This is a rush transcript from "The Journal Editorial Report," June 12, 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," record deficits, high unemployment, a rollercoaster stock market, economist Art Laffer says we ain't seen nothing yet. Will 2011 bring with it a second recession?

Plus, a bailout for big labor? A scheme to save some poorly managed union pension plans may put you on the hook for tens of billions.

All that, and Dorothy Rabinowitz on America's growing disenchantment with President Obama and why we shouldn't be surprised.

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

Record deficits, near double digit-unemployment and a rollercoaster ride on Wall Street. If you think things have been bad lately, my guests this week say they could get worse next year.

Economist Art Laffer says the threat of a double-dip recession is real. He joins me now from Nashville.

Art Laffer, good to have you back on the program.

ART LAFFER, ECONOMIST: Thank you, Paul. It's a pleasure.

GIGOT: You're typically an optimist.

LAFFER: Yes, I am.

GIGOT: So why the doom and gloom now?

LAFFER: Well, President Obama has, you know, when he took office, did not repeal Bush's tax cuts, but let them expire, which means on January 1, 2011, Paul, you're going to get very major tax rate increases in personal income, capital gains, dividends, estate taxes, personal income, off-shore investing, alternative minimum tax, Cadillac plans. I could go on and on. And people know tax rates are going up next year, what they will do is they will shift income into this year obviously to take advantage of lower tax rates now. And if they do that, that will make this year look a lot better than it otherwise should and make next year look a lot worse.

GIGOT: Right.

LAFFER: And you know, we did the same mistake, only in reverse in 1981. We deferred tax cuts and we caused, I think, the recession of '81- '82 and then we had the huge boom in '83-'84 when the tax cuts took effect. And I think Obama is going to get the mirror image of that. And unfortunately, I think we're going to have a setback in 2011.

GIGOT: But if you look at the underlying economy though, the fundamentals, you've got a healthier housing market than a year ago.

LAFFER: Sure. Yes.

GIGOT: You've got a much healthier financial system that you had a year ago. You've got some private-sector job growth finally.

LAFFER: Sure do.

GIGOT: And corporate profits have been really quite good.

LAFFER: Great.

GIGOT: That means we have some forward momentum. And you're saying that just the tax increase alone has the potential to derail all of that momentum?

LAFFER: I think the forward momentum, Paul, if I may, it is, in part, due to the tax increase on January 1, 2011. It's illusory. And people are moving income into 2010 and spending it in 2010 because they're afraid of 2011 and beyond, and they should be. This administration and Congress, and no slur intended, are doing an awful job on the economy. And you can't have a prosperous economy when the government is way overspending, raising tax rates, printing too much money, over regulating and restricting free trade. It just can't be done.

GIGOT: But here's what the Democrats would say, Art. They would say, look, the tax rates are going up, OK, but they're only going back up to what they were in the 1990's, and the 1990's actually were a very, very prosperous time, after 1994, when you had the change in Congress.

LAFFER: True.

GIGOT: Why are these — this tax increase this time going to be so much more damaging?

LAFFER: In the 1990's, we had the largest cut in government spending as a share of GDP in the history of the U.S. In the 1990's, we were doing free trade, we passed NAFTA, we went through there. We were for lowering interest rates and controlling money far better. And we weren't regulating nearly as much. We had welfare reform and all of those wonderful things. We had the biggest tax cut in our nation's history. Any comparison between today and the 1990's, it's totally inappropriate. Bill Clinton, as bad a person as he was, was a good president. And this one is a good person, but a bad president. And I'd rather have a good president than a bad one.

GIGOT: Well, a couple of days after you wrote your piece, Bob Doll, the legendary investor for Blackrock, wrote on our pages —

LAFFER: Right. Yes, he did.

GIGOT: He said look, the United States is actually going to do very well. He made the bullish case for equities. And one of the arguments he made was, look around the world, we're in much better shape in the United States than Europe, for example. We're in much better shape than Japan. And even the merging economies, China, India, who are doing well, they aren't a big enough part of the global economy to really become a place where a lot of capital wants to go. So the U.S. stocks are going to do quite well. What's wrong with that argument?

LAFFER: Well, I hope he's right. I mean, to be honest with you, I do hope he's right. But I think he's using hope as a strategy and it's not a good one.

(LAUGHTER)

And I really do do that. But the current numbers are fine. That's what you'd expect when people are accelerating income in the present. Just before they eliminated the Cash for Clunkers program, auto sales looked great. And the same thing with the housing starts, when they still had the $8,000 tax credit. I hope he's right and I hope I'm missing something serious. And I frequently do, as you know, Paul. But I don't try to and this —

(CROSSTALK)

LAFFER: Sorry.

GIGOT: I want to ask you about a piece you wrote a year ago on our pages, almost a year ago to the day, about inflation. You were worried that we'd see a real rebound in inflation.

LAFFER: Yes.

GIGOT: Because of the ease that — Federal Reserve monetary reserve policy.

LAFFER: Yes.

GIGOT: And we haven't seen any so far. Is that around the corner, too, or was that one of those cases where you were wrong?

LAFFER: Well, I may have been wrong. I hope, I —

GIGOT: Well, we all make —

LAFFER: Yes, we do, at least I do. But I don't think so. I think the inflation prospects for the U.S. over the next five or six, seven years, are quite serious. You cannot have a bumper crop in apples without the value or the price of each apple falling. The Fed has had the largest increase in the monetary base in the history of the U.S., from colonial times to the present, times ten. You're going to get a decline in the value of the U.S. dollar. And unfortunately — fortunately, it's not happened yet. But you know, I just don't think anyone should take the inflation threat lightly. And I look at it in the next two, three, four, five years. It's not over the weekend.

GIGOT: So is the most important thing we could do now, as a policy point of view, briefly, we don't have a lot of time.

LAFFER: Yes.

GIGOT: But basically keep the current tax rates, don't let that tax increase hit?

LAFFER: Yes. In the short run, don't let them go up. And let the Fed sell bonds to bring bank reserves back down to required reserve levels, so we have restraint on bank lending and bank issuances of liability. Yes, that's what we should do.

GIGOT: All right, Art Laffer, I wish they were going to take your advice. I don't think they're going to so —

LAFFER: I don't think they are either, Paul.

(LAUGHTER)

GIGOT: All right, still ahead, if you thought you'd seen the last of the taxpayer bailout, think again. Mismanaged for years, some union-run retirement plans are underwater. And Democratic Senator Bob Casey hatched a scheme to have you pick up the tab.

(COMMERCIAL BREAK)

GIGOT: Well, there's another bailout in the pipeline, and this time, not for the banks, but big labor. If Senator Bob Casey has his way, you could soon be on the hook for poorly managed union pension plans. The Pennsylvania Democrat is busy gathering support for his Create Jobs and Save Benefits Act, a bill that would transfer tens of billions of dollars worth of retiree liabilities to the Pension Benefit Guarantee Corporation backed by, you guessed it, U.S. taxpayers. The total tab could reach tens of billions of dollars.

Wall Street Journal columnist and deputy editor, Dan Henninger, joins us; and editorial board member, Mary Anastasia O'Grady; and Washington columnist, Kim Strassel.

Kim, very simply, for our viewers, what kind of union pensions plans are you talking about? They're called multi-employer plans. How do they work?

KIM STRASSEL, WASHINGTON COLUMNIST: Multi-employer plans, the way they work is, you have companies across an entire industry who pay into a single pension plan. These plans are usually run by unions. They've tended to be very poorly managed. But they're plans that unions love because since, if you're a worker, if you move from one company in the industry to another, you get to keep your retirement benefits.

GIGOT: Give some examples of companies or industries that would have these plans.

STRASSEL: Well, they're very popular and the Teamsters has one. The Teamsters has been a big driver behind this push in Congress to actually have a rescue, because the problem with these plans is that they sort of work like Ponzi schemes. You set them up and all of these promises are made to them. But the next time the unions go to the companies with negotiations, there's a huge focus on current wages and current benefits and scraps go to the pension plans. Meanwhile, if a company goes under or fails, he exits the plan and the rest of the employers left are left to float the entire cost for the entire pension plan.

GIGOT: What's the magnitude of the problem, Mary?

MARY ANASTASIA O'GRADY, EDITORIAL BOARD MEMBER: Bob Casey is saying it's about $8 billion.

GIGOT: That's what it would cost?

O'GRADY: Yes, but the Pension Benefit Guarantee Corporation, which would take these liabilities, is in trouble to the tune of $165 billion.

GIGOT: Moody's estimates that's the degree to which there's underfunded liabilities in these plans.

O'GRADY: Yes, and a big part of the problem which Kim alluded to is what economists call moral hazard, which is that, you know, the pensions, the pension manager, the union pension manager, has an incentive, knowing in the back of their minds that they can dump these liabilities on the Pension Benefit Guarantee Corporation, on the taxpayer.

GIGOT: On the government, yes.

O'GRADY: To front load what they get in negotiations toward current workers, and so.

GIGOT: Ah.

O'GRADY: So they're cooking up the problem there that they know, in the end, they can sort of off-load to the taxpayers.

GIGOT: So don't fund the retirees. Put those liabilities, which those promises you made previously, put those on the taxpayers and then you're able to get more for current workers, who, by the way —

O'GRADY: Yes, for votes.

GIGOT: — vote in union elections.

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: All right, well, let's talk about the politics. These union retirees, which as Kim was suggesting, are ultimately going to get shafted. You know, how much the PBGC pays out annually when they bailout one of these funds, to an individual, $12,800, $1000 a month. Now, Casey is saying he's going to raise it to $21,000 if he gets away with it. This is a terrible deal.

GIGOT: It's a terrible deal for the current pensioners —

HENNINGER: Awful.

GIGOT: — expecting to get a lot more money than that if these pensions aren't thrown on the lap of the government.

HENNINGER: Right.

GIGOT: So why would the unions be supportive of this?

HENNINGER: Because the unions like to control — the power to control these pensions. It's, you know, it allows the union leaders to do the investment, to have control over the money, rather than what they should be doing, creating 401(k) systems that would allow the union members themselves to control their own money and have some, you know, power over their own investments.

GIGOT: This isn't only about union support, is it? I mean, businesses as well, who have these plans, kind of like this bailout, too, some of them.

O'GRADY: If we were living in the same world, companies would be encouraged or maybe enforced to go to what they call defined contribution plans.

GIGOT: Like a 401(k)?

O'GRADY: Exactly.

GIGOT: Where you control the money.

O'GRADY: When you put the money in and you control, and then what you get in the end is how you managed your money over time. Instead, they want to stick with these defined benefit plans, which sound good because they take all of the —

GIGOT: Which guarantee basically that you're going to get a set payout per month for the rest of your — retirement years.

O'GRADY: Yes.

(LAUGHTER)

GIGOT: Assuming they stay solvent, but that's the promise as opposed to defined contribution, where you put the money in and you invest it and you get whatever the buildup is.

O'GRADY: And most responsible companies have gone to the defined contribution.

GIGOT: OK.

STRASSEL: We should point out, Paul, too —

GIGOT: Yes?
STRASSEL: — that some companies, responsible companies, and a good example is UPS, have actually taken a big hit to buy themselves out of a multi-employer plan and to restart over, because they understand that these things are a big problem and they're not getting better.

GIGOT: And they spent several billions of dollars to buy their way out. So this bailout would hurt them because it means that the other companies would get, would get off the hook.

STRASSEL: That's right.

O'GRADY: Yes, and there's also the problem that a lot of these companies that turn to Pension Benefit Guarantee Corp are dumping pensions in there that are underfunded. So the company, the guarantor is already starting way behind, and being asked to deliver 100 percent. They just can't do it.

GIGOT: Kim, briefly, what are the political prospects for this? We're under fiscal pressure, obviously. Is the Congress really going to pass something like this?

STRASSEL: We are under fiscal pressure. and one of the problems with this, though, is that the Democrats in Congress, clearly there, they want to help their union allies, but the Republicans are having the big business community in their districts come to them and say, hey, help us out here, get us off the hook from these liabilities. And so, you know, there are — there's a Senate version of this and a House version. The House version was co-sponsored by both a Democrat and a Republican. So it's a concern that there is some momentum on both sides for this.

GIGOT: All right, watch out taxpayer.

When we come back, the growing disenchantment with President Obama has critics from the right and the left ramp up their criticism. Dorothy Rabinowitz says we shouldn't be surprised, and she'll tell us why, next.

(COMMERCIAL BREAK)

GIGOT: Well, the criticism of President Obama has been growing with commentators from across the political spectrum piling on, most recently, over his response to the Gulf oil spill.

Wall Street Journal editorial board member, Dorothy Rabinowitz, says we shouldn't be surprised by the deepening disenchantment and she explained why in a provocative op-ed in this week's paper, titled "The Alien in the White House." And Dorothy joins me now to talk about that.

First of all, I should say, by aliens in the White House, you're not referring emphatically to the claims by some that the president was not born in the United States? I don't credit those and I know, neither do you.

DOROTHY RABINOWITZ, EDITORIAL BOARD MEMBER: Yes, we call them the lunatic fringe, yes.

GIGOT: But I want to read your quote from your piece and ask you to elaborate. You wrote, "A great part of America now understands that this president's sense of self identification lies elsewhere and is, in profound ways, unlike theirs." How so?

RABINOWITZ: It has to do with the sense that Americans had, from the moments that the president took office and went on the long grand apology tour, bowing before the rest of the countries to apologize for the United States. Now, most Americans understand that there are things we do not say about the nation and the American leader. But beyond that, all of these moments told us that this president is detached from a knowledge of American history that Americans carry with them. And that sense has to do with, we are the most benign power ever to have exerted the greatest military power, not only saved the nations at World War II after the war, with the Marshal Plan, everything about this nation.

GIGOT: You mentioned a particular anecdote, which is the return by President Obama to then-Prime Minister Gordon Brown of the Winston Churchill bus, which had been a gift after 9/11 by former Prime Minister Tony Blair. He returned it and sent it back.

RABINOWITZ: Yes.

GIGOT: And you thought that was a telling illustration of this mindset that you're talking about. Explain this why.

RABINOWITZ: I and ten millions of other Americans, though it was covered in mystery and all that —

GIGOT: You mean the reason why he sent it back?

RABINOWITZ: Why he sent it back. It had to do with the fact that, in this great house of many — mansion of many houses —

(LAUGHTER)

GIGOT: Many rooms, yes.

RABINOWITZ: Rooms. The idea that the first act of this international kind was to send back this bus of Winston Churchill, why was that done? The point is, any American connected to what Americans know, that this is the face of our national connection in World War II. This is the character in history that Americans hold close to their heart, much more than this Britain now, to dispatch this with no excuse.

GIGOT: Misunderstands that tight relationship, that historic relationship?

RABINOWITZ: Doesn't value, doesn't know, doesn't connect with the great war-time alliance. We're talking about a person who is the representative of exactly the kind of teaching that goes on among the tenured leftists in our academies. It has to do with a sense of America that is, we are guilty. We are guilty of colonialism. We are guilty of a great growth.

GIGOT: Here is the thing, Dorothy. I think the question you have to answer, Barack Obama won more votes than any other presidential candidate since LBJ, 52 percent of the votes. He did so knowing — with the American people knowing almost everything about of his background, the background in Chicago, the association with Jeremiah Wright, the Harvard background, Columbia background and all of that ideological class membership that you talk about.

RABINOWITZ: People don't know this. They know the surface. No one who pays $40,000 —

GIGOT: Anybody who watched Fox News knew about it.

(LAUGHTER)

RABINOWITZ: Nobody who pays $40,000 to send his kid to a university knows what he is dumping his child into in terms of intellectual —

GIGOT: But they still voted for him and they did so against a candidate in John McCain who is the embodiment of the kind of traditional American values and instincts and sentiments you talk about.

RABINOWITZ: Because Americans, being who they are, are filled with hope and there is this eloquence, but he wasn't —

GIGOT: On the part of President Obama, there was eloquence.

RABINOWITZ: On President Obama. That he wasn't hiding anything, but he was just — on the other hand, we should have known who his appointees are. One is John Brennan, counterterrorism expert, who may as well as be the counterterrorism spokesmen for the rest of our enemies in the world.

(LAUGHTER)

HENNINGER: Well, ultimately, what you're talking about here is the idea of American exceptionalism, what Ronald Reagan called the shining city on a hill, which I think, most Americans believe in.

RABINOWITZ: Yes.

HENNINGER: I think that Obama did repress it some in the campaign. He has elevated, in a way that's really quite remarkable — it is an idea that comes from the American left that the United States ought to be more or less on a level with other countries.

You know what, I think this is ultimately a voting issue. It will come up in the next election and if Americans think as strongly as you think, Dorothy, I think he could have problems.

GIGOT: You agree with that, Dorothy, I assume?

RABINOWITZ: Well, I do agree with that. But first, we have to know and focus on what is there that Americans are feeling. And I think to confront it and to say, this is different because, let the last thought be, that if you think of all of the radicals sitting quietly dispensing all of this information about the United States, that's who is sitting in the White House. These are the attitude attitudes.

GIGOT: All right, Dorothy, we'll leave it there.

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

(COMMERCIAL BREAK)

GIGOT: Time now for "Hits and Misses." This week, the highs and lows from Tuesday's primary elections.

Kim, first to you.

STRASSEL: This is a miss for the unions who, in the words of the White House, just flushed $10 million down the toilet, trying to defeat Blanche Lincoln in her primary runoff against Democrat Bill Halter. The unions went to Arkansas to make an example of Ms. Lincoln for not supporting their agenda of Card Check and a public-option health care. Instead, she went on offense against this activist base of the party. She very ably portrayed them as a special interest with an iron grip on Washington that wanted to also tell Arkansas what to do, and she won.

GIGOT: All right.

Mary?

O'GRADY: This is a backhanded hit for Republican Senate Senator Jake Knott, who uttered a racial slur against primary candidate Nikki Haley in South Carolina. And thanks to that, Nikki Haley did well. She was the Tea Party candidate. She won. And I think it's strong evidence that the Tea Party voters in South Carolina are tired of this stuff and what they want is limited government. That's what Nikki Haley is offering them, and they chose her.

GIGOT: Good for them.

O'GRADY: Yes.

GIGOT: Dan?

HENNINGER: And also in South Carolina, Republican voters in a primary for an open congressional seat gave 16 percent of the vote to Strom Thurmond's grandson, Paul, 14 percent of the vote to iconic Governor Carroll Campbell's son and 32 percent to Tim Scott. Who is Tim Scott? He's a black guy, suggesting that the voters of South Carolina, and Republicans, are not irredeemably racist.

GIGOT: All right, Dan.

And remember, if you have your own "Hit or Miss," please send it to us at jer@foxnews.com.

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

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

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