This is a rush transcript from "The Journal Editorial Report," August 7, 2010. This copy may not be in its final form and may be updated.

STUART VARNEY, GUEST HOST: This week on the "Journal Editorial Report," a federal judge deals a blow to Obamacare and clears the way for a constitutional challenge that could go all the way to the Supreme Court.

Plus, has his magic touch turned into the kiss of death? Why some Democrats are dodging the president as campaign season kicks into high gear.

And to build or not build. Both sides weigh in on the plans for a mosque just blocks from Ground Zero.

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

It is the biggest blow yet to the future of Obamacare. Judge Henry Hudson this week denied the government's motion to dismiss a lawsuit brought by the state of Virginia challenging the new health law. Judge Hudson's ruling states that "It is far from certain that Congress has the authority to compel Americans to buy insurance and penalize those who don't."

Betsy McCaughey is the former lieutenant of New York. She is the author of "Obama Health Law: What it Says and How to Overturn It."

Betsy, is this court ruling the start of the unraveling of the health care reform?

BETSY MCCAUGHEY, AUTHOR & FORMER LIEUTENANT GOVERNOR OF NEW YORK: It may well be, yes. It's a very positive sign. Last November, House Speaker Nancy Pelosi was asked, is it constitutional to require Americans to buy a one-size-fits-all health care plans and she's, "Are you serious? Are you serious?" Judge Henry Hudson said it is time to get serious and apply the Constitution, something that Congress didn't do before they passed this law.

VARNEY: This is all about the mandate that you must buy health insurance?

MCCAUGHEY: Or pay a penalty.

VARNEY: Or pay a penalty. If that is cut out, if for whatever reason it is cut out, does the health care reform plan collapse?

MCCAUGHEY: Yes, it could fall like a house of cards. Most conflict legislation includes a boiler-plate provision that says, if one part of the law is struck down, others will remain enforceable. The authors of this law actually removed that boiler plate before the final version was passed. And both the deliberations about passing the law and even the court papers filed by the administration in this case suggests that they all agree that this law cannot stand without this mandatory provision.

VARNEY: What are states going to do as the legal situation is sorted out?

MCCAUGHEY: This is important. The states are being pushed hard to implement insurance what are called insurance exchanges and other costly changes to accommodate the Obama health care law. Now the states, which are short on cash, are to slow down preparations. And that will be a bruising blow to this health law.

VARNEY: A bruising blow. Is it that serious?

MCCAUGHEY: Oh, yes.

VARNEY: Is this a real a setback for reform?

MCCAUGHEY: Yes, because, first of all, Judge Henry Hudson said, of course, there are serious constitutional questions here. The administration all along made an argument that it was necessary to force people to buy insurance in order to spread the cost over more people and avoid people getting health care for free. But that an ends-justifies-the means argument. Virginia came in and made a constitutional argument saying, no matter how wise it is, it is not within the powers of the Constitution. The Virginia folks cited the Federal Papers and 200 years of Supreme Court history saying that the powers of Congress are limited and doesn't include forcing Americans to buy anything.

VARNEY: That's the legal fight. That's the constitutional fight.

MCCAUGHEY: Right.

VARNEY: Got it. Put that on one side for a second. There was a vote in Missouri.

MCCAUGHEY: That next day, on Tuesday.

VARNEY: That's pure politics. That's the legislative —

MCCAUGHEY: It was not pure politics. Excuse me, Stuart. It was American people ignited to defend their freedom. And with the Constitution on their side, they believe they can do this. Seventy-one percent of the Missouri voters on Tuesday supported a proposition saying that residents of this state cannot be compelled to buy health insurance.

VARNEY: That will be superimposed by the federal law. Precedence, that's what I'm trying to say.

MCCAUGHEY: You're arguing the supremacy law. It is only supreme if it's constitutional. And in this case, many Americans believe and know that it is not. That was at the heart of the Virginia case. Virginia passed a law called the Health Care Freedom Act, saying no resident of the state of the Virginia can be compelled to buy insurance. 21 states are challenging the constitutionality of the Obama health law on that ground. Five states passed something like the Health Care Freedom Act and three other states have propositions up on the ballot just like the Missouri one.

VARNEY: You are piling it on and you are real happy about this wrench in the works, aren't you? You don't want health care reform, do you?

MCCAUGHEY: I want everyone to have insurance and health care. But I don't want to see not our constitutional rights shredded and that's what the Obama health law does. First of all, it requires everyone to buy this one-size-fits-all plan and enlarges the powers of the IRS to track you down and penalize you if you don't. It also puts the government in charge of your health care for the first time. It said that insurance companies can pay only doctors who implement whatever regulations the secretary of Health and Human Services think are good for health care quality. Well, that covers everything. It could cover things like whether you get a stint or a bypass and whether your Ob-Gyn does a caesarian section, whether the president sees that end-of-life counseling made a mandatory part of health care.

VARNEY: OK. If the current Supreme Court, the Roberts court, were adjudicate today on this issue, which way would they?

MCCAUGHEY: It's hard to predict. I can say that the constitutional argument to strike it down is strong. The administration claims that they have the power under the Commerce Clause. They have stretched the Interstate Commerce Clause like a rubber band, arguing that the decision of an individual not to buy insurance is interstate commerce.

VARNEY: And?

MCCAUGHEY: The decision not to do something is interstate commerce, and what Henry Hudson, the judge in Virginia, said, well, that is a novel argument. We have to have a trial on this one?

VARNEY: Betsy McCaughey, thank you so much indeed. We appreciate it

When we come back, some vulnerable Democrats dodging President Obama and preferring to go it alone on the campaign trail. Has the president once magic touch turned in the kiss of death?

(COMMERCIAL BREAK)

VARNEY: Are Democrats running away from President Obama? As campaign season kicks into high gear, some candidates are missing when he makes an appearance in their home state. It's no wonder. The latest Gallup/USA Today poll has the president's job approval at just 41 percent, his lowest rating in that poll since he took office in January of '09.

White House Spokesman Robert Gibbs, when asked this week if the president would continue to stump for Democratic candidates, had this to stay.

(BEGIN VIDEO CLIP)

ROBERT GIBBS, WHITE HOUSE PRESS SECRETARY: We'll go the places where candidates think that's helpful. We'll raise money in places where candidates and committees think that that's helpful. We're not going to go to places where people think it is unhealthful that we go. That would be crazy.

(LAUGHTER)

(END VIDEO CLIP)

VARNEY: Joining the panel this week, Wall Street Journal columnist and deputy editor Dan Henninger; Washington columnist Kim Strassel; and opinoinjounral.com journalist John Fund.

Kim, to you first. Who is running away from the president and how fast?

KIM STRASSEL, WASHINGTON COLUMNIST: The answer to that, concisely as you put it, is any vulnerable Democrats and, these days, at road runner speed. They're going away quickly.

Midterms always tend to be a referendum on the president. We are onto the hundred-day mark of the midterm. When you look, you cannot find any public enthusiasm about any aspect of this agenda: unemployment, the economy, the health care bill, taxes, immigration. You saw it — we just mentioned the Gallup poll. We've got to look — those numbers, as low as they are for the president nationally, are much worse in particular states. The president recently went to Georgia. His approval rating there is in the 30s. I think it is 37 percent. and that's why you had Roy Barnes who is running for the governorship, is a Democrat, and he made sure he was nowhere near President Obama when he came on that visit to the state and, in fact, he was happy to be elsewhere.

VARNEY: John, are these people, the candidates, the Democrats, are they making the calculated decision that an appearance with President Obama would be a negative and it would subtract from their support? Is it that bad?

JOHN FUND, OPINIONJOURNAL.COM COLUMNIST: I think the last couple of weeks, as we saw economic growth slow, candidates decided that if they see Obama next to them, it will be associated with bad economic times. There's a new poll out, Stuart, by Stan Greenberg, who is Bill Clinton's former pollster, Democracy Corps. It says, by 54 percent to 39 percent, the American people say President Obama's economic policies have done nothing to alleviate the recession. In other words, they're a bust. With those kinds of margins and that lack of confidence in the economy, no candidate would want to risk their political future by standing next to President Obama.

VARNEY: Dan, what is their game plan?

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: Their game plan of late is to go local and run on local years and put the national part of it aside. The problem of that is, let's take the Great Lakes. The Great Lakes states have become a kind of base of support for the Democratic Party. How can you go local in Michigan when the unemployment rate there is 13.2 percent, or in Ohio, when it's 10.7 percent? It is impossible to duck the problem.

And I think reason for that, Stuart, President Obama probably should have dedicated his entire presidency to addressing the economy. Instead, he came into office, did the stimulus bill early in 2009, and then spent an entire year doing the Obama health care plan, which is not that popular. I think the electorate is saying, why did you spend all that time on your agenda, which is what his party wanted to do, rather than fixing our problem. That's a real dilemma for the Democrats.

VARNEY: Kim, it seems one of the planks for the Democrats coming into the November election will be tax the rich. Will it fly?

STRASSEL: Some of them are. You are seeing a movement in another direction among vulnerable Democrats who are now becoming very wary about that motto and are increasingly saying maybe we shouldn't raise any taxes here at all.

I would add one thing here too. It is not as though Democrats are guessing what the outcome of this might be if they're seen with President Obama. A lot of them are looking at the Virginia and New Jersey governor races last year where the president was very involved. He lost both of those races. Massachusetts, the Senate race, he really stumped for the Democratic candidate and Massachusetts sent a Republican to the Senate for the first time in decades. So a lot of these guys — and things are only worse now. They don't have a track record here either and that is spooking Democrats too.

VARNEY: John, what is the Democrat's game plan here?

FUND: Basically, try to ride this out and recognize the Republicans are always incapable of shooting themselves in the foot. The Democrats have decided to try to link the tea party with the Republican Party. So, whatever extreme ideas the tea party has, you can expect that from the Republicans. And, of course, to raise the specter of Bush all over again. You didn't like the policies of President Bush. They are going to come back, as Republicans take control of Congress.

The problem with that is several pollsters have found that even though the Republicans have not done a great job articulating what they want to do if they get back in power, the public does not think they want to return to President Bush's policies. They Democrats are in a bit of a pickle here because they don't have a good argument to make.

HENNINGER: Stuart, what is an interest subtext of what John is saying is, what does it mean for the future of the Democratic Party? In Colorado, the president has endorsed the sitting Senator there, Michael Bennett, who is in a primary with the challenger, Andrew Romanoff, who a few weeks ago was endorsed by Bill Clinton. After which, Romanoff pulled ahead of Bennett in the polls. There is a school of thought that many of the Democrats would rather have Bill Clinton campaigning for them —

(LAUGHTER)

— than the left-leaning president, Barack Obama. Maybe Clintonism is making a comeback.

VARNEY: Kim, I hear you laughing there. It seems like an extraordinary turn around in 18 months, doesn't it?

STRASSEL: Yes, and the most amazing thing is the Republicans think there is a lot of mileage in this. We saw in Missouri the Republicans running for the Senate, Roy Blunt ran the first ad out there in which he tried to directly link his opponent, Jeanne Carnahan, to President Obama. The entire ad was about that. They think there is going to be a liability of the opponents as they face being connected and connected strongly to the White House.

VARNEY: All right. We will, of course, be covering this in the next 90-odd days.

We'll be right back. Thanks, everyone.

Still ahead, plans for a mosque just blocks from Ground Zero spark a fiery debate in New York City and across the country, not to mention, one right here in the Wall Street Journal. The case for and against the Cordoba House, when we come back.

(COMMERCIAL BREAK)

VARNEY: To build it or not build it, that is the question that's roiling New York City, where this week, the city's landmark commission voted unanimously against preserving a 152-year-old factory building just two blocks from Ground Zero, clearing the way for the construction of a $100 million Islamic community center called the Cordoba House.

We are back with Dan Henninger. Also joining the panel is Wall Street Journal foreign affairs columnist, Bret Stephens; and assistant editorial page editor, James Freeman.

James, are there any serious legal challenges that could get in the way of building of this mosque?

JAMES FREEMAN, ASSISTANT EDITORIAL PAGE EDITOR: No, there are lawsuits but they are essentially nuisance suits. On legal grounds, it should go forward. This is America. It is their property. They have freedom of religion. And there is no reason to stop it now. The landmarks commission made the right decision. The building is a dump and it should be put to a new use.

VARNEY: Well, there's an interesting opening gambit, James. It should be built. It will be built.

(LAUGHTER)

No further legal obstacles.

What do you say to that, Bret Stephens?

BRET STEPHENS, FOREIGN AFFAIRS COLUMNIST: Yes, I live in that neighborhood. The building is not such a dump. It's not such an eye sore. It's a nice neighborhood. The real issue here is not a question of, we live in America and we're so proud of having these rights, there is no legal issue here. We are not talking about rights. That is a cheap-shot argument. We are talking about whether, if the interest of this imam are to promote interfaith understanding, whether he is advancing those interests or not, and he clearly is not.

VARNEY: Do you question, from the background of the imam, you question his motivation and involvement in the mosque?

STEPHENS: There are some real questions that need to put to this imam. They are separate from the questions of whether this mosque and cultural center are built. But if he's really talking about promoting interfaith and understanding, I would love to see, for instance, a dialogue with gay and lesbian Muslims takes place in this center. I would love to see him have an exhibit with depictions of the prophet, Mohammed.

FREEMAN: But he owns it, Bret.

STEPHENS: But what he is doing, James, is he is saying who are — I'm going to show to you —

FREEMAN: Who you are to tell him to address all of the social issues, if they own the property — unless you are saying you want a mosque-free zone extending X number of blocks. By the way, this is the old Burlington Coat Factory building. It is several blocks from Ground Zero. I don't think if there were not a media fire storm, any visitors to the hallowed ground of Ground Zero would not know this thing existed.

STEPHENS: Well, it's a 13-story —

FREEMAN: It's a short way to another mosque. We would have to kick out the other mosque if we have a mosque-free zone out from Ground Zero several blocks.

STEPHEN: Look, James, we are talking past one another. It is not whether this imam has a right in the United States to build the center. He does. I am conceding that point. I don't think it is not the material point. The point is whether this imam should be building and if his interest is to promote tolerance. What he is doing is promoting the opposite of it, not because of the reaction it's creating, but because of the inherent cheekiness of putting it there.

VARNEY: Yes, James, to that point, you don't find this somewhat provocative of the part of this imam?

FREEMAN: I am concerned about the double standard. We are not applying all of these standards to other religious groups. We're fortunate, in the New York City — I'm not there at the moment — but we have a wealth of religious expression and people are free to erect churches. And frankly, we have a lot of crazy cults in the city. But this is America. We don't gin up campaigns to shame them all into doing something else with the property they own.

VARNEY: Dan has another perspective.

HENNINGER: The debate has the word "tolerance" elevated quite a bit in how we have to show that we are able to be tolerant of diverse points of view.

Let me just point out that, in the 1990s, a great mosque was built in Rome with the permission of the Vatican. In last several years, the pope requested that Saudi Arabia build a Christian church because there are at least a million Christian workers in Saudi Arabia. He asked the president of Yemen if a Christian church could be built there. The president said he would look into it. In neither case has Saudi Arabia or Yemen or, much less, anywhere else have they been able to build a Christian church.

I think there is a problem of good faith here between organized Islam and the rest of the world's religions. I don't think they have earned the right to have a mosque down the on the edge of Ground Zero. They have shown no good faith to try to live up to the standard of tolerance that we are discussing here.

VARNEY: Is there rights to build the mosque in question?

FREEMAN: Yes, I'm not saying that they have.

VARNEY: Go ahead, James. Go ahead.

FREEMAN: I am not arguing that it is a — I'm vouching this is a wonderful group and this a big warm embrace there are giving the people of New York and the United States. I don't know. But what I am saying is that we have a model better than Saudi Arabia. Our model is freedom and openness. Eventually, it will prevail over theirs, unless we move to their model, which is cracking down and eliminating points of view we don't like.

(CROSSTALK)

VARNEY: James, you had the first word, James. I have to give the last word to Bret.

STEPHENS: Look, there is this idea that we consistently have to demonstrate what a tolerant country we are and how much better we are than the Saudi Arabians of the world. I don't think the United States ever has to demonstrate that. There was no anti-Muslim pogroms in the wake of 9/11.

What I think where the onus should lie is on the founders of the mosque, who are not only putting in a mosque, but an entire cultural center to demonstrate exactly what Dan was talking about, good faith. Let's see those gay and Lesbian Muslims in that center. Let's see those images of the prophet, Mohammed. Let's see condemnations of Hamas and other terrorist groups issuing forthrightly and then I will be impressed.

VARNEY: We've got to go. Thank you.

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

(COMMERCIAL BREAK)

VARNEY: It is time for "Hits and Misses" of this week.

Dan, you're first.

HENNINGER: A big miss to Congressman Jerrold Nadler of New York City for introducing the bill to give New Yorkers a tax break with the IRS, arguing that they live in a place where the dollar is worth less than it is in, say, Topeka or Spokane and Michigan.

I think this is nuts. It is like a sinner in New York, dying, going to the pearly gates and saying to St. Peter, hey, St. Pete, I lived in a city that was full of temptation. You can't send me to hell. I need a break.

(LAUGHTER)

St. Peter says, well, you should have move to Topeka.

(LAUGHTER)

And I think that's the answer to Congressman Nadler. New Yorkers should move to Topeka.

VARNEY: That was a good one.

You're next, Bret. Beat that.

STEPHENS: Look — that's unbeatable. But a big hit to Mother Nature. We've had, by all accounts, the worst oil spill in American history in the gulf and, lo and behold, just a few months in to this, it turns out the oil is dissipating into the water, it's degrading, it's being dispersed by chemical that the EPA doesn't like, but I am sure that Louisianans really do like. And I think it is a reminder, in fact, for all of these natural and environmental calamities, Nature knows how to take care of herself. And we owe her some recognition.

VARNEY: Well said.

John Fund, you're up.

FUND: A miss to California Attorney General Jerry Brown. A state judge has found that he used misleading and prejudicial language in describing a ballot initiative before the voters this November. That initiative would delay enactment of that state's limits on greenhouse gases. The judge said that Jerry Brown said it would lead to pollution and it would lead to the abandonment of the state's admission policy. The judge said it is completely misleading. Greenhouse gases are not traditional pollutants. And finally, someone has slapped down the attorney generals who constantly distort what the meaning of these initiatives are.

VARNEY: It's a mess. It's a miss for Jerry Brown.

And that's it for this week's edition of the "Journal Editorial Report." Paul is back next week.

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