jason says, new buyers would come into the market and also this idea of a cram-down which is the government forcing banks to basically cut the principal....

GIGOT: This is through a change in bankruptcy law, which is part of this package, which would allow judges to basically change contracts, mortgage contracts which has never been allowed before.

O'GRADY: Right. That's what they're doing. They're forcing people who lent the money to take a loss on their balance sheet.

GIGOT: What about this point Jason makes? You have this generalized subsidy for credit, which we talked about for lot, and you've had it for homeownership. And a lot of people made the rational choice, I'll buy more home than I can afford because the government's making it easy and helping me do it.

HENNNINGER: Well, the politicians and Federal Reserve are never going to take the hit for this. They never do, right?

(LAUGHTER)

GIGOT: Right.

HENNINGER: It's a tough world. So I think what Barack Obama is trying to do here, he inherited a financial panic in the housing market and the credit market. He's trying to restore some level of confidence so that the markets can begin to turn around. Theoretically, does it look like it will work? As an economic? Probably not. But the psychology is very important.

O'GRADY: I have another...

GIGOT: Sorry, Mary.

O'GRADY: OK.

GIGOT: We've got to go.

When we come back, states of pain. After decades of runaway spending, states across the country are facing huge budget deficits. That could mean a world of hurt for you, the taxpayer.

(COMMERCIAL BREAK)

(FOX NEWS BREAK)

GIGOT: The Golden State lost a little more of its luster this week confronting a $42 billion deficit. California lawmakers voted to pass the largest tax increase in the state's history. They may not be alone after decades of chronic overspending, states across the country are facing huge budget gaps which could spell big trouble for taxpayers.

Steve, let me ask you, what states are in the worst trouble and how did they get there?

MOORE: Well, California is just an order of magnitude worse than just about any other state — $42 billion in deficit. With this wonderful package, Paul, you just mentioned that's going to raise their taxes out of this crisis, California will now have the highest income tax, sales tax and gas tax in the country. It's starting to make New York look like a free market Mecca by comparison! You've got — one last point — the three states with the biggest budget problem, New York, California and New Jersey, guess what, those are the states with the highest taxes and highest spending. They brought this on themselves.

GIGOT: That's one of the ironies here is the states with some of the deficits are those with the highest tax rates. Could there be a paradoxical connection here?

Mary, would the tax rates allow the legislature to spend a lot and, therefore when the bust hits, they don't have the cash because the revenues collapse?

O'GRADY: Yeah, I think the politicians who came up with this idea forgot about the fact that people can actually leave their state.

(LAUGHTER)

In fact, California has a big problem with outward migration. And this is measuring just non-immigrant population. But it's lost a huge amount of people in the last decade. Generally, they're people who are actually among the productive members of the state.

GIGOT: Let's put a chart up. I want us to take a look at some of the states with the highest tax rates. California's at the top of the income taxes with the rate of higher than 10 percent and sales tax. But income tax in particular.

Very progressive tax code, which means in the boom time the revenues soar, Dan, but in the bust, they really collapse because the high revenue or high earners don't earn as much. and the state is very dependent on a very few taxpayers.

HENNINGER: That's right, Paul. And what do they have to pay for? What is in those budgets, those big states? Largely, those are public spending in the sense though that it's on pension costs for the unions, it's for the union contracts they sign, which tend to be above the rate of inflation. Finally, it's for debt servicing. Most of these states bonded out a lot of their infrastructure spending. The money spent to pay for that debt has grown exponentially over the last ten years.

GIGOT: We have new jersey Governor Jon Corzine come in to see us last year, lamenting what his predecessors had done. Their debt burden has become unbelievably large.

HENNINGER: Yeah, they become very huge, and it's going to get bigger. So when the times go bad, they simply have no money for the public commitments they've made.

RILEY: The stimulus package includes a $54 billion stabilization fund for the states. Some governors are threatening not to take it, but I think, in the end, most will. There's also a little bit of political theater going on here because the state legislatures can override governors that say they won't take the money in the end. So a governor can go out there, particularly a Republican governor, a conservative governor, who has higher political ambitions, can say I won't take this money knowing full well his state's going to get it anyway through the legislature.

GIGOT: Steve, let me ask you about California. I thought Arnold Schwarzenegger was elected several years ago to stop this. What's happened?

MOORE: Well, you have probably the most liberal legislature in North America in Sacramento. They've raised taxes every crisis they've had. I just mentioned, now they have the highest sales tax, gas tax and so on. They're all now depending — all these states, Paul, are depending on the federal government to bail them out.

The problem is what happens when this money runs out in two years. A lot of the governors I talked to this week say this is going to make our budget problem even worse two years from now when the federal money runs out.

GIGOT: So this does reward governors legislate, the stimulus bill, who spent irresponsibly. You are a sap if you sat back and balanced your budget — you don't get any of this money.

O'GRADY: That's right. Even Governor Paterson, who is not exactly...

GIGOT: Of New York.

O'GRADY: Of New York — has said this is, as Steve says, a temporary funding for a couple of years. And the federal government is also telling the states that there's strings attached to these things. And some of them — some of the strings will cost states to expand some of their entitlement programs. At the end of two years, they're going to have another plan.

GIGOT: Because the stimulus creates an incentive to put more Medicaid people on the rolls because the more you put on the rolls the more federal money you get.

HENNINGER: We have a perfect historical example. In 1975, New York City was on the brink of bankruptcy. The solution was to create a financial control board. That board had the power to refute contracts, lay people off, cancel capital projects. It solved New York City's financial problem. What we're doing is precisely the opposite of that. We need a financial control board for the United States government.

GIGOT: Jason, Is there any governors who look particularly good here in the sense that they're resisting this?

RILEY: So far, I think Bobby Jindal of Louisiana has made noises about resisting it. The ones that stand out, the ones that look particularly bad, like Governor Crist of Florida, a Republican, I mean, it's one thing to take the money. It's another thing to invite Barack Obama to your state, embrace him, and let him use you to show bipartisanship.

GIGOT: That's because Barack Obama stole the whole in his budget.

All right, Jason.

Still ahead, Obama's Afghan surge. The president says he'll send 17,000 more troops to the troubled region, but will it help?

(COMMERCIAL BREAK)

GIGOT: President Obama quietly announced a surge of his own this week promising to send 17,000 additional troops to stabilize what he called the deteriorating situation in Afghanistan. More than 30,000 troops are already in the region, but the top commander there says the increase may not be enough.

We're back with Dan Henninger and Jason Riley and also joining the panel, foreign affairs columnist, Bret Stephens.

So, Bret, President Obama is doubling down on the surge. Is he wise to do so? And are more American troops the answer here?

BRET STEPHENS, FOREIGN AFFAIRS COLUMNIST: The question is whether Obama understands what the Iraq surge was all about, which wasn't simply about more troops, although that was an essential component. It was about a new strategy, a new way of approaching...

GIGOT: A counterinsurgency strategy.

STEPHENS: A counterinsurgency strategy that, as Dave Petraeus, the commander, says, it focuses on the people. The people are the terrain. He has to win hearts and minds in the areas like Helmand Province, Kandahar, the areas that border Pakistan to make sure they don't become nesting grounds for the Taliban and al Qaeda.

GIGOT: And winning over the people means protecting them. That means if you come in there and they sign with you and your forces while you're there, and then you leave, they're going to be punished by the Taliban that come back. So they have to have confidence that you can keep them safe.

STEPHENS: That's right. It means security first and services second.

GIGOT: All right. The Obama administration is portraying this as even harder than Iraq. Richard Holbrooke said that explicitly to the new envoy, President Obama's envoy. Is that right?

STEPHENS: That's absurd. Iraq was a very tricky situation. It's a way of Holbrooke making himself look good. But it is true in one respect, because this is simply not a problem about Afghan. It's a problem we have with Pakistan where the Taliban enjoys an increasingly large sanctuary, where the government is increasingly on a weak footing. And we don't have major forces in Pakistan. We can't really police what goes on in that country.

HENNINGER: Paul, I think the most interesting aspect is really going to be political. Everyone involved...

GIGOT: Political in the U.S.?

HENNINGER: In the U.S., domestically. Everyone involved is preparing the American people for a long commitment. The commander there, General David McKiernan, is talking about 60,000 troops being in Afghanistan for up to four years. General Petraeus, Defense Secretary Gates, even Joe Lieberman gave a speech all saying in the past week there has to be a larger civilian presence, meaning diplomats going into the countryside, as Bret was describing, and doing institution building, creating the rule of law.

GIGOT: That's a big American national commitment of people and money. Politically, that may not be sustainable here in the United States?

HENNINGER: Absolutely. I'm saying it's easy for the critics to say that sounds a lot like Iraq. That sounds a lot like Vietnam. You explain, Mr. President, why it isn't.

GIGOT: And "Newsweek" magazine, which loves Barack Obama, said this week, put on the cover, "Obama's Vietnam" about Afghanistan. Thanks a lot, fellows.

(CROSSTALK)

RILEY: The left's got a problem here. Iraq was Bush's war, but Afghanistan was the good war and Democrats want to show they were tough on terrorism embracing Afghanistan. Now it's Obama's war.

GIGOT: Are they going to sustain it, Bret? Are we looking down the road here politically where Obama's biggest supporters for Afghanistan might be Bush Republicans or neo-cons, like you?

STEPHENS: Yeah, the irony is astonishing. But already you look at places like the "Huffington Post, reading Senator Fred Collins saying, what are we doing in Afghanistan? And it's a remarkable turn-about from just a few years ago.

GIGOT: What is the U.S. national interests, Jason, in Afghanistan? Is it to build a democracy like we were trying to do in Iraq or is it just to deny Afghanistan as a safe haven for al-Qaeda and the Taliban?

RILEY: I would say it's the latter. If we leave prematurely, the Taliban can come back in full force and the elements of the Taliban in Afghanistan can move over to Afghanistan, if we leave a vacuum. I make another point which is a little disturbing in that the Obama administration is publicly trashing Karzai and I don't know...

GIGOT: The president of Afghanistan.

RILEY: The president of Afghanistan. And to dump on a local leader, our local ally like that when, before we have a successful counterinsurgency strategy of protecting the people so these last local allies can be more effective in their leadership, I think is disturbing.

GIGOT: Bret, on Pakistan. We've been making progress with drones against al-Qaeda and Taliban. So have we made progress in recent years or is it deteriorating a little bit?

STEPHENS: It's one step forward and two steps back. What's happened is we've been successful about going after top al-Qaeda leaders in the frontier regions hard on the Afghan border. But the Taliban is retreating into the heartland of Pakistan. They effectively have control of this area called Swat, the Switzerland of Pakistan, and are imposing Sharia law, beheadings, going after girls' schools.

GIGOT: So they ended up making it more difficult for the Pakistan government in Islamabad, which ultimately could hurt our larger — this is going to be a very difficult situation for Barack Obama. We'll see how he handles it.

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.

Bret, first to you.

STEPHENS: This is a hit to the Women's Tennis Association to players like the Williams sisters, to the American tennis channel, to everyone that did not allow the Arab Emirate of Dubai from getting away of barring women from playing in the Israeli tennis player, Shahar Peer, from playing in the Barclays Dubai tennis championship. Instead of shrugging it off, the tennis world insisted that Dubai reverse its decision or be kicked off the tennis calendar. Dubai folded. And while it's too late for Shahar Peer to play, Israeli tennis great, Andy Ram is on his way to Dubai. It's a victory for sports and it's a defeat for bigotry.

GIGOT: All right.

Mary?

O'GRADY: This is a hit for the Canadian government. Like a lot of governments around the world, their facing the possibility that its economy is slowing down and tax revenues may not be enough to close its fiscal deficit. So it is thinking — and I stress thinking — about selling assets in the Crown's corporations. This, even a decade ago, would have been considered blasphemy, but now it's looking at assets in the rail company called Via Rail, in the Royal Canadian Mint and also in Canada Post. I think it shows how open and competitive and global Canada has become.

GIGOT: All right.

Jason?

RILEY: Another hit for a Rochester mother, Yolanda Hill, who was arrested last week for sending her kids to a school in a district where they allegedly do not live. So she was seeking a better education for her children and her crime was to put down her mother's address on the enrollment form. She was actually put in jail for doing this. And I think that while what she allegedly did is clearly wrong, I think the real crime here is that people like Yolanda Hill don't have school choice.

GIGOT: All right.

Boy, you're all in a gracious generous mood. Thank you all.

If you have your own "Hit or Miss, please send it to us here at jer@FOXnews.com.

That's it for this week edition of "The Journal Editorial Report." Thanks to my panel and to all of you for watching. I'm Paul Gigot. We hope to see you right here next week.

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