Sen. Coburn Talks Debt and Taxes; Cardinal Donald Wuerl on Religion and Politics

The following is a rush transcript of the December 26, 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. Welcome to a special holiday edition of "Fox News Sunday."


WALLACE (voice-over): With the lame-duck session in the rear-view mirror, time to look at what's next. Runaway government spending, the country's growing debt, and a possible push for tax reform. We'll discuss America's balance sheet with the Senate's leading fiscal hawk, Republican Senator Tom Coburn.

Then, with the Christmas season upon us, we'll talk about religion and politics with Cardinal Donald Wuerl, archbishop of Washington.

Also, the 2011 political landscape, from the White House, to Capitol Hill, to the presidential campaign trail. We'll ask our Sunday panel what to expect. All right now on "Fox News Sunday."


WALLACE: And hello again from Fox News in Washington. We hope you had a wonderful Christmas and are enjoying the holiday season.

A top priority for the next Congress with Republicans in control of the House and with more clout in the Senate will be to cut spending. Joining us now with his ideas for getting our fiscal house in order is Senator Tom Coburn, known as "Dr. No" for his opposition to government spending.

He joins us from his home state of Oklahoma. Senator, welcome back to "Fox News Sunday."

SEN. TOM COBURN, R-OKLA.: Well, good morning, Chris.

WALLACE: I want to start with the lame duck session of Congress that you just finished. You blocked the Democratic omnibus spending bill, which had $8 billion in new earmarks.

On the other hand, Congress did pass that extension of tax cuts and also unemployment benefits, which adds another trillion dollars to the deficit. So my question is, did Congress get the message that voters were sending in the mid-term elections?

COBURN: I certainly don't believe that the lame duck Congress did. The omnibus would have spent -- raised the baseline about $40 billion when you take all the tricks out of it. When we wanted to have a stimulus program, but we don't want to get rid of the inefficient things that are not working in the federal government, and there is well over $300 billion a year, which I can lay out for you in detail that most Americans would agree we should eliminate.

We made an easy decision to pass the tax cuts and the unemployment compensation, as well as the decrease in Social Security payments. We didn't do the hard work. The hard work is eliminating the parts of the government that aren't working, that aren't effective, and also a lot of it that's not even in our constitutional role. WALLACE: Well, let me turn to 2011 and the new Congress. How much, realistically do you think the new Congress can cut in federal spending?

COBURN: I think that remains to be seen. We could certainly cut $100 to $200 billion and help ourselves. What most of America doesn't understand is if we don't put our house in order, we are going to look like Greece or Ireland or even Spain and Italy, which are coming, or even maybe ultimately Japan.

And so, time is of the essence for us. And you're seeing economists around the world starting to worry about whether or not we're going to make the substantive changes to austerity that we need to make in our country to correct our course and to create the confidence that we don't wind up like in Ireland.

WALLACE: Let's get more specific. We'll get to the debt situation, the economic situation in a minute, but let's talk about the job that Congress has.

You just released what you called "Waste Book 2010," in which you outline $11 billion in what you call wasteful spending, including some of those crazy earmarks like $5 billion for an neon sign museum in Las Vegas.

But Senator, for all the waste, if you are going to cut spending seriously, aren't you going to have to cut programs that Americans now rely on? Aren't you going to be calling on Americans to make some tough sacrifices?

COBURN: Absolutely. The problem that faces our country today, the last 30 years we have lived off the future, and the bill is coming due. So there cannot be anything that is not put on the table. There will not be one American that will not be called to sacrifice. Those that are more well-to-do will be called to sacrifice to a greater extent. But the fact is, if we all want a successful future for our kids, and we want to see a renewal in America's productivity and growth, we're going to have to make sacrifices. We've -- both the Republican and Democratic administrations have refused to do that. And we're at a time where we don't have the option anymore, and we need to make those decisions ourselves, rather than have those decisions forced upon us by the international financial community.

WALLACE: If I can, Senator, let's get a little specific. Give me the idea of some programs, because, of course, the dirty secret is everybody is opposed to government spending in general. But when it affects them, they like government spending for the programs that actually benefit them. Give me an idea, in your mind, not necessarily Congress is going to pass of a couple of specific programs you'd have to say aren't waste, but we simply can no longer afford?

COBURN: Well, first of all, we haven't even done the hard work of identifying all the duplications in the federal government. A year ago or two years ago, I asked the GAO to give me a report of all the government programs that are out there, so we could cross-reference which ones do the same thing. It's taken the GAO a year-and-a-half and they refused to do it until I put it in the last debt limit extension.

But for example, we could save about $50 billion a year by eliminating programs. I'll give you a couple of examples. We have 267 job training programs across 39 different agencies. Why do we have 267 of them?

We have 105 programs to encourage people to go into science and technology, engineering and math. That's 105 sets of bureaucrats. None of them have metrics on it. We have $100 billion at a minimum of fraud in Medicare and Medicaid. The healthcare bill didn't significantly address that. That is money that's just being blown away.

The Pentagon can't even audit its own books. It doesn't even know where its money is going. And we refuse to have the tough forces go on the Pentagon so that at least they are efficient with the money they're spending.

So we have a round-up of about $350 billion that will not truly impact anybody in this country that we could eliminate tomorrow.

WALLACE: Now you mentioned the magic phrase, "debt limit." The fact is that the continuing resolution, which Congress just passed, will fund the government until early March. That is about the time that we think the debt limit is going to come up.

And my question is, how tough are you and do you think your fellow Republicans willing to get to say to the Obama administration, look, if you want to increase the debt limit, if you want to keep this country from defaulting on its obligations, you're going to have to give us serious spending cuts?

COBURN: I'm not sure. I have spoken with the president, and he understands where we are with some of these issues. The question will be, will he help lead in making the hard choices?

And of course, most of the things that I've been talking about are discretionary spending. Will he help us fix the problems that have been created by new healthcare bill, and the underlying problems in healthcare is that it costs too much because there are no market forces controlling its cost?

My hope is that he gets out, holds hands with us, and we make some significant cuts. Some economists say that if we cut spending, it will hurt our recovery. Well, we just set up about $1 trillion to be spent in the economy over the next few years in terms of the stimulus. So I think there is no problem that we could cut $100 or $200 billion and start making a down payment and come to an agreement. There doesn't have to be a standoff. What there has to be is real leadership and recognizing the serious nature and the urgency of our problem.

WALLACE: Let's talk about that because I think it's fair to say you are an alarmist about debt. You talk about a, quote, "debt triggered apocalypse." You talk about the idea that if we don't do it, the international community is going to do it. You raise the comparison to Greece. Do you think the U.S. is headed to be another Greece?

COBURN: I do. I think within three to four years, if we have not done the critical changes that we have to make, I think the confidence in our economy and in our currency will be undermined significantly. And that may scare some folks. It's not intended to.

But the fact is we're living off our future, and everybody else in the world that's doing that today is getting punished. And what makes us think we can continue to do that? And so, if we send a signal to the rest of the international financial community that we are going to start down a road to austerity, we're going to start living within our means, we're going to decrease our spending, we are going to look at what the true role of the federal government is and try to limit our impact to that range, and we're going to eliminate programs that are not a priority.

Chris, the issue is not whether the government can do good things. It does great things. The question is what are the good things it can do and still afford to do it without doing significant harm? And what is happening in our country is we're not taking seriously the very real and urgent threat that will undermine the standard of living in this country.

And I agree. I told you the other evening that if we didn't take some pain now, we're going to experience apocalyptic pain, and it's going to be out of our control. The idea should be that we control it.

WALLACE: I was going to say, let's talk about that. You say you don't want to scare people. Go ahead and scare people, Senator. You scared me the other night when we happened to be at a dinner together.

WALLACE: How bleak do you think our financial and economic picture in this country will be over the next decade if we don't get serious about cutting spending?

COBURN: I think you'll see a 15 to 18 percent unemployment rate. I think you will see an 8 to 9 percent decline in GDP. I think you'll see the middle class just destroyed if we don't do this. And the people that it will harm the most will be the poorest of the poor, because we'll print money to try to debase our currency and get out of it and what you will see is hyperinflation. So we don't have a lot of options other than living within our means and sending the signal that creates confidence that we can repay our debt and that we're not going to debase our currency to do it.

WALLACE: I want to go back to your role earlier this year. Over the course of the last few months, you were a member of the president's debt commission, and you voted for the Bowles-Simpson debt commission plan which called for ending $1 trillion in tax deductions. As a result, you took some heat from normally a supporter of yours, Grover Norquist, who is the head of Americans for Tax Reform. He says the Democrats snookered you. And let me put up the quote. "When he [Coburn], puts his fingerprints, however fleetingly, on a trillion- dollar tax increase, he damages the Republican Party."

Senator, how do you plead?

COBURN: I plead that's the kind of language that causes us to not solve our problems. I don't care if you're rich or poor, liberal or conservative. If we don't fix the problems in front of us, everybody is going to pay a significant price. And the very fact that we have $1.1 trillion in tax expenditures every year that directs capital in a way that the government says it should be directed rather than the way it should be directed based on markets, tells us that we have a terrible tax system. And we need to reform our tax system and at the same time we need to eliminate a lot of the waste, fraud, abuse and duplication in the federal government.

And so, to have that debate and to say that hurts the Republicans, you know, I'm not in the Senate for the Republican Party. I'm in the Senate for America and for the future of our country. And if we are going to measure everything by Republican/Democrat, we're going to continue down this course that is going to result in our failure.

Chris, the history of republics is they average 200 years of life. And they all fail in the history over fiscal matters. They rot from within before they collapse or are attacked. And it's always over fiscal issues. And we need a wake-up call. We need real leadership, Democrat, Republican and independent to stand up and say, we have to live within our means. It means all of us will sacrifice. There is not a problem we can't solve if in fact we quit denying what the real problem is, and start working on it instead of playing politics with it.

So we need to go after what the real problems are, not the symptoms, and not pay attention to the naysayers on both the left and the right, and fix our country. And if we do, we have a wonderful future. If we don't, we have a bleak future.

WALLACE: I want to get into one last area with you. You have just won reelection, and as a believer in term limits, you have pledged that this six-year term that you are beginning now will be your last in the Senate. As a practical matter, what impact does that have? Will that free you to do things that you might not otherwise do if you were looking at a possibility of another term, still another term in the Senate?

COBURN: I don't think so. I think if you look at my first six years, you know, my goal is to do what I think is the best right thing for our country and to follow the Constitution. And so I had a fairly healthy winning percentage doing that, and I don't expect to change at all. I don't think it has anything to do with term limits. I think it has to do with what your core beliefs are and whether you're willing to stand up for them and take the heat.

Just like on the 9/11 bill this last week. I took all the heat, but we solved the problem and spent $7.2 billion less than we would have, and there is not going to be any difference in impact for the people we're trying to help.

WALLACE: And I just have to ask you, as one of these professional skeptics, if you suddenly made tremendous headway and you really were turning Washington around, come 2016, would you consider running for a third term? Are you saying I don't care, no way, no how, I made a pledge, I'm keeping it?

COBURN: No way, no how. I'll be through at the end of this term. And you know, I think that's really healthy for us. We have this assumption that only people who are dedicated to the life of public service can serve. And what the real problem is in Washington is we have people who don't have the breadth and depth of the experience of living outside of politics and coming and applying that breadth and depth to the very critical issues of our day. I would tell you I think that's why we're in the problems we're in, is that we have career politicians who have very limited experience making critical decisions for us. And what we need is real-world experienced people outside of politics to come and apply some common sense.

WALLACE: Well, and we should point out, Senator Coburn, that not only you are Senator Coburn, you are also Dr. Coburn, a medical doctor. Senator, doctor, we want to thank you so much for joining us on this Christmas weekend and happy New Year to you, sir.

COBURN: Happy New Year to you.

WALLACE: Up next, religious and politics. We will discuss both with Cardinal Donald Wuerl, the archbishop of Washington.


WALLACE: It's always an honor to talk with our next guest, especially at this time of year. We welcome Cardinal Donald Wuerl, the archbishop of Washington. Your Eminence, merry Christmas and happy holidays, sir.


WALLACE: As you look across America, let's talk about the spiritual state of our union as we approach 2011. I know one of the things that concerns you are all the shouting, talking heads on TV, and all the divisive blogs, and you say they come out of the same mentality as road rage. Explain.

WUERL: I think what happens is when people don't feel they are accountable for what they're saying -- and that often happens when there is no one there to challenge what you are saying -- people can -- some people tend to say things that really need to be modified. They need to be contextualized.

I think what we have to say to ourselves, as we look at this great country and all of the wonderful things that are a part of our history and our life together, we need to be respectful of each other. We need to be talking to each other out of the same tone that we would if we were directly across the table from someone. And that -- that is a little bit of a challenge today because with blogs and with all the ease of communications, we sometimes forget directly across the table from us--


WALLACE: We're across the table, so I'll be very respectful. I would anyway.

Your major initiative right now is what you call the new evangelization, which is to call on Catholics to renew their faith and renew their commitment to the church. As part of that, the archdiocese has distributed 11,000 yard signs.

WALLACE: And here is one of them, encouraging people to find the perfect gift. Which is?

WUERL: The perfect gift is our lord. And the reason that our lord is the perfect gift is because in this season that we have just celebrated and we're continuing to celebrate, the birth of Christ, we remind ourselves that there is no person in all of human history who has so impacted the world with his message, his message of respect for one another, for love, compassion, care.

That is a great gift. We just have to renew it in our own hearts. We have to renew it in own heart and mind. This is the gift we've received and we're capable of sharing that same gift.

WALLACE: But, Cardinal, the church does have some problems. And I want to pull up some polls. According to surveys, 75 percent of Catholics attended church weekly, 75 percent back in the 1950s. That's now down to 45 percent. And while 31 percent of Americans say they were raised in a Catholic family, only 24 percent now describe themselves as Catholic.

Question, how do you account for that?

WUERL: I think what we're facing is the erosion because of the heavy, heavy influence of secularism. We live in a world, and particularly, our country, that is awash in the continuous repetition of the secular view.

And all these statistics say to me is, I'm not doing as good a job as I should in preaching the Gospels. I am not doing as good a job as I need to do in getting the rest of the story out there.

And the rest of the story is it's wonderful to live in a technologically advanced, highly scientific world, but with that is also the gift of faith, and what faith brings to that whole world. Those statistics simply say to me I need to be, the church needs to be much more effective in telling the story of Jesus.

WALLACE: I want to ask about a specific problem, though. Because clearly, you would agree that the church priest abuse sex scandal was very damaging to the church, and hurt a lot of Catholics' views about the church.

You helped write the guidelines for the U.S. bishops. Are you confident that today that a priest who is accused of sexual abuse is not just transferred to another parish and is promptly reported to civil authorities?

WUERL: I think that is one of the great accomplishments of the Catholic Church. When we look back and we talk about sexual abuse, we're talking about something that happened 10, 20, even 30 years ago.

We have succeeded in terms of the church and her response. We have succeeded in guaranteeing that if a priest is accused and there is a credible allegation, he is simply removed from the ministry, that is reported to the authorities and we begin to try to heal whatever was damaged in that abuse.

I think it's one of the great accomplishments of the church. It recognized there was a serious problem. It dealt with it forthright and then moved on to see that we're in a much, much better place, a much safer place today.

WALLACE: Cardinal, even during the Christmas season, this is still a Sunday morning talk show, so I'm going to ask you about a political issue which has a strong moral component. How do you feel about the repeal of "Don't Ask/Don't Tell," the ban on gays serving openly in the military?

WUERL: You have to put that in context of what the church would be concerned about. When we're dealing with the question of military readiness or morale, those are issues that we have to really hear from others on.

What the church is concerned about and what it brings to this debate, this discussion, are two realities. One, the understanding the long, long teaching of the church that every human being is worthy of respect. Every person must be embraced and respected and treated with fairness.

Then you also have to take the rest of the Gospel message, the rest of Jesus's message that human sexuality has a purpose. And this is not for simply personal satisfaction. Human sexually has to be seen in the context of the great gift of love, marriage, family.

And so when the church addresses any of these issues that touch on sexuality, that is our starting point. And that's why we often times are viewed, I think, as an opposition voice, because this is a highly, highly focused society on the pleasures of life. And the church is saying that's true, but there is also responsible sexuality.

WALLACE: So are you in favor or against the repeal of "Don't Ask/Don't Tell"?

WUERL: That is a question that has to be worked out politically. And there isn't a specific Catholic Church position, but whatever happens, it has to be seen in terms of the church's teaching position.

And that is, human sexuality is something that is supposed to be exercised responsibly and within the context of marriage.

WALLACE: But you did have to make a decision when Washington, D.C., this year, legalized same-sex marriage. And your archdiocese ended its 80-year foster care program. Why?

WUERL: We had to. One of the things that the archdiocese spoke about and the Catholic Charities spoke about during that whole debate was, we want to be able to work with everybody and to continue to serve as we do, everybody.

If you force us to change the definition of marriage -- there is a definition of marriage that the whole world has accepted. If you change that definition and then insist that we now follow a new definition, we're going to be limited. And that is what happened.

We were simply limited in what we were able to do. I have said and I think this is something the church has said very, very clearly. The Catholic Church in her social service ministry serves everyone, no matter what their race, religion, sexual orientation, background, whatever that is, we serve everyone.

But there is some things we won't do, some things we can't do. Abortion would be one of them. We simply can't do that. And so when we are asked to redefine marriage, we can't do that. But we can serve everybody who comes to us with need.

WALLACE: You had a very exciting -- you personally, an exciting 2010. You were -- in the last month, you became a cardinal of the Catholic Church. You went to Rome. Here we can see on the television you receiving the red hat, as you call it, from the pope.

Beyond the obvious honor, what does it mean to you in terms of your role and your responsibility, Cardinal?

WUERL: The first thing it says to me is everybody in this church of Washington in some way is responsible for that red hat. I get to wear it. But it really reflects all of the people, priests, deacons, religious laymen and laywomen across this whole archdiocese who work so hard to be a faithful witness to the Gospel. That is the background.

Now, I have to admit there is a personal joy in being able to be the representative of this church, and to be the shepherd of this church. It was a time of great excitement, great joy, but a realization that at the heart of all of this is an enormous responsibility, the responsibility to bear witness to the gospel of Christ.

WALLACE: And we have -- and I apologize. We have about 45 seconds. In this special season, what message do you have for Christians and non-Christians alike?

WUERL: Christmas is a time when we all can look with hope to the future. That's part of the message of Christmas. There is the best in each one of us. And we're all capable of bringing out the best.

And to do that together with one another, in a very pluralistic society, says that we can look to the future with hope, because if we respect and love one another, there is nothing we can't accomplish.

WALLACE: Cardinal Wuerl, we want to thank you so much for coming in, especially during what is a very busy season for you. Happy New Year to you, sir.

WUERL: Thank you, Chris. Thank you very much.

WALLACE: Up next, our Sunday group is here to talk about what is in store on the political scene in 2011.



PRESIDENT BARACK OBAMA: A lot of folks in this town predicted that after the midterm elections, Washington would be headed for more partisanship, and more gridlock. Instead, this has been a season of progress for the American people.


WALLACE: President Obama at a year-end news conference, putting the best face on what was a tough 2010 for him.

And it's time now for our Sunday group, still full of holiday cheer -- Bill Kristol of The Weekly Standard; Nina Easton of Fortune magazine; former White House Press Secretary Dana Perino; and Fox News political analyst, Juan Williams.

So, the president had several victories, I think it's fair to say, in this surprisingly busy lame duck session of Congress -- repeal of "don't ask, don't tell," ratification of START, extension -- a compromise to extend the tax cut, but also to extend unemployment benefits.

Bill, what do you think all that says about President Obama's standing going into 2011?

BILL KRISTOL, THE WEEKLY STANDARD: I think he's not as weak as the media thought he was going to be six weeks ago and he's not as strong he thinks he thought this week he is -- judging from the press conference, you know, when one over-interprets these things. He's much -- he's much weaker than he was two weeks ago. And that's the bottom line.

And two years ago, he was coming in to inaugurate a new liberal era of America. And now, he's cutting deals with the Republicans, even before the Republicans control the House, to continue to the Bush tax rates. He's going to preside over, in my opinion, decline, modest perhaps, a decline in the domestic discretionary spending. So, he's going to have give back some of that excessive spending he and the Democratic passed over the last two years.

He'll be fighting to defend Obamacare. But I think that's going to be a tough fight. And he's going to succeed, I suppose, in stopping the Republican House from removing it -- from repealing it over the next two years. But I think that remains an open issue for 2012 election.

I think on foreign policy issues, he'll be working with Republicans to try to stop Iran from getting nuclear weapons.

WALLACE: Working against the liberal Democrats.

KRISTOL: Exactly. And sustaining the war in Afghanistan, I should say.

WALLACE: Nina, there is a lot of speculation that the president is going to move to the center, try to reclaim his brand from 2008 as a post-partisan leader. How do you see him walking the line between dealing on one hand with a newly-empowered Republican majority in the House, a bigger minority in the Senate, but on the other hand not completely alienating his liberal base?

NINA EASTON, FORTUNE MAGAZINE: I think he will have to alienate his liberal base to some extent because I think what he's going to do is try to get out front in spending cuts. And we're going to see this in the State of the Union message. We're going to see probably, and word is, some kind of cut in Social Security benefits. He is going to try to get out front and brand himself as somebody who is serious about dealing with the deficit.

But I have to say if he was -- he and his team, economic team, were smart, what they need to get out front on is the long-term joblessness. We have, it's unprecedented in post-World War American history to have this many people out of work, not just for months, Chris, but for years. And the people who --

WALLACE: Well, let me --


WALLACE: We know the problem. What would they do? They have agreed to keep the Bush tax cuts. They've got some more stimulus.

EASTON: What they need to do is understand it's not just about creating jobs because -- yes, they have taken steps to create jobs. It's getting long-term people who are skills are rusty, who are relying not just on unemployment insurance, but relying on family and friends who have skepticism from the perspective employers. There's a mismatch. There's some 1 million to 3 million jobs are open now that they don't have -- they can't find the right employees with the right skills.

They've got to start talking about ways to match people who are long-term unemployed with jobs that are open. And some --

WALLACE: Retraining and education?

EASTON: Retraining, education -- there's also a geographic mismatch, which is a much more difficult nut to crack because where the jobs are is not where the high joblessness is. But they need to open that conversation. And frankly, that's a bipartisan conversation. WALLACE: Dana, how -- how do you see the Republican majority in the House fitting in to this? How do you expect John Boehner to go about trying to change Washington as dramatically as they are talking about it, given the fact that he still has to deal with a Democratic majority in the Senate and a Democratic president?

DANA PERINO, FORMER WHITE HOUSE PRESS SECRETARY: I think what you saw in the lame duck is you have Republicans still united. It's easier to be united when you're in the minority, right? And you can be on offense more when you are in the minority.

So, I think that they will hold together, both Boehner and McConnell. Just think about McConnell with the omnibus bill -- he had lost nine Republicans at the start, and convinced nine of them to come back. And that's a really show of unity. And that will blunt President Obama's ability to get some things done.

I think where you see some areas of cooperation, I think that President Obama will not be able to bring as many troops home from Afghanistan as he initially wanted and he will get Republican support for that.

And there could be support for trade policy. But --

WALLACE: Free trade agreement such as South Korea?

PERINO: Free trade. However, I think in the House, under Speaker Boehner, if the White House does not agree to include Colombia and Panama along with the South Korean trade agreement, he's going to have a fight on his hands.


JUAN WILLIAMS, FOX NEWS POLITICAL ANALYST: Well, first of all, let me say, Bill says the media thought he's going to be weak. I think a lot of people on this panel thought that the president was going to be much weaker than he proved to be. This was really a tremendously successful lame duck session.

In this two-year period, you know, the tension in here is he got so much done. By anybody's measure, it's been a historic 111th Congress.

But I heard someone say the other day, but you know what? The American people didn't like what he got done. And that's what resulted in November election result that saw the Republicans now pick up six seats in the Senate and lose -- and gain control of the House.

But the other way of looking at it is that this was about the economy. And that the American people were really voting on the economy. So, going forward now, as we get in the large budget issues and the question of where the cuts are going to take place -- the issue becomes: are the American people responding to Obama as a liberal president with a liberal agenda? Bill Kristol talks about, well, now, we're going to have to see some recession on all this liberal spending that exploded during the first two years. Or is it that the American people say, no, we want spending that has real results that we can see is effective and not wasteful?

And I think that's going to be the issue. And I must say that for Republicans, who are now I think Tea Party sensitive, especially in the Senate, you are going to have -- you know, I think it's half of the freshmen in the Republican -- half of the Republicans coming in right now are freshmen. That's a really shocking number. I have didn't realize that. And then so many of the senators are Tea Party people.

So, there's going to be the sense of urgency about cutting, cutting, cutting. Well, exactly, where are Republicans going to say, yes, we want to cut and we can find common ground with this president, and as we go forward in terms of this cutting, we will defend it to the American people, especially older seniors, who are upset about the --

WALLACE: Why are you -- have that Cheshire cat look on your face?

KRISTOL: There are plenty of places to cut. There's the federal funding for National Public Radio, just to begin with.


KRISTOL: To begin with the easy -- easy little things they can start with.

UNIDENTIFIED FEMALE: We have your support.

KRISTOL: Domestic spending ballooned -- domestic discretionary spending ballooned, I don't know, 23 percent, is it, in two years under President Obama. Plenty of that can be cut back, and will be cut -- some of it will be cut back and President Obama will accept some of those cuts, and he will even propose some cuts, I suspect, in his budget at the end of January.

PERINO: Not only will President Obama do that, but there are a dozen Senate Democrats who are going to be up for election in 2012 that are going to want to show their independence from President Obama and Harry Reid.

WALLACE: Claire McCaskill of Missouri...

PERINO: She's the one...

WALLACE: ... is already talking about a three-year cap.

PERINO: And I think one of the reasons she was mad about the omnibus bill being shelved was that she wanted to vote on it so she could show that she was going to vote against it. So there will be a healthy appetite amongst Senate Democrats as well.

WALLACE: We have about a minute left. And of the keys -- and I talked about this with Senator Coburn. This isn't all just going to be neon signs museums in Las Vegas. Americans are going to be asked to tighten their belts. Are they not, Nina?

EASTON: That's right, and the deficit -- we always had -- the deficit didn't show up in polls, frankly, as a serious concern until this past year. I mean, it really -- people said they were concerned, but they didn't really vote on it. Now they've actually voted on it. And now they have to -- and, yes, there are going to be serious sacrifices, particularly on things like Social Security. And we haven't even started with the big nut, which is Medicare. They are going to have to make -- he is going to have to make the case for that.

And the other thing is, he is going to alienate his base to a large extent doing this. I know the White House wants to gain that spending brand, that anti-spending brand, that cut-spending brand, but already the left is making noises about it.

WALLACE: All right. We have to take a break here. But when we come back, the beginnings of 2011 marks the start of the presidential campaign of 2012. Yes, it's true. And it's not too early to start handicapping the race.



JAY LENO, HOST, "TONIGHT SHOW": A new poll shows President Obama ahead of Sarah Palin 54 percent to 39 percent in a potential match-up. You know what that means? John McCain could get Barack Obama elected twice.


WALLACE: Well, there you have it. We're not out of 2010 yet, and the late-night talk show hosts are already focusing on the 2012 presidential sweepstakes. And we're back now with the panel.

Bill, let's face it. It's never too soon to start talking about a presidential race. In this case, the Republican presidential campaign. And I think it's fair to say the jockeying is going to start right after new year. How wide open is this fight, and to the degree that there is one, who is the front runner?

KRISTOL: It's wide open. I really think there isn't a front- runner. And I think someone who is not now considered a likely candidate could well run and could well win. I mean, I saw Chris Christie in New York a couple of weeks ago at a dinner and I told him I thought he should think about running. Oh, no, no, no chance. I told him a friend of mine had already come up with a slogan for his campaign, "a big man for a big job." He likes that.


KRISTOL: He pretended to be. And then I saw him muttering to his aide, "never let Kristol near me again."


WALLACE: We say that all the time...


KRISTOL: So I think Chris Christie, Paul Ryan, Rick Perry, the governor of Texas. I mean, lots of people who right now are not on the lists of the most likely...


WALLACE: Almost all of them, I must say, on this show have said they are not going to run for president. But you know, we all know that doesn't necessarily mean anything.

Let me ask you, Nina, about somebody who I think it's fair to say most people consider to be the front runner, although not necessarily a strong one, that's Mitt Romney. And the question I have is, how strong a front-runner and how big a problem for Romney is healthcare reform plan that he did as governor of Massachusetts?

EASTON: It's a problem. I mean, it's something that people raise all the time when you raise Mitt Romney's name. It's a problem. In the same way that he has baggage, I think everybody else has baggage. If you look at all of these front-runners, we are talking about timing, just going back to this. You were talking about this being so early to open this election season.

This time and this election cycle for the Democrats last time around, Hillary was just about to announce, Hillary Clinton, and Barack Obama was about to give his speech in February, just a few weeks away on the statehouse steps.

What strikes me about this election is how late everything is. Yes, maybe Romney will have an organization up and running by the spring. Yes, maybe Tim Pawlenty. Yes, maybe -- and by the way, I think -- Newt Gingrich I think probably will. And sorry to break it to Gingrich, but I think -- break it to Kristol, sorry, but I think the -- these leading governor candidates that everybody loves, Chris Christie and Mitch Daniels, my prediction is neither one will run. Yes, there may be another surprise candidate.

KRISTOL: It's the Christmas season, Nina.


WALLACE: Let me bring in Dana, because I think it's also fair to say that the big decision that everybody in the Republican camp is waiting for is whether or not Sarah Palin is going to get into this race. One, do you think she will? And I know it is just an opinion, but do you think she will? And secondly, do you think Republicans would nominate somebody who is so popular in their own party but has such high negatives when it comes to the general election?

PERINO: Look, anything is possible at this point. And I have talked to two people last week that I trust very much in politics that know her. One says she is definitely running and one told me she is definitely not running. So I think...

WALLACE: Well, somebody is right.


PERINO: Yes, somebody is going to be right, and so I just have to wait and see. It is interesting how the other candidates, potential candidates sort of tiptoe around. She is not hesitant to criticize them at all. But they're very wary of criticizing her because of the popular media attention she gets.

What I'm interested to see is what happens when these guys go to Iowa? In this new world that we have, against subsidiaries and reduced spending, who is going to be against an ethanol subsidy in Iowa?

WALLACE: And what is your answer? Do you think a lot of them will or do you think none of them will?

PERINO: I have no idea, but all of them will be considered hypocrites if they support it. So there is, I think one reason...

WALLACE: It has not stopped politicians of both parties before from supporting it.

PERINO: Right, but it will be more difficult. And also, remember, America usually re-elects its president. It's very rare to not give an incumbent president a second term. I think President Obama is much more vulnerable than any of us thought he might have been two years ago, so -- but I agree with Bill, it's wide open on the Republican side.


WILLIAMS: Well, let me just say in terms of Obama, that his standing in terms of the polls...

WALLACE: No, talk about the Republicans.

WILLIAMS: Well, I will, but let me just say, in terms of his own standing, it's about where most presidents are at this time in their tenure.

In terms of the Republicans, I think Dana is right on target in saying that everybody is looking at Sarah Palin. Sarah Palin can decide what she wants to do. I don't think she's the (inaudible) of the Republican establishment. She has the money, the celebrity, so she can drive the conversation. I think people are not paying sufficient attention, though, to people like Mike Huckabee. I think Huckabee did very well last time, especially in South Carolina, a key primary state. He has the really kind of emotional cultural context with the evangelicals that I think can drive some Republicans crazy.

WILLIAMS: So I would look at someone like Mike Huckabee. And I'd also -- you know, I thought Haley Barbour down in Mississippi was going to be someone who was going to be a player in this. But his comment this week in an interview with The Weekly Standard, Mr. Kristol's magazine...

WALLACE: Yes, let me put -- yes, let me, just quickly, put those up. Because Haley Barbour -- there was a big profile of him. There you can see it, not a very flattering caricature, on the cover of The Weekly Standard.

WILLIAMS: You're always criticizing and making fun of Republicans, Kristol.


WALLACE: And in this profile, Haley Barbour says about growing up during the Civil Rights movement, "I just don't remember it as being that bad."

And he talks about the White Citizens' Council as his hometown of Yazoo City as being a force for moderation back in the '60s.

Let me ask you, Bill, about that. Because he walked that back the next day. But do you think race and perhaps insensitivity on this issue is going to be a problem for him?

KRISTOL: What I think he -- Haley was saying that it wasn't that bad in his city. And I think Yazoo City was less bad than an awful lot of other places in Mississippi in the early-mid '60s.

So it's a pretty interesting profile. People should read the whole profile.

WALLACE: Yes, sir. And it's a great Christmas gift...



KRISTOL: Yes, discounted for the holiday season.


But I -- I -- no, look, Haley -- I don't think people are going to hold it against him, one sentence he said about what he -- how he remembers things when he was 15 years old. He's been a good governor of Mississippi. I think there are a lot of Republicans governors who could run who are impressive, actually, if you think about it, Daniels, Christie, Barbour, Jindal, Rick Perry of Texas, who somehow isn't in these lists, even though he's been elected three times.


WALLACE: Another fellow who says he's not going to run.


WALLACE: Let me -- Nina, let me put up a picture of a bunch of the other contenders, some of whom we've mentioned, some of whom we haven't: former Governor Mike Huckabee; current Governor Tim Pawlenty; Newt Gingrich, former speaker of the House; Senator John Thune of South Dakota; Mitch Daniels, governor of Indiana.

And let me ask you and we can just, sort of, throw this open. Who jumps out among those?

EASTON: Definitely -- it's interesting when you throw them up like that. I think Thune jumps out because he has the least baggage. I think Newt Gingrich has personal baggage.

WALLACE: Also because he's cute, right?

EASTON: And he's a very handsome-looking guy.


But he's -- Newt Gingrich has personal baggage that doesn't go -- his marital history doesn't go over well with social conservatives. You've got -- you know, Huckabee, we just discussed. I don't think Mitch Daniels is necessarily going to run.

Haley Barbour, I think, is -- even if those comments specifically don't hurt him, I think it opens up a line of inquiry which we've already seen some other comments come out on the race issue that could hurt him. His lobbying issues could hurt him.

I mean, there's just -- you just see all of these -- when I look at all of these candidates, I see problems.

KRISTOL: Can I go out on a limb, since everyone else is scared to say -- actually make any predictions. I predict Palin will not run. I have no knowledge at all; I just have the hunch that she ultimately will not run.

I think Newt Gingrich is underestimated. Newt is going to run and Newt will be formidable. People can talk about the baggage, but lots of candidates have had lots of baggage, and people think they're the right guy for the job, he could do better -- and I do think -- than people expect.

I think, if Mike Pence runs, he could be formidable as a, kind of, conservative movement candidate, the congressman from Indiana. I guess he's trying to decide whether to run for president or governor of Indiana, which will be open after Daniels finishes.

And I do think someone could get in late, you know, in September. I think it will be a late-breaking race, and that's where the Christie or Paul Ryan, who will be the most important Republican in Washington for the next six months.

WALLACE: Who is the new incoming chairman of the Budget Committee.

KRISTOL: He will develop the Republican budget, the House Republican budget, which will be the contrast to President Obama's budget. It will articulate, in a sense, how Republicans would go about governing the country. So I think someone like Ryan or Christie getting in late could be -- could be interesting.

WILLIAMS: You know, what's telling to me is this is such a weak field. You know -- and you know what? I think President Obama is vulnerable.



KRISTOL: Because President Obama had done so much when he ran for president.

WILLIAMS: No, no, no.

KRISTOL: I mean, all these guys are better qualified than Barack Obama.

WILLIAMS: Not at all.


WILLIAMS: And you know what? It's telling to me again. Mike -- you're talking about Mike Pence from Indiana. You talk about charisma gap, you know, a charisma challenge, people. Mike Pence -- I mean, there's nobody out there except for Sarah Palin who could absolutely dominate the stage. And she can't stand on the intellectual stage with Obama.

WALLACE: OK. Well, there you go. Thank you, panel.


I can see there will be a lump of coal in...


See you all next year. That sounds strange to say. And don't forget to check out Panel Plus, where our group picks right up with the discussion on our website, And we'll post the video before noon Eastern time. We'll be right back.

WALLACE: Finally, we want to express our gratitude to you for tuning us in during this very busy year. As we say goodbye to 2010, here are the names of all the people who worked so hard every week to put this program on the air. From all of us, have a happy new year. And we'll see you next "Fox News Sunday."

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