This is a rush transcript from "The Journal Editorial Report," April 24, 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," rage against the government. A new poll shows growing frustration with Washington, and not just among Tea Partiers. What it means for the midterm elections.

Plus, battles are brewing in states across the country between public employee unions and taxpayers. And this week, New Jersey was ground zero as voters said no to rising pay and bloated pensions.

Plus, President Obama and the Democrats are running against Wall Street. But will their financial reform plans really rein in the big banks?

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

First up this week, a new poll that could spell big trouble for incumbents in Washington. A study by the nonpartisan Pew Research Center finds by almost that by almost every measure, Americans are growing more disenchanted with the federal government and its elected officials. Just 22 percent of those polled said they can trust the federal government almost always or most of the time, among the lowest measures Pew has found in half a century. Only a quarter of Americans have a favorable view of Congress. And just 27 percent want to see most members re-elected, about the same level as in the fall of 1994, just prior to the mid-term elections that saw Democrats lose control of both the House and the Senate for the first time since 1954.

Joining the panel this week, Wall Street Journal columnist and deputy editor, Dan Henninger; editorial board member, Jason Riley; and Washington columnist, Kim Strassel.

Dan, if you look at the chart you see that the trust in government was high before the 1960s, had a bounce up in the 1980s under Reagan, and again after 9/11. But now the numbers are stunning, 20 percent. How do you explain it?

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: Well, I think there are two things going on, Paul. The numbers fall off the cliff after 2000 and that's the presidency of George W. Bush.

GIGOT: But there was a bounce after 9/11.

HENNINGER: There was a bounce because the country came together. But the line goes straight down. It's two things. First of all, it's, I think, the extraordinary bitter partisanship that has developed between the two parties. The two parties have pulled apart. The Democrats are kind of the party of the public sector, that Republicans are over here, more or less, and have a hard time. This really annoys people.

But below the surface, there has been an economic issue, which I think relates to the states as well, like California and New York. And when you got to September, 2008, and you had this big financial implosion on top of the recession, a tremendous amount of economic anxiety got built into the system. And I think people got worried about the way the government was handling these tremendous economic problems. They already had a lot of skepticism, but they're feeling now that they just do not have the confidence to handle the problem —

GIGOT: And you're saying this is fundamentally about economic anxiety?

Jason, or is this about the size of government?

RILEY: Well, I think the polls showed that the interpretation of the numbers, they said that the discontent with the government generally does track with the economy. In the '70s, there was a lot of discontent. In the early '90s, there was a lot of discontent. There was less so in the '80s, however, and less low in the late '90s. So there is some correlation —

GIGOT: But that suggests this isn't a libertarian sentiment. It's about the fact that times are tough. And when the economy gets back, that people will say the government is doing well.

RILEY: Other numbers suggest there is a libertarian string here. For instance, 30 percent say that government is a matter threat to their personal freedom. That's up from 18 percent in 2003. That would suggest a libertarian strain here.

GIGOT: So how much, Kim, is this a reaction against the Obama agenda, the Democratic agenda that will go away if somehow there's a check put on those — those expansion of government plans?

KIM STRASSEL, WASHINGTON COLUMNIST: You know, the Democrats have made a huge mistake here, because the more we look at polls like this — and then we have this interesting survey that was done about the tea party movement last week. What you're actually getting is a vision of a group of people out there, and a growing number of them, who actually were very angry about things even before the financial crisis, OK. They felt that Congress was nonresponsive. They looked at the Republicans, there was these corruptions, these scandals. They voted them out.

And now, instead, they still have an ethics issue with Charlie Rangel. They were worried about earmarks and spending. They got rid of the Republicans and instead they get the Barack Obama team and the stimulus spending and all its spending and money. So there is this feeling that government is utterly nonresponsive to what they want. It doesn't matter who they elect.

The Democrats had an opportunity, especially with this financial crisis, to come in and say, you have lost your faith in institutions, and we are going to put forth a moderate agenda and show you things can work again. They didn't. They put forward a very radical agenda and people are very angry that, no matter who they vote for, they're not getting any change in Washington.

GIGOT: One of the items in the poll, Dan, 74 percent of the public says they don't think that the government does a competent job of delivering services that they provide. That's three out of four.

HENNINGER: Yes, it's a loss of faith. And I think that people are losing confidence in the government. But the fact that they fell so far in the last year is a fascinating phenomenon. A year ago, this poll shows about 53 percent of the people thought the government ought to do something about the economy. You know what that number is now, 40 percent.

GIGOT: Forty.

HENNINGER: It dropped 14 points. What else did the Democrats do in that year? They passed stimulus, two budgets, and the health care bill. The financial commitments add up to $9 trillion. And I think the American people have an internal gyroscope about things getting too big.

GIGOT: Jason, here's a scene of contradiction. Fifty percent of the people in the poll say they're paying about the right amount of taxes. Only 43 percent say they're paying more than their fair share. How do you explain this if you've got the rage against government competence?

RILEY: Maybe the Bush tax cuts of '03 helped a lot more people than the left wants to admit.

(LAUGHTER)

But what I also found interesting in the poll, it's not just the federal government. People are also increasingly frustrated at the state and local government. And as states battle with these budget deficits now, perhaps raising taxes, cutting services, that trend will probably continue.

GIGOT: Kim, let's take a look at a chart where you see the relative favorability ratings of Republicans and Democrats. Democrats really had a big increase, obviously, in 2006-2008, early part of 2009 under President Obama, but now the numbers are back to about the same, 38, 37 percent favorability for both parties. What do you think this means for the midterms?

STRASSEL: They've got a huge problem going on.

GIGOT: You mean Democrats? You mean Democrats?

STRASSEL: The Democrats have a huge problem, the majority. Dig down into the numbers a little bit more. There isn't just a lack of faith in the government. There's an active hostility out there to the government and its programs and the agenda that's been passed.

Moreover, dig a little more closely, and you've got the independent views in here — are extraordinary. There's no squishy middle. They've swung enormously in a more conservative direction. They are very angry as well, very determined to vote. And if you look at the enthusiasm gap, what they talk about, this poll also looked at that too.

Republicans, conservative-leaning Independents, which is the majority right now, very determined to go out this fall and change things, very anti-incumbent. And none of that is good news for Democrats.

GIGOT: Alright, Kim, thank you very much.

When you come back, there's a showdown looming in states across the country as taxpayers take on public employee unions over pay and pensions. And this week, New Jersey was ground zero. Find out why, next.

(COMMERCIAL BREAK)

GIGOT: There's a showdown looming across the country between taxpayers and public employee unions over pay and pensions. Ground zero this week was New Jersey where voters took an unprecedented stand on spending, rejecting well over half of the school budgets that were up for a vote.

In an effort to plug an $11 billion deficit, Republican Governor Chris Christy last month unveiled a state budget that slashed $820 million in education aid. And he urged voters to defeat their district's school budget if the local teacher's union did not agree to a one-year pay freeze. Taxpayers across the state did just that on Tuesday, rejecting more than 58 percent of school spending plans. The first time since 1976 that a majority of budgets were defeated.

Wall Street Journal assistant editorial page editor and garden state resident, James Freeman, joining us with more.

JAMES FREEMAN, ASSISTANT EDITORIAL PAGE EDITOR: A proud resident.

(LAUGHTER)

GIGOT: Jason, the conventional wisdom here is that once the benefits are in place, you can't stop them and you can't take on the teacher's unions, you can't take on city hall. Why is Chris Christy succeeding, at least so far?

RILEY: So far, he's been able to articulate what's at stake here. And he also has a population in New Jersey that's been getting soaked for decades. They pay the highest property taxes in the country and they're saying enough is enough.

GIGOT: How is he articulating it, the stakes?

RILEY: He's explained to people that the state is simply out of money.

GIGOT: It's broke.

RILEY: The state is broke. He's been able — and what he's been able to do is take away an argument that the unions and the public sector unions, and articulate particularly, teachers unions have been making for decades, which is opposing any increase in spending for us is anti- education or anti-kids. He's gotten around that. He said no.

GIGOT: How?

RILEY: Well, he's pointed out, for instance, that their staffs have grown, far outpacing student enrollment in the states. And I believe, in the past decade, that their staffs have grown by 13 percent and enrollment grown by three percent. He's explained to people that these two things can't be reconciled and that there is room, there's fact there to cut.

GIGOT: The default has long been, by the unions saying, all you've got to do is raise taxes the rich, you, Freeman.

(LAUGHTER)

You pay more. And, you know, it won't have any impact and life will go on. Why is that suddenly an issue?

FREEMAN: Well, the message is not selling anymore because, not only is it the nation's highest tax burden, but New Jersey saw a flight of people with money. Very clear once the top income tax rate went up in 2004, a Boston College study shows people left. They go to Florida. They go to Pennsylvania. They leave with their money.

(LAUGHTER)

We can't keep them walled in inside New Jersey.

But the good news, Paul, the people are dumping on New Jersey. Those days are over, because America's governor is now showing the nation —

(LAUGHTER)

— leading the nation toward governance that balances our responsibilities and revenue and spending.

GIGOT: So is the key here that Christy has engaged the middle class? I mean, think about it. In New Jersey, property taxes are paid fundamentally by home owners by the middle class.

FREEMAN: Sure.

GIGOT: It's not like the income tax, which you can at least take out some — reduce the burdens on some middle class taxpayers, relative to the rich. But property taxes hit right at that sweet spot. So has he engaged that voter base on his behalf?

FREEMAN: He has engaged them. But I think it relates to what Jason is saying, is that he's the first governor in a long time to say clearly, here is what I think the problem is. That problem is government employees, and that includes teachers unions that have gotten promises from this state and from taxpayers that can't be fulfilled.

GIGOT: Alright, Kim, what are the implications here nationally? Are these lessons translatable to Sacramento or Albany, and other failed capitals?

STRASSEL: Their knees ought to be shaking right now. Behind this, of what we've just been describing, is the idea, especially among kind of Democratic led administrations in many of the places, that these wealthier suburbs in particular are always going to be with them on everything. They tend to agree with — these suburbanites tend to agree with them on a lot of cultural issues and environmental issues. And obviously they're going to go along with all the public union spending, et cetera, and so on.

What you're seeing in New Jersey and what you saw in Massachusetts with the election of Scott Brown is a lot of the people are saying, no, you do not have a lock on us, do not take us for granted. You are pushing us to a point where we cannot pay anymore. And we're not going to take it anymore. It's a big change in politics.

HENNINGER: You know, Paul, I would say one word — Greece. Why Greece?

GIGOT: New Jersey is our Greece.

HENNINGER: Yes, and people think, in this country, that can't happen here. You know what?

GIGOT: That's unfair to Greece.

(LAUGHTER)

HENNINGER: It can happen here. Greece is about to explode financially. And the problem is, you have bonds. If you default on your debt, the markets will simply withdraw. New Jersey, New York, California are close to that point. They do not have enough money to pay their debts. And if they reach that point, that's kind of the message the governor is telling the people of New Jersey. And they seem to be responding, unlike the Greeks.

GIGOT: The unions were able to roll Arnold Schwarzenegger in the middle part of this have decade when he tried to put similar reforms on the ballot.

FREEMAN: Right. I think the school votes this week, most of the towns voting essentially with Chris Christy, to say that education spending has to be reined in. We're not going for higher taxes.

And just — I want to say that the big difference between Greece and New Jersey —

(LAUGHTER)

— is, in New Jersey, we have a governor who is saying no bailout, we need to fix our problem and we are going to cut the spending. You don't see that in Greece.

GIGOT: Or in Europe.

Alright, when we come back, tough talk from the president and his party as they vow to crack down on Wall Street. But does their financial reform bill really take on the big banks?

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

PRESIDENT BARACK OBAMA: A vote for reform is a vote to put a stop to taxpayer-funded bailouts. That's the truth. End of story.

(END VIDEOTAPE)

GIGOT: President Obama took his campaign for financial reform to lower Manhattan this week, hoping to capitalize on what Democrats see as a winning issue heading into the midterm elections. But despite all of tough talk about reining in Wall Street, does their bill really take on the big banks?

We're back with Dan Henninger and James Freeman and Wall Street Journal columnist Mary O'Grady also joins us.

So, James, are the banks, the big banks, really as opposed to this bill as the president likes to describe?

FREEMAN: There are certainly things they don't like about it. It's going to limit profits on derivative trading. But if you're a big bank —

GIGOT: You mean those esoteric financial instruments that have implicated in the Goldman's SEC case?

FREEMAN: That's right. That's right. That crumbling SEC case.

(LAUGHTER)

But, no, there's a lot to like here, if you're a big bank. This consumer agency is going to put a lot of burdens on the smaller competitors that'll be — you'll have the economies of scale, so you'll have the advantage there. If they make you put this derivatives trading in a subsidiary, all the big banks already have those. Bank of America has Merrill Lynch. JPMorgan has a securities arm. So that's kind of a nice advantage over small banks too. And then most of all, what you get is the federal back stop.

GIGOT: This is the too-big-to-fail, the systemic — if you're system risk, you have the implication that they'll rescue you?

FREEMAN: Right. And you not only have the implication, you also have these FDIC debt guarantees that they can apply to banks and bank holding companies, like Goldman Sachs and Morgan Stanley, stand behind your debt. You also have the ability to borrow from the Federal Reserve in an emergency. So there's a lot to like here if you're a big bank.

GIGOT: And if you're a big bank and people think you're going to be rescued, then your cost of creditors, what you pay creditors to borrow is lower. That's what we saw with Fannie Mae and Freddie Mac. They had a real advantage over their competitors. Big banks will have a real advantage over small banks.

MARY ANASTASIA O'GRADY, COLUMNIST: Right. The banks right now are supposed to being told, this is the last time, we warn you.

(LAUGHTER)

But, you know, because of the things that James just described, really, the next time the regulators and the politicians are looking at a problem and the banks are saying, you know what, we're so big, if you don't give us money, we're going to blow everybody to kingdom come. The facilities are still there to bail them out.

GIGOT: So it sounds like this is something like a kabuki dance, Dan, where everybody wants to posture as if they're really against Wall Street, but in the end, Wall Street can do pretty well because it has the means, the ability to hire the big lobbyists, to be able to go to the Treasury, go to the Fed, and say, you don't really want to regulate this too tough.

HENNINGER: Yes. Well, I'd say where's Ron Paul when we need him. What do I mean by that?

GIGOT: The Texas Libertarian, Ron Paul, OK.

(LAUGHTER)

HENNINGER: Listen to what you're saying. OK, Obama was down there saying, we want to align the interest of Wall Street with Main Street. Please. What does Main Street have to do with banking anymore? There are no more banks on Main Street out in the country. It's all big, regional, global financial institutions.

And if you go in this direction and the Republicans sign on, because they don't want the banking issue to get in their way to a big win in November, I think it's just going to have a coercive effect on people's attitudes toward Washington. It's all about the big boys, the lobbyists, the parties doing deals for themselves.

GIGOT: So what do you do to stop these big banks from holding us up again if they get into trouble the next time with Treasury and the Feds saying, we've got to help, we've got to help, but have no choice? What do you do? How do you stop that now? What would you do to put that into law to stop it?

O'GRADY: I think what they should do is try to enhance the bankruptcy code so that it's very clear that not just — right now, we know that equity shareholders, equity holders lose. For example, they lost in Bear-Stearns most.

GIGOT: Though not in Citibank.

O'GRADY: Yes, not at Citibank. It's the idea that it's not so hard to let the equity holders go, if you have the political will. It's a little more difficult to figure out the creditors. And I think that —

GIGOT: Because of the potentially systemic implications across the whole system? Yes.

O'GRADY: Yes, it could ripple through the system. And that's what they threatened basically in the fall of 2008, that if they didn't get bailed out, the whole system would come down. So what you need to do is have a bankruptcy code whereby you could deal with that particular problem.

But I think there's another problem here, Paul, which is that Obama's speech the other day did not talk at all about the actual source of the problem, which was Washington, Fannie, Freddie, anointed rating agencies. That was the source of the problem. That has not been dealt with.

GIGOT: James, I want to ask you quickly about the politics here. Democrats think they have Republicans on the run. They're going to divide here and they'll be able to break a potential filibuster and pass this. Is that right?

FREEMAN: Well, I guess you'd have to bet that way. But I think there's a chance there's a thing chance that this thing could still go off the rails. Because at the heart of it, it allows the bailouts that we saw through 2008, and it really codifies that bailout system. Americans hate this.

GIGOT: But Republicans have to be able to stand up and say that and keep saying it right through November if they really believe that.

(CROSSTALK)

GIGOT: And they think they're going to clean up in November right now. And this is the one issue, if they can be portrayed, rightly or wrongly, as being with the banks, this is the only issue that can stand in their way.

FREEMAN: I think opposing bailouts and favoring bankruptcy is a good political issue.

GIGOT: Alright, James, thank you.

When we come back, "Hits and Misses" of the week.

(COMMERCIAL BREAK)

GIGOT: Time now for hits and misses of the week.

Dan, first to you.

HENNINGER: Recycling, a miss to recycling, which looks like it's going to the way of the Doe-Doe bird. PepsiCo, the Pepsi-Cola people, have found out that so few people are recycling bottles and cans — for plastic bottles, it's down 24 percent — that they're going to put containers at rock concerts and in grocery stores and in cities to encourage people to recycle. It looks as though the only group committed to recycling right now are those homeless people who collect the mountains of bottles to get the nickel deposits. Arguably, most people think it's a waste of time. Recycling was a religion born about 30 years ago. And now, I guess most people think it's something you do in the gym.

(LAUGHTER)

GIGOT: Alright.

Jason?

RILEY: With all the Earth Day celebrations, a lot of people might not know that this week marked World Malaria Day. And the two events are not unrelated in so far as Earth Day politics is largely responsible for the malaria epidemic we still have today. Malaria kills about a million people every year, mostly in Africa.

GIGOT: Wow.

RILEY: Even though we have a safe and effective way to prevent it in the form of the insecticide DDT. It's what we used in the U.S. and Europe to get rid of it. And we could be using it in more places if not for the anti-insecticide ideology of the environmentalists.

GIGOT: Alright.

Kim Strassel?

STRASSEL: A miss to the birther movement, which is still convinced that President Obama is not a U.S. citizen. They even managed to convince the Arizona House this week to advance legislation that would require the president to show his birth certificate if he wants to be on the ballot.

Stop the madness, OK. This is not — it's sour grapes. It doesn't sit well with the average America. And it's counterproductive. I would hope, with everything out there, health care, financial regulations, taxes, the Arizona House has something more productive to do.

GIGOT: Alright.

That's it for this edition of the "Journal Editorial Report." Thanks to my panel and to all of you.

I'm Paul Gigot. We hope to see you right here next week.

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