The following is a rush transcript of the February 26, 2012 edition of "Fox News Sunday With Chris Wallace." This copy may not be in its final form and may be updated.
CHRIS WALLACE, HOST: I'm Chris Wallace.
Two big states up for grabs Tuesday. It's the next big test to the Republican race for president.
Mitt Romney fights for his political life on his home turf of Michigan, as well as in Arizona. We'll hear from the candidate fighting to regain his status as the front runner. Mitt Romney, only on "Fox News Sunday."
Then, he's one of the country's leading governors with an unmatched fiscal record. So, how would the man from Indiana put people back to work? We'll ask Republican Governor Mitch Daniels.
Plus, will pain at the pump become pain at the polls for President Obama? We'll ask our Sunday panel how rising gas prices will affect the presidential race.
And our power player of the week offering adventure on the Internet.
All right now on "Fox News Sunday."
And hello again from Fox News in Washington.
On Tuesday, voters go to the polls in Michigan and Arizona for what may be the most important primary day so far.
Joining us now from Flint, Michigan, is Governor Mitt Romney, who's got a lot riding on both contest. And, Governor, welcome back to "Fox News Sunday."
MITT ROMNEY, REPUBLICAN PRESIDENTIAL CANDIDATE: Thanks, Chris. Good to be with you again.
WALLACE: Before we get in to politics, I want to ask you about the latest crisis in Afghanistan. As you know, U.S. and NATO forces are being pulled out of all of the Afghan ministries there because two top U.S. military advisers were killed as part of the continuing furor over the burning of the Korans.
The question I have is what does that say to you -- pulling our forces out of the ministries, what does that say to you 10 years after the war began and the nature of our alliance with the Afghans?
ROMNEY: Well, it's an extraordinary admission of failure for us to establish the relationships that you'd have to have for a successful transition to the Afghan military and Afghan security leadership. I hope that we're going to see some improvement very soon. But it's obviously very dangerous there and the transition effort is not going as well as we'd like to see it go. But certainly, the effort there is an important one, and we want to see the Afghan security troops finally able to secure their own country and bring our troops home when that job is done.
WALLACE: Do you still oppose President Obama's decision to start pulling out U.S. troops from Afghanistan this year? And what do you think of his earlier apology this week to the Afghans for the burning of the Koran?
ROMNEY: Well, first of all, with regards to the apology, I think for a lot people, this is it sticks in their throat, the idea that we are there, having lost thousands of individuals through casualty and death. We've made an enormous contribution to help the people their achieved freedom and for us to be apologizing at a time like this is something which is very difficult for the American people to countenance.
At the same time, you know, I'm very concerned about the pathway forward. I think the president made an enormous error by announcing the withdrawal date of our surge forces during the fighting season. This is the time they are supposed to come out. He should have waited for at least three months until things quieted down.
And secondly, the announcement is win to the combat forces are going to be withdrawn and combat operations were over. It's one thing to make those plans internally. It's another thing to announce them to Taliban and to Afghanistan and to the Afghanis.
And finally, to announce a specific withdrawal date before you have the input from those who are on the field I think is another mistake.
This president has made it more for the fighting men and women to be successful in our mission in Afghanistan.
WALLACE: But just to make it clear, Governor, you're saying then that despite the killing and in some cases inside job killing of American soldiers, you would continue your commitment to winning the war in Afghanistan?
ROMNEY: Well, what we want to do is to transition Afghanistan such that its own military and its own security forces can maintain the sovereignty of their government from an attack for the Taliban. We don't want to see Afghanistan once again return to a Taliban- dominated nation with al Qaeda and other training camps coming into the nation.
We're -- that is a mission which is continuing, and based upon what we are seeing so far, we haven't been as successful as we could have been. And I think one of the reasons for that is the president didn't insure the elections were fair and open, with credible being selected. The president also announced the withdrawal date, a time certain which I think made it very clear to the Taliban they just had to wait us out.
I think the president has made some enormous errors in the conduct of our mission there.
WALLACE: Four years ago, you won Michigan by nine points over John McCain. But in the latest "Real Clear Politics" average of polls there, you are barely -- barely beating Rick Santorum.
Why are you having such a tough time locking up your home state against Rick Santorum?
ROMNEY: Well, I'm proud of the fact that I was born and raised in Michigan. And, you know, last time when I ran here against Senator McCain, I think started off eight points behind in the polls, with two weeks ago and was able to fight very hard, earned every vote, and ended up winning, as you point out.
About 10 days ago, I think Rasmussen had me down 15 points in Michigan. Now, it's tied or slightly ahead. I think I can show that I can fight real hard and come from behind. And I think the people, as they focus on my campaign and my candidacy and my plan to get America working, a plan that calls for dramatic changes in the way Washington is structured -- those are things that I think people are warming to and making progress.
WALLACE: Well, you say you're making progress. You don't have much time. The vote is Tuesday.
Flat question, are you going to win Michigan? And secondly, even if you do, isn't this nomination battle going to go on at least until May?
ROMNEY: Well, I'm planning on winning here in Michigan and also in Arizona. Obviously, that will be huge for us if we're able to do, particularly having come from so far behind here in Michigan. So, we are planning on winning. We're making -- obviously, the momentum is in the right direction. We've cut the lead down and now, we're tied, we're slightly ahead.
Some polls show us more ahead than slightly. We'll see what happens in the remaining days.
But how long the process goes on, I think it's hard to predict. But I'm convinced I'm going to become the nominee, and we'll be willing to take however long it takes to get that job done.
WALLACE: One problem that you have in Michigan is that you opposed the government bailout of Chrysler and General Motors. You say that the companies eventually through bankruptcy, which is what you advocated all along. But critics say there is a problem with that.
And let me point that out. With government money, the two companies, Chrysler and G.M. went through Chapter 11 reorganization, which was faster and easier. Without government money, they would have gone through Chapter 7 liquidation which the company say would have cost thousands of jobs and critics say one of the reasons they needed the government money is because private companies refused to give them money, including your old company Bain Capital.
ROMNEY: Well, actually, I know the Obama people are pushing that story very hard. But if we go back in history, the 2008, when the CEOs of these companies went to Washington asking for, what, $50 billion, I said, don't give them the money. Instead, have them go through a managed bankruptcy. And if need help after that bankruptcy, then the government can help with guarantees and guarantees on warranties and so forth.
So, the money and the support, that comes after they've gone through bankruptcy.
What the Obama people and, by the way, the Bush team did the same thing. They started writing checks until they finally realized I was right, these companies needed to go through managed bankruptcy. When they finally got that done, they were finally able to get their legs underneath them and now, I'm delighted to see these companies back and thriving.
And I've laid out a plan I think to get these companies to be not just the Motor City of America, but the Motor City of world.
WALLACE: But, Governor, to follow up on that -- there are a number of people, a number of top leaders in Michigan who say you are wrong, that without the money up front -- which they couldn't get from private companies, which they had to get from the government, they would have gone through Chapter 7 liquidation instead of the Chapter 11 managed bankruptcy.
The governor of Michigan who supports you, I might add, he says that and so does the head of General Motors who's a Republican. Let's watch what he says.
(BEGIN VIDEO CLIP)
DAN AKERSON, GENERAL MOTORS CEO: We would have been in bankruptcy for years and I think you could have written off this company, this industry and this country.
(END VIDEO CLIP)
WALLACE: They say without the government bailout, Chrysler and General Motors might have gone under.
ROMNEY: Well, they are simply not understanding what I wrote and what I believe.
And, by the way, there are a lot of businesses in America that get in trouble. You have seen airlines go into bankruptcy. You've seen all sorts of businesses go in bankruptcy. And they come out and are stronger. This is not the first time that an industry or a company has been in trouble.
And my position was very simply: don't start writing checks as they did for months. It was the head of the UAW who said, look, they can't go in bankruptcy. These companies can't go into managed bankruptcy, he said, don't do that. They'll never come out. Well, he was wrong. And I was right. They finally went in bankruptcy. After bankruptcy, that was the time to give them the financial support, the guarantees to provide the help to get them out of bankruptcy. That's the way it would have been done best.
The result of the president's plan was that we spent several billion dollars before -- at the time we needed to, number one. And, number two, after the process was over, he gave a huge share to the UAW.
That's not the way bankruptcy normally works. He was paying off the people that supported him and that, by the way, are trying to get him reelected.
The right course was for this industry to go through the same kind of bankruptcy other industries have.
ROMNEY: And if for some reason, they needed some government help, that should have come and get them out of the bankruptcy, not spending billions that the auto executives went to Washington to receive in the first place.
WALLACE: All right. Let's talk about your new economic plan which you released this week. And let's go through some of the details of it.
You would cut individual marginal tax rates by 20 percent across the board. No taxes at all on capital gains and dividends for families making less than $200,000. Cut the corporate tax rate from 35 percent to 25 percent. And entitlement reform slowly raise the eligibility aid for Medicare and Social Security. And smaller benefit increases for the wealthy.
Now, there are criticisms both on the right and the left.
Now, let's first talk about the critics on the right. They say they are playing the Obama class war game. Santorum says you are using the language of Occupy Wall Street, making life more difficult and the rules different for the top 1 percent.
How do you respond to that?
ROMNEY: Well, we have a progressive tax code right now, and what I'm talking about are pretty significant reductions in tax across the board. And the reason I'm talking about those marginal tax reductions across the board is to create incentives for small businesses to start growing and hiring again.
And I'm not trying to change the progressivity of the code. I'm not trying to say that one group or another is going to get a better deal. But what I'm trying to do is to make sure that under no circumstances is the middle class going to end up with a larger share of the tax burden.
It's absolutely essential to me as a guiding principle that middle income Americans don't get hit with a bigger share of the burden. That's the point that I'm making and I'm going to make sure that as we add it all up, that the middle income Americans are not getting a bigger burden.
WALLACE: And what about the argument that you're saying the same class warfare? And you hear this from a lot of people. "The Wall Street Journal" which generally liked your plan says it's the same old Obama class war argument. Yes, you're going to reduce capital gains taxes for the middle class, not for the rich.
ROMNEY: Well, obviously, I want to make sure that we maintain the progressivity of the code. And I want to help people who I think have been most hurt by the Obama economy -- and that's middle income Americans.
I'm not looking to change the deal that we have right now with regards to people looking at their share of the tax burden, but what I am looking to do is to lower the marginal rate for all Americans across the board. And by doing that -- I'm sure you understand this -- about 55 percent of America's workers work in businesses that are not classic corporations. They are instead taxed in an individual rate. I want to get these rates down so we get American workers back into jobs again.
This is a pro-growth policy. That's why "The Wall Street Journal" liked it, wrote a very positive editorial about it. That's why I think people look at President Obama's plan which is calling on raising the marginal rate. That will kill jobs and make it harder for our economy to reboot.
So, whatever choice of language I have to use, I want to make sure to get across to the American people, I'm cutting rates across the board by 20 percent and I'm not going to put a bigger burden on middle income Americans.
WALLACE: All right. Now, let's take the argument from the left. And they say that if your plan as you and your advisors claim is revenue neutral, which means that all of these taxes, when you cut the rates and add or eliminate some deductions isn't going to raise or lower the deficit, that you get your deficit reductions through spending cuts, $500 billion you claim in 2016.
And they say that that ends up being about a 40 percent cut in domestic programs, which means major cuts on the programs that the poor depend on the most.
ROMNEY: Well, as you I'm sure understand, the tax plan that I've described is very much consistent with the tax plan that the president's own bipartisan commission came up with. The Bowles- Simpson commission laid out a plan, which is very similar to mine.
What's astonishing I think to a lot of people in this country is that President Obama just abandoned his own tax commission.
WALLACE: But he took a trillion --
WALLACE: If I may, sir, he took $1 trillion of that money and used it for deficit reduction. You don't.
ROMNEY: Well, what --
WALLACE: -- he didn't, but Bowles-Simpson did.
ROMNEY: Yes. What I do is I take -- I get this tax rate. Take the marginal rate down to encourage economic growth, which it will do. Put more people back to work, get more tax revenue by virtue of that. I also broaden the base, which means for certain individuals, high income individuals, we're going to limit the deductions and exemptions.
And then I go through and reduce the rate of growth and benefits for high income people and Medicare and Social Security. That's for folks down the road, by the way, not for current retirees.
And then I also eliminate a lot of programs, federal programs, and take a lot of poverty programs and send them back to the states where I think they can be managed far more efficiently.
But let me tell -- if this is an argument about President Obama saying hey, look, don't cut back on federal, keep on growing this deficit, I think that's a battle I'm going to win because I am planning on cutting the deficit down to zero. I'm planning to get the balanced budget and at the same time getting this economy going again.
This is a classic pitting of two very different philosophies. Do you believe in lower taxes and lower marginal rates, and smaller government? That's what I believe in.
Or do you believe in higher taxes, like the president is proposing, and more government spending and larger deficits? That's what President Obama stands for. That's a failed policy. We know where that leads.
WALLACE: Finally, sir, and we got only have a couple of minutes left.
Your unfavorables have gone up dramatically during the course of this campaign. Back in October, you were plus 11, favorable versus unfavorable. Now, you're minus 8.
And I hear two major complaints about you. One is that you seem to be campaigning more by attacking your rivals than saying what you're for. And the other is this continuing argument that somehow you seem out of touch with the average Americans.
And there were two examples of that this week I want to play and then have you respond to, sir.
(BEGIN VIDEO CLIP)
ROMNEY: I'm the only person in this race --
JOHN KING, CNN: Is there a misconception about you? The question is the misconception.
ROMNEY: You know, you get to ask the questions you want, and I want to give the answers I want.
I driveway a Mustang and a Chevy pick-up truck. Ann drives a couple of Cadillacs actually.
(END VIDEO CLIP)
WALLACE: Governor, can you understand why some voters would be put off by those things?
ROMNEY: You know, I can't be perfect. I just am who I am. And I can tell you this, with regards of the cars, we have that something that was talked about last September. People asked us what vehicles we own and we have a car that we have in California. We got a car that we have back in Boston, where our home is. So, that's the way it is.
If people think that there is something wrong with being successful in America, then they better vote for the other guy, because I've been extraordinarily successful and I want to use that success and that know-how to help the American people.
And by the way, in terms of connecting with the American people, you know, when I got into this race, a lot of the guys in the race, other people have come and gone. I've got more votes than anybody else in this race so far. I've been the guy that's been able to connect in New Hampshire and in Florida and Nevada. And I think we are on track to do pretty well here in Michigan and Arizona. I'm expected to get the nomination in part because I understand how this economy works.
I, by virtue of my experience, know what it takes to create jobs. I've also balanced budgets. Other people talk about doing that. I've actually done it as a governor, as the head of an Olympics, and as a guy who's run businesses. I'm going to get America back on track.
WALLACE: So, Governor, in 20 seconds, what is the biggest misconception about you.
ROMNEY: Well, I think the biggest misconception would be that I'm a guy that comes from Massachusetts and therefore I can't be conservative. But, you know, if you look at my record in Massachusetts and see that I balanced the budget, lowered taxes 19 times and enforce the illegal immigration laws, got English immersion in our schools, stood up for traditional marriage, was a pro-life governor. I'm a solid conservative -- a committed conservative with the kind of principles I think America needs.
WALLACE: Governor Romney, we want to thank you so much for joining us today. Safe travels on the campaign trail, sir. And we will see what happens Tuesday night.
ROMNEY: Thanks, Chris.
WALLACE: Up next: Governor Mitch Daniels on the Republican race and what needs to be done to get America working again.
WALLACE: The nation's governors are in Washington for their annual conference. And we want to talk policy and politics with one of their leaders, Indiana Governor Mitch Daniels.
And, Governor, welcome back to "Fox News Sunday."
GOV. MITCH DANIELS, R-IND.: Thank you, Chris.
WALLACE: It seems as this Republican race goes on, the GOP voters are growing less and not more satisfied with the field. Let me put up a couple of statistics.
A Gallup poll finds 55 percent of Republicans and Republican-leaning independents wish someone else were running.
And here's what former Florida Governor Jeb Bush this week, "It's a little troubling when people are appealing to people's fears and emotion rather than trying to get them to look over the horizon for a broader perspective."
Question -- are you troubled by the negativity, some would say, the smallness of this race?
DANIELS: Oh, from time to time -- on both sides, by the way. The president is one of the main perpetrators of negative politics. But -- and we can all wish, and I do, that it would subside some. But I don't necessarily blame the candidates. There's a certain dynamic to the race that leads to a magnification of small differences and people picking on each other.
WALLACE: Let me ask another aspect of it. You have said Republicans need -- particularly need time to focus on the economy and debt, and as you famously said once, to call a truce on social issues. Are you troubled when you see Republicans spending so much time talking about contraception and Planned Parenthood?
DANIELS: Well, let's remember -- they didn't start this, the president did, with a very intrusive liberty-limiting decision. They were asked to react to it. So, they answered the question.
No, I think when they get a chance -- Governor Mitt Romney this week talking about all the right issues -- and ultimately, that will be where this election gets decided. This economy is staggering. It's in very weak shape. It's the weakest recovery ever from a deep recession. We got the fewest number of Americans or percentage of Americans in the workforce working today, since the day of the stay- at-home mom.
And so, eventually, this is going to be a binary choice and it will be decided, I'm confident, on the biggest issues and biggest threats.
WALLACE: Are you impressed by Mitt Romney's economic plan as we just laid it out?
DANIELS: I'm very encouraged that -- and other candidates, by the way, in that field are talking about the right question. How do we get this economy growing, how do we stop killing growth -- as this administration does with every new action and regulation and threatened tax and so forth.
So, yes, I think that things are headed in a direction that will present the American people with a very good contrast and a positive alternative.
WALLACE: All right. I want to ask you a couple of political questions. We'll move on to policy.
DANIELS: I know you would.
WALLACE: Well, OK. But is too late for someone new to get into this race and to push it to a contested convention in August?
DANIELS: You are not asking the right guy. I'm not a great student in these things. I'm told it's not too late for people to file in a significant number of states with significant number of delegates -- as a technical matter.
As a practical matter, I don't think it's very likely. And I don't know what it would lead to.
WALLACE: Is there any chance -- are there any circumstances under which Mitch Daniels gets into this race?
DANIELS: No, sir. I crossed that decision bridge a long time ago. My family did. And I'm trying when I get the chance to play some role, look forward to helping our eventual nominee.
But running for president is something I never thought about doing and nothing change my mind.
WALLACE: So, Shermanesque statement -- if drafted, you will not run?
DANIELS: These types of things just don't happen, Chris. You've been covering these things a long time. We're going to have a nominee probably well ahead of the convention.
And a lot of these questions that really very intriguing I know right now will be long forgotten. And we'll have a debate about how we keep this country from going broke, how we restore the American dream, rebuild a stable and hopeful middle class.
WALLACE: OK. Let's focus on that. As you know, gas prices are rising sharply. Back when Barack Obama took office, gas cost $1.85 a gallon. It's now up to $3.67 a gallon.
In your formal response to the president's State of the Union speech, you blamed what you called extremist policies, extremist policy by the president to stifle domestic production and you said that that was a pro-poverty policy.
This week, the president talked about Republicans. Here's what he said.
(BEGIN VIDEO CLIP)
PRESIDENT BARACK OBAMA: You can bet that since it's an election year, they are already dusting off their three-point plan for $2 gas. And I save the suspense. Step one is to drill and step two to drill and then step three is to keep drilling.
(END VIDEO CLIP)
WALLACE: The president said that the Republicans are playing politics with gas prices and a lot of it is beyond the control of any president and domestic oil production is the highest in eight years.
DANIELS: Let's give the president credit for one domestic policy that works. He wanted higher gas prices and he got them. He said it -- Secretary Chu said $8 are about what they pay in Europe. It would be great. Secretary Salazar said $10 and it still wouldn't be for drilling in the places where we know there's an awful lot of domestic production.
And so, they have gotten the doubling of gas prices and perhaps worse, is a conscious policy of this administration. Maybe the one thing they set out to do and actually accomplished.
And let's face it. When you lock up vast tracts of land where we know there is oil, when you lean against the shale oil and shale gas. They have about eight federal agencies now clamoring this greatest break we've had in the American economy in many, many years.
When you have environmental regulations that are going to raise the price of refining gas, possibly put some of our scarce refineries out of business, guess what? You are going to get higher gas prices.
WALLACE: But if I may, they say have opened up millions of acres, oil and gas exploration and that U.S. dependence on foreign oil is the lowest in 16 years.
DANIELS: No thanks to them. This is the product of openings that happened under his predecessor. He likes to talk about what he inherited. He inherited a more aggressive pro-energy policy. Since then, leases have been cut in half, permitting for new drilling is cut by two-thirds.
WALLACE: OK. Let's talk about the economy and you gave the numbers early and I want to want to come back to it, the question of just how strong this economy is, how fast the recovery is. Unemployment now down to 8.3 percent, that's the lowest in three years. New claims for jobless benefits this past week hit a four-year low and consumer confidence is at a one year high.
Is the economy getting better?
DANIELS: If the president thinks he's going to be s running on an economic success story, he is headed for a rude surprise in my opinion. The employment rate doesn't tell as much anymore, Chris. And this is widely written these days.
The employment rate against just fell below 64 percent. It's the lowest since the 70s and again, a lot of moms were staying at home.
Unemployment insurance claims may be down. But we've moved a couple of million people on the Social Security disability rules, which has become a new form of perhaps permanent unemployment for a lot of people.
So, this is not a pretty picture. And we ought not candy-coat it. We ought to recognize we're going to need a different mix of very pro-growth polices. I have said often -- until Americans are working again, until we have the revenue coming in to pay our bills and meet our debt, growth ought to trump everything else.
WALLACE: Finally, you just signed this month a law making Indiana the 23rd state, right-to-work state in the country, which means that people don't have to join the union to get a specific job. Question: What's wrong with unions?
DANIELS: Nothing is wrong with unions. And if that measure affected any way the right to bargain, the right to organize collectively, I wouldn't have been for it. That's completely untouched. All it says is the worker can decide whether or not it's worth the dues, whether they'd rather have that money themselves.
WALLACE: But doesn't that necessarily in a practical sense over the long run weaken unions? Certainly, the unions think so.
DANIELS: No, not necessarily. There are higher rates of unionization in some right-to-work states than there are in Indiana today. It really a matter of whether people think they're getting their money's worth. And we just knew it would bring more jobs to our state and that was my principal motive for doing it. And already, the phone is ringing and we are about to strike some agreement I think to put more Hoosiers to work.
WALLACE: All right. Back in 2006, you said that you opposed right-to-work as, in your words, too divisive. Now, the unions say, as a result of this decision to sign and make it a right-to-work state, that wages will go down and work places will become more dangerous.
DANIELS: Well, first of all, that's all bunk. Facts be could not be more clear that safety is unaffected, wages and job growth are much faster in the 22 right to work states than in the 28 that didn't provide this protection to workers.
Now for several years that really true I said -- I never said I was opposed to right to work, I said we can succeed under the labor laws we have. Ultimately, particularly in this terrible national economy I reluctantly came to the conclusion that we need to take this step if we were going to have the kind of opportunity state I wanted Indiana to be.
WALLACE: Governor Daniels, I want to thank you so much for coming in. It's always a pleasure to talk to you, sir. Please come back.
Up next, the Sunday panel tackles the rise in gas prices and the growing violence against Americans in Afghanistan. Back in a moment.
(BEGIN VIDEO CLIP)
OBAMA: There's no silver bullet that will bring down gas prices or reduce our dependence on foreign oil over night.
NEWT GINGRICH, REPUBLICAN PRESIDENTIAL CANDIDATE: The president of the United States first of all that there is no single silver bullet. Now that is just wrong. Defeating Obama is the single thing that would change.
(END VIDEO CLIP)
WALLACE: The war of words over gas prices as the president and Newt Gingrich point fingers for the recent pain at the pump.
And it's time now for our Sunday group Bill Kristol of the Weekly Standard, former Democratic Senator Evan Bayh, Ed Gillespie chairman of the Republican state committee and Fox News political analyst Juan Williams.
Well, the president made a preemptive speech on gas prices, Bill, not to announce new policy but basically to say that he is doing everything that he can and to hit Republicans for playing politics on this issue. How effective was it?
BILL KRISTOL, WEEKLY STANDARD: It might have helped to muddy the waters. I think the president and his team are right to think that gas prices are a potentially damaging issue for the administration. It's the price that everyone sees every week or twice a week at the pump. And I think in voters mind it correlates with things generally going back.
When have gas prices surged in our adult life time? In the 70s. All kinds of things went wrong in the 70s. In 2007 and 2008. A lot went wrong in 2008.
So I don't think it's just that voters don't like paying 3.74 instead of 3.24 at the pump. It's that they have a sense that this is not -- things are not going to go well if gas prices are rising so much.
EVAN BAYH, FORMER U.S. SENATOR: Well, that's right, Chris. It is a visceral issue. People see it every week when they fill up at the pump. But as you pointed out in your questioning of my governor, this is an issue that has bedeviled...
WALLACE: As you point out, you are a Hoosier from the state of Indiana.
BAYH: We are finally getting our dues. And we thank you for that and we are a motoring state so this is important in the Midwest.
But people tend to forget gas prices hit four dollars a gallon under President George W. Bush. This is something that...
WALLACE: And the Democrats hammered him then.
BAYH: They did.
Look, gas prices have fluctuated under presidents of both parties. Politicians of both parties are going to use this issue politically. The important thing to remember is that in the long run, trying to ease demand, the tensions in the Middle East, you can't do much about that.
This president has been aggressive on raising fuel economy standards, which in the long run will reduce our dependence on oil and diversifying supply away from petroleum, which will also help in the longer run, which is really the only thing a president can do.
WALLACE: Ed, how potent are high gas prices as a political issue in this campaign? And how effective, or persuasive is the Obama argument -- look, domestic oil production is the highest in eight years.
ED GILLESPIE, REPUBLICAN STATE LEADERSHIP COMMITTEE: Well, first of all it's very potent as an issue. It hits people right in the wallet and their pocket book and people see it every week when they fill up. And aggravates people. And they see a correlation to his policies here in terms of Keystone XL.
WALLACE: That's the pipeline...
GILLESPIE: The pipeline that he rejected. The fact is that drilling in the Gulf of Mexico, which the federal government controls is down 30 percent. Drilling in federal leases as a result of federal leases in the Rocky Mountains down 67 percent. They've stopped drilling off of the coast of the Virginia from going forward even though two Democratic senators support it and the Republican governor.
So it is a big problem for them. And it's going to be a drag on the economy. In fact it's going to hinder what they are hoping to be a stronger recovery.
JUAN WILLIAMS, FOX NEWS POLITICAL ANALYST: At the moment, it is it a modest impact on the economy. And I think something gets lost here, which is that even if we, the United States was to drill, drill and drill more, that that domestic oil production is really part of a global oil production story. And you have more and more global oil production, but it is going to have limited impact in the terms of gas worldwide because of what is going on in Brazil, China, and the threat of Middle East stability.
So those are factors even if the U.S. is producing more oil. Gas prices are not going to go down markedly. It is just not the case. It's going to be that oil is marketed worldwide.
WALLACE: I want to pivot to another story that keeps getting bigger. And that is the blow back in Afghanistan from the reportedly accidentally burning of some Korans at a U.S. base. Today it is reported -- today, Sunday -- that seven U.S. special operations forces were wounded when Afghan protesters threw grenades into a U.S. base in northern Afghanistan and that of course follows the killing this week of four U.S. military people including the assassination, it appears, inside the interior ministry of two U.S. military advisers yesterday. And as a result, all NATO personnel are being pulled out of government ministries.
I will and you, Bill, the same question that I asked Governor Romney, what does that say about the nature of our alliance with Afghanistan 10 years into this war?
KRISTOL: It says it's not good. And it really isn't good in Afghanistan. In October, we visited some of these ministries where there were U.S. advisers embedded. And General John Allen in charge of our efforts there was very proud and correctly so of how much we were doing with the Afghans. It is going to be a transition with Afghan control without losing the war, we need to have advisers and we need to make the transition work. And this makes it incredibly hard.
So it is really depressing for those of us who have supported the president -- both President Bush and President Obama in the effort to make that war a success.
WALLACE: I mean, to pick up on that, Senator, you know whole point is to stand up the Afghan military, the Afghan police so we can get out. Now -- (inaudible), but still, we have got Afghan police, Afghan military using their weapons not against the Taliban, but against U.S. soldiers. Will this increase the pressure on President Obama and on Republican candidates to get out?
BAYH: It probably will, Chris. I mean, after all these years of treasure and blood spent there to try and help these people, this is the thanks we get? I mean, it's -- this is a tragedy unfolding and to remind us how feckless some of the leaders there are. And secondly, this is a fragmented society.
It's unlikely to be a functional democracy any time soon. We need to narrowly define our national security interests there, which is not have it return to be a platform from which we can be attacked. But the illusions of this, we're going to be engaged in nation building there, that's simply not going to happen any time soon. They are just not for that.
WALLACE: And let me ask you about another aspect of this, and that is the president apologizing -- this is before the latest set of killings and it was the same time as the first two Americans were killed, apologizing for the burning of the Korans.
Now the argument that the administration officials make is he is trying to prevent more Americans from getting killed. On the other hand, you saw Romney today, Gingrich earlier in the week, hitting him. Why are we apologizing to the Afghans for burning books when they are killing American soldiers?
GILLESPIE: Well, a couple things. I mean, first of all, it was wrong for Korans to be burned, obviously, and I think it's right for the American government to say that that -- that that's wrong, and obviously it violates the policy of the U.S. government.
At the same time, the fact is that they were accidentally burned. And now we have Americans being deliberately killed. And there is not a moral equivalency here. And I do worry that when the president treats this issue, this way you kind of contribute to the notion, well, I guess that's, you know, somehow morally equivalent. It is not.
And the fact, while making clear it's wrong, I think the president should have also been strong in saying that -- but we're -- you know, we are not going to tolerate Americans -- I guess they did yesterday -- Americans being targeted here.
WALLACE: Juan, briefly.
WILLIAMS: Well, I think it was a pragmatic move by the president. The thing is that it becomes political when you have Newt Gingrich saying it is an outrage to apologize. You know that Mitt Romney has said the president goes around apologizing for America . At that point then, it looks as if it's a sign of weakness. Actually, I think it's pragmatic.
And just as Ed was saying, you have American lives at stake and you want to make sure -- the president does -- that he's protecting American service men and women. I -- the equivalency, I don't know if we can get into that. I understand your point, Ed. But to me he did what was appropriate for the American president in this situation.
WALLACE: The problem, of course, is the apologies aren't working because the murders continue. All right. We have to break here but when we come back what would a Rick Santorum win in Mitt Romney's home state of Michigan mean to the already unsettled Republican race for president? Our panel weighs in after the break.
(BEGIN VIDEO CLIP)
ROMNEY: I think Senator Santorum wishes he could take back what he said. He talked about he voted for some things because he took one for the team.
RICK SANTORUM, REBUBLICAN PRESIDENTIAL CANDIDATE: Are you going to vote for someone that says one thing one day and says anything else that's necessary the next day to win? Or are you going to vote for someone you trust?
(END VIDEO CLIP)
WALLACE: Republican candidates Mitt Romney and Rick Santorum getting in some more digs on this final weekend before the Michigan primary. And we are back with the panel. Well, after another barrage of negative ads and a very aggressive performance in the debate this week, Mitt Romney has moved into a small lead in Michigan and a bigger lead in Arizona.
And where does the race stand now? And is it enough for Romney to win Michigan or does he have to win by a sizable margin?
GILLESPIE: Well, actually probably a week ago, it would have been enough to, you know, would have needed to win by a sizable margin. But now I think a win will be seen as, you know, turning things around, which it would be, given where Rick Santorum was a week ago.
But where we are in this primary is where we are intended to be by the RNC rules, which was to not have a race where it is easy for a frontrunner to wrap up early . It is designed to go on. It was -- we have had sprints on the Republican side in the past.
It was designed to make it more of a race and now it may make it a marathon before it is all over. I think this race is going to go on for some time. It does seem to be coming down increasingly to Governor Romney and Senator Santorum.
WILLIAMS: Well, you know, I think that the proportional awarding of the delegates, especially in Michigan, means that even if Santorum doesn't win but comes close he still gets a good share of the delegates and can claim that he did very well --
WALLACE: There is even a way that Romney could get the popular vote and Santorum could get actually a majority of the delegates.
WILLIAMS: Correct. So I think that for Santorum, then, the prospect is, as you were just discussing with Ed, that we're going have a long Republican race which I think for lots of Republicans is sort of disconcerting because they see that the man who looks like the inevitable nominee, Mitt Romney, is not doing all that well in terms of independent voters, that, you know, he is terrific at running these negative ads and he has lots of money and the super PAC that is supporting him has lots of money.
He's terrific at tearing down, you know, we can begin with Rick Perry and go on to Newt Gingrich and now Rick Santorum. But it comes at a cost to Republican solidarity (inaudible). And I think it also comes at a cost in terms of general election, where you are trying to win independent voters. You look at Hispanics, you look at women, his numbers are just falling through the floor.
WALLACE: Let me turn to another aspect of that, Bill, and that is that Romney this week unveiled this new economic plan. The headline is a 20 percent cut across the board in marginal tax rates. Does that help satisfy conservatives who have kept saying that Mitt Romney is running totally on his biography and not on ideas?
KRISTOL: I think it helps. You cut marginal individual tax rates and conservatives' hearts go pitty-pitty-pat and mine does -- even mine does, too. Even my heartless (ph) heart--
WALLACE: There is a heart there?
KRISTOL: Yes, barely. I would say, though, it is, in a way, indicative, also, of the problems that Romney has. It's not the matter of conservative or moderate. It's a matter of big ideas versus incremental changes. Cutting the current tax code across the board by 20 percent, it's still the current tax code. It is just lower.
And I do think there's much more of a market than, I think, Governor Romney's team appreciates -- and there are risks to this, too, of course, which is why they aren't going there, I suppose.
But this is a big political market our there for big change and big reform and big ideas and the sense that the system is broken on the spending side, on the entitlement side and on the tax side . And I would say the way in which Mitt Romney presents his plan doesn't convey that same sense of urgency.
WALLACE: But, you know, it's interesting, Senator, because in the interview with Romney -- I talked about the criticism from the Right, that he's using the class warfare argument -- and not using the argument but kind of playing into it because he is not going to treat the top 1 percent the same as he treats the middle class.
He said, look, I am most concerned about the middle class and I am not going to lower or eliminate the capital gains tax, the dividend tax for people making over $200,000 a year. People on the Right are upset about that. He is obviously banking on -- in the general election that saying I am the champion of the middle class -- will be effective in running against Obama.
BAYH: Well, he is looking down the road and he doesn't want to make himself vulnerable to, you know, the argument that he's favoring the top 1 percent versus the other 99, because he knows that's something the president is going to lay on him. It also would play to the stereotype, which we have shown with regard of the Cadillac comment and so forth about him being a very affluent candidate. He is also trying to avoid that.
I think the ongoing story here, though, Chris is a couple of things. First, you have a very weak frontrunner. This is his home state. And he's barely getting 40 percent. Why is he weak? Because he's not resonating with the base of the Republican Party. And eventually if he is going to do more than win ugly, you know, tactically by disqualifying his opponents and that drives up his negatives with independents, he has to come up with a broader message and be an authentic messenger for that.
WALLACE: And you don't think this 20 percent tax cut did that?
BAYH: Well, look, Bill obviously noticed, the Wall Street Journal editorial page will notice, you can go into Michigan, put a gun to the head of the people going into these caucuses and no one will be able tell you the specifics of Romney's economic plan, or very few. But they do get a gut sense is this someone who is a leader with big idea who can try and lead this country in a better direction. God love him, he just hasn't been able to communicate that yet.
WALLACE: All right. Let's talk about the others in the race, because this isn't all about Romney.
Let's assume that the polls hold up and Romney wins Michigan, but wins narrowly, and Santorum finishes a strong second. What kind of staying power does Santorum have? And you said before, maybe this is a two-man race. Are you saying Gingrich is really on the sideline now?
GILLESPIE: Well, he is sideline now. He's not playing in Michigan.
But I understand.
But the question is, you know, does he -- his bet is Super Tuesday and having represented a congressional district in Georgia, can he do well in the south. And he could get back in the game.
You know one of the things I've learned in this election year is toss all the conventional wisdom out the window. So with that I think is probably his last stand. That is clearly his own campaign's approach. But I do believe it is probably going to be Romney and Santorum from here through probably April.
WALLACE: And we've got less than 30 seconds left, Juan, is that what you see that this really devolves into a two man race?
WILLIAMS: You know, I keep damaging my credibility by saying somebody is out of the race. I thought Gingrich was done -- has been done several times and he has come back and proved me wrong. So I don't want to say it again. But I must say GOP intensity, you know from all this, is on the right -- is with Santorum right now. And so that is where I would look.
WALLACE: I am with you, no predictions.
Thanks, panel. See you next week.
And don't forget to check out panel plus where our group picks right up with the discussion on our web site FoxNewsSunday.com. We'll post a video before noon eastern time. And make sure, also, to follow us on twitter @Foxnewssunday.
Up next our Power Player of the Week.
WALLACE: By now it is almost a cliche-- the young man or woman who comes up with a business for the Internet that is worth billions. But each time it is still something of a shock. Here is our Power Player of the Week.
TIM O'SHAUGHNESSY, CEO LIVING SOCIAL: Amazon is where you go when you want things to show up in two days and Facebook is where you go to see what your friends are doing. I think there is going to be an answer to that for local and I think we can be that.
WALLACE: 30-year-old Tim O'Shaughnessy is co-founder and CEO of Living Social, a deals website that offers members big discounts at local businesses. They can save up to 70 percent at restaurants, spas and stores. The businesses get new customers.
O'SHAUGHNESSY: The yellow pages wasn't really cutting it. They couldn't see was that performing? Were people coming through the doors? And so we put those things together and we thought that there was a strong path ahead.
WALLACE: What do you think of Groupon.
O'SHAUGHNESSY: Groupon has built a great business.
WALLACE: Groupon is the biggest coupon website. But Living Social has built quite a business. Since 2009, 60 million members in 25 countries have bought 63 million coupons.
O'SHAUGHNESSY: There is a competitive aspect, but I think it will end up being, you know, when history is written something that looks more like eBay and Amazon.
WALLACE: What he means is Living Social is branching out from coupons, offering its members adventure.
O'SHAUGHNESSY: We might do something called white water rafting and beer tasting. We'll take you through a rafting experience and we take you to a brewery where you do a beer tasting and then we drop you back off in the city.
WALLACE: And they just opened a clubhouse in Washington where they offer experiences. Like a two hour paving class with Juan (ph) or a cooking class with a top local chef.
UNIDENTIFIED MALE: We're not going to peel the carrots or anything, we're just going to chop them up a little bit.
WALLACE: O'Shaughnessy showed us a few of his 5,000 employees putting together adventures.
O'SHAUGHNESSY: You can see people, you know, e-mailing back and forth, you know, figuring out contract. You know, there's a sexiness associated with the actual event, but there's a lot of labor that goes in to actually get it there.
WALLACE: There were 700 coupon businesses on the web last year, 170 shut down. In November, Groupon raised $700 million in an IPO that put its value at more than $13 billion dollars.
If Groupon is worth $13 billion, what is Living Social worth?
O'SHAUGHNESSY: Without the market to tell you what it is, it is a very good question. How much do you want to buy shares for?
WALLACE: As a kid O'Shaughnessy used to buy candy in bulk then sell it at local playgrounds.
Triple or quadruple the price?
O'SHAUGHNESSY: Wholesale and retail. You can get a lot of efficiencies out of that.
WALLACE: Where do you think you got the entrepreneurial bug?
O'SHAUGHNESSY: I used to be called when I was little people used to call me stat man.
WALLACE: He would check out players' performances versus their salaries and who decide who was a bargain.
O'SHAUGHNESSY: All of those types of characteristics I think are just part of my DNA and it has been a lot of fun to be able to turn that into a career.
WALLACE: Building a business he thinks will make life in the big city a little nicer.
O'SHAUGHNESSY: People want to feel connected to their cities, they want to support local businesses. We can keep doing that and do that right, that's going to be a fantastic business.
WALLACE: In case you are wondering when Living Social sells a coupon and a $20 meal for $10 they take a 30 to 50 percent of that and give the rest to the local business which hopes that it picks up a new customer.
Now this program note. Next Sunday we'll have an exclusive interview with presidential candidate Rick Santorum just before Super Tuesday.
And that's it for today. Have a great week. And we'll see you on the next "Fox News Sunday."
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