This is a rush transcript from "The Journal Editorial Report," August 22, 2009. This copy may not be in its final form and may be updated.

STUART VARNEY, GUEST HOST: Up next, more bad news for the economy. Retail sales sink. Troubled mortgages hit a record high. Could the wheels be coming off the administration's recovery plan?

Is double talk sinking health care reform? We'll take a closer look at Obama Care's contradictions and the left's meltdown over the public option retreat.

As millions of Afghans vote despite Taliban threat, a majority of Americans say the war there is not worth fighting.

"The Journal Editorial Report" starts now.

Welcome to "The Journal Editorial Report." I'm Stuart Varney, in this week for Paul Gigot.

First off, could the wheels be coming off the administration's economic recovery plan? Well, the bad news keeps coming. Retail sales fell unexpectedly last month, raising fears that the key back-to-school shopping season will hit negative territory for the first time in years.

News this week that the number of homeowners delinquent on their mortgages or in foreclosure rose to the highest level in four decades. More than 4 percent of all borrowers are in foreclosure. About 9 percent missed at least one payment. It is a triple whammy, if you add to that the continuing problems with unemployment.

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

Steve, we start with you, if I may. The stock market, a terrific rally. We hear that the recession is winding down and may be over. Why is the president's recovery plan questioned so harshly?

STEVE MOORE, SENIOR ECONOMIC WRITER: Well, the one piece of good news, Stuart, is the stock market has been on a soaring increase over the last three or four or five weeks. That's good news. I've always regarded the stock market as an important forward-looking indicator. But every time it looks like the economy is picking up a little bit of steam, you see the statistics that come out that suggest it's stumbling again. What is making Americans most nervous right now is these lousy unemployment numbers. We saw unemployment numbers climb a little bit last week. This suggests we might be in the throngs of a jobless recovery where we don't see the unemployment rate fall much. When you have 15 million Americans who are unemployed, it's hard for them to pay the rent, pay the mortgage and it's hard for them to go out and shop.

VARNEY: Dan, I am looking at the creditability of the president's recovery plan, and I saw the credibility question by Warren Buffett in The New York Times where he said, look, you can't go on spending, borrowing and printing money like this. I saw it as a warning shot.

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: It is a warning shot. We've talk about that a lot on the program, Stuart, the threat of inflation. I think Buffett also suggested something about the value of the dollar.

It's entirely possible they'll try to engage in an export-led recovery, which implies cheapening the dollar. A cheaper dollar implies feeding inflation into the system. As we said many times on the program, at some point the Federal Reserve will tighten the liquidity. But they may have to do that in advance of next year's off-year election. That will be politically unpopular. The Fed is under tremendous pressure not to tighten next year but it would feed inflation in the system.

JASON RILEY, EDITORIAL BOARD MEMBER: It's not just Warren Buffett that's questioning the effectiveness of the stimulus package. USA Today put out a poll that said 57 percent of Americans don't think the stimulus package is working. So consumer confidence is down, which is feeding the retail numbers that you mentioned earlier. They look at unemployment, as Steve mentioned, nearly 9.5 percent. People don't feel confident to go out and spend money.

It's hard to see where the economic growth will come from. That is the real problem here with everyone looking for it, whether it's the stock market or consumers. Typically, in our economy, it's upper-income Americans who are the job creators. And Obama made them enemy number one. He's going to go after them.

(LAUGHTER)

VARNEY: It seems like two distinct sides of the fence. Wall Street is rallying. Profitability and corporations looking pretty good. Main Street suffers from declining consumer spending and lower — continually higher unemployment, now this housing crisis.

Tale of two realities, Steve?

MOORE: Look, I think that Jason really put his finger on the problem. Where is the growth going to come from? The one lesson hopefully we've learned from the last six months is you don't create prosperity and you don't create jobs by massively increasing government spending and increasing debt.

The other portion of the story we haven't mentioned yet is what is going to happen late next year? Tax rates will increase on small businesses and investors. That makes businessmen very reluctant to invest in new enterprises and new equipment and new hires if they think their tax rates are going up. It's a cockamamie theory that you can increase spending and raise taxes later and get growth.

RILEY: And those housing numbers could get worse before they get better. A lot of people are in homes they can't afford. They're still under water. They owe more on the mortgage than the home is worth, which could drive the foreclosure rates down even further or up even further.

VARNEY: We've posed the question, Dan, where is the growth coming from? What about a second stimulus package?

HENNINGER: Yeah. I think a second stimulus is probably plan A, B and C, for the administration. They believe in it, right? Is it their economic theory that the stimulus creates this multiplier and creates jobs in the economy. Some within the administration and others outside, like Paul Krugman and Joseph Stiglitz, do want another big stimulus package.

Politically, I don't see it happening. He's already asking his Democrats in Congress to vote for a $1.4 trillion health care bill. They did a big stimulus package. Obviously, the American people are upset about the deficit. So I just don't see that happening.

If that doesn't happen, I don't see a plan "B" for the administration. As Steve suggested, normally under the circumstances, you would go to cutting taxes in a recession. But they need all the tax revenue they can get for the health care bill. Where does that lead us?

VARNEY: Steve, if I listen to the town hall meetings, it's not — there is anger over health care reform. That is true. But there seems also to be anger about the government spending that is just out of control. Another stimulus plan would make it worse, wouldn't it?

MOORE: There is no question about it. This rage out there, that is not just Republicans and conservatives but independent voters, is really a result of the massive debt. Look, the voters get the joke. If you have $800 billion of spending, it's not free. It has to come from somewhere. That is the fallacy of the stimulus idea. People know that their taxes will have to be raised later or the debt is going to have to go up by a massive amount to pay for the spending, which is a big millstone around the neck of this economy right now.

VARNEY: Last word, Dan?

HENNINGER: Alan Greenspan used to say that the American economy had been so deregulated and so privatized that it's now able to withstand extraordinary blows from recessions that would have brought it to its knees in the past. Again, his point was it was the private sector that was the strength of the American economy. I just don't see them doing anything to help the private sector.

VARNEY: Got it.

When we come back, ObamaCare's contradictions. The president says support for his plan is falling, that because folks aren't listening. But maybe he's in trouble because they are.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

PRESIDENT BARACK OBAMA: The concern is that somehow that will mean rationing of care, right? That somehow, some bureaucrat out there will be saying, well, you can't have this test or you can't have this procedure. The idea is actually pretty straight forward, which is if we've got a panel of experts, health experts, doctors, who can provide guidelines to doctors and patients about what procedures work best in what situations, and find ways to reduce, for example, the number of tests that people take...

Medicare and Medicaid are on an unsustainable path. Medicare is slated to go into the red in about eight to 10 years...

If we're able to get something right, like Medicare, then there should be a little more confidence that maybe the government with a role, not the dominant role but a role in making sure that the people are treated fairly when it comes to insurance.

(END VIDEO CLIP)

VARNEY: Confused about ObamaCare? It could be because the president contradicts himself, often times, in the same speech. Under his reform plan, government bureaucrats won't tell you what tests you can and can't have. But a panel of health experts will. Medicare, it's an example of something the government got right, except it's going broke.

The latest administration double talk, well, whether the so-called public option is essential to their reform efforts.

Senior editorial page writer Joe Rago joins the panel for this segment.

All right, Joe, I think this debate is chaotic. What say you?

JOE RAGO, SENIOR EDITORIAL PAGE WRITER: That's right. It's not only the contradiction. It's President Obama is out there blaming the Republicans for the current trouble. But he doesn't lack Republican support. Well, he does. But what he really lacks is the public support, the Democratic support. The administration's withdrawal on the public option this week, which would have been an entitlement program like Medicare for the middle class sent democrats going berserk, liberal Democrats. You have the conservative Democrats running away from the liberals. And chaos is the way to put it.

VARNEY: We haven't even mentioned the Republicans yet.

Dan, what about — there seems to have been an attempt to demonize the private insurance companies.

HENNINGER: That's right. We know the strategy turned from health care costs to reforming the health insurance industry. Nancy Pelosi has tried to call them villains, say they carpet bomb the American people. Boy, something extraordinary happened last week. Henry Waxman, chairman of the House committee that's shepherding the bill, sent out a letter to the chairmen of all the health insurance companies asking and requesting, quote, unquote, "information about compensation levels of all their executives who make over $500,000." They wanted their compensation level, their salary, bonuses, stock options, and perks and off-campus pus retreats and such. This is wrong sort of intimidation. When they did that to the banking industry, the argument was they were taking taxpayer money through TARP and therefore we had an obligation to oversee that the money was well spent. This industry has taken no such money. It's just pistol whipping them into coming around to support this bill.

(CROSSTALK)

VARNEY: ... the Republicans.

RILEY: Well, it's not just the insurance industry that's being demonized by the administration. It's just ordinary Americans who oppose their plan are being demonized by the administration. We see these town hall meetings where conservatives are showing up, voicing their opposition, and they're being labeled as un-American, disruptive. When liberal groups, like ACORN or MoveOn.org, protested everything that George Bush did, it was grassroots democracy. When conservatives do the same thing, they are labeled un-American.

VARNEY: Where are the Republicans in this?

RILEY: Where are the Republicans in this?

(LAUGHTER)

VARNEY: Yes. The debate is chaotic within the Democratic Party.

RILEY: It is. But I think the Republicans run the risk of overplaying their hand here. Obama did get elected in part on a pledge to reform health care. The American people want health care reform. They may not what Obama is proposing but they do want reform. I think Republicans, it's not enough for them to just say, "no," they have to be seen as negotiating in good faith.

VARNEY: We talk about the tort reform, talk about a national market, no state mandates.

Steve, what do you say?

MOORE: I think the American people would like to turn in Obama Care under the Cash for Clunkers program. I think the Americans have two big problems with the proposal. Number one, the idea that you will save money from the health care system and create a $1 trillion new entitlement is laughable to Americans. That is problem number one. Problem number two is it turns out about 75 to 80 percent of Americans kind of like the health care they get right now. And all they see is a kind of downside risk to totally restructuring the system, pushing more Americans into a government program they don't want. And I think those are the two central contradictions of Obama Care.

VARNEY: Joe, is there a difference between the public option and the co-op idea?

RAGO: There are some differences on the margins but they're both leading in the same direction. If we start co-op in this states, it's just going to be another non-profit insurer, like Blue Cross or Blue Shield. Pointless. On the other hand, it could become a government sponsored enterprise, like Fannie Mae and Freddie Mac, where it has a lifeline to taxpayers, gets into all sorts of trouble, is bailed out and drives out the private-sector competition because of its government advantages.

VARNEY: We seem to be coming to a little bit more clear-cut debate between do we get a continuation of private medical care in the United States or do we shift to a socialized medical system? Do we spend $1 trillion or don't we spend $1 trillion? It seems to be coming down a funnel like that, Dan.

HENNINGER: I think it all comes back to arriving at that point because of the forces in play here. Look, the left wing of the Democrats in Congress, the so-called progressives, like Henry Waxman and Nancy Pelosi, want a public option and head towards a national system. Their strongest constituencies want to as well, the union. Andy Stern, head of the Public Employees Union, said this week, he things Democrats will be turned out of office in November if they don't enact the public option. I took it as an implication that the unions might pull back some of their support if the Democrats don't push it through.

Yeah, I think eventually next September when they come back, we're going to be back at the same watering hole arguing over whether there will be a federal insurance program or whether that will be a threat to the private insurance people have now.

VARNEY: And that's when the real threats begin, is it not?

HENNINGER: It will be fun.

VARNEY: It sure will.

Still ahead, as Afghan voters defy Taliban threats to vote in this week's presidential election, a new poll says the American public is losing its resolve to win the war there.

(COMMERCIAL BREAK)

VARNEY: Defying Taliban threats and attacks aimed at polling stations, millions of Afghans voted Thursday in an election seen as a critical benchmark as the nation's progress, as well as a test of the administration's new strategy there. President Obama this week called the war in Afghanistan a war of necessity, one that we have to win. But a new Washington Post poll finds a majority of Americans say the war there is not worth fighting.

Wall Street Journal foreign affairs columnist and deputy editor, Bret Stephens, joins our panel, as well as editorial features editor, Robert Pollock.

Bret, to you first. Doe that poll — that was a shocking poll. Does that put a time limit on President Obama freedom of maneuver in Afghanistan?

BRET STEPHENS, FOREIGN AFFAIRS COLUMNIST & DEPUTY EDITOR: If he chooses to follow public opinion rather than lead it, it does. Americans see a war that's not going well. They see a Taliban that is resurgent. They saw an election in which the voters were courageous but intimidated by the Taliban. The question is whether this president means it when he speaks about a war of necessity, a war we have to win. On the other hand, when Obama talks about finishing this war, that suggests that he's looking for some kind of exit strategy. And when you're dealing with an insurgency situations like that, finishing it is not necessarily the end stake.

VARNEY: He rarely talks about it. He doesn't mention Afghanistan very often.

STEPHENS: He understands that he spoke about Afghanistan as to the contrast to the war in Iraq, a war America has to win. But there really is a question of whether he has the political will — it certainly has the political capital to resist his left flank, which is urging him to get out of Afghanistan as if 911 never happened.

VARNEY: Rob, should there be a new surge, Iraq-style in Afghanistan?

ROBERT POLLOCK, EDITORIAL FEATURES EDITOR: The question is surge to achieve what? We have to be realistic about the mission in Afghanistan. Anyone who has been to Afghanistan, as I have, twice, knows it's a different country from an old civilization like Iraq. Afghanistan as very, very primitive country. It's largely illiterate. It's as poor as West Africa basically. You can't talk about rebuilding Afghanistan. It's a building operation. I don't think we can terribly optimistic about the prospects for Afghanistan becoming a modern democracy in the short run, and by that I mean the next couple of decades.

So what is the mission there? The mission is preventing Afghanistan from becoming safe haven for terrorists. That can be done without terribly large commitment of U.S. forces.

VARNEY: You're in it for a very, very long haul.

POLLOCK: With a small number of forces. You're in it for a long haul but you don't have lots of troops there.

VARNEY: Dan?

HENNINGER: Yeah, Stuart, I would like to talk about the politics of this and take issue with one thing that Bret said, which is that the president had the political capital to see this through. Any president, even as popular as this one, has a limited reservoir of political capital. This president is drawing down his capital on health care and trying to get the economy revived. The health care bill is going to drain his political capital.

There are advisors around him that have been telling him, you do not want Afghanistan, this war on the front pages next November when Democrats are running for re-election in the Congress. This is a dilemma for him. There's gong to be tremendous pressure to ratchet down the war in Afghanistan.

We could pay a price over there if he does that on the ground. But I think he will be asked again and again get us out of there.

STEPHENS: Look, the classic problem for Democrats is they're always perceived as weak on national security. It's important for this president in particular to stand up when it comes to Afghanistan. He needs to ask himself what will hurt more, if the American troops are fighting in Afghanistan or if he is pulling out of the country and there's a perception that that country is going back to where it was in the 1990s when Osama bin Laden slipped into Afghanistan and plotted the attacks of 9/11.

VARNEY: What do you make of all these bombings in Iraq recently, going back to another war, Iraq, horrific bombings across the country? Does it detract from the president's ability to act forcibly in Afghanistan?

POLLOCK: I'm not sure it does. I don't think that the success going forward in Afghanistan will be defined primarily by the number of American troops on the ground. Already, in Iraq, we have withdrawn American troops from the Iraqi cities. The Iraqis are doing reasonably well. I'm quite optimistic. Am I surprised the terrorists are challenging the situation? No, I'm not. Do I know who it is? They accused — they said it was Al Qaeda. It could just as well be Iran trying to destabilize the country. There will be continuing challenges to the order in Iraq. The interesting thing about Iraq is Iraq is continually surprised to the up side.

VARNEY: Last word, Bret.

STEPHENS: I agree one bombing in Baghdad does not make a terrible ending to the war. This president is going to have to show the same fortitude his much maligned predecessor showed in Iraq with the surge.

VARNEY: Will he, Bret?

STEPHENS: Well, we'll see.

VARNEY: We shall indeed. Thank you.

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

(COMMERCIAL BREAK)

VARNEY: All right. Time for the "Hits and Misses" of the week.

Bret, what say you?

STEPHENS: What happened to "Braveheart"? This is the huge miss to the government of Scotland for letting free the terrorist who were convicted of murdering 270 people in the Pan Am flight 103 that went down over Lockerbie, Scotland, 21 years ago. He was sentenced to life in prison, which I think is already compassion too much, with a minimum of 27 years. When he was set free, he wound up spending the total of 12 days in jail for every single one of the victims that he killed. This is a black day for Scotland and it's a victory for terrorists who know the West don't have the will to confront and punish them.

VARNEY: What got me was the hero's welcome he got, when he got back home.

Rob, what's yours?

POLLOCK: Stuart, you remember Cindy Sheehan, the mom who lost her son in Iraq, and then was credited with the bulk of the press with absolute moral authority of her critique of the war. At least she's a consistent critic of war now that Barack Obama is in power. Last week, she told journalist, Byron York, that, quote, "The anti-war left was used by the Democratic Party. I like to call it the anti-Republican war movement." Asked by Mr. York if she was still protesting, she said she was, but the media isn't interested anymore.

VARNEY: Got it, Rob.

All right, Joe, what is yours?

RAGO: You remember Tom DeLay, the former Republican majority leader, nicknamed the Hammer? He may get a new one after his new gig, which is an appearance on the reality TV program "Dancing With the Stars." This is a hit because it shows that there are consequences for bad behavior in Washington. This is one of the men most responsible for the GOP's overspending and corruption in 2006. Instead of becoming a high-powered or a high-price lobbyist, he's now been reduced to appearing on a talent show.

VARNEY: Let's see if he wins.

Steve, what's yours?

MOORE: The great towering economist, Rose Friedman, wife of Milton Friedman, died this week. She was a lovely lady and an incredibly influential economist. She was the co-author of the mot important economics book of the last hundred years, "Free to Choose." She promoted freedom, free enterprise around the world, in places from Poland and China and India. There's a good-news end of this story though. Now she and her husband are now promoting free enterprise and the flat tax in heaven.

VARNEY: You've got it Steve. We thank you very much indeed, one and all.

Back next week. Paul returns. We'll see you then.

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