Sens. Graham, McCaskill Talk Foreign, Domestic Flashpoints

The following is a rush transcript of the November 28, 2010, edition of "Fox News Sunday With Chris Wallace." This copy may not be in its final form and may be updated.


CHRIS WALLACE, ANCHOR: I'm Chris Wallace, and this is "Fox News Sunday." Showdown with North Korea -- how will Washington handle the latest crisis? And how should the U.S. bring terror detainees to justice? We'll get the latest on foreign and domestic flash points from two leading senators, Republicans Lindsey Graham, and Democrat Claire McCaskill.

Then, the president talks turkey this week with congressional leaders of both parties. We'll ask our Sunday group if compromises are possible on the Bush tax cuts and the new START treaty.

And our Power Player of the Week -- how about this for a Christmas present, all right now on "Fox News Sunday."

And hello again from Fox News in Washington. We are headed into a big week here in the nation's capital -- the growing confrontation with North Korea, a presidential summit with the new congressional leaders, and the debt commission finishes its work.

Joining us to discuss it all are two key senators. From his home state of South Carolina, Republican Lindsey Graham. And from her home state of Missouri, Democrat Claire McCaskill.

And, Senators, welcome back to "Fox News Sunday."



WALLACE: Let's start with Korea. The U.S. and South Korea began naval exercises today in the Yellow Sea, ignoring protests from both North Korea and China. You are both members of the Senate Arms Services Committee.

How should the U.S. deal with the growing threat of North Korea, from North Korea? And how should we respond to China's new call for emergency talks?

Senator Graham, why don't you start?

GRAHAM: Well, number one, you go forward with the exercises. You don't flinch. You know, this is a very unstable regime who stays in power through fear and intimidation. And there'll come a day where the people in North Korea are so frustrated they will act.

But what I worry about is South Korea. I worry about this democracy that we support in South Korea. How much more will they take? China has a chance to change the feature of the Korean peninsula. I'm looking at China to step up their game against North Korea and try to get -- bring them in the fold of a peaceful nation.

So I think we should push China hard and keep the sanctions on North Korea.

WALLACE: Senator McCaskill, really, the same questions to you. How should we deal with North Korea? And you know, China plays this game where they say, "Oh, let's have these talks," but they never really put any pressure on North Korea.

GRAHAM: Right.

WALLACE: Is it time to give up, Senator McCaskill, on China ever restraining the regime in Pyongyang?

MCCASKILL: No, I don't think so. I mean, China obviously borders on this country, and I think China calling for a resuming of the six-party talks is important. Typically, we've been, you know, wanting six-party talks and China has not been as enthusiastic, so I think that's a good sign.

I agree with Lindsey. We need to continue the exercises. We need to take a very strong stand. This is brazen and it's belligerent and it's something that I believe that all of those six countries -- all of the people in the six-party talks need to get to work on, including Russia, I might add, which is why the START treaty is also important here.

WALLACE: Well, that brings me in to my next subject, which is kind of complicated, but Wikileaks. The Wikileaks Web site...


WALLACE: ... is expected to engage in another massive document dump, this time of State Department cables, within the next 24 hours.

Senator Graham, there is speculation that among the classified documents that are going to be released are embarrassing assessments of Russian leaders, possibly secrets from negotiations with the Russians on arms control.

Really, two questions. One, what do you make of this latest Wikileaks document dump? And secondly, what impact could it -- if it does have this kind of information about the Russians and arms control negotiations, what information could it -- or impact could it have on ratification of the START treaty?

GRAHAM: Well, one, leaking the material is deplorable. I agree with the Pentagon's assessment that people at Wikileaks could have blood on their hands. How they affect START negotiations, I really don't know.

I do know this, that it would be good for the United States and Russia to enter into the START treaty if it is a good treaty. The question for me -- are we sure, are we absolutely certain, that we can proceed with missile defense development apart from the START treaty.

It is my belief you cannot allow the START treaty to interfere with the missile defense of this nation. We are at risk here from Iran, North Korea and other actors. I don't know what the cables may say, but it's just we're at war.

I mean, the world is getting dangerous by the day. And people who do this are low on the food chain as far as I'm concerned. If you can prosecute them, let's try.WALLACE: Well, you talk -- you talk about missile defense. I mean, yes, there is some language in the preamble which...


WALLACE: ... is non-binding.

GRAHAM: Right.

WALLACE: But the administration says that doesn't in any way bind the U.S. And you had all these Republican wise men like Henry Kissinger and former secretary of state Baker come and say that they think...

GRAHAM: Right.

WALLACE: ... START's important. Why doesn't that persuade you?

GRAHAM: Well, Jon Kyl is a wise man, and he has brought up a very good point. The preamble to the START treaty negotiated with Ellen Tauscher and the Russians indicates that the Russians could withdrawal from the treaty if we develop the fourth stage of missile defense.

Here's a simple question. Are the Russians looking at that preamble as a provision that prevents us from developing strategic missile defense systems? If it -- if it's going to be interpreted by the Russians that way, I need to know before I vote.

If the Russians says -- say that they will withdraw from the treaty if we develop strategic missile defense systems, I need to know that.If they that it doesn't mean that, then I think we're a lot closer to the treaty being enacted.

WALLACE: Senator McCaskill, I got, I guess, the two questions for you, one about the Wikileaks dump, and secondly about the new START treaty.

MCCASKILL: Well, you know, Lindsey's right. The people who are leaking these documents need to do a gut check about their patriotism. And I think they're enjoying the attention they're getting. But frankly, it's coming at a very high price in terms of protecting our men and women in uniform...


MCCASKILL: ... national security. And I hope that we can figure out where this is coming from and go after them with the force of law.

The second thing about the START treaty -- you know, this is really amazing to me. And you know, Lindsey Graham is a responsible senator who doesn't play these games. But there's some game-playing going on with the START treaty, and it's all about politics and it's all about trying to damage the president of the United States.

And this is a moment where we need to set that aside and look at what really this is. This is a treaty that's supported by our military. This is a treaty that's supported by our allies. This is a treaty that's supported by secretaries of state from both President Bushes, Henry Kissinger, Jim Baker, Colin Powell, along with almost every expert in the world, in terms of keeping our nation safe from strategic nuclear weapons.

We've now gone months without any verification of loose nukes. Look at Dick Lugar, who I think -- instead of playing politics and hiding behind the skirts of Jon Kyl, I hope that the Republicans look at Richard Lugar, the ranking member of the Foreign Relations Committee, who has said unequivocally, "We need to do this START treaty."

And look at what's going on in the world right now with North Korea, with Iran. And as Lindsey knows, our supply lines to our men and women in Afghanistan -- this treaty is important because our relationship with Russia is important so we can move supplies to our men and women in Afghanistan.

WALLACE: Senator...

MCCASKILL: I just think it's time for us to do what we've always done...

GRAHAM: Can I...

MCCASKILL: ... in this country...

WALLACE: Yeah, real quickly, Senator.

MCCASKILL: ... and do this in a bipartisan way.

WALLACE: Senator Graham, real quickly, and then I've got...

GRAHAM: Well, can...

WALLACE: ... to move on to another subject.

GRAHAM: Well, here's the question. Does the preamble to the START treaty allow the Russians to opt out of the treaty if we develop the fourth stage of missile defense, as our Pentagon has said they want to do?

MCCASKILL: Absolutely not. The preamble is not binding. Everyone knows it's not binding. But there's all kinds of posturing...

GRAHAM: The Russians say...

MCCASKILL: ... that goes on around the treaty.

GRAHAM: ... that it is. The Russians say...

MCCASKILL: Well, that -- you know, that's just not -- first of all -- first of all, we absolutely went to NATO after this treaty had been inked and all of our allies signed the agreement to continue with missile defense. I can't find anybody -- I can't find anybody in any document anywhere that's saying that somehow that preamble has any...

WALLACE: Senator...

MCCASKILL: ... impact. We are moving ahead with this missile defense, period.

WALLACE: ... with all due respect, we're not going to solve...

GRAHAM: Give me a statement from the Russians...

WALLACE: ... this here, and I want to...

MCCASKILL: Missile defense is going to happen.

GRAHAM: ... saying what you did...

WALLACE: Guys, if I can...

GRAHAM: ... what you just said.

WALLACE: ... move on to another subject, because I know this is something particularly you, Senator Graham, want to talk about, and that's about terror detainees and how we handle them.

Senator Graham, we had Secretary of State Clinton on "Fox News Sunday" last week. And despite the fact that Ahmed Ghailani, the alleged co-conspirator -- well, I guess he's now been convicted in the case of the bombings of the U.S. embassies in Africa.

Although he was convicted on one count, he was acquitted on all the other 284 counts. Despite all of that, here's what Secretary Clinton said last week about the handling of terror detainees in federal civilian trials. Let's watch.


SECRETARY OF STATE HILLARY CLINTON: When you look at the success record in civilian courts of convicting, sentencing, detaining in maximum security prisons by the civilian courts, it surpasses what has been accomplished in the military commissions.


WALLACE: Senator Graham, what do you make of Secretary Clinton's argument? And are you going to take action -- I know you have an amendment out there. Are you going to take action to block civilian trials especially of the non -- of the 9/11 conspirators?

GRAHAM: I believe in all-of-the-above approach to terrorism trials. There's a place for Article III civilian courts in some cases, like the Christmas Day bomber, a guy caught fresh off the plane, probably low-level Al Qaida operative.

I will do everything in my power to make sure Khalid Sheikh Mohammed and the co-conspirators of 9/11 who attacked our country nine years ago never see a civilian court. I think it is a big mistake to criminalize the war, to take someone you've held under the law of war as an enemy combatant for six or seven years, then put them in civilian court. It is a disaster waiting to happen.

I believe I got the votes to block it. I don't think Khalid Sheikh Mohammed will ever get congressional approval to see a civilian court. He should be tried at Guantanamo Bay. He should be tried now. He was ready to plead guilty before the Obama administration stopped the trial. We should have him in a military commission trial beginning Monday and get this case behind us.

WALLACE: Senator McCaskill, at various points you have supported closing Guantanamo and moving all of the prisoners from Guantanamo to U.S. prisons. In the wake of the Ghailani verdict, in the wake of what you just heard from Senator Graham on Khalid Sheikh Mohammed, isn't that idea dead?

MCCASKILL: I think -- I think that Lindsey and I both have spent time as prosecutors, and he's right, all of the above needs to be available. We need to have every kind of trial available. And each case should be dictated by the facts, the evidence and the circumstances.

I agree with him that the very highest level operatives of 9/11 should be -- those trials should be in a military setting. But that doesn't mean that the civilian courts should not be available, as Lindsey has indicated, in some instances.

So I think this has to be done on a case-by-case basis. And I think largely Senator Graham has done some yeoman's work trying to move us to upgrading our military commission trials and to working in a reasonable way to make sure.

And here's what the president, I know, is most concerned about, making sure that none of these terrorists ever see the light of day.

WALLACE: Let's move on to another big subject. As I say, this is going to be quite a week in Washington. Your Senate Arms Services Committee is going to hold a series of hearings this week on the question of whether or not to repeal "don't ask, don't tell."

Senator McCaskill, the Pentagon will formally release at your hearings this study which reportedly says that most military troops do not object to repeal of the policy. And yet Senator Graham and Senator McCain are saying they want another study. Are they in the process of moving the goal line?

MCCASKILL: Well, I don't know. I do know this, that gay members of the military have served for decades, and there hasn't been a problem with our military being the finest in the world.

The question is can they serve with integrity. And I think our military is the kind of organization that wants to make sure that everyone can serve with integrity. So I'm looking forward to seeing the study. I'm looking forward to seeing the results of the study.

And I think that we should move forward to make sure that any person who stands up and says, "I'm willing to die for our country" can do so with honor.

WALLACE: Senator Graham, the Pentagon has been studying this issue for months. The secretary of defense and the chairman of the Joint Chiefs both say they favor repeal. Why isn't that enough?

GRAHAM: Well, there are service chiefs who object to repeal, particularly the Marine Corps. And the question that was asked of our military members is how would you implement "don't ask, don't tell" once it's repealed. They didn't ask the question, "Should it be repealed?"

This is a political promise made by Senator Obama when he was running for president. There is no groundswell of opposition to "don't ask, don't tell" coming from our military. This is all politics.

I don't believe there's anywhere near the votes to repeal "don't ask, don't tell" on the Republican side. I think we'll be united in the lame duck. And the study I would be looking for is asking military members should it be repealed, not how to implement it once you as a politician decide to repeal it.

So I think in a lame duck setting, "don't ask, don't tell" is not going anywhere.

WALLACE: Let's turn to domestic politics. The president is going to be meeting with congressional leaders of both parties on Tuesday at the White House. This is the first meeting since the midterm elections. And they're going to discuss a number of issues, and let's go through a couple of them.

Senator McCaskill, would you support a temporary extension for several years of the Bush tax cuts both for the middle class and for those making more than $250,000 a year?

MCCASKILL: Well, I think we should draw the line in the sand for millionaires. Honestly, with all the talk and the righteous indignation about the deficit, are we really going to hold up tax cuts for all of America just for the millionaires? And I think that's where we should draw the line.

Our deficit is serious. Anybody who believes that that small tax differential for militaries is going to make a big difference on job creation hasn't been paying attention. There's many things we can do that's much more stimulative to the economy than taking care of the millionaires.

And by the way, we've done a net tax cut of $300 billion in the last 18 months, most focused on the middle class and small businesses, and that's where we need to keep our focus.

WALLACE: So let me just make sure, real quickly, I understand. What you're saying is that you would back off the idea of making the cutoff point $250,000. You say extend the Bush tax cuts for everyone who's making less than a million dollars a year?

MCCASKILL: That's what I think is the right approach. That's the approach I'm going to be working for.

I can't speak for the rest of my caucus. I certainly can't speak for the president of the United States. But I think it is ridiculous, with the deficit looming, that we could actually be held hostage -- the middle class could be held hostage -- by trying to get tax cuts to families, frankly, like mine and others that the last thing in the world that 3 percent differential is going to mean is more jobs.

WALLACE: Senator Graham?

GRAHAM: I'm not going to vote to increase taxes on anybody in America, millionaires included. We're in a very weak economy. If you want to make it weaker, raise taxes on anybody is a bad idea.

There will be bipartisan support in the lame duck to extend all the tax cuts for two or three years, and I think that vote will be had before the end of the year.

And if the president doesn't support that, I think he's running a risk of making the economy weaker at a time where he could help make it stronger through bipartisan support by Democrats and Republicans to extend all the tax cuts. And stop playing class warfare. Let's get the economy going.

WALLACE: All right. Meanwhile, the debt commission is going to finish its work this week. It has a December 1st deadline.

And few people, Senator Graham, expect it to get the super majority, 14 out of the 18 votes of the members of the commission, to pass...

GRAHAM: Right.

WALLACE: ... anything. Does that mean deficit reduction is dead?

GRAHAM: Well, I want to say something positive about Claire. She said some nice things about me. She's been working with Jeff Sessions to reduce spending, I think, to 2008 levels or freeze it to last year's budget -- would save about $100 billion. I want to applaud her and Senator Sessions.

The commission probably is dead. We're not going to have a national sales tax. No Republican's going to vote for that. But I'll make a challenge on your show to any Democrat, particularly my friend Claire.Let's see if we can do anything about entitlements.

The game really is entitlement reform. Let's see if we can come up with a way to increase the age for people under 55 who are about to -- for Social Security and Medicare purposes. Let's see if we can recalculate benefits for Social Security recipients and our income levels to save Social Security from bankruptcy. That's where the game's at.

Let's see if we can do something next year on Social Security to save it from bankruptcy and get away from all this partisanship about the rich and the poor. We're all in -- we're all in this together in terms of Social Security.

WALLACE: Senator McCaskill, would you accept benefit cuts? And that was certainly one of the things that the co-chairs agreed to. Would you accept benefit cuts in entitlements?

MCCASKILL: I think we need to look at means testing, and I think we need to look for the next generation and the generation following what is the appropriate age for retirement. Do we need to tweak that slightly -- which is all we'd need to do, frankly, to make Social Security safe and secure for generations to come.

And do we really need to be buying prescription drugs for billionaires in this country with tax dollars?

GRAHAM: There you go.

MCCASKILL: Can we afford that? Can we afford that?

GRAHAM: I agree with you.

MCCASKILL: I don't know. And so I think Lindsey -- if he's willing to sit down and talk about this, I'll be there, and I'll buy the coffee.

GRAHAM: Well, let me tell you...

MCCASKILL: And let's try to figure out a way that...

GRAHAM: ... can I -- can I...

MCCASKILL: ... we can go forward that's is politically responsible.

WALLACE: But, Senator Graham, let me ask you...

GRAHAM: Can I just say just one thing, Chris?

WALLACE: Senator Graham, I'm going to give you an opportunity to respond. But I want you to...


WALLACE: ... because one of the other things -- because you're talking about what Republicans particularly want to see, which is cuts in spending. But in its report, the debt commission also said, "Let's have a formula, 3 to 1, spending cuts to tax increases."

And they were willing to -- they said there have to be some revenue increases as part of this deal. Would you accept that?

GRAHAM: Well, when you look historically, when we raise taxes, the economy slows, and we don't get any more revenue. When we cut taxes, the economy grows, and we maintain the same of revenue, generally whether or not we've raised or lowered taxes. So let's keep taxes low to create jobs. Here's what I say to upper-income Americans like me, you and Claire. Why should the government buy our prescription drugs? This is a way for people in the upper incomes to help their country become solvent without raising taxes, which kills jobs.

Let's look at my benefits when I retire. I'm going to have a military retirement. I'm going to have a congressional retirement. I'm willing to give up some Social Security because we can't afford to pay me what's promised. I'm willing to do that, and I bet you and Claire would be, too.

That's a way to get upper-income Americans to help solve our debt problems without raising taxes, which kills jobs.

WALLACE: OK. Finally, I want to talk -- and some would say we've already been doing this, but let's talk some pure politics.

Senator McCaskill, you're up for election in 2012, and I don't have to tell you Republicans say you're one of the most vulnerable Democratic senators. You're now touting your independence from President Obama.

But looking back at your record, over the last two years you voted for the stimulus. You voted for health care reform. You voted for financial regulation. So where is your independence from this president and his agenda?

MCCASKILL: I'm opposed to cap and trade. I voted against the omnibus. I voted against the second round on "cash for clunkers." I voted against a number of -- in fact, I voted against every omnibus bill. I voted against comprehensive immigration reform. There's a long list of things where I've separated.

In fact, when he was a senator, he and I didn't always vote together. My record of independence stretches back, frankly, for a long time. And I've got to make sure Missourians know about that. And I'm used to being an underdog. It's not an uncommon place to be if you're from Missouri in elections.

And so I am anticipating being an underdog in this election. And that means I'm going to have to work twice as hard, which is OK with me.

WALLACE: I mean, beyond these specific issues, is there a conceptual area in which you think this president is wrong?

MCCASKILL: Well, I think that there have been -- I think, frankly, there has been not enough focus in terms of the job creation at a point in time -- we did the stimulus. We did -- we did what has been, by the way, wildly successful, the TARP.

And especially look what's happened with General Motors. We saved "made in America" for domestic auto production. We saved thousands of jobs. We saved entire communities...

WALLACE: Yeah, but my question is where has he been...

MCCASKILL: ... because of what we did with General Motors.

WALLACE: ... where is president wrong.

MCCASKILL: I think that at the point in time that we did those big things, moving into health care at that particular time, I think, was very difficult, because the American people were just beginning to feel this economic slump.

And they were going, "Wait a minute, you guys are arguing about a lot of policy that is complicated in health care, and I'm worried that my son just lost his job and is moving back in the house, and I can't pay for my kid's college." I think that many of those things didn't get the focus they should have at that point in time.

WALLACE: Senator Graham, you're safely not up for re-election until 2014, but I do want to ask you about the tea party. What role do you think they'll play over the next two years? And what do you think of this talk from some, to the degree that there are leaders in the tea party, who are now saying, "Let's get into social issues, not just fiscal issues?"

GRAHAM: Well, I think every American should be involved in issues that matter to people. And the tea party can be hugely helpful. I talked to Rand Paul and Mike Lee about adjusting the age on entitlements and about recalculating benefits, and I was very pleased with the reception I had. So these are two new members of Congress that I think are serious about getting our fiscal house in order.

If the tea party would get behind adjusting the age for Social Security and Medicare recipients in the future, recalculating benefits based on income, a means test, they would have done the country a great service. But from this discussion, the one thing I can tell you is not going to happen, the DREAM Act.

She's talking about voting against comprehensive immigration reform. I support it done right. But if we bring up the DREAM Act in the lame duck, that's going nowhere, because why would you give legal citizenship to 2 million people without securing the border first?

WALLACE: Senators, we're going to have to leave it there. I said we were going to give you a workout, and we did. We want to thank you both for giving us your insight into a number of issues you're facing here in Washington. Enjoy the rest of your holiday weekend.

GRAHAM: Thank you.

MCCASKILL: Thank you.

WALLACE: Up next, our Sunday panel previews that Tuesday meeting at the White House between President Obama and the newly empowered House Republicans. Will they find a way to get anything done?



PRESIDENT BARACK OBAMA: I've invited the leadership of both parties to the White House for a real and honest discussion, because I believe that if we stop talking at one another and start talking with one another, we can get a lot done.


WALLACE: President Obama with an optimistic view of his first meeting Tuesday with GOP congressional leaders after the shellacking he took in the midterm elections.

And it's time now for our Sunday group, Bill Kristol of The Weekly Standard, Mara Liasson of National Public Radio, former State Department official Liz Cheney, and Fox News political analyst Juan Williams.

So they finally agreed on a date. They apparently agreed on the shape of the table. And on Tuesday, President Obama's going to sit down at the White House with congressional leaders of both parties, but especially with the leaders of the new Republican majority in the House and the expanded -- the increased Republican minority in the Senate.

Bill, how important is this meeting? And what do you expect to come out of it?

BILL KRISTOL, THE WEEKLY STANDARD: I think it's reasonably important, and I think they will agree on a process for resolving the tax issue. It is crazy to go to the new year with taxes going up for everyone, with the expectation that then the Congress will have to act retroactively to reduce all or some of those taxes. It's just a crazy way to run economic policies, especially in these times.

And I imagine what they will agree to is a series of votes where the Democrats get a chance to present their preferred alternative, the Republicans present their preferred alternative, making all the tax cuts permanent, and then they will end up agreeing on a two- or three-year extension of current tax rates.

They won't agree on that on Tuesday, but I think they will agree with the congressional leadership on a process that means that by mid-December they will resolve the question of what tax rates are next year.

WALLACE: What do you make of this fallback position the we're hearing from the Democrats -- we heard it from Claire McCaskill today -- "All right, we won't make the cutoff $250,000. We'll make it a million dollars."

KRISTOL: I think they can try to bring that to a vote, too, and I think Republicans won't accept that, and I think we'll end up with extending all current tax rates for two or three years.

WALLACE: Mara, what is the smart play here -- I mean, really, for both sides? Do they want to show, "Yes, we're ready, eager, willing to compromise," or do they want to, at least at this point, make a -- make a statement to their base, "We're going to fight for our principles?"

MARA LIASSON, NATIONAL PUBLIC RADIO: I think for the Republicans, probably this early on they need to make a statement to their base. I don't know if that's the best thing for the country. I think probably compromise is.

But I think right now before they've even come into office, to be seen as compromising or giving away things, especially on taxes, would probably be a mistake.

President Obama is still reaching out his hand. You played that clip just before. He's still searching for common ground. I'm afraid there isn't very much right now in Washington on anything.

But I do think on the tax cuts there will be a series of votes where each party gets to test its strength, to see if it can get its preferred plan through. I can't imagine that there are votes for either side's top priority, and they'll have to compromise in the end, because it would be a disaster for those tax rates to go up, and I do think the president would be blamed.

WALLACE: Let me follow up on that specifically with you, Liz. Whether in this meeting or over the course of the next few weeks, do you expect -- because the obvious compromise would seem to be a temporary extension of all the tax cuts. And one thing I didn't get to talk about, and I had on my list, but we didn't get to it, what about earmarks?

LIZ CHENEY, FORMER STATE DEPARTMENT OFFICIAL: Yes. I mean, I think that the Democrats are going to have to compromise on the Bush tax cuts. And I think it's important to remember that we're really not talking about tax cuts. Those are tax increases now.

WALLACE: Tax increases if the current levels lapse.

CHENEY: If they expire, right. And I think that, you know, if you look at this meeting that's coming up, I actually think that it's sort of Washington theater.

I don't think that there are a lot of American voters outside the beltway who are watching saying, oh, thank goodness, they're going to have a meeting. I think that they want action. And I don't think that the message of the election was compromise, frankly. I think the message was we're really concerned about the direction this administration is going in, and they want the Republicans to stop it.

They want the Republicans to stop the spending. They elected people who hopefully will be able to return us to an understanding that the private sector has got to be --


WALLACE: But it would be a compromise for the Republicans to agree to a temporary extension. I mean, they wanted to see a permanent extension.

CHENEY: Well, and I agree with more on this. I don't think that you're going to see any kind of a compromise right now. And I don't think you should.

I think that the Republican position has been very clear. You do not raise taxes when the economy is struggling, as our economy is right now. And I think it would be very foolish for the Obama administration and the Democrats on the Hill to demonstrate so quickly that they are completely ignoring the message the voters sent the last -- a couple of weeks ago.


JUAN WILLIAMS, FOX NEWS CONTRIBUTOR: The best argument from the Republican perspective has been made by Orrin Hatch, who says if you take away the tax cuts for the very rich in the country, it actually hurts working class people, because it acts as a deterrent to economic stimulation. But you know what? That's a trickle-down argument. And, in fact, if you look at the stimulative effect of giving added money to the very rich, it's negligible and it comes at such a high cost in terms of adding money to the deficit, which is a real problem for our country.

And when you think about it, President Obama is on the defensive because of the elections. President Obama, right now, is being pressured by Independent voters, those in the middle, to show that he can act in a bipartisan manner.

So it seems to me this is a real opportunity for Republicans to put the pressure on Obama. But they have got to be willing to compromise to some extent. And I think the idea of cutting it off at $1 million, or a little bit over a $1 million, is a fine idea, but I just don't think the Republicans have any incentive to do anything but hammer the table and insist that they get what they want like children. I mean, that's all they're going to do.

CHENEY: But, you know, what you ignore in that analysis, Juan, is that a significant proportion of the people that pay income taxes at that high income level are small businesses, and that those are where we get job creation. So, it's nice for sort of the rhetoric of the Democrats to say, oh, the Republicans are trying to help the wealthy, but that ignores how many small businesses are going to be hurt.

WILLIAMS: That's just not true. Liz, I'd love to --

CHENEY: It's absolutely true.

WILLIAMS: It's not --

CHENEY: How many small business owners --

WILLIAMS: How many small business --

WALLACE: One at a time.

WILLIAMS: How many small business people do you know who make more than $250,000 a year, or make $1 million a year?

CHENEY: Juan, it is a significant proportion of the taxpayers who file at that level, are, in fact, small businesses. And when you increase the tax burden on those small businesses, you discourage them from hiring.

And what we've learned over the last 19, 20 months now of the Obama administration is that you cannot grow this economy, you can't stimulate the economy through government handouts. You've got to do it through the private sector.

WALLACE: Let me just say, I hope that the meeting at the White House goes better than this meeting is going today between the two of you.

I want to turn to the other big subject, domestically, this week, and it hasn't gotten much attention, but it will. And that is that the debt commission has its deadline on Wednesday, December 1st. It goes out of business. And there's really a couple of questions, Bill.

Do you expect them to get the supermajority, 14 out of the 18 members, which would have to be a bipartisan agreement, to issue any set of recommendations? And if they don't, what does it mean for deficit reduction?

KRISTOL: I'm not sure if they can get the votes, but I think the Bowles/Simpson report --

WALLACE: Those are the two co-chairs.

KRISTOL: -- the two chairmen who already have released their sense of where we need to go on entitlements and taxes, I think have had a pretty profound effect. And the bottom line is, they think a thorough revamping of the tax code, with a top rate of 23 percent, is optimal for economic growth. Twenty three percent. That's below the current top rate, let alone below a hike in the current tax rate.


KRISTOL: No. And on entitlements, they have courageously -- at least parts of the commission, Simpson and Bowles, themselves, and then Paul Ryan and Alice Rivlin -- Bill Clinton's budget director -- have (INAUDIBLE) Medicare reform that is very much like Paul Ryan's roadmap. I would say this budget commission, which I was a skeptic about, that has actually laid the groundwork for pretty good movement over the next couple of years on both taxes and entitlements.

Can I say something about the politics of this? The other interesting thing is that everybody who didn't like what they proposed had an implicit challenge -- OK, come up with a plan of your own. And there are now dozens of plans coming out.

But when you test the specific proposals in the polls, all of them are unpopular. Everybody wants a deficit cut, but when you ask them, do you want the retirement age increased, or do you want spending cuts, everybody says no.

So I think the challenge for both parties, for the president and the Republicans, is to figure out who can make the argument for growth and competitiveness as a vehicle for reducing the deficit, not just green eye shade, raising taxes and cutting spending. Who can really put it in a real vision for getting the economy growing again?

And that's the challenge, because, otherwise, you can't sell these specific proposals. That's why they're not politically viable, although they are really, really interesting.

KRISTOL: Getting Alice Rivlin, Bill Clinton's budget director, a very respected Democratic policy expert, to sign on basically to Paul Ryan Medicare reform, I think it's --LIASSON: Why? She doesn't (INAUDIBLE) Medicare under 55.

KRISTOL: No, she does turn Medicare -- moves Medicare from defined contribution towards defined benefits. And that is pretty --


KRISTOL: But I think this gives some legitimacy to the notion that you can't just take the position, let Medicare grow as it's growing, leave the entitlements alone. They don't need to be funded --


WALLACE: The idea here -- and it has always been the idea -- if you're going to have a real compromise, there's going to have to be a bargain. There have to be serious spending cuts, even in entitlements.But there is also going to have to be some increased revenue.

Do you think that's a bargain? I'm not going to ask you to speak for the Democrats. Would Republicans -- I mean, what they're talking about in the Bowles-Simpson plan, 3-1 spending cuts to tax increases.

LIASSON: And income tax drops, though.

WALLACE: All right. But is that acceptable?

CHENEY: Well, I mean, neither you nor I have any votes that we can negotiate over this morning, Chris. But it seems to me that you've got to give Bowles and Simpson a lot of credit, even though I don't agree with everything that they've recommended, a lot of credit for just saying, you know, we're going to cut through the BS, here, frankly, and we're going to put forward a proposal.

They've also addressed this issue of the corporate tax, the highest corporate tax level, which is a terrific step as well. And I think something else very interesting is going on here. If you look at what Marco Rubio did in Florida, Marco Rubio ran on the need for entitlement reform, which is something we haven't seen in American politics before.

WALLACE: Which is also a tough thing to do in Florida.

CHENEY: And he didn't just win Florida, but he won the senior vote. I think people understand that the country is facing a very, very significant crisis if we don't, in fact, do entitlements.

WALLACE: Juan, 30 seconds.

WILLIAMS: Well, I think that's exactly right. And I was impressed that somehow, seniors, and not only in Florida, but across the country, are saying that we need to reduce the size of the deficit in this country. And a central part of that operation is slowing down the growth of entitlements. So I thought what Bowles and what Simpson did was just terrific. Now, I must say, the reaction from Democrats has been less than enthusiastic because they see this as rewarding the rich, punishing the poor. But I think you've got to have the long-term view that Mara was speaking about, and the long-term view is, this is good for America, it reduces the deficit and it grows the economy.

WALLACE: All right. We have to take a break here. But when we come back, North Korea flexes its military might. Our panel discusses that. And still another document dump from WikiLeaks.



PRESIDENT BARACK OBAMA: We are rally the international community once again to put pressure on North Korea. We want to make sure that all the parties in the region recognize that this is a serious and ongoing threat that has to be dealt with.


WALLACE: President Obama responding to the latest act of North Korean aggression against South Korea.

And we're back now with the panel.

As I discussed with the senators, the U.S. and South Korea have begun naval exercises, war games in the Yellow Sea, off the coast of both North Korea and China, ignoring protests from those countries.

Bill, how serious is this situation there? Are we overstating it?And what can the U.S. do about it?

KRISTOL: It's pretty serious. North Korea has killed South Koreans in an unprovoked attack. They killed other South Koreans, what, eight months ago, the attack on the ship? And they're testing nuclear weapons. And the regime is unstable and tyrannical, and that's a pretty bad situation.

President Obama himself didn't quite seem to have his heart in it when he said we're once again rallying the international community to put pressure. You know what? That's fine, but we should try to destabilize the regime during this transition.

It's not easy for this regime to make the transition from Kim Jong-il to his 27-year-old son. We should be doing everything we can to bring down this terrible regime and that nuclear weapon problem, and re-ignite the two Koreas.


LIASSON: That is easier said than done.

KRISTOL: Well, I can't do it. All I can do is talk here.

LIASSON: Look, North Korea is a really difficult problem because nobody understands what's going on there. There's no internal pressure. There's no kind of, you know, Aung San Suu Kyi. There is nothing there.

And China doesn't seem to want to cooperate right now. What China wants, of course, is stability. They don't want North Korea to implode and send millions of people over their border.

WALLACE: But they sure aren't putting much of a damper on it.

LIASSON: But they sure aren't putting much of a damper on it. So it's unclear what the Chinese think is the best way to resolve this, but North Korea seems determined to be a nuclear power and to provoke a real confrontation.

WALLACE: I'm going to switch subjects on you, although if you want to talk about North Korea, I'm sure, Liz, that you will go ahead and do so.

We're waiting, and we expect within the next 24 hours, that WikiLeaks is going to have another release of ten of thousands, perhaps more than 200,000, apparently classified State Department documents, files, cables, et cetera.

You used to work in the State Department in the last administration. Is this just a matter of being embarrassing, or could this really be damaging?

CHENEY: Well, I think judging from what we've seen, some of the official American statements about it, it could be potentially very damaging. And we know that the last dump of WikiLeaks docs, in fact, put people's lives at risk, people that we have been working with in Afghanistan and Iraq.

So, I think, once again, the government of Iceland ought to shut down that Web site. I think they ought to stop allowing this stuff to come out of the Web site in Iceland. And I think that the administration ought to be focused very much on prosecuting those responsible.

Back on North Korea for just a second, I do think that what we have seen there is an example of how provocative American weakness can be.And I think that, unfortunately, it is a policy of weakness that has expanded back into the Bush administration, in the last years of the Bush administration.

I think that we've seen time and time again, North Korea, if they test a nuclear weapon, there are no consequences. If they build a reactor for the Syrians, there are no consequences. And what they've learned is that their belligerence, in fact, oftentimes yields from us capitulation and concessions.

I think that it's time for us to put them back on the terrorist list, and I think it's time for to us be very direct with China and say, you know, if you really do want to be the world power that you aspire to be, you've got to step up to the plate here. You can't just benefit from the open economic system in the United States, from the open economies around the world. If you really do view yourself as a world power, and you want the rest of the world to you view you that way --

WALLACE: But don't you think we're saying that?

CHENEY: I don't know. I don't think that we are, actually.

I think that we've been tiptoeing around the Chinese. I think if you look at what happened last July, when we said we were going to have joint military exercises with the South Koreans,. the Chinese objected and said don't do it in the Yellow Sea. We said OK and we moved it.

WALLACE: Yes, but this time we did do it in the Yellow Sea.

CHENEY: That's right. That's a good step.

But I think that our message to them has got to be much more direct and much stronger than it has been. This isn't about pleading with the Chinese to help us. It's about saying to them, if you don't step up to the plate here, you're going to end up with nuclear proliferation throughout your neighborhood. And that is not the way that a world power --


WALLACE: Is that a card that we should play to say to the South Koreans, maybe you should begin your nuclear program? Japan?

CHENEY: No, I don't think we should say that to those countries, but I think we should be clear to the Chinese that if they don't step up to the plate and get the North Koreans -- they are the North Korean's largest trading partner, their closer ally. If they do not engage more effectively and directly in getting the North Koreans to stop what they're doing, the result will be a nuclear proliferation in that neighborhood.

WALLACE: Juan, I put a buffet table of treats in front of you. Go ahead.

WILLIAMS: Well, thank you for that holiday invitation.

WALLACE: There you go.

WILLIAMS: But I must say, it sounds like warmongering. We're already engaged in two wars, Afghanistan, Iraq. We have tensions in the Middle East. And Bill and Liz say, oh, let's go to war with China.This is madness.

WALLACE: Wait a minute --

CHENEY: Nobody said that, Juan.

WILLIAMS: Yes. Both of them said -- look, if you think we're not being direct, that we're not engaged in war games, in territory that China has already said belongs to them, that those are their waters and that we're doing it illegally -- so you can't say that we're not being direct and tough.

If you simply want to embarrass the Chinese and force them into a position where they feel like they are losing face, and that they have no option but to appear to be simply abiding by U.S. dictates, that's a losing hand, Liz. A losing hand.

CHENEY: But you think that we've got --



CHENEY: You think what we've been doing for the last five years --

WALLACE: Wait. Wait. OK.

Liz, your turn. Go ahead.

Wait. Wait. Let Liz go.

WILLIAMS: Oh. I'm sorry.

CHENEY: Do you think that what we've been doing for the last five years has worked? I mean, what we've been doing, basically, is saying we're going to offer carrots to the North Koreans, because we're going to talk them out of their program, and we're going to plead with them to stop? And, by the way, we're going to ignore evidence that they have got an enrichment program going on, which we learned this week they actually do have going on.

UNIDENTIFIED MALE: We didn't even know about the uranium.

WILLIAMS: But I must say, the Chinese have now said let's have more six-party talks. The U.S. government, the Obama administration, has refused those talks. They don't want more talks. They're being very clear and hard-lined.

So, it does not seem to me that your argument that there is somehow softness going on here is in the play at all. What's going on is we need to find a way to resolve the issue, and the administration, contrary to what Bill had to say, has been demonstrating admirable restraint and not warmongering and saying, oh, yes, go in there and start a fight that you can't finish.

KRISTOL: I'm not for warmongering. I am for doing whatever you can do through covert action and other -- bribes (ph) and everything.


KRISTOL: If they're doing it, more power to them. Just as in Iran, the stocks (ph) and that virus (ph) seems to have slowed down their nuclear program.

As with Iran, what's going to do more good, all the talks we've had, or actually subverting their nuclear program? In North Korea, what would do the most good is trying to find fissures in the military, people who are upset about his 27-year-old son taking over, and bringing down the regime.

I'm not calling for war. I am calling for everything you can do.

WALLACE: Wait. Wait. Let me ask -- please.

What makes you think if we brought down that regime, the next regime would be any better?

KRISTOL: It couldn't worse. It couldn't be worse. And there would be reunification on the Korean Peninsula, maybe the Chinese would want to keep a sort of token North Korea up by their border for their own sake. Then about two-thirds of North Korea could become part of a unified Korea, and that would be a lot better than the current situation.

LIASSON: The South Koreans want to do that in a manageable way, not all of a sudden, and huge chaos.

KRISTOL: Well, we should help them do it if -- the chaos of refugees fleeing across the border to freedom is a chaos we should welcome, compared to the current situation.

CHENEY: And I think that the extent to which our allies in the region, the Japanese, the South Koreans, the extent to which they understand that, in fact, we are committed to ensuring that the North Koreans don't proliferate, the fact that we are committed to matching our rhetoric with action, will make us all much more safe and secure.

WALLACE: Thank you, panel. See you all next week.

And don't forget to check out "Panel Plus," where our group here picks right up with the discussion on our Web site, And we promise we'll post the video before noon Eastern Time.

Up next, our "Power Player of The Week."


WALLACE: Now that Thanksgiving has passed, we're officially in the Christmas shopping season. And if you're thinking of getting a bauble for your loved one, we have got something, as we first reported last year, to put you in the right spirit.

Here is our "Power Player of the Week."


JEFFREY POST, CURATOR, GEM AND MINERAL COLLECTION, SMITHSONIAN'S MUSEUM OF NATURAL HISTORY: It's a beautiful thing to look at. The history is both mysterious and intriguing.

WALLACE (voice-over): Jeffrey Post is curator of the gem and mineral collection at the Smithsonian's Museum of Natural History, and he is talking about the Hope Diamond.

POST: Blue diamonds have always been very rare, and so it's hard to lose a blue diamond in history.

WALLACE: And what a history it's had. In the 1600s, the French gem merchant Tavernier found it in India and sold it to King Louis XIV.

POST: This blue diamond, then known as the "French Blue," or the "Blue Diamond of the Realm," was one of his featured gemstones.

WALLACE: During the French Revolution, it was stolen. And according to some accounts, ended up in the collection of King George IV of England.

By 1839, British banker Henry Philip Hope owned it and gave it his name, only now the 69-karat diamond was 45.5 karats.

POST: We believe it ended up in London, and there it was re-cut in order to disguise the diamond so that it could be now resold.

WALLACE: That's not just a guess. The Smithsonian did computer modeling to show the Hope Diamond fits perfectly inside the French Blue, which fits inside Tavernier's original gem.

In 1912, famed jeweler Pierre Cartier sold it to Washington socialite Evelyn Walsh McLean for $180,000, plus some diamonds she traded. And Cartier seems to have invented a curse to go with it.

POST: Well, Evelyn Walsh McLean wore it everywhere. It's hard to find a picture of her after she purchased the diamond in which she is not wearing the diamond.

WALLACE: Gem merchant Harry Winston donated the Hope Diamond to the museum in 1958, where it now sits in an impregnable glass fall (ph).That is, except for when Jeff Post took it out and gave us an extraordinary look at it.

POST: Well, Chris, here is the Hope Diamond. And it's not often we have a chance to introduce someone as closely as we are here.

WALLACE (on camera): May I --

POST: Go ahead.

WALLACE: Ah, the Hope Diamond.

(voice-over): It is only one inch in diameter, but it has been an object of fascination for centuries.

The museum was celebrating 50 years of the diamond by displaying it naked, without its setting. Then people were to vote on the Internet for a new setting it would be displayed in. But no one would see it like this.

(on camera): Speaking technically, how good a diamond is it?POST: It is a diamond with great clarity, it is a near-flawless stone.The combination of the size, the color and the clarity of it make it an unmatched diamond. It really is one of a kind.

WALLACE: And if you wanted to sell it?

POST: If there's anything in the world that one could point to and say it's priceless -- you know, take the U.S. Treasury, or even bigger, the U.S. debt, and try to take that money and go out and buy another diamond like this one, you literally could not do it. There is not one out there anywhere.


WALLACE: The Hope Diamond is back on display at the Smithsonian in its new setting called Embracing Hope, complete with a ribbon of 340 diamonds. But I will always remember holding it in my hand.

Up next, we hear from you.


WALLACE: Time now some for comments you posted to our blog, "Wallace Watch."

First, about Secretary of State Hillary Clinton's comment last week she doesn't plan to run for office ever again.

Fred Shane doesn't buy her flat statement. "What I believe is Secretary Clinton's going to wait then poke her toe in the water. And if it feels right, she'll dive in and give it all she's got."

And Andy Smith had this to say about Texas Governor Perry's comments about Social Security: "I have to agree with him that the Social Security system is a Ponzi scheme. The federal government needs to get out of it because they do it poorly. There is no reason to expect the government will perform better that it has in the past."

WALLACE: Please keep your comments coming. You can find us at

And that's it for today. Have a great week, and we'll see you next "Fox News Sunday."

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