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Special Report

Economy's Impact on Midterm Elections; Tensions Surrounding Ground Zero Mosque

This is a rush transcript of "Special Report With Bret Baier" from August 3, 2010. This copy may not be in its final form and may be updated.

(BEGIN VIDEO CLIP)

GEORGE STEPHANOPOULOS, ABC NEWS: Should Americans be prepared for unemployment to go up before it goes down?

TIMOTHY GEITHNER, TREASURY SECRETARY: It's possible you will have a couple of months where it goes up one thing that happens in recovery, George, people start to come back into labor force.

That can cause measured unemployment rate to go up temporarily. But what we expect to see, I think most forecasters expect this is an economy that's gradually healing.

(END VIDEOCLIP)

BRET BAIER, ANCHOR: The treasury secretary talking about the unemployment rate saying it might go up in a couple of months. Well, a couple of months puts you right at November, the mid-term elections.

Here is the latest USA Today Gallop poll on the president's approval rating and it's at its lowest job approval rating, 41 percent according to this poll.

Let's bring in our panel. Bill Kristol, editor of the Weekly Standard. A.B. Stoddard, associate editor of The Hill, and syndicated columnist Charles Krauthammer.

Bill, first to you. The White House is clearly trying to say that this is a slow recovery and that things could be worse. How is that selling out in the public?

BILL KRISTOL, EDITOR, THE WEEKLY STANDARD: Things could always be worse. I hope the recovery does chug along and we don't have a double dip. They passed their huge stimulus in a partisan vote.

I always come back to that February moment when they could have dealt with Republicans. I was talking to Republicans throughout that period. The Republicans were very nervous. They had the huge Bush incubus on their backs still.

Obama could easily have split Republicans. There were plenty of Republicans who did not want to be in the position of opposing a popular president on this first big vote.

He passed. He acceded to Nancy Pelosi into the House chairman. They passed stimulus bill. Stuff full of Democratic goodies and that it's now his recovery policy. Joe Biden about six to seven weeks ago, announced that it was going to be the summer of recovery. They have embraced this economy and I think at this point they're stuck with it.

BAIER: A.B., the politics here?

A.B. STODDARD, ASSOCIATE EDITOR, THEHILL.COM: Right, well, the members who are running for the re-election know that the trend lines are set and they're not going to change between August 3 and November 2. They don't expect to see any better unemployment picture between now and then.

So what they're trying to do is force Republicans to answer for blocking unemployment, extension of unemployment benefits. Eventually that got through, but being opposed almost universally to that and also procedurally blocking a package of $30 billion in the tax relief for small businesses before Congress recessed.

And at the same time, open up this tax cut debate. Will Republicans who would like to see every single bracket in the tax code, all the tax relief with the Bush tax cut extended even to the wealthy, will they come up with any pay-force or offsets or they simply advocate extending all of them.

Even though, froze the deficit while they block things like the small business tax relief and unemployment extension, and benefit extensions? That is what they are doing to try to change the subject and to try to look like they're fighting for the unemployed and fighting for small business while they go to September approaching this tax cut debate.

The tax cut debate is going to be so definitive in this fall's elections. I think the Democrats -- what they have to do is pick a side.

They're a little bit divided right now about whether or not to extend them to all the brackets or to drop the ones for the wealthy, and whether or not they're going to make this announcement to the voters in September or whether or not, they're going to wait. I think they have to decide pretty quickly.

BAIER: Charles, White House Press Secretary Robert Gibbs today went on a riff about the small business charging that the Republicans, “you're are for small business except when you are not for small business”. So that seems to be as A.B. mentioned a talking point coming up.

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: I think the Republicans have a pretty strong argument. Whatever goodies the administration is saying are packaged in the bill they want passed, the loans and the targeted tax cuts are going to be totally undone on January 1.

When if the president and Geithner have said, they're going to raise taxes by allowing the Bush cuts to expire, which will be taking a huge amount of money out of the pockets of small business and this is how liberal economics works.

The government takes your money in taxes and then it will deign to restore some of it as a loan on which you have to go to bureaucrat and you have to fill out a form, get on your knees and be nice and adhere to all the mandates.

Get part of your money back with interest or in targeted tax cuts, which means the government will tell you how to spend your money, how to do your expansion of the business, spend it on the "x" and not "y."

The answer is I think if you are a Republican, you make a principled argument to better not to raise taxes in the first place, not to raise them on January 1.  Allow small business to keep its money and it will invest as it sees fit. That is the most efficient and it's also the most fair.

BAIER: Republicans Senators Tom Coburn and John McCain pointed to a new report out about what they call the wasteful projects in the stimulus package. Take a listen.

(BEGIN VIDEO CLIP)

SEN. TOM COBURN, R -- OKLAHOMA: When the special IG for this admits that there's going to be $50 billion in fraud, out of this bill, and we highlight things that we think are stupid and inappropriate. It's normal that we're going to get criticism.

UNIDENTIFIED FEMALE: Do you think it's a credible report?

ROBERT GIBBS, WHITE HOUSE PRESS SECRETARY: From what I read, no.

(END VIDEO CLIP)

BAIER: OK, here are some of the things in this report, half a million dollars for new windows in the Mount St. Helens Visitor Center in Washington. The building has been closed since 2007. No plans to reopen it.

$6.9 million for repairs to this four dry Tortugas at the end of Florida keys. Few people can visit it unless they hire a sea plane or take four-hour boat ride.

$2 million to study exotic ants in Indian Ocean, dog domestication at Cornell, $296,141 to send students from Montana State University to China to study dinosaur eggs and the list goes on, as you can see here. Charles. What about these?

KRAUTHAMMER: These are not inefficiency or errors. This tells you why the stimulus is not a jobs program as it was sold.

Of course, if you spend a trillion dollars, you're going to create a job or two here or there, but unbelievable waste. What this was, was the pent up demand by liberals for thousands of project, arbitrary political, who knows whatever reason that had been stored up over the years and trillion dollars of goodies handed out as way to win support of Democrats in Congress per other things.

And that's why the Democrats are running around from the word stimulus. Everybody understands it was a payoff and not a jobs creator.

BAIER: Which is the more powerful political argument, A.B, the helping small business charge that the Republicans are not or that the stimulus is packed with this wasteful spending?

STODDARD: Look, none of the voters want to hear about the wasteful projects in the stimulus package. Polling is consistent and it does not budge that most Americans don't believe it was effective.

It is the foundation of Obama's economic policy. Will the Democrats spends between now and November 2 talking about how the Republicans are not really for fiscal sanity because they don't want to pay down the deficit because they want to extend all tax cuts and they don't want to pay for them.

Will they talk about it or will they actually be defending the stimulus? I think you're not going to hear them defending the stimulus.

They're going to spend the time talking about Republican opposition to things that they think will help. But they don't talk about the past. The Polling won't move on the stimulus.

BAIER: Bill?

KRISTOL: I'd like to know about the results of the $300,000 study on the dog domestication at Cornell University. We're having some issues with the dog and that they might be discovering some useful stuff.

That part of the stimulus maybe will end up being useful, not job creator. Look, this talk, talk, talk. It's not going to matter.  The president of the United States and the Democratic -- and his party, his party controls Congress.

The president has gotten his agenda through. He wanted stimulus and he got it. He wanted healthcare bill. He got it. The Republicans haven't passed anything. The Republicans haven't blocked anything important.

They delayed small unemployment benefit such as trivial $30 billion bill, which is actually -- the equity stakes and banks encouraged them to make loans. No serious economists think it will have an effect. It's Obama's economy.

Now, this could last three or four years to get out of it and unemployment could up before it goes down, go up to 10 percent then he might have some running room. He took possession of it. Congress did what he wanted. He's his. They're in deep trouble politically.

BAIER: Tell us what you think about the effect of the stimulus package on the economy, go to our homepage at FoxNews.com/specialreport. Vote on our online poll, right there on the right side of the screen.

Next up, an Islamic mosque near ground zero. One step closer tonight to reality.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

MAYOR MICHAEL BLOOMBERG, I - NEW YORK: Community Board in Lower Manhattan voted overwhelmingly to support the proposal. If it moves forward, I expect the community center and mosque will add to the life and vitality of the neighborhood and the entire city. Political controversies come and go, but our values and our traditions endure.

REP. PETE KING, R - NEW YORK: This is such a sensitive issue. This to me is such a wrong place to have a mosque such as this. Then it will cost $100 million and they're refusing to say where the money is coming from.

And the Imam himself who poses as a moderate, yet he was saying after 9/11 that the U.S. may have brought on the attack himself. He also refused to say whether Hamas is a terrorist organization.

BAIER (voice-over): Decision today by the New York Preservation Commission decided to leave up a building saying it does not rise to the level of landmark status.

That clears the way for the tearing down and the creation of potentially a $100 million Islamic culture center and mosque in its place.

Asked about that today the White House press secretary said that this is a local issue and that the White House is not going to get involved in the local decision-making.

(END VIDEO CLIP)

BAIER: What about this? In national scheme of things, we're back with the panel. Charles?

KRAUTHAMMER: It's no more a local issue than 9/11 was a local New York event. That's a dodge and it's disgraceful. The president doesn't know how to express himself on this.

Now look, nobody in America would object to the construction of Islamic Center, however the question is why here? Why in this spot? This is spot that was for hours bathed in the ashes of the Twin Towers and the thousands of innocents who died in it.

It's not just any other spot. It's sacred ground. It's not to indict Islam. It's not to indict the vast majority of Muslims who were appalled by this event.

But let me give you -- in 1993, Pope John Paul II ordered the Carmelite nuns who established Covenant in Auschwitz to evacuate and to leave it.

And the reason is not because Carmelites had any involvement in, of course, Auschwitz or even the Catholic Church was not the perpetrator, but because it was sacred ground and it was inappropriate. It was seen as provocation and extremely insensitive.

In this case -- in the case of the Carmelites it was act of goodwill. They prayed for souls of those who died. I'm not sure of the goodwill of this imam who as we heard if he was asked if Hamas was a terrorist organization answered I'm not a politician. It's a difficult issue.

BAIER: A.B.?

STODDARD: I agree with much of what Charles said and Congressman King, you know, he's asking where the $100 million is coming from. I think that -- I really think in this debate that nobody is wrong and everybody is right.

I understand why both sides are very worked up about this. None of us wants to offend anyone who lost a loved one on 9/11 and worsen their pain in any way, but I can see why Mayor Bloomberg says this is such a critical task of the separation between church and state.

I don't think we can walk away from tolerance or the protection of religious freedom. We can scrutinize this organization and investigate funding and make sure that we continue to protect ourselves from harm, but I can see why both sides feel very strongly about this.

BAIER: Bill?

KRISTOR: Well, there is one person I think who's wrong with this and acting with the bad intent and that's the Imam Ralph. He is not building the mosque because he thinks it's good for interfaith relation with New York and the U.S.?

He's building this huge mosque here one block from ground zero. There's been no demand that I know of, shortage of worship space for Muslims in lower Manhattan. There are hundred in mosque in New York City. They could build them all over the place and no one would say anything.

But he’s building it a block from ground zero as a statement, and it's offensive statement and I think it's shocking that Mayor Bloomberg is pretending it's horrible that they're offended by it. I’ll make a prediction. This mosque will not be built. This mosque will not be built. Construction workers won't work on it, the banks won't finance it. People will refuse to deal with the people who are building it and it will never happen.

BAIER: Should the White House weigh in on the issue?

KRISTOL: Well, the president likes to weigh in on a lot of other local issues. The Cambridge police force, the Arizona law, but this one is a local call and it's the two cents -- yes, I think he has a lot of goodwill in the Muslim world.

He should say the truth, which is decent Muslims are appalled by this. This isn't helping Muslim relations in the United States. It's terribly damaging to them. He should say to his imam if you care all about comedy and decency in the U.S., build this mosque elsewhere.