This is a rush transcript from "Special Report," August 22, 2012. This copy may not be in its final form and may be updated.
(BEGIN VIDEO CLIP)
DOUG ELMENDORF, CONGRESSIONAL BUDGET OFFICE: If lawmakers do not reduce the deficit sharply in 2013, perhaps because of the near term economic consequences, they will need to reduce it later. At some point we will need to adopt policies that require people to pay significantly more in taxes, accept substantially less in government benefits and services, or both.
(END VIDEO CLIP)
BRET BAIER, HOST: Doug Elmendorf, the head of the Congressional Budget Office, talking about what happens at the end of the year. The CBO projecting today deficits for this coming fiscal year, 2012, to be $1.1 trillion. As you take a look at the graph, deficits under President Obama, of course this is a president who vowed to cut the deficit in half when he came to office, you will see it exceed $1 trillion according to the CBO for the fourth straight year.
As you take a look at the next graph, this is essentially what Elmendorf is talking about. If the current law stays in place, the alternative fiscal scenario, there you see everything stays the same. They pass everything to stay the same as it is right now. The deficit is roughly $1.1 -- shy of $1.1 trillion, not billion. That should be $1.1 trillion. The growth, GDP would be 1.7 and unemployment at 8.0.
But then you see the 2012 baseline. That is really what happens if the sequestration goes in to place. This is at the end of the year. If the tax cuts are not extended, the Bush era tax cut, then you see the deficit go down, growth go in the negative, and unemployment shoot up. Again, that is $641 billion and $1.1 trillion roughly.
Let's bring in the panel, Steve Hayes, senior writer for The Weekly Standard, A.B. Stoddard, associate editor of The Hill, and syndicated columnist Charles Krauthammer. Steve, you look at the numbers and you can see what Elmendorf said today, and put it in political perspective.
STEVE HAYES, SENIOR WRITER, THE WEEKLY STANDARD: It's scary. And it's a virtual certainty that nothing will be done about this before the election. Everybody is operating as if nothing will be done because it doesn't make sense politically for either party to do this.
The problem with the fiscal cliff among many others, including the fact it would end us in recession as Doug Elmendorf suggested, is that it mainly cuts in discretionary spending and mainly to defense. So it may have a short-term impact on the budget trajectory, but it doesn't actually solve the long-term fiscal problems. It does nothing on entitlements. It really doesn't challenge the structures of the entitlements driving the national debt.
So it's a short-term hit we'd take. It would drive us into a recession as a near certainty, and it doesn't do anything to solve our problem. This is exactly the kind of thing that people send their congressmen and women to Washington to fix. And nobody wants to do anything about it.
BAIER: The White House response is that the House and Republicans in Congress are holding middle class -- the middle class hostage to give tax cuts to millionaires and billionaires, tax cuts they say that the U.S. can't afford. The president's now banking on this plan for his election.
HAYES: Yes, this is one of the most unbelievable storylines of the 2012 election cycle. President Obama has twice in public on the record argued against raising taxes and economic downturn. There is no question that he has made this case. He said it would hurt the economy if we raised taxes in an economic downturn. He said it twice in 2009 and again in 2010.
He is now running with that as the centerpiece of the economic message. So he is running on something that he himself said would hurt the U.S. economy. And where is the national news media asking him questions about this? This should be the first question he gets at every press conference. Mr. President, why are you running on something that you have said specifically would do damage to the U.S. economy? And he is not being asked the question.
A.B. STODDARD, ASSOCIATE EDITOR, THE HILL: Well, let's get back to the fiscal cliff, which is not the fault of the Republicans but it is not the fault of Democrats either. Both parties are accountable, and everyone at home watching should recall that they both supported this deal. It was rigged from the start with a triggered death trap of cuts that are nonsensical.
BAIER: Let's -- just one second. For people sitting at home, the reason it came to this, it went to a super committee. Because the White House and House Republicans, namely Speaker Boehner, couldn't come together on a big deal on deficit and debt cutting that included tax increases on the Democratic side and major spending cuts and entitlement reform on the Republican side. We ended up in a super committee, they couldn't get it done. That was the threat that if they couldn't, you would get sequestration, these major cuts, and separately all these tax increase tied to extending the Bush era tax cuts. Fair, in a simple way?
STODDARD: They knew the time to fix these across the board, nonsensical draconian cuts would be at the time that the Bush tax cuttings were expiring because the whole thing was a head fake and the people that signed on the deal at the cliff of default in August of 2011 all knew in both parties they could rewrite this if they had to this December at the last minute after the 2012 presidential election.
BAIER: Isn't that a crazy way to run government?
STODDARD: It's really incredible. I wish I could tell you, as you know I'm a little obsessed with the fiscal cliff. I wish I could tell you that members when you talk to them are any further from their denial or closer to the reality of how quickly they will have to forge consensus in that seven weeks from November 7 to Christmas Eve or whenever it is, but they are not.
The new rumor is they will let everything expire and set in on December 31 because that way, five days later, they can reinstate some of the tax cuts if not all of them so they are tax cutters instead of people who raised taxes.
BAIER: If you're sitting on the couch, Charles, at home and you have to sit at the table and do your budget, do you look at Washington and say what is going on there?
KRAUTHAMMER: Well, this is kind of a crazy way to do business. But I must say I feel a strange equanimity about this cliff. I'd like to get my shorts in a twist, but I can't make myself, because there are only two options. Either Obama wins or Romney wins in November. If Obama wins -- and Elmendorf's warning is a useful one. Everybody knows if nothing happens we're going over a cliff and have a recession.
So assume Obama wins. He doesn't want to have a recession or a worse economy starting off a second term than he had in the first. Assuming the Republicans retain the House, a good assumption, he has the come to a compromise exactly like the kind he did after the shellacking he took in 2010 where he and the McConnell (ph) worked out a deal.
If Romney wins he will simply announce on the day after he is elected that if the problem isn't solved in the lame duck he will as soon as he gets in office reverse retroactively everything that happens on January 1. This does assume that Republicans win the Senate. If Romney wins the White House he will likely win the Senate, although we have a Missouri Akin issue.
BAIER: Which we will talk about next in the panel.
KRAUTHAMMER: Right. But assume if you have enough to win the presidency you probably have enough to win 51 seats in the Senate. So he will announce a retroactive undoing of all this stuff, a six-month extension while they work out real Ryan-like tax reform and entitlement reform. I sleep well at night.
BAIER: If it's a President Romney you sleep well at night?
KRAUTHAMMER: No, but, either way. Yes -- but about other issues. But as to the cliff, either way, whether Obama's elected or Romney, we do not go over a cliff.
HAYES: What incentive will President Obama have to work with House Republicans once he is given reelection?
KRAUTHAMMER: Because if the House Republicans sit on their hands and you can't enact anything unless they agree, then Obama has what Elmendorf has just reported, a crash in the economy, nine percent unemployment, a second recession. Obama does not want to start a second term with a ruined economy. It makes no sense.
HAYES: So he's going to give on the tax cuts to the rich?
KRAUTHAMMER: He will work out the same kind of deal he worked out with McConnell in 2010.
STODDARD: After winning instead of losing?
BAIER: Isn't the signal that they're sending is they could break the Republicans if they win with a mandate from the U.S. people --
STODDARD: There won't be a mandate for Obama or Romney.
KRAUTHAMMER: Under the constitutional system he is not a dictator. He can't enact a mandate unless the House agrees. If the Republicans hold the House as they held in 2011, he can't act without the Republicans and therefore he will have to work out a compromise as he did with Mitch McConnell.
BAIER: OK, for Charles, it's a fiscal hill.
KRAUTHAMMER: You don't need --
BAIER: For the others it's a fiscal cliff.
KRAUTHAMMER: You don't need Ambien.
Content and Programming Copyright 2012 Fox News Network, LLC. ALL RIGHTS RESERVED. Copyright 2012 CQ-Roll Call, Inc. All materials herein are protected by United States copyright law and may not be reproduced, distributed, transmitted, displayed, published or broadcast without the prior written permission of CQ-Roll Call. You may not alter or remove any trademark, copyright or other notice from copies of the content.