This is a rush transcript from "The Journal Editorial Report," February 6, 2010. This copy may not be in its final form and may be updated.

PAUL GIGOT, FOX HOST: This week on the "Journal Editorial Report," President Obama's new budget, a record spending boom paid for by $2 trillion in new taxes.

And the drone war, as the administration ramps up predator strikes against Al Qaeda and Taliban targets, the left begins to push back.

Plus, a social theory turned upside down, why crime rates have fallen as unemployment has spiked.

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

President Obama unveiled his budget for the 2011 fiscal year this week, and despite talk of tough choices and spending freezes, the big news is a big boom in new spending, including $25 billion for states for Medicaid and $100 billion for yet another jobs stimulus. It's all financed by record deficits and $2 trillion in tax increases.

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

So, Steve, the Scott Brown election in Massachusetts was supposed to be sending a message about fiscal restraint against the growth in government, but this budget doesn't show that. What is the White House calculation here? I mean, political and economic?

STEVE MOORE, SENIOR ECONOMICS WRITER: You know, Paul, last week, I was in the — at the Republican retreat when President Obama told the House Republicans, I am not an ideologue, but look at the budget, and you see the opposite, massive increases in domestic spending on top of the fiscal stimulus bill that passed last year. We'll borrow, under this budget, in Barack Obama's first three years in office, $4 trillion...

GIGOT: Steve, I get that, but what is the White House calculation here? Do they believe that this is going to grow the economy and, therefore, we must spend to create jobs? Is that part of it or is there something political here? Is this a political document going into the elections?

MOORE: I think it's an ideological document. I think that Barack Obama does believe in the power of big government. He talks about all of these green programs that are going to create jobs. And so I think it's really being driven by a view that this is a way to expand the economy. It hasn't worked. We saw with the unemployment rate numbers that came out on Friday that the economy still isn't creating jobs, despite this massive infusion of government and the stimulus.

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: The part of Paul's question though, I just do not understand is what their political calculation is. I don't read it because, as you said, there was Massachusetts. I personally believe that both the gubernatorial races in New Jersey and Virginia also went to the Republicans because the electorate, in large part, is very anxious about the level of spending that we're engaged in the past year. We started the year with a $787 billion stimulus package. Then he segued into the health care debate, which was a trillion dollar proposal, and now this. I think you get to levels of spending and the American people just get nervous about it. I mean, after all, they threw the Republicans out of Congress in 2006 because of spending.

GIGOT: Let's talk about the targeted tax cuts, which are a big part of the president's strategy, a jobs tax credit, you've got a zero rate for capital gains for some small businesses. Is that big enough to make a difference to create jobs?

MARY ANASTASIA O'GRADY, COLUMNIST: Well, the National Federation of Independent Businesses has called it a drop in the bucket.

GIGOT: Really?

O'GRADY: Yes, and there are a couple of reasons for that. I'll give you some examples. The capital gains tax cut. Apparently, it's for C- corporations and only 25 percent of small businesses would qualify for that. Also, things like the $5,000 tax credit. You know, businesses are not going to shift their business plans for such a small amount of money. And what they're facing is an elimination of the Bush tax cuts and a lot of policy mandates that the president is threatening, like cap-and-trade, health mandates, higher taxes. All of those things have them very worried. So for them to take on new employees on their payroll in an environment of so much uncertainty is not — they're not going to do that.

HENNINGER: And, Mary, the health care bill still looms over that.

GIGOT: Right.

HENNINGER: I mean, the health care bill mandates that you provide insurance or, if you don't, you pay an 8 percent payroll tax. The Small Business Federation is adamantly opposed to that. That's up in the air. On one hand, proposing a tax credit and, on the other hand, threatening a payroll tax.

(CROSSTALK)

GIGOT: Steve, let me ask — sorry, Mary. Steve, I want to ask you about this, at least a little mini revolt among rank and file Democrats who have started to say, you know what, we probably ought to extend those Bush tax rates, those lower rates, which will begin to expire on January 31st. They're agitating for that. Is there any chance at all that this could begin to build momentum and we could see the rates remain?

MOORE: Let's hope the mini revolt you're talking about turns into a major revolt. I think that would be one of the most important things that President Obama could do to help stimulate the economy is simply announce, look, we're not going to raise capital gains taxes. We're not going to raise dividend taxes. and most importantly, apropos to what you were talking about, remember the income tax increases on the, quote, "rich," it turns out that two-thirds of the people who are going to pay those income tax rate increases in 2011 are exactly the small businesses that Barack Obama says he wants to help.

GIGOT: Politically, politically, do you think there's a chance the White House will turn on this if the economy remains weak enough there's little job growth the rest of this year?

MOORE: I really do. I think that almost no one believes that raising capital gains and dividends and small business taxes, if we still have high unemployment, I don't think anyone can argue that's a good thing to do to the economy.

GIGOT: So you really think there could be politically a chance the White House could turn on this?

MOORE: You seem skeptical, Paul.

(LAUGHTER)

But I do think they may see the light on this.

(CROSSTALK)

O'GRADY: I think their calculation is that, you know, job creation is a lagging indicator coming out of a recession and I think they're going to start to eat into the unemployment figure.

GIGOT: And you'll get some reduction.

O'GRADY: Yes. They're going to take credit for that. And I think they're going to, with that, do better in the November elections than anyone thinks right now.

GIGOT: Than anyone thinks.

O'GRADY: Yes.

GIGOT: This Republican euphoria is premature at best.

O'GRADY: They better be careful.

(LAUGHTER)

MOORE: You know, Mary, I think you're wrong on that.

In 1994, the economy was doing pretty well and the Republicans still had a big, big election. I'm not sure just an improvement in the economy is going to lead to these kinds of results. The point that Dan made is so important, there's a revolt against big government that goes beyond the unemployment rate.

GIGOT: All right, well, we're going to have a lot of time to debate this one going ahead.

(LAUGHTER)

Still ahead, the drone wars. President Obama ramps up predator strikes against Al Qaeda, but opposition to the attacks is starting to emerge here to home.

(COMMERCIAL BREAK)

GIGOT: American counterterrorism officials said this week that they believe the Taliban leader in Pakistan, Hakimullah Mehsud, has died of injuries he sustained in a U.S. drone strike last month. Mehsud has been blamed for a string of deadly militant attacks in recent months and claimed responsibility for a bombing of a CIA base in Khost, Afghanistan, last year that killed seven CIA employees. Drone strikes in the region intensified after that attack with more than a dozen taking place since the beginning of the year.

But as the attacks ramp up, so does opposition to them. The American Civil Liberties Union filed a Freedom of Information Act request last month, questioning the legal basis of the predator drone program.

We're back with Dan Henninger; and also joining us, editorial board member, Matt Kaminski; and editorial page writer, Colin Levy.

The president has ramped up this predator campaign above what the Bush administration was doing. How well is it working?

MATTHEW KAMINSKI, EDITORIAL BOARD MEMBER: Well, it's quite dramatic actually. Last year, we had 50 attacks, which is more than the last three years in the Bush administration. As you mentioned this month, last month, there were more than a dozen attacks. I think it's been the one unheralded success of President Obama's War on Terror. In Pakistan we've not only killed this Mehsud — this — but a Mehsud...

GIGOT: From before.

KAMINSKI: That's right. The guy, who in Pakistan, held six months ago, also killed by drone attacks. And also used in Yemen where we killed six of the 15 leaders of Al Qaeda there. So it's been — it's amazing that we're even debating this today.

GIGOT: And rather than just killing Al Qaeda, now, with the Mehsuds, they're killing Pakistan Taliban, Dan, which means that the Pakistanis are happy with us because we're killing the people who have been targeting their cities and their government?

HENNINGER: Yes, that's right. I mean, one of the attacks, I think just on January 29th, they struck the Haqqani network in North Waziristan. The debate now is whether they should push the drone attack into Baluchistan, which is where...

GIGOT: The south.

HENNINGER: The south, which is where the really tough Taliban go down into Afghanistan.

GIGOT: Mullah Omar.

HENNINGER: Mullah Omar. So the real debate inside the administration is how far to push this, not whether to ramp it back.

GIGOT: And the Pakistanis are cooperating here privately. They denounce the attacks in public and privately they're given the go ahead.

KAMINSKI: Absolutely. I have been at a meeting in Islamabad where I was going to meet and the foreign minister said, we understand we're doing this, thank you for doing it.

(LAUGHTER)

And a minute later, came out in the press conference and said, I denounce Admiral Mullen instead of...

GIGOT: This is for domestic political consumption because the association with the American War on Terror is not that popular.

KAMINSKI: Look, I mean, I think Pakistan is one of the most anti-American countries in the world. It is not popular there. But I think the mood there is shifting and there is clear support both in the Pakistani military and a political class with this.

GIGOT: All right.

Colin, let me get to the opposition here, the American Civil Liberties Union is starting to act. What is it doing?

COLIN LEVY, EDITORIAL PAGE WRITER: Well, it filed the Freedom of Information request, and what it's really looking for here is to make the Obama administration justify what it's doing. So what it's challenging is the idea that this is sort of a new form of state-sanctioned lethal force that, as we've just been talking about, untethered from geography. In other words, it's not in the traditional theaters of war, not just in Iraq and Afghanistan, it's happening in countries like Pakistan and Yemen. So that's — that's what they're getting at here. And that's what they're concerned about in terms of compliance with the international law.

GIGOT: What do you think the next act would be? You get a Freedom of Information Act request and let's say there's some disclosure about the program, which is highly classified now. Is the ultimate goal here to stop the program by way of lawsuits?

LEVY: Well, I think that the goal here is to just generally create sort of trouble for the Obama administration and lawsuits can come in. I think what will happen is we'll see how well the Obama administration decides to actually comply with the Freedom of Information requests and what the ACLU can then do is, you know, challenge or make some trouble regarding, you know, how well the administration's complying with providing information about that.

GIGOT: Is there any doubt that international law would allow such — allows for such attacks, even on a third-party country?

LEVY: Well, you know, the thing here, too, you have to remember is that this use of force was authorized by an executive order and President Obama's, you know, use of executive power here is very interesting in vis-a-vis how the ACLU is responding because it's the use of executive power that goes beyond some of what they objected to from President Bush.

GIGOT: It's fascinating to me, I think, Dan. If President Bush were still doing this, would we see even more opposition to this, do you think? Because as a Democratic president who's doing it maybe some of the opposition from the left is more muted than it might otherwise be?

HENNINGER: I don't think there's any doubt that that's the case. I remember the SWIFT Program the Treasury used to track terrorist financing around the world?

GIGOT: Financing, yes, sure.

HENNINGER: That was on the front pages and blown out of the water. And I think, for sure, so we're very fortunate, in a sense, that Barack Obama is president, because it's very successful program is helping win that war.

GIGOT: And the intelligence director, Dennis Blair, said this week they feel it's legal even to target some American citizens who have turned and now are engaging in war with the United States overseas if they have to.

KAMINSKI: That's been the case for the last eight years even. We've had four people in The Washington Post reported this week that — who are American citizens who are on the list. Remember, probably there are only two dozen people on the list who are not sort of blowing up...

GIGOT: Right.

KAMINSKI: Sort of going — it's a very targeted list. But even in your international law, you are allowed to kill your enemy. And we don't want forget it.

(CROSSTALK)

GIGOT: Even under international law.

(LAUGHTER)

KAMINSKI: And declared that Al Qaeda declare war on us, and the Congress authorized force a week after 9/11, and has been acting on that authority.

GIGOT: What about the prudential argument against this, which is that it causes a lot of collateral damage, civilian death, and therefore turns the Pakistan public against the war effort, and therefore is counterproductive.

KAMINSKI: I think it's one of the most overstated arguments out there. I think the drone has been shown to be one of the most humane, if you can use that word, of war.

(CROSSTALK)

KAMINSKI: I mean, never before have we been able to discriminate between the enemies and civilians. The hell-fire missile is actually quite targeted. It makes a big boom in one very small place, and it's very unfortunate, as in Mehsud's case, both Mehsuds case, their family were killed along with them.

GIGOT: All right. Thank you, Matt.

When we come back, turning social theory on its head. If poverty is the root cause of crime, why are crime rates so low while unemployment is high? The answer next.

(COMMERCIAL BREAK)

GIGOT: Finally this week, a crime theory demolished. My next guest says that the economic recession has had at least one positive effect to, once and for all, disprove the claim that unemployment begets crime. As the economy began to shed jobs in 2008, criminologists predicted crime would shoot up. The opposite has happened. More than seven million lost jobs later, crime in the United States has plummeted to its lowest level since the 1960s.

Heather MacDonald is a senior fellow at Manhattan Institute and contributing editor for The City Journal.

Welcome.

HEATHER MACDONALD, SENIOR FELLOW, MANHATTAN INSTITUTE & CONTRIBUTORING EDITOR, THE CITY JOURNAL: Thank you, Paul. Glad to be here.

GIGOT: So some good news, crime rates have begun to fall. What kind of magnitudes are we talking about?

MACDONALD: Extraordinary magnitudes. In the first six months of 2009, homicides dropped 10 percent nationally.

GIGOT: Wow.

MACDONALD: Property crime, which is what you would really expect to go up if the root cause of crime theory is true, a response in inequality and property, property crime went down over 6 percent. And violent crimes went down almost 5 percent.

GIGOT: So we're back at levels not seen since the 1960s, and that's extraordinary.

MACDONALD: It is extraordinary. And I credit the spread, ultimately, of efficient policing and incarceration, but this is the exact opposite of what criminologists were hoping for, really gleefully hoping for, that the crime drop began in the '90s nationally would finally reverse itself and they could reclaim the dominance of the root cause of serious crime.

GIGOT: Tell us about that, the development of this root cause, this theory. That developed in the 1960's. And it's taken hold in the widespread elements within the academy.

MACDONALD: The academy and the media, of course. The idea was that crime really was a form of social criticism, that youth in inner cities came to understand that the American dream was a myth and a cruel dilution. And when they found that the society was blocking their advance, they would turn to crime as a form of social protests.

GIGOT: And that really became widespread not just — and did begin to influence public policy, how so?

MACDONALD: Extraordinarily, police chiefs bought the theory as well, that they couldn't affect crime. And the FBI, in its annual crime reports through the late 1980s, said that homicide is a societal problem that police could not respond to. The root causes theory of crime was the big motivator for the war on poverty. It gave the government an excuse to engage in massive redistribution of wealth and social programs because it could say, well, these have public safety values since the police cannot bring crime down. The way we have to bring crime down is to take money from the rich and give it to the poor, otherwise they will cause social havoc in the streets.

GIGOT: So this means that — whatever you think of welfare programs, whatever you think of job creation programs or food stamps, whatever their utility as redistribution and income maintenance programs, what you're saying is that those have almost zero utility as crime fighting programs?

MACDONALD: We should have known this after the 1960s, Paul.

GIGOT: That makes sense.

MACDONALD: Because the 60s saw a 43 percent increase in homicides nationally. At the time, when the economy was growing, and what was really growing were government jobs. You had massive government jobs programs in the inner city to try and stop crime, but, in fact, it had no effect whatsoever.

GIGOT: So this dramatic change, what does this tell you about policing policy going forward? What should we focus on?

MACDONALD: It's a very optimistic story, Paul. It shows that the government can create safety for its citizens by enforcing the rule of law. But it's also a cautionary tale. If crimes starts going up, it will be because cities rashly cut their police force and start emptying prisons. We've had a five-fold incarceration increase since this...

GIGOT: You think that incarceration — there's no question in your mind that increasing incarceration has made a big difference?

MACDONALD: It incapacitates people and gets people off the streets.

GIGOT: Off the streets.

MACDONALD: We keep hearing a myth that the only people — that we're sending more and more innocuous people to prison. That's not the case. The profile of the people going to prison today is not radically different than three decades ago. It's still a lifetime achievement award for crime.

GIGOT: So who are the heroes in this story, if you will? By that, I mean intellectual, but also political. Who ended up — who has changed the thinking here that has caused police forces to go back to actual crime fighting and has— and have helped to blow up this social theory of the last 40 years?

MACDONALD: Without being too parochial, I would claim New York City as the seed-bed of this revolution. In the 1990s, William Bratton was police commissioner under Rudolph Giuliani.

GIGOT: Went on to be police chief in Los Angeles.

MACDONALD: In Los Angeles, which has, like L.A., has seen double- digit crime drops since the recession. Both chiefs Bratton in L.A. and New York City's commissioner, at the start of the recession, were the only chiefs in the country that said, we are going to keep lowering crime because we know how to do it. They've been proven absolutely right. Homicides in New York are down 19 percent, in L.A., 17 percent.

GIGOT: Wow.

MACDONALD: We have started, in New York, that has spread across the country, a policing revolution that uses crime data obsessively and that holds local precinct commanders accountability. It's an accountability revolution as well as an information revolution.

GIGOT: All right, Heather MacDonald, thanks so much. Some good news for a change. Thank you.

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

(COMMERCIAL BREAK)

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

Matt, first to you.

KAMINSKI: I want to give a missed opportunity to Barack Obama in Europe where, as you'll recall, in '08, he won in a landslide. But this week...

(LAUGHTER)

GIGOT: Even though they didn't vote. They could have.

KAMINSKI: He would have won by 50 percent.

(LAUGHTER)

But this week, President Obama told them he would not be attending the annual E.U.-U.S. summit through a leak in the Wall Street Journal. This makes for a pattern of snubs to the Europeans, none more glaring than towards Frances Nicolas Sarkozy. Remember, Sarkozy is probably the first pro-American president in history. He brought back France into NATO last year. But he's not been able to get an appointment at the White House. He feels jilted by the president that he did so much to sort of put in office, he thinks. And I think the question is, will the passing of Obamamania in Europe be the next shoe to drop.

GIGOT: All right.

Colin?

LEVY: Paul, this week the medical journal from Britain, called "The Lancet," finally retracted a 12-year-old study that suggested there was a link between the MMR vaccine, measles, mumps, rubella vaccine, and autism. This was a study that created sort of an international panic and had parents refusing to vaccinate their children. And it just goes to show how dangerous junk science can be when it receives the imprimatur of a prestigious medical journal.

GIGOT: All right, thank you.

Dan?

HENNINGER: Super Bowl Sunday, Paul, and I simply want to salute the Super Bowl refuse-nicks, those people who are not going to sit down with 100 million fellow Americans. They're engaging in an all-American act of dissent. Instead, they'll be out there at empty swimming pools, empty golf courses, tennis courts and normally hard-to-get-into restaurants. I think they're totally wrong to do this, but I salute them and honor their act of dissent against Super Bowl Sunday.

GIGOT: All right.

Matt, why — I think that President Obama is right not to attend this gab fest in Europe. And what — it's not a very important event. You want to meet with the Belgium prime minister? How important is that?

(LAUGHTER)

KAMINSKI: Paul, I've been to more than one of these things and I can appreciate that he may not want to attend, but the better point holds I think. We have allies in Europe that are worth cultivating.

GIGOT: All right. All right.

That's 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 all right here next week.

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