This is a rush transcript from "The Journal Editorial Report," July 17, 2010. This copy may not be in its final form and may be updated.

PAUL GIGOT, HOST: This week on the "Journal Editorial Report," the White House hails the stimulus as a success, claiming it created or saved millions of jobs. But business owners aren't buying it. And so far, neither is the public. Can the administration make the sale?

And President Obama takes on the left, issuing a rare veto threat as House Democrats try to strip funds from his school reform agenda.

Plus, prosecutors rest their case in the Blagojevich trial, but not before exposing the underside of Chicago politics and some embarrassing details about the Obama White House.

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

Well, the White House's so-called summer of recovery rolled on this week. And the latest claim is that $862 billion of economic stimulus has saved or created about three million jobs. But polls show voters are far from convinced. And business owners, facing hundreds of new rules in the financial reform bill that passed this week, aren't buying what the administration is selling either. At the U.S. Chamber of Commerce's job summit Wednesday, Chamber President Tom Donahue took on the Obama White House for what he sees as its job-killing policies.

(BEGIN VIDEO CLIP)

TOM DONAHUE, PRESIDENT, U.S. CHAMBER OF COMMERCE: Instead of continuing their partnership with the business community, and embracing proven ideas for job creation, they attacked and demonized key industries. They embarked on a course of rapid government expansion, major tax increases and suffocating regulations, going well beyond what has been done to keep the economy out of a depression.

(END VIDEO CLIP)

GIGOT: Joining the panel this week, Wall Street Journal columnist and deputy editor, Dan Henninger; assistant editorial page editor, James Freeman; and Washington columnist, Kim Strassel.

Kim, let's deal with the White House first. We saw them roll out the big promotion for the stimulus. Is the beginning of the White House campaign for the fall, which is the stimulus worked, happy days are here again? Don't go back to those bad Republican policies?

KIM STRASSEL, WASHINGTON COLUMNIST: If you can believe it, yes. They got an economy problem and it is coming to settle on two questions: one is the stimulus, which they — $862 billion, big promises, it was going to keep unemployment below 8 percent. It's done no such thing. And so they are trying to plump it right now.

The other problem is the business community, which sat by, even went along and helped the administration on some issues, like health care, and now is revolting and stepping out and pointing out cap-and-trade and the lack of trade and uncertainty overtax policy and all these things that are killing jobs and making them not hire people. So they are now attack the White House. The White House is on the defense on both of these.

GIGOT: Right.

What finally, Dan, turned the business community because, as Kim said, they were, for a long time, trying to do business with this administration?

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: Yes.

GIGOT: Suddenly, you see a turn where they are saying they have to top these destructive policies.

HENNINGER: Well, obviously, we're discussing this in terms of politics, business community versus the White House. Look, the way I would put it is I think the business community is trying to bailout Barack Obama. The economy doesn't care about the politics. The economy is trying to function, right? And what are they —

GIGOT: They are saying we just can't function properly —

HENNINGER: That's what they're saying.

GIGOT: — and create jobs in this environment, in this policy environment.

HENNINGER: Right. So the automakers sent a letter to Congressman Waxman talking about the auto safety regulations that are being proposed. The Business Roundtable has sent a letter to the White House talking about corporate tax levels, regulations —

GIGOT: 54 pages of burden that they see.

HENNINGER: Yes. So something has to be holding down the economy. It is a legitimate question whether this rush of regulation that the administration has proudly passed is the problem? I think that's the message the business community to trying to send them.

GIGOT: How big a political problem is this, James, for the administration?

JAMES FREEMAN, ASSISTANT EDITORIAL PAGE EDITOR: It is huge political problem because it is now coming from across the spectrum, if you will, of people engaged in business.

GIGOT: Big, small, little?

FREEMAN: Let's face it, it is most of America, right?

(LAUGHTER)

GIGOT: Still, still.

FREEMAN: Small business. You normally count on big business to be the voice of soft, squishy moderation. But here, they are giving that same free market message, that same push-back as you are seeing from small businesses. The uncertainty created by Washington has hit a point that is unsustainable. And unfortunately, it's getting worse.

GIGOT: Kim, one of the things I noticed this week was this was the Clinton rehabilitation tour by the White House this week.

(LAUGHTER)

They brought in Bill Clinton to come in and broadcast to everybody and he was going to advise the president on the economy. The president named a new budget director, Jack Lew, who happened to be Bill Clinton's last budget director when the budget was balanced.

Is this symbolism or are they really going to take advice from the last Democratic president, who actually did preside over a strong economy?

STRASSEL: He did. And he is generally thought of as pro-business. I think it is symbolism though.

Look, you've got to remember that back in 2008, there was no love lost between this current president and the former one. They don't share much in common on their outlooks or their policies. I'm not sure how much is going to come from this.

The problem is what we are seeing in the White House is the limits of rhetoric. They keep going out, saying they are pro business. Look, we have Bill Clinton. Warren Buffet came into the White House today. What everyone is looking for is action. When are you going to pass those trade deals? Are you going to stop pushing cap-and-trade? Are you going to do something about the expiration of the Bush tax cuts on January 1st? And I think that's what the public is going to look for.

GIGOT: So what you're saying is only policy changes, not just symbolism, not just saying we are pro business, not just studies that say, oh, we've created — you have to actually — to be credible, they are going to have to change course?

STRASSEL: Yes.

HENNINGER: But the thing is, Paul, as we were saying earlier, the stimulus, the $862 billion, roughly a trillion, that was their economic policy, full-stop, no plan B, right?

GIGOT: I would disagree with that a little. I think that policy you're seeing — that's true. That was their fiscal policy. But their whole broader economic policy is everything you have seen since. It's the financial regulation bill.

HENNINGER: Right.

GIGOT: It's cap-and-trade. It's politically directed credit to favored energy industries.

HENNINGER: But that —

GIGOT: This is also part of the whole strategy and that's part of the problem because, instead of being driven by the private sector, they think you can do it, driven top-down by the government.

FREEMAN: Yes. I think that was the really amazing thing about the speech this week by the vice president, is the seeming ignorance of how markets work. He was basically lashing out at Republican critics saying, they are saying we don't like business. Look at all these electric car manufacturers we've invested in.

(LAUGHTER)

GIGOT: Right.

FREEMAN: Look at all these solar companies we've funded.

GIGOT: Which we have no idea that — they might work, they might not work. Maybe they will, but who knows if some expert in the Department of Energy picks them out.

FREEMAN: Right. And we've now run the experiment. We've seen the job creation you get out of $862 billion of Washington picking winners and losers, favoring certain sectors of the economy. It doesn't work, just like it didn't work in the '70s. They've got to understand that there's a real economy out there where people make voluntary decisions and create things. and they got to let it happen.

GIGOT: Big financial reform bill, 2300 pages, 243 rule makings, and that's a low-ball estimate.

FREEMAN: Yes.

GIGOT: Is that going to make a difference to lending credit?

FREEMAN: I think the only thing we can say with certainty is you will pay more for a checking account.

(LAUGHTER)

And that they've not reformed Fannie Mae and Freddie Mac, the two biggest consumers of taxpayer dollars through all these bailouts.

GIGOT: Everything else is not certain here? What —

FREEMAN: As you said, this debate, whether it's going to be 247 or 533 rule makings, enormous power shifted to the Washington bureaucracy to make decision. All the tough calls Congress didn't want to make, they've punted to the same regulators who blew all the tough calls in 2007 and 2008.

HENNINGER: And one big problem at the center of this bill I think is a time bomb. The Federal Reserve is being given hugely expanded powers. This is our central bank. It's supposed to be an individual agency. They are being more politicized than ever. I think that is going to create some confidence problems out there in the private sector.

GIGOT: Kim, are we beginning to see — and we don't have a lot of time. But are we beginning to see a revolt here among some of the back benchers in the Democratic Party? I note that one New York congressman, Mike McMahon, came out this week and said we shouldn't raise taxes in 2011. We should let the Bush tax rates continue. Are you going see more of that? And is there a chance those tax rates could be extended?

STRASSEL: I think there is. And you see that. And I think there's even some members of the White House who are nervous about raising taxes in this environment. You might see a tentative alliance. But you've got to get that through Nancy Pelosi and other appropriators in the House, who have shown no interest, and, in fact, are counting — all their budgets have been designed to count on the money that will come from those tax hikes jumping back up again. So this is going to be a tough haul.

GIGOT: Yes. Their motto is "show me the money."

All right, when we come back, the Democrats' education battle. Believe it our not, the president takes on the left wing of his party over cuts to his school reform agenda. Can he win?

(COMMERCIAL BREAK)

GIGOT: President Obama is taking on the left wing of his party, issuing a rare veto threat over cuts to his school reform agenda. At issue is an amendment tacked on the war funding bill by Democratic Congressman David Obey that gives $10 billion in aid to states to avoid teacher lay- offs. This gift to the teachers unions is paid for with cuts to some of the administration's key education reform initiatives, including Race to the Top and charter school expansion. The House passed the measure before the July 4 recess. The president says he will veto the bill unless the cuts are restored in the Senate.

Editorial board member, Jason Reilly, joins us with more.

So wonder of wonder, miracle of miracles, the president takes on his left. Last time that happened, a solar eclipse.

(LAUGHTER)

What explains this?

JASON RILEY, EDITORIAL BOARD MEMBER: Well, this president deserves some credit for taking on his left. It is not something that happens a lot. Although, we should note that they created this dilemma for themselves somewhat.

Prior to what passed in the House, Senator Harkin, Democrat Senator Harkin, and the Senate proposed a larger bailout, some $23 billion for teachers and school districts. The administration wholeheartedly endorsed that.

GIGOT: Right.

RILEY: Harkin couldn't get any Republican votes. the Senate passed the bill without that provision. Then, over in the House, Representative Obey said, well, maybe if I cut the amount, I can bring some Republicans onboard and find some offsets. It's just that he targeted some of these school reforms that the White House cares about.

GIGOT: But why? Why would he do that?

(CROSSTALK)

GIGOT: I don't understand that.

RILEY: Well, I think it tells something about the reform instincts of the Democrats in Congress.

GIGOT: They're none existent, is that the point?

RILEY: Yes, they are lacking somewhat.

(LAUGHTER)

I mean, the idea that this is the only place you can find to cut money in education is in school reform efforts, like Race to the Top funds, that give money to states that are putting in place reforms.

(CROSSTALK)

RILEY: Or charter school expansion money. It's ridiculous.

HENNINGER: Well, I can think of a few reasons why they're doing this. Let's try to be as cynical as we can. Reforms don't make campaign contributions. OK?

GIGOT: Teachers unions do.

HENNINGER: Sure. In the 20 years before 2009, before public unions, including the two teachers unions, the National Education Association and the American Federation of Teachers gave $126 million to the Democratic Party. 95 percent of their contributions go to the Democratic Party. You could argue that what David Obey is doing is recycling campaign contributions. Right?

(CROSSTALK)

HENNINGER: Because a percentage of those dues go straight into the political funds of these unions.

RILEY: What the unions — what the unions are arguing is that, without this money, there will be massive teacher lay-offs. We have to have them.

GIGOT: Right.

RILEY: But what we should keep in mind is that school districts and states have been increasing their payrolls for decades, with no regard to student enrollment, and with little to show in terms of student performance in the classroom.

GIGOT: How much has spending increased over the last —

RILEY: Over the past decade, school spending is up, after inflation, by about 30 percent or more.

GIGOT: Wow. And that includes —

RILEY: Yet, student enrollment is only up, over the past decade, by 1 percent per year on average.

GIGOT: Yes, but a lot of this money hasn't gone to classrooms, teachers in classrooms. It has gone to padding the —

RILEY: Exactly. The idea that there is no bureaucracy here to cut, no efficiencies to be found is ridiculous.

HENNINGER: Well —

GIGOT: Here's what's interesting here, Dan, politically in this fight. You begin to see a fault line opening up within the Democratic Party between the forces of the status quo, the unions, the people, that's how they get their money, that's how they get elected, and the reform element, which is saying this is a betrayal of our mission as Democrats for equal opportunity. This is a betrayal of young people, especially in the inner cities. We've got to get on the right side of this morally and in terms of actually results.

HENNINGER: Morally is exactly the word, Paul. The condition of the inner city schools is the biggest moral scandal in the United States, bar none. If elements of the Democratic Party are beginning to realize that, there is some hope. I think that, over time, we can make some progress on this subject.

GIGOT: It is interesting, Jason, you look at some of the big city reformers, like Joel Klein, the chancellor in New York, Michelle Rhee, the chancellor in Washington, D.C., these are Democrats.

RILEY: Yes, yes.

GIGOT: When you talk to them, they say, you know who our obstacle is? It is not Republicans. It's not business.

RILEY: Yes.

GIGOT: It's the unions and the Democratic Party status quo. So how deep is in fault line? Is it going to keep getting bigger?

RILEY: I don't see a closing, Paul, unless we get a critical mass of Michelle Rhees and Joel Kleins out there fighting for the kids. Clearly, the party, the politicians, Congress has decided to side with the adults who run public education instead of the kids.

GIGOT: Right. But what about the president himself? He is uniquely positioned here, as Democratic president out of Chicago, with a lot of support. He can — can't he — isn't he uniquely positioned here to drive this debate in a way that, say, George Bush never could?

RILEY: Well, he can rhetorically. He can use his stump to say the right things. But education is largely a state and local issue. Federal spending on education is a very small percentage of overall spending on education.

GIGOT: But there —

RILEY: So he can only do so much.

GIGOT: But he can leverage it with his rhetoric and with federal dollars, which is something that —

HENNINGER: He could him himself so much politically by doing that, Paul. He's a beleaguered president right now. I think this is what people thought they were electing Barack Obama to do, that sort of change.

GIGOT: I agree with that. I think it could help him politically. It could give him a more centrist view.

HENNINGER: Yes.

GIGOT: The public would say, you know what, he's willing to take on a special interest group in his own party instead of just attacking business.

Still ahead, it's the trial of the summer and the White House is hoping nobody is watching, as the prosecution rests against former Illinois governor Rod Blagojevich. We'll bring you up-to-date on some testimony that could cause a little embarrassment for the president and his top advisers.

(COMMERCIAL BREAK)

GIGOT: The prosecution rested its case this week in the federal corruption trial of former Illinois Governor Rod Blagojevich, but not without some testimony that cast the Obama White House in an unflattering light.

Washington columnist, Kim Strassel; and opinionjournal.com columnist, John Fund, have been following the trial and have some of the details.

So, John, this is, in part, a trial about whether former Governor Blagojevich was trying to sell his Senate seat. The president and his aide said he had no interest in figuring out — in determining, influencing who succeeded Obama in that Senate seat. What is the trial telling us? Is that right?

JOHN FUND, COLUMNIST, OPINIONJOURNAL.COM: Two witnesses have sworn under oath that they did get messages, one from President Obama and one from Rahm Emanuel —

GIGOT: So?

FUND: Yes. That the president wanted Valerie Jarrett, and was pushing Valerie Jarrett.

GIGOT: These were not calls to Blagojevich himself, but to outsiders, right? Who did he call, the president call?

FUND: Absolutely. The president called Tom Balanoff, who is the head of the Service Employees International Union, a big Obama backer in Illinois. Emanuel called John Wyma, who is a former chief of staff for Congressman Blagojevich when he was in the Congress.

GIGOT: Wow.

OK, Kim, what does this tell us about the White House report at the time by former White House Counsel Greg Craig that there was no participation in trying to influence the selection of that seat?

STRASSEL: What it tells us is that this report is probably technically accurate. We know that it was very careful to say that the president-elect and that Mr. Emanuel had not — that no one had a lot of direct contact with Mr. Blagojevich or his staff. But —

GIGOT: But it wasn't the whole truth? But it was not the whole truth?

STRASSEL: Yes. That's the point. This is pretty stunning coming — remember this report got put out just a few weeks or not long after the president was elected, on a hope-and-change and reform message. Now we find they were already playing games and people were calling emissaries to have them go to the governor, and that we didn't get the whole story.

GIGOT: John, what does this tell us about the way this White House plays politics?

FUND: It's the Chicago way. Look, reformers in Chicago always said the president talked a good game on reform back in Illinois, but he never criticized the Daley machine. And Rahm Emanuel —

GIGOT: He needed the Daley machine to help —

(CROSSTALK)

FUND: They helped his career.

GIGOT: — help advance his career, sure.

FUND: And Rahm Emanuel told The New Yorker long before Blagojevich got into trouble, that in 2002, when Blagojevich first ran for governor, there were four people who chartered his general election campaign.

GIGOT: Now just so people understand, Rahm Emanuel was the congressman who succeeded Blagojevich?

FUND: That's correct.

GIGOT: All right, go ahead.

FUND: That's correct.

GIGOT: Name those four people.

FUND: Rahm Emanuel, Barack Obama and two others. that was Blagojevich's brain trust. No wonder the White House does not want attention attached to this trial.

GIGOT: But, Kim, aren't there people who would say, so what. Look, everyone knows that presidents care who succeeds them in the Senate, even if they dissemble a little bit or don't tell the whole story. LBJ almost certainly cared about who succeeded him in the Senate.

STRASSEL: Sure. Sure.

GIGOT: JFK, probably you figured he cared about who succeeded him in the Senate.

STRASSEL: Sure. Sure.

GIGOT: Joe Biden tried to get his son to run to succeed him in the Senate.

STRASSEL: That's right.

GIGOT: Before it looked like he would lose if he ran. So why should we care?

STRASSEL: Look, there's probably no crime here. Nobody has suggested that. It is just this administration — first of all, they ran on reform. They ran on a new kind of politics. So this suggests, in fact, they are playing the old politics.

The second problem for them, as John said, it makes them look very Chicago, puts them back in the limelight in the midst of a trial that is just ugly, has the worst sort of corruption element and questions about the way Chicago politics works.

The other thing is it puts a new perspective on some of the other things this administration has done. And if you look, you know, there's been a big scandal over this question of whether or not the White House was trying offers jobs to Joe Sestak, Pennsylvania Congressman —

GIGOT: Running for Senate.

STRASSEL: Running for Senate. Andrew Romanoff, out in Colorado, to get them out of the primary field so their own preferred candidates could have a clear way. When you look at that and hear about the Chicago thing with Blago, people begin to say, maybe this is how they do business all the time.

GIGOT: Kim, has the White House been asked at all about the trial testimony. And what's their response, if it has been?

STRASSEL: Their response — yes, they have been asked, and their response has been we don't comment on an ongoing trial. There seems to be direct contradictions or at least not the whole truth told between the testimony we are getting and this memo that they came out, and they are going to have to answer to that at some point.

GIGOT: All right, John, we got this week, coming week, the defense puts on its case. What should we expect to see?

FUND: The defense is everybody always operated this way. The place is a cesspool of corruption. They are all tainted, so why are you signaling me out —

(LAUGHTER)

GIGOT: So you —

FUND: — Blagojevich.

GIGOT: We're all crooked. We're all —

FUND: Yes. Blagojevich —

GIGOT: This is politics as usual. We're not crooked. They're saying this is politics as usual. Everybody does it. See, even the president, even the chief of staff, even all of these famous, honorable people do it, so I'm not a crook.

FUND: It would be taking a giant tar barrel and trying to pour it over everyone in Illinois.

(LAUGHTER)

GIGOT: All right.

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

(COMMERCIAL BREAK)

GIGOT: Time for "Hits and Misses."

Kim, first to you.

STRASSEL: This is a hit for the House Resource Committee which this week followed the Senate and voted to allow Congress to set up its own oil commission spill investigation commission. And this is a direct rebuke to President Obama, whose own presidential oil commission has, of course, been stacked with activists and anti-oil environmentalists. So if Congress gets its way, we'll have engineers looking at this that might actually get answers.

GIGOT: All right.

Jason?

RILEY: This is a miss for the NAACP for suggesting that the tea party movement is somehow racist. Any organization that has honored the likes of Louis Farrakhan, Jeremiah Wright, Jesse Jackson, Al Sharpton has no credibility on this issue and has no business casting stones.

GIGOT: All right, Jason.

John?

FUND: A miss to state and federal government officials who didn't pay any attention to the evidence that felons voted illegally in the Minnesota Senate election that Al Franken won by 312 votes. It looks as if up to 1,000 felons may have voted illegally. And that was enough to make up the difference.

GIGOT: Wow.

Jason, do you think the NAACP is acting politically here?

RILEY: Of course, they are.

(LAUGHTER)

(CROSSTALK)

RILEY: And it is a shame because it was once a very honored organization that has had a rapid decline in the past few decades.

GIGOT: All right, thanks.

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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