This is a rush transcript from "The Journal Editorial Report," July 18, 2009. This copy may not be in its final form and may be updated.

PAUL GIGOT, FOX HOST: This week on "The Journal Editorial Report," states of pain. California, New Jersey and New York all on the brink of insolvency after decades of runaway tax and spend policies. Is the federal government headed down the same path?

Plus, as Democrats work to push a climate bill through the Senate, a look at the true cost of cap-and-trade and how similar schemes have fared in Europe.

And banning the burka. French President Sarkozy says the Muslim veil isn't welcome in his country.

"The Journal Editorial Report" starts right now.

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

First up this week, states of pain. California, New Jersey and New York a decade ago, all three states were among America's most prosperous. But after runaway spending and so-called progressive tax policies, they are now on the brink of insolvency. California has begun handing out IOUs to its creditors. Doesn't sound like much a program for the rest of the country. But is the federal government headed down the same road?

Here to tell us, Wall Street Journal columnist and deputy editor, Dan Henninger; columnist, Kim Strassel; and senior economics writer, Steve Moore.

Steve, you've paid a lot of attention to all these states. What policies do they have in common?

STEVE MOORE, SENIOR ECONOMICS WRITER: The wheels have come off in California, New Jersey and New York. It's amazing. None of them can pay their bills. You mentioned that California is now sending out IOUs. I think that's the first time in history that has happened.

And you look at policies of those states and there are what I call advance indicators of Obamanomics, Paul. You're talking about — for example, California and New York have the highest tax rates on small businesses and on individuals in the country. Yet they can't pay their bills. They have the highest rates of unionization. They have forced union policies in those states. They have among the highest unemployment. The other factor that is interesting, Paul, is that these are supposed to be worker paradises with all these liberal policies, but people and businesses are moving in droves out of those states.

GIGOT: That's true. What is a good citizen who wants to do something about this to do? Is there a way you can rein this in?

KIM STRASSEL, COLUMNIST: First question is whether you are going to have, as you mentioned, the national government do this. This ought to be what people are focused on. These are exactly what President Barack Obama says that they want.

A good example if you want to talk about this, is health care since that the discussion down in Washington. These are states that have intense amount of government regulation and intervention in the health care market.

GIGOT: Regulating private insurance policies with certain mandates tends, and you must cover this, tends to increase the price of the private insurance and also in New York, Medicaid?

STRASSEL: That's right.

GIGOT: Huge section is on Medicaid, much higher, mostly double than most of the rest of states.

STRASSEL: Yeah, we are told that if this is what you do, and on a national level, that you are going to get fewer people who are uninsured, better levels of care and lower prices. What you've actually seen in these states, New York, for instance, the average insurance cost for a family is twice that of the rest of the nation. And most of these states have a higher levels of people are uninsured because the costs are so high.

DAN HENNINGER, COLUMNSIT & DEPUTY EDITOR: Paul, I think one question we have to ask here is where is all of this going for California and New York.

GIGOT: Where is the money going? Where is the direction going? Off the cliff?

HENNINGER: No, where is the state of their fiscal health going? Off, it's going off the cliff.

(LAUGHTER)

GIGOT: That's where it's going.

HENNINGER: Then I think what will happen, there has to be a solution. They just can't die.

GIGOT: Right, right, right.

HENNINGER: I think what probably is it going to happen to them is the same thing that happened to New York City in the 1970s, which is you created what was then called a financial control board. The city's finances were put in the hands of a group of people who had statutory authorities to run the city's finances. They did things like abrogate union contracts. They laid people off. They ran the city's finances.

GIGOT: They put the politicians on an allowance.

HENNINGER: Yeah, exactly.

GIGOT: They said, we're going collect the money and we are going to dole it out to you when we think you really deserve it.

HENNINGER: Yeah. I think that's what's going to happen to California and New York State.

GIGOT: Steve, one of the things that Mario Cuomo said recently in our newspaper, the former governor of New York, a liberal Democrat, he they should have a constitutional convention in New York to rewrite the state constitution to make Albany, the state capital, more accountable. Do you think that is the path some of the states are going to go?

MOORE: I think its potential path. The same thing is being talked about in California.

To Dan's point, I think it's interesting. I call California and New York the Chrysler and G.M. of states because they can't pay their bills.

Dan, I would not be surprised if both California and New York come hand in hand to Washington and say bail us out. We cannot pay our bills. Of course, Washington can't pay its bills either. But I think that's the way it's headed.

Let's not forget one other point. California and New York haven't been involved in these kinds of cap-and-trade schemes too. California has renewable energy standards. They've passed their own cap-and-trade and businesses are moving out of the state because of those high regulatory costs as well.

GIGOT: One of the ironies here is that these states do have very high tax rates. Every time they say — they get in a budget crisis, they say let's raise them some more. And they are the states with the biggest budget deficits.

STRASSEL: I know. Part of the reason why is because, as Steve said, businesses are flowing out of state, people are flowing out of state, just picking up their bags and going, because they do not want to be the ones who are stuck paying all these bills in the end. One of New York's big problems right now is they have come to rely so heavily on marginal tax rates, on the highest income earners.

GIGOT: A very small percentage of taxpayers paying a huge proportion, 50 percent of stated revenue.

STRASSEL: When you have a recession like this, that money goes poof. And they are in an even bigger hole that they were before.

GIGOT: You really do need tax reform and you ultimately need tax and spend limitations.

All right, thanks to you all.

When we come back, the cap-and-trade controversy. As Democrats push their climate change plan on capital hill, we'll take a look how similar schemes have worked or not in Europe, and what the true costs will be at home.

(COMMERCIAL BREAK)

GIGOT: It's been dubbed cap-and-trade and as Democrats work to push a climate change bill through the Senate, all eyes on this controversial approach to combating global warming. The system to require U.S. companies to purchase permits to emit green house gases. And the total number of permits available would be capped. The companies would be able to trade or sell their permits depending on their emission needs.

Europe has been employing cap-and-trade for years, but has it actually worked?

Bjorn Lomborg is director of the Copenhagen Consensus, a think tank in Denmark, and author of "Cool It, the Skeptics Environmentalists Guide to Global Warming."

Bjorn Lomborg, welcome.

BJORN LOMBORG, AUTHOR & DIRECTOR, COPENHAGAN CONSENSUS: Thanks, Paul.

GIGOT: So Congress and the president are pushing cap-and-trade here in the United States, a good idea?

LOMBORG: Pretty bad idea. In sense that both — it's not going to do very much to climate. It's not going to reduce temperatures very much. Estimates show 0.2 degrees Fahrenheit by the end of the century.

GIGOT: And why is that? Because China and India wouldn't be part of it?

LOMBORG: It's probably partly because the way that it's constructed, that it turns out you can go out and buy a lot of permits elsewhere. So there is a huge barn door open for actually not reducing very much.

GIGOT: So unless you really push that cap down you're not going to really help.

LOMBORG: Yes. The second part is the U.S. is only a fairly small player towards the end of the century. The vast majority of emissions are going from China and India.

GIGOT: All right, so why else is it a bad idea.

LOMBORG: And the problem is that it costs a lot of money. You end up paying a lot, even if you did it smartly, but chances are most of these kinds of legislation is going to be bungled because there is a huge amounts of political interest, a smorgasbord for political lobbyists.

GIGOT: OK.

LOMBORG: So essentially, you are going to have a very expensive bill that is not going doing very little good for the climate. That's a bad idea.

GIGOT: Interesting. Now Europe had this for years, after the Kyoto protocol was endorsed by European nations. How well has it worked in Europe?

LOMBORG: It's almost not reduced emissions.

GIGOT: Really? Not at all?

LOMBORG: No. It probably has a tiny bit, but if you look at the major impact of what has happened in Europe, it's because England went to gas because of Thatcher. And it's because East Germany was incorporated into West Germany. Those are the two main things that caused to reduce its gas — reduce the emissions from coal.

GIGOT: Fewer emissions opposed to coal, from coal.

LOMBORG: So basically, it had very little to do with Kyoto what happened in Europe. What you also saw was the main people gaining from Kyoto. Who was that? That was the energy companies in Europe. They got all the permits for free, which is also what it's going to look likely in the U.S. But they have changed the consumers, so they made tens of billions of Euros every year from Kyoto.

GIGOT: So this is something that you call the climate-industrial complex, a play off Dwight Eisenhower's famous military-industrial complex. What do you mean when you talk about this? This is a relationship between business and government on this kind of climate legislation. Give me an example?

LOMBORG: The problem, of course, there is a lot of companies that going to make a lot of money. Immelt from G.E., obviously making a lot of windmills.

GIGOT: G.E., General Electric.

LOMBORG: He would love for us to buy more windmills. T. Boone Pickens, a lot of people are going to make a lot of money off of this. So, of course, they are telling us climate is terrible. If you actually look at the latest — their latest summit in Copenhagen, because we're going to have the climate summit before the end of the year. They told us that we were going to see eight-story high sea level rises, which is beyond anything even Al Gore has been claiming.

(LAUGHING)

But, of course, if makes since to try to terrify people to say, all right, well, we want to buy into cap-and-trade.

GIGOT: If you talk to some of the CEOs, they say, look, we have no choice to play ball with the government because, if we're not at the table, we're on the menu. So we have to be there and we have to make sure to protect our shareholders. And if they are going to tax us or limit what we can do, we have to fight and lobby to get some kinds of benefits that we can offset those costs. What is wrong with that?

LOMBORG: You are absolutely right that many businesses just simply want security and they don't know what is going to happen. Therefore they would rather have something happen than not knowing where they're going. The problem is that many are also playing for much, much higher taxes and much higher cap-and-trade, because they are going to make money.

But, yes, we do need certainty. We should be honest that climate is a problem. We should tax it at the relevant rate, that is how much damage does an extra ton of CO2, and the answer is about $7 per ton of CO2.

GIGOT: Congress is thinking of 20 or more.

LOMBORG: Right and, if you look at Kyoto, that was probably 30 or $40. The next Kyoto is probably going to be more.

GIGOT: So you're saying impose — if you are really serious about global warming and want to do something, impose a tax across the board on carbon.

LOMBORG: Yes.

GIGOT: But that is politically unpalatable because that would raise gas prices. that would be something consumers could see directly. Cap- and-trade is hidden and it's on businesses, so people don't see it. Is that part of the calculation?

LOMBORG: Absolutely. Of course, you have to be honest. If you're going to reduce consumption of fossil fuels, it needs to be more expensive. But the crucial fact is to remember, even if you put a $7 tax on carbon, it won't mean much. It means 6 cents more per gallon of gasoline. So it won't be a terrible disaster. What you need, and this is the thing that is really missing in the whole discussion, is you need much more research and development. You need to get green energy to much more cheaper. Solar panels are incredibly expensive, so...

GIGOT: I understand that. I have to tell you, we have been subsidizing solar panels in the United States for about 30 years. And they are still not competitive with regular carbon energy. Why are you going to throw more money after bad?

LOMBORG: Because you have been doing it badly. And most of the world has been doing it badly.

GIGOT: That's for sure.

LOMBORG: You have been subsidizing people putting up solar panels, inefficient solar panels. That's not we want to do. We should invest in getting better technology of solar panels because we want to have solar panels, or something else, eventually competitive with fossil fuels. Now that is much cheaper and the benefit is that the only way you are going to get the Chinese and Indians on board.

GIGOT: And you subsidize wind and other things as well, or alternatives?

LOMBORG: Don't subsidize them. Invest in research and develop so they become cheaper. So imagine if we could solar panels cheaper than fossil fuels by, say, 2040 or 2050, we would have solved global warming because everybody would shift to these solar panels. Not because they are green, not because they are good people, but because we made it cheaper.

GIGOT: All right. Excellent discussion. Thanks, Bjorn.

Still ahead, should the burka be banned? The French parliament is considering that step after President Sarkozy declared the Muslim garment is unwelcome in France. Was he out of line? There's a debate ahead.

(COMMERCIAL BREAK)

GIGOT: French President Nicolas Sarkozy created an international stir when he told lawmakers he was in favor of banning the burka, calling the head-to-toe veil a sign of the debasement of Muslim women. Sarkozy told the French parliament, quote, "The problem of the burka is not a religious problem. This is an issue of a woman's freedom and dignity. This is not a religious symbol. It's a sign of subservience. It is a sign of lowering. I want to say solemnly the burka is not welcome in France."

We're back with Dan Henninger. Also joining us Wall Street Journal foreign affairs journalist, Bret Stephens; editor for editorial board member, Matthew Kaminski; and assistant features editor, Bari Weiss.

So, Bari, do you agree on banning the burka?

BARI WEISS, ASSISTANT FEATURES EDITOR: Even though the burka offends my sensibilities terribly, I have to say that I'm coming down in defense of it. I don't think the state should be in the business of telling women what they can and cannot wear. That is exactly what makes liberal democracies different from countries like Saudi Arabia. Some of us, again, might be offended by women's choice to wear the burka, but it's her choice.

GIGOT: Even if it's a sign of the men — I mean, even if the women themselves want to wear it because they're faithful Muslims?

WEISS: I think women...

GIGOT: Should they...

WEISS: That is precisely the point. Some women in French society are choosing to wear this out of some kind of religious == what they view as a religious obligation. Even if it's not mandated by Muslim laws, they are choosing to do it. And I think that's the point, choice.

GIGOT: Bret, I know you like French politicians, and mostly agree with them.

BRET STEPHENS, FOREIGN AFFAIRS JOURANLIST: I do.

(LAUGHTER)

I agree in this case. And I agree with what Sarkozy has done and I think it is courageous. He is the same president who has done more to integrate French Muslims into French political life than any of his predecessors.

But there is an important point here which transcends France and the United States. We're talking about what liberalism is about. Liberalism is the politics of the individual. That means the individual, who has rights, who has responsibilities, but who also has to have an identity in the political sphere. When you put a woman in what amounts to a head-to-toe covering so you can't see her face, you can't identify who she is, she identifies herself only as a Muslim, only as a particular kind of Muslim, you are erasing her personhood. You are erasing her identity. That is antithetical to what liberal democracy is all about.

GIGOT: Even if she wants to wear it?

STEPHENS: Yes, even if she wants to wear it. There are all kinds of things you can't do. You can't walk around naked on the streets of New York City. There are regulations in terms of the kinds of choices you make. There are regulations in terms of the kinds of religious choices you can make. You are can't take peyote, for example.

GIGOT: There's no doubt that the state has an interest sometimes in limiting expression for public order. In Bret's case, he may be stretching that when he talks about personal identity. But take up his argument. Do you agree with it?

MATTHEW KAMINSKI, EDITORIAL BOARD MEMBER: Absolutely not. I think we want to keep fashion police an idiot and not a reality.

(LAUGHTER)

There is a legitimate concern in this country and western Europe and in liberal societies about how is fundamentalist Islam affecting us. How do we integrate these people? Our response should not be to adopt their methods. What you're suggesting is having a kind of ministry to the publication of vice and the prevention of virtue in our societies, kind of a mirror image of what the Saudis are doing in telling them they can't wear a mini skirt or cannot wear — cannot show themselves in public.

HENNINGER: Well, one aspect of this I think we should mention. Beyond fashion is the fact that these women are sometimes beaten up by relatives, brothers, fathers, if they violate this prescription. This sort of really significant violence against these women is the sort of thing that the French should be prosecuting. That would send a message to Islamic culture. This is not going to be tolerated inside our — not that, not any activity of that sort. But they won't go there and take on those men who are beating up these women.

GIGOT: Bret, is this is — to the extent that this is a sign of religious expression, a burka, for many women — and you would agree that it is. They are not all forced to wear it. They are all not subjugated and wearing this. But how is this different from the Amish dressing plain or other symbols, like a yarmulke?

STEPHENS: Sure. It's a significant difference because part your identity is being able to see your face. I know you are, Paul and not Matt, for example. With the Amish, Ultra Orthodox Jews, Muslims who cover their heads simply with...

GIGOT: You have no problem simply with a veil.

STEPHENS: I have no problems with that. Those are signs of identity and those are signs of choice. But this is a kind of negation of personality. It goes a crucial step further. And I would under emphasize the point the idea that this is all about women's choice, that these women freely choose to dress that way. I think that's easy to exaggerate. The amount of social coercion is astonishing.

GIGOT: The prime minister of Turkey, who is the Islamic leader, he said, when he was here, his daughter wanted to go to school in the United States. And want to know the reason she went here?

WEISS: So she could freely wear the veil.

GIGOT: Which is banned in Turkey. We could expose her to American free expression and tolerance.

WEISS: Exactly. Absolutely. I think the second you try and strip someone of their choice and ban it, they're going to cling to it even more. If the goal is assimilation in French culture, I think we can do that. I think Sarkozy and the French Parliament can do that in much more constructive ways. Give people better education and job opportunities. I don't think that this marginal symbol, oppressing it, is the way to go.

GIGOT: All right, Bari, last word. Thank you.

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

(COMMERCIAL BREAK)

GIGOT: Time for our "Hits and Misses" of the week.

Dan, first to you.

HENNINGER: A big miss, Paul. If you were from Utah — which I know you are not.

GIGOT: I wish I were. A great state. A great state.

HENNINGER: The one thing you know for sure is that last year's undefeated University of Utah football team did not get invited to play in the Bowl championship series. So naturally, Utah's senator, Orrin Hatch, has to hold a Senate hearing and accused the BCS of antitrust violations. This is a cartel, bellowed the senator because of the league's 90 — they got 90 of the 94 slots in the championship series. Wow! That is a pretty big cartel. Senator Hatch says they ought to be accused of Sherman antitrust violations. And I say it's summer and everybody expects a lot of hot air.

GIGOT: All right.

Kim?

STRASSEL: This is a gentle miss to a U.K. real estate company called Willis Holdings, which is moving to Chicago. They have been the lead tenant in the Sears Tower. And they have decided, as a part of that, they are going to rename it the Willis Tower. Now, no one is disputing their right to do this, but there comes appoint at which you just do not mess with iconic architectural buildings around the world. It's not like new owners of Chrysler building renamed it the Abu Dhabi Tower.

(LAUGHTER)

So Chicagoans are so miserable about this, they are refusing to call it that, and I think I'm with them on this.

GIGOT: All right, Kim.

Steve?

MOORE: Paul, remember Title Nine, was the program that brought gender equity to university sports. As a consequence, many universities had to cancel their men's tennis and swimming and volleyball programs. Now the Obama administration wants to bring that idea to science and engineering classes. They want 50 percent of the people in classes to be women. The threat here is if they don't reach that gender parity, many of these schools may have to cancel their physics and chemistry programs. Paul, the one area in America where we shouldn't have to have political correctness is in science and engineering.

GIGOT: All right, Steve, thanks very much.

That is it for this week's 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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