This is a rush transcript from "The Journal Editorial Report," August 28, 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," so what ever happened to the summer of recovery? Worries about the economy deepen as home sales plummet, consumer confidence flags and unemployment remains high. Are we headed toward a double-dip recession?

And an Alaskan Tea Party. What Republicans can learn from Lisa Murkowski. And a look ahead to what is shaping up to be November's hottest race.

Plus, the next front in the battle over immigration. Should babies born to illegal aliens be denied citizenship?

(BEGIN VIDEO CLIP)

VICE PRESIDENT JOE BIDEN: Returning this great ship of state around that was wandering out to sea and it's heading back to port. Look, it is not happening as fast as anyone would like and certainly not fast enough for millions of folks still out of work. But there isn't any doubt we are moving in the right direction.

(END VIDEO CLIP)

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

And that was Vice President Joe Biden this week putting a decidedly happy spin on what he previously called the summer of recovery and insisting that the economy is moving in the right direction. But it's proving to be a tough sell. The unemployment rate is lingering at 9.5 percent. Consumer confidence is continuing its slide. And sales of existing homes drop by 27 percent in July to their lowest level in more than a decade.

Joining the panel this week, Wall Street Journal columnist Mary Anastasia O'Grady; assistant editorial page editor James Freeman; and senior economics writer Steve Moore.

Steve, on Friday, the second-quarter growth numbers revised downward from 2.4 percent to 1.6 percent. How worried are you that this is going to be a double dip or is this a temporary deceleration?

STEVE MOORE, SENIOR ECONOMICS WRITER: Paul, I am very worried about it. I have to say in response to what Joe Biden said, I don't think many Democrats will want Joe Biden in their district come this campaign season.

GIGOT: No.

MOORE: This is a guy who, just yesterday, was saying the big triumph of the stimulus plan was they've weatherized 200,000 homes. That is not bringing unemployment down. I'm very worried, Paul.

And I think the central problem is, even if you believe in this idea of a Keynesian stimulus, with that trillion dollars or so we spent over the last year and a half, what happens when the money runs out? And the money is running out. There is no second act from this administration or plan B as the economy decelerates.

GIGOT: What is the cause, Mary? What do you think is the problem? We threw all this monetary stimulus through low interest rates, all of the fiscal stimulus, special programs, tax credits and what not. And we are still stumbling along. That is a problem.

MARY ANASTASIA O'GRADY, COLUMNIST: Yes, I think that is the problem.

GIGOT: The government stimulus and all that is the problem?

O'GRADY: No, the fact that the government has thrown all of these things at the wall, none of which have done something, is making it worse. People are realizing there is nothing left for them to do. If all of these things that were promise to give prosperity again have failed, what can be done? I think that uncertainty has paralyzed people. There is a lot of cash lying around. Corporations are famously flush with money.

GIGOT: $2 trillion my most estimates.

O'GRADY: But there is paralysis. And if you don't have money changing hands and then, in central banking terms that is velocity, money going from one party to the next, you have an economic slowdown. That is not something that the Fed can fix. That's something that policy decisions by the Treasury can —

GIGOT: This is the paradox, James. We have a lot of money on the side lines and balance sheets are actually much improved from two years ago. Consumer balance sheets are improved as the savings' rate has been increasing. Yet it is all on the side lines. We have a capitol strike, if you will. No one wants to invest.

JAMES FREEMAN, ASSISTANT EDITORIAL PAGE EDITOR: Yes, the signals from Washington are all bad.

I agree with you. Corporations are healthy right now. That's why I disagree with Steve. I don't think we're hitting a double dip. But what we are hitting is just bumping along with slow growth, a lot of uncertainty from Washington. Maybe we should cut Vice President Biden some slack. All of the numbers are bad so he has to find some numbers that are good.

(LAUGHTER)

So he said, 200,000 homes winterized. I love his stats. Even do you think that is the key to economic growth, there are more than 100 million households in the United States, so another century, and this program will pay huge dividends.

(LAUGHTER)

We need the message from Washington that they're going to get out of the way and let business do what it does.

GIGOT: Steve, our friend, Art Laffer, previously said he thought it would be a good year and that 2011 will be the bad year once taxes rise. What is the cause of this particular — I mean, why are we seeing the down sing six months, nine months earlier than the tax increase?

MOORE: The one thing I disagree with my good friend, Laffer, about is that I thought there would be more of an anticipation of the tax increases coming and that businesses would decelerate they economic activity right away. I think that's a bit what happening.

Here's an interesting statistic, Paul. You mentioned the GDP number was revised for the second quarter down less than two percent. An amazing statistic is in the first year of the Reagan expansion in 1983, the economy grew by almost eight percent, almost four times faster than the economy is growing right now. In response to what you ask Mary, what can we do, Mary is right. They tried everything out of the liberal play book. The one thing they will not try is tax rate reductions, which has worked so many times in the past.

GIGOT: Mary, does the White House really believe what Joe Biden is saying or are they trying to put the happy face on it or do you think privately they are worried?

O'GRADY: Clearly, they are in a corner. They have to decide between saying we are wrong and we should —

GIGOT: Politicians don't like to say that especially too much before an election.

(LAUGHTER)

FREEMAN: Get them reelected.

(LAUGHTER)

O'GRADY: They need to extend the Bush tax cuts and repeal Obamacare, lift a lot of the regulatory burden from the financial sector. These are things that have been their platform for the last two years. It's tough for them to say we are backtracking on that. But that's the corner they're in.

GIGOT: John Boehner, the Republican House leader, said this week — it got a lot of headlines —Tim Geithner, the Treasury secretary, and economic counselor, Larry Summers, should resign or the president should ask for their resignations. Are they the problem?

FREEMAN: Not really. With Geithner, since he was king of the bailouts and wasn't a fanatic about paying his taxes, maybe you said that is a public service to get rid of him.

(LAUGHTER)

But the problem is from the top. That kind of cosmetic move doesn't change the fact that you need a change in direction here and it is not about rearranging the deck chairs. The Obama administration, the president has to say, I'm going to let this economy grow.

GIGOT: But the president, Mary, seems to believe what — he picked these economic advisors. He believes this stuff. He believes in government stimulus.

O'GRADY: It is more than the president. It is the entire Democrat Party that put him in office. They believe punishing the rich and redistributing income and they believe in this Keynesian model of pushing aggregate demand rather than making the environment better for producers. That's they're solution. If it is not working, it is hard for them to backtrack.

GIGOT: Steve, one of the things that Biden, Joe Biden said, in response to the Boehner speech, was that Republicans are not offering any of their own positive ideas for how to get the economy moving again. Is that a fair criticism?

MOORE: Maybe a little bit. But when your opponent is shooting themselves in the belly, you stay out of the way and let them do that. But you have superstars in the Republican Party, like Paul Ryan, who I think does have a great road map for economic recovery.

On the issue of the leadership in the White House, I have to say this. I think it is important that President Obama bring someone in the White House who knows how to run things. There is a real issue of core competence. You saw how they dealt with the oil spill. I think bringing in a Fred Smith of Federal Express or someone like that who has business experience, knows how to run things would help straighten things out over there.

GIGOT: OK, Steve, last word.

Still ahead, a wild week in politics. What Republicans can learn from Lisa Murkowski's uncertain fate.

And a look at what is shaping up to be the hottest Senate race of the year. Will Democrats rally behind Kendrick Meek in Florida or will some secretly support Charlie Crist's independent bid?

(COMMERCIAL BREAK)

GIGOT: In an already surprising primary season, the biggest shock of all may have come in Alaska where Tea Party upstart Joe Miller leads incumbent Republican Senator Lisa Murkowski by 1,600 votes. The final outcome may not be known for several days as absentee ballots are counted. But the message to the GOP should be clear.

We are back with James Freeman and Steve Moore. And joining us, opinionjounral.com columnist, John Fund.

John, what is the message from Alaska to the Republican Party is?

JOHN FUND, OPINIONJOURNAL.COM COLUMNIST: First, no incumbent is safe. Lisa Murkowski a few weeks ago had a 40 percent lead in the polls and had 20 times the money than Joe Miller did, and she still lost.

Secondly, she voted against Obamacare but, in a town hall meeting last year, she said, well, I could vote for a government-run health care plan, I just want to vote for one that works. That was devastating to her.

Lastly, I really believe that the Appropriations Committee, Congress's favorite factory, is no longer the place where you get credit for dispensing pork but it is where people say the big spenders hang out. Lisa Murkowski is the third Senator this year to lose a primary because she was on the Appropriations Committee.

GIGOT: John, Bob Bennett was another. Who was the third?

FUND: Arlen Specter.

GIGOT: Arlen Specter, a Democrat in that case.

What role did Sarah Palin play in the primary? What is decisive?

FUND: Her husband held fundraisers for Miller. She was a little in, a little out. She endorsed Joe Miller and did a robo call for him just before the election but made no campaign appearances. Remember, there is a long feud between the Palins and Murkowskis.

GIGOT: Right. The Hatfields and the McCoys.

FUND: Exactly. And I think she wanted credit for Miller's defeat but didn't want to insert herself as the major player in the race.

GIGOT: Steve, these Republican insurgents — there are probably a half dozen of them among the Senate candidates. How many of them will make it past the finish line? Do you think Miller will be one of them?

MOORE: Paul, I agree with what John said. This is the season where we will see so many — we have already seen so many upsets in the primaries. I think, come Election Day, we'll see a lot of these Murkowski- type of races where people say, boy, I never saw that coming. So I don't think any incumbent in either party is safe in this environment.

GIGOT: Well, hold on, Steve, let me push on that.

MOORE: Yes.

GIGOT: Because 98 percent of the incumbents are winning, by the way. The anti-incumbent wave is not that large. In Arizona, you had a case of McCain, who ran as a moderate and really governed as a moderate for many years, being challenged on the right, and he won comfortably.

MOORE: That's true. Although John McCain was in a boatload of trouble earlier in the election season. The reason he won was J.D. Hayworth, his challenger, just was not credible. He had taken all this pork and had made advertisement for how you can get government money. But I think there is an incredibly intense hatred for incumbents right now because incumbents think that they're out of touch.

To your question, Paul, I think you're going to see a bunch of these people elected in the primaries on the Republican win. I think Sarah Palin is going to win in Nevada. I know you may not agree with that one.

GIGOT: You mean Sharron Angle, Sharron Angle in Nevada.

MOORE: Sharron Angle, right.

GIGOT: And you think the majority of those are going to win.

But, John, deal with this point about 98 percent incumbent reelection. There's only I think three Senate incumbents who have lost and there are not that many House incumbents who have lost. Are we overstating this wave?

FUND: In 1994, which was another big revolutionary year, over 90 percent of the incumbents lost. In 2006, when the Democrats took over Congress, over 98 percent of incumbents win. Over 90 percent of incumbents always win. The fact that you get down to 97 or 96 or 95 percent is big news.

(LAUGHTER)

GIGOT: What's the message, James?

FREEMAN: I would agree with John on that. That's the big difference between this and '94, where they talk about the Republican revolution then. It was a revolution bringing Republicans to power. This is partly a revolution against the Republican establishment as well as the Democratic establishment.

GIGOT: And so this is what Dick Army, who was a former majority leader in the House and now out of office, but helping with the Tea Party, caused a hostile takeover for the Republican Party.

FREEMAN: That's right.

GIGOT: And you're saying that is what this was —

FREEMAN: He was a Republican leader and he retired, got sick of the Bush big-government conservatism that the Republican Party had become. His is now with the Tea Party and I think you are going to see a more Republican Senate, but the Republican caucus being more activist and more in line with the Tea Party.

GIGOT: John Cornyn, who is running — he's a Texas Senator, Republican, running the senatorial campaign committee for the Republicans. He's tending to support the people who lost.

FREEMAN: That's right. He's been anointing the establishment candidates around the country and voters are saying no, no, no — Colorado and Kentucky, Utah, Alaska. I think it is a big deal. And it's true, incumbents almost always win. It's at the major where they are losing.

GIGOT: All right, John, let's turn to Florida where Democrats nominated, who I think is their strongest candidate, Congressman Kendrick Meek. What choice will the White House make among the three candidates? Right now, they say they will support Meek and a lot of the private money people say they will support Meek. But if he falls behind in the polls to third, will they be tempted to privately support Charlie Crist?

FUND: Yes, because Charlie Crist is completely ambidextrous politically. You could walk through his deepest consistency and not get your ankles wet.

(LAUGHTER)

He will join the Democratic caucus if they make him a better deal.

The problem is Kendrick Meek is an African-American congressman who has been in the Democratic Party his entire life and they can't completely repudiate him. So they will have to do it quietly and subtlety. The Democrat African-American establishment will be furious if they abandon Kendrick Meek.

GIGOT: Steve, I see Marco Rubio, the Republican, holding on to his base and getting no less than, say, upper 30s and maybe as much as 40 in the race. That means one of the other two will have to emerge as the main challengers? Will it be Crist or Meek?

MOORE: I don't think there's any question. It will be Charlie Crist. Charlie Crist is a great campaigner. It is a real question, as John was saying, whether the Democrat liberal voters peel off of Meek and go to Crist. That is the Crist strategy. He has moved to the left in this campaign to get those — to woo those Democratic voters. My money is on Marco Rubio, who is a star.

And the other big story about what happened in the primaries, that's happened all year, Republican turnout is higher than Democrat turnout. That augurs well for November for the Republicans.

GIGOT: But you — just quickly — think Crist will be the main competitor?

MOORE: Yes.

GIGOT: OK.

When we come back, the next front in the battle over immigration. Babies born to parents here illegally are automatically granted U.S. citizenship. Should they be? There is a debate ahead.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

SEN. LINDSEY GRAHAM, R-S.C.: What I am not OK with is someone breaking our law, going to an American hospital, coming here illegally with the express purpose of having a child in America to create citizenship.

(END VIDEO CLIP)

GIGOT: That was Republican Senator Lindsay Graham of South Carolina who created a firestorm recently by floating the idea of abolishing what is known as birthright citizenship. The term refers to the Fourteenth Amendment's guarantee of citizenship born to every child born on American soil. Graham said birth-right citizenship in a magnate, drawing illegals into the U.S. And other GOP lawmakers have said they would support a constitutional amendment that bans citizenship to babies born to undocumented parents.

For more, I'm joined by Wall Street Journal editorial board members, Dorothy Rabinowitz and Jason Riley.

Jason, you heard Lindsey Graham. Is he right?

JASON RILEY, EDITORIAL BOARD MEMBER: Well, if Lindsey Graham has some evidence, some careful data, statistics that show large numbers of people come here for the express purpose of having a baby, I wish he would present it. I haven't seen such evidence.

What bothers me about this debate right now is that it is being discussed in the context of reducing illegal immigration.

GIGOT: Yes.

RILEY: That if we repeal this amendment, it will reduce the illegal flow from Mexico. It sort of reminds me of the car — driver's license debate we had a few years ago, the suggestion that if we deny illegal immigrants driver's licenses, fewer will come. This is ridiculous. That is not why they are coming. They are not coming here to drive legally and they're not coming here to have children that will become U.S. citizens. Let's not kid ourselves. We can have a healthy debate about whether or not this amendment to the Constitution is necessary. But let's not kid ourselves into thinking that this will in any way significantly reduce illegal immigration. It won't.

GIGOT: Dorothy, on that point, is there evidence to support this? I know their anecdotes. I had — when I lived in Hong Kong, there were people who would come to the states, six, seven months pregnant. But that is an anecdote. That is not really statistical evidence. Is there any?

DOROTHY RABINOWITZ, EDITORIAL BOARD MEMBER: No. I can say there is anecdotal evidence and the anecdotal evidence is impressive. There is a hospital in Texas where 40 percent of all of the illegal births are for people who come over.

GIGOT: Coming over.

RABINOWITZ: And paid by taxpayers. And there is one doctor that says — it is a hospital in McAllen, Texas, that appeared on CBS. He says, when you ask people if there is anything wrong with this, they say, of course not. Do you know people who have come here to only have babies? Oh, yes, says the mother who has just had them. But that's all of the evidence there is.

I think that is beside the point. But what we do know is something like 30 or 40,000 children were born to illegal aliens here, a huge percentage of the birth rate of illegal aliens are children born in United States.

GIGOT: That is 30 or 40,000. That's not nothing. That is a fair number of people.

(LAUGHTER)

RILEY: But just to take the hospital example, 40 percent at a certain hospital. OK. The people giving birth there, had they been here 10 years or 20 years, two months?

RABINOWITZ: As one doctor said, the woman was still wet from crossing the Rio Grande.

GIGOT: OK.

RABINOWITZ: This is very dramatic.

RILEY: There is evidence, to be fair, of something called birth tourism, where companies abroad tell families, we'll set up a place for you to give birth in the U.S. We'll make sure the timing is right and so forth.

But again, there's no — when we find these outfits, when the authorities find out about these outfits, they shut them down. And there's no evidence that there is a large number of them catering to some critical mass of individuals. Again, it is mostly anecdotal. There may be a few dozen or a few hundred or maybe a couple of thousand. But the idea that repealing this amendment would significantly reduce illegal immigration, there is no evidence of that. We know why these folks come. They come to work. We know that because of their labor participation rates. Hispanic immigrants in the U.S. have the highest labor participation rate of any group in the U.S. They are coming here to work.

GIGOT: Dorothy?

RABINOWITZ: Here's the thing. I think we can concede we don't know that. We can concede there is very little chance that this amendment would in any way be repealed.

GIGOT: Right.

RABINOWITZ: The courts have said no twice to it. It seems pointless.

But here's the thing. There is something about this, much like the mosque in New York, that brings out all of the demigods in the world, accusing people who object to this as racists, oppressors. All, thank you, Mayor Bloomberg. Yet there remains this capacity not to face the facts, this enormous number of illegal aliens. And consider, across the world, there are would-be immigrants, skilled, needed immigrants, who are playing the game by the rules and waiting their term to come here. And they have to wait while people who can cross the river in Texas have this extraordinary birth right?

GIGOT: You are saying that the symbolic politics of this are useful even if you really can't change the law?

RABINOWITZ: Absolutely. Completely, because there is no reason not to scrutinize something that ends up being a cynical exploitation of American rights and principles and values that is this horde of illegal aliens.

GIGOT: OK, Dorothy, last word. To be continued, I hope.

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" of the week.

Dorothy, first to you.

RABINOWITZ: Yes, the United States has joined the U.N. Human Rights Conference, which is composed of a series of oppressors, that no other administration has wanted join. And this week, delivered a long apology, among other things, for the U.S. record on human right in the United States and the oppression of minorities, et cetera. The Obama administration's insistence on simply embracing every tyrannical majority, by assuring them that we are just as well continues apace.

GIGOT: All right.

Jason?

RILEY: Paul, unemployment is 9.5 percent. Black unemployment is pushing percent 16 percent. And black teen unemployment is 40 percent. Yet a labor union is fighting tooth and nail to keep Wal-Mart from building a store and bringing thousands of jobs to a low-income neighborhood in Brooklyn. Where is the civil right's leadership when you need them?

GIGOT: Mary?

O'GRADY: This is a hit for the miners in Chile and for their families and for the rescue workers. These miners are 700 meters below the ground. They were told they may not get out for several months. And I think what we are seeing in the process is a tribute to not only the human spirit but the spirit of cooperation. Everybody is working together. Everybody is doing their job. I think it's something to really applaud.

GIGOT: God bless them.

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 who for watching.

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

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