Gov. John Kasich talks balanced budget push, 2016 plans; Denis McDonough on president's domestic, foreign policy priorities

Insight from the White House chief of staff


This is a rush transcript from "Fox News Sunday," January 25, 2015. This copy may not be in its final form and may be updated.

CHRIS WALLACE, FOX NEWS ANCHOR: I'm Chris Wallace.  President Obama is defiant, doubling down on his agenda in his first State of the Union speech to the new GOP-controlled Congress. 


PRESIDENT BARACK OBAMA: I have no more campaigns to run. 


My only agenda -- I know because I won both of them. 


WALLACE: We'll discuss the president's domestic policies and the growing terror threat in the Middle East with White House chief of staff, Denis McDonough.  Plus, House Speaker Boehner invites Israel's prime minister to Capitol Hill without consulting the White House.  Our Sunday group weighs in.  Then, Republican 2016 contenders hit the key state of Iowa. 

FORMER GOV. RICK PERRY, R - TX: The Americans are looking for leaders who will bring the country back together. 

GOV. SCOTT WALKER, R - WI: We can move this country forward. We can have our own American revival. 

GOV. CHRIS CHRISTIE, R - NJ: It is time for us to stand up and fight together for the country that we were given. 

WALLACE: We'll get the latest from Des Moines. And we'll talk with Ohio governor and potential candidate, John Kasich, about his push for a constitutional amendment to balance the federal budget.  And just a week before Super Bowl XLIX, another NFL controversy. 

TOM BRADY, PATRIOTS QUARTERBACK: I have no knowledge of anything. I have no knowledge of any wrongdoing. 

WALLACE: All, right now, on "Fox News Sunday."


WALLACE: And hello again from Fox News in Washington.  We begin with some breaking news. A new video from ISIS militants claims they have executed one of their Japanese hostages. And the terror group is demanding a prisoner exchange for the second hostage. We'll talk with White House chief of staff Denis McDonough in a moment. But, first, Fox News chief White House correspondent Ed Henry is traveling with the president in India and joins us with the latest -- Ed. 

ED HENRY, FOX NEWS CHIEF WHITE HOUSE CORRESPONDENT: Well, Chris, here in India, the president has now phoned the Japanese Prime Minister Shinzo Abe to express solidarity over this beheading. He also called it a brutal murder.

That comes just a few days after in the State of Union, the president claimed that American leadership is stopping ISIS' advance.  At a news conference here, he was also pressed about another contradiction, the fact that he called Yemen a success story in September. Well, now, it's clearly in shambles now. The president denied U.S. counterterror efforts there have been sidelined, though his defensiveness shows that ISIS beheading is just one of a series of crisis in the Mideast. 

In fact, on Air Force One on his way here, the president also called the new king, King Salman of Saudi Arabia, abruptly canceled plans for Vice President Biden to lead the U.S. delegation, mourning the death of King Abdullah. Images like this of the French President Hollande, personally greeting King Salman was perhaps too much for the president. Remember, he was slammed not too long ago for not going to anti-terror rally in Paris. And look how Saudi Arabia which the president is visiting Tuesday, sits right in the middle of this cauldron. Yemen on its border of the South, up in the north there, Iraq and Syria where ISIS has strongholds, and just across the Persian Gulf, of course, to the East, you have Iran, inching closer to nuclear weapons. That's why a few days ago when the president did these interviews with some YouTube stars, he at one point said of the world, there's a lot of bad stuff going on -- clearly an understatement, Chris.

WALLACE: Ed Henry with the president in India -- Ed, thanks for that.  Now, let's bring in the White House chief of staff, Mr. McDonough. Welcome back to "Fox News Sunday."


WALLACE: The White House has made it clear that it flatly opposes paying ransom for any hostages. But now, ISIS is making a new demand, offering a swap of the Japanese hostage for a terrorist being held in Jordan. Is that something to be considered?

MCDONOUGH: You know, our policies are pretty well set, Chris. We don't get into negotiation with terrorists. We don't pay ransom because that cash then fuels further kidnappings, which just continue to exacerbate the problem. So, we're not going to do that. 

WALLACE: And a prisoner swap? 

MCDONOUGH: We're not going to do that. 

WALLACE: And you would advise the Japanese not to do that. 

MCDONOUGH: Well, I'm not getting into a conversation with the Japanese on your show. I'm not here to talk about that today and I don't anticipate doing it. 

WALLACE: But I take -- I take you view it as another form of ransom. 

MCDONOUGH: Well, that's the way we treated this. 

WALLACE: OK. This week, House Speaker Boehner invited and the Israeli Prime Minister Netanyahu accepted an invitation to come to Congress in March to talk about Iran -- all of this, doing it without any consultation of the White House. A senior U.S. official is quote in a major Israeli newspaper as saying this, about Netanyahu, "He spat in our face publicly and that's no way to behave. Netanyahu ought to remember that President Obama has a year and a half left to his presidency and that there will be a price." What's the price?

MCDONOUGH: Look, I don't know who made that quote. That's not my position. That's not the president's position.  And our view is that, as a traditional matter, we have avoided getting in the middle of our friends, even our closest friends like Great Britain or Israel, getting in the middle of their campaigns. Given the proximity of this visit to that election in Israel, we just think it doesn't make any sense for us to have a meeting. So, that's how we're going to treat it. But also, let's take a step back and talk a little bit about the strength of this bilateral relationship and its breadth from our shared values to intelligence, military -- 


WALLACE: I understand that.

MCDONOUGH: And that's exactly how we're going to treat this.

WALLACE: But are you angry, honestly? Are -- is the -- are you, is the president, is the White House, are you angry with Speaker Boehner for doing this on his own and for Netanyahu accepting it on his own without any consultation with the White House?

MCDONOUGH: Look, I don't spend a lot of time on my emotions or getting angry, otherwise. I'd spend a lot of time dealing with the situations that we're presented with. And here's the way the president's always seen the U.S.-Israel relationship, as above partisan politics, something that is fundamentally in our interest. And so, that's how we'll continue to treat this, irrespective of how this thing goes back and forth.

WALLACE: But the fact is that the secretary of state, John Kerry, met with the Israeli ambassador to the United States, Mr. Dermer, for two hours on Tuesday. Dermer never mentioned that to him. Doesn't that raise issues about the strength of the relationship?

MCDONOUGH: The strength of this relationship is based on our shared values, the shared threats we confront and the shared opportunities we create. We'll continue to do that. We'll continue to support our allies. You know, I'll let Secretary Kerry or maybe even Ambassador Dermer explained why that occurred the way it did. The president's view is this relationship is in the national interest. It should be treated as non-partisan. That's the way it's always been treated. And that's exactly how we'll do it.

WALLACE: Just four months ago, the president was bragging about his policy in Yemen. Take a look.


OBAMA: The strategy of taking out terrorists who threaten us while supporting partners on the front lines is one that we have successfully pursued in Yemen and Somalia for years.


WALLACE: But now, Yemen's government has collapsed. There are reports that the U.S. has had to suspend some of our counterterrorism efforts against Al Qaeda in Yemen, AQAP. How much is the chaos in Yemen going to hurt our effort to take out, to fight perhaps the greatest terror threat we face?

MCDONOUGH: Going back to 2007, Chris, the president has been very clear that his administration will be about taking the fight to Al Qaeda and its affiliates where they are, based on our terms and ensuring that we do not face the kind of threat that we faced in 2001. That's exactly what we're doing.


MCDONOUGH: But the president said just there on the TV is that he just said that what we're doing in Yemen is not occupying Yemen with a large ground force. What we're doing is training Yemenis to take the fight to AQAP, making sure that we have the wherewithal -- intelligence and wherewithal to take out a threat when they are presented to us, when they threaten our people and our interests.  That's, by the way, Chris, is exactly what we've done in Yemen and we will continue to do that.   

WALLACE: But to repeat my question, the fact is that the intelligence agencies that you had dealt with in going after AQAP, the defense agencies you've dealt with, they are no longer under any control. That -- it's in chaos and in fact going to hurt our effort against Al Qaeda in Yemen.

MCDONOUGH: This is what we know about Al Qaeda, be it in Syria, be it in Iraq, be it in Afghanistan, Pakistan or on the Arabian Peninsula. They're going to go into the dark corners where it's difficult for us to get to them. That means that we're in -- always going to be dealing with difficult political situations. We're going to have to be dealing with partners who are less than perfect. That's why we are going to work with them, train them, because this is as much their fight as it is our fight.  And when we need to, Chris, we'll take action to protect ourselves. You've seen this president do that time and again, and we'll do it when we need to.

WALLACE: Let's turn to domestic issues. Does President Obama realize that he lost the midterm election?

MCDONOUGH: What the president realizes, and he laid this out in a speech last night, is that over the course of now decades, middle-class families in this country have faced unrelenting pressure as costs go up while wages stagnate. What the president laid out in the speech on Tuesday night is a plan to say, hey, let's put the middle class first in this country for one, let's close some loopholes, invest in them, things like child care, job training, community college, and make sure that they can get the kind of opportunities that we all had when we were growing up in a middle-class family.

WALLACE: But forgive me. During the campaign, the president said that his agenda was -- the midterms were in effect going to be a referendum on his agenda. Take a look.


OBAMA: I'm not on the ballot this fall. But make no mistake: these policies are on the ballot, every single one of them.


WALLACE: And yet, despite the fact that Republicans gained nine seats and took control of the Senate, gained 13 seats in the House, the president didn't acknowledge the fact that Republicans won the midterms and didn't basically scale back any of his agenda to reach out to Republicans.

MCDONOUGH: Here is what we've gotten since the midterms. We've normalized relations with Cuba, a policy that for 50 years had been failing. We've made great strides on carbon -- 

WALLACE: Respectfully, you are not answering my question.


MCDONOUGH: We laid out a plan for the middle class on Tuesday night, and in the meantime, the Republicans have debated a single infrastructure project for three weeks. They've debated among themselves over how to address women's health issues, and for just going back to the first set of issues, as I look at it, I don't see a pathway for getting the DHS appropriations bill which funds -- 


MCDONOUGH: Which funds things like counter-terrorism, our aviation security. I don't see a path to how they get that done. I hope they'll lay that out for us this week. We're ready to work with them on all these things, Chris.


MCDONOUGH: But we got to make sure that we get things like the DHS appropriations bill done.

WALLACE: The president famously said in 2009 to Eric Cantor, "Elections have consequence. I won." Well, guess what? In November, the Republicans won. What are the consequences? Doesn't the president need to scale back his agenda to find areas of agreement with the Republicans who won the midterms?

MCDONOUGH: The president has laid out a lot of places in speech as well where we can work with Republicans. Precision medicine, you saw that in the newspaper today. Things like trade, things like infrastructure, things like research and development, which have traditionally been nonpartisan issues. We're ready to work on those.  But the other thing the president -- here is where the president is not going to trim back his agenda, Chris. He's not going to say that we should trim back our agenda working for middle-class families in this country. He's not.  It's decades now that wages have stagnated, for hard-working middle-class families. He's saying enough is enough, we're out of the crisis of the last several years. Unemployment is down under 5.6 percent. More oil produced in this country than in any time in the last several decades.

WALLACE: No thanks to the Obama administration.

MCDONOUGH: Well, you know, sometimes -- 

WALLACE: It's all happening -- 

MCDONOUGH: Sometimes, Chris, you are inclined to tell us that we are responsible for things that are happening that are bad, but are not responsible for anything good.


WALLACE: -- on federal land and private and state land, and, in fact, the administration was opposed to a lot of the fracking.  One last question if I may.

MCDONOUGH: More clean energy than ever in this country. More oil and gas -- 

WALLACE: Again, no thanks to this administration.

MCDONOUGH: More oil and gas produced in this country than ever before.

WALLACE: Again, no thanks to this administration.

MCDONOUGH: We're producing more than we import for the first time in two decades. That means lower energy prices, that means more jobs, and it's time for us to focus on the middle class.


MCDONOUGH: The president will not trim his sails on that, Chris. He will not.

WALLACE: All right, one last question, sir. The president wants to pay for free community college, for increased child care tax credits by raising taxes on the wealthy, $210 billion over 10 years. And his argument is the same as it's been since he came into office. Take a look.


BARACK OBAMA: We are helping to ensure that all Americans are contributing their fair share.  To pay our fair share. Folks making $1 million or more so that we can help the folks who are struggling to get by.  Everyone pays their fair share. Everyone does their part.  Everyone does their fair share. Everyone plays by the same set of rules.


WALLACE: But during the Obama years, the top capital gains rate has jumped from 15 percent to 23.8 percent, and he'd now like to raise it to 28 percent. And the top income tax rate has gone from 35 percent to 39.6 percent. Question, what is a top earner's fair share of taxes?

MCDONOUGH: You know, it's interesting you point out the capital gains rate that the president wants to make sure that Congress gets agreement to do. That brings it back to where it was under President Reagan, somebody who I think you and many of us in this town believe was a record tax cutter -- 


WALLACE: The top tax rate was when President Reagan came into office was 70 percent.

MCDONOUGH: Which was that he was a record tax cutter. So, we're going back to a capital gains rate, 28 percent, that President Reagan had and laid out. Now, let's also ask ourselves a question about this, Chris, which is to say, well, what the president is laying out is trying to close the trust fund loophole, which is to say if you have a trust fund, when you pass, it ought to be treated like any other asset that you have.


WALLACE: It's not a trust fund. It isn't -- you know, that's a nice talking point, I'm sure it's been focus grouped, but it isn't what it is.  It's what somebody has saved their whole lives, they have invested in something, now, it's a question of whether or not you pay the basis at which they bought it or the point -- the value of it now. It's not a trust fund, sir.


WALLACE: But let me just ask, if I may -- 

MCDONOUGH: Let's agree to disagree on this.

WALLACE: If I may, what is the fair share of taxes for a top earner? Is it 30 percent, is it 40 percent? And is there some point -- this is the real question -- is there some point at which raising taxes on people hurts the economy?

MCDONOUGH: Two things. What the president is talking about is taking capital gains back to the rate at which President Reagan taxed capital gains, point one. Point two, since the president has taken office, we've gone from 10 percent unemployment to 5.6 percent unemployment. The deficit has been cut by two-thirds -- 

WALLACE: If labor force participation was what it was back in 2009, it would be 9 percent unemployment.

MCDONOUGH: We've seen that deficits cut by two-thirds. We see 10 million people with access to health care now. Health care costs growing at slower rate than at any time in 50 years. And we are creating more jobs through oil and gas and clean energy than ever before.  So, ask yourself that, Chris, what are the data telling us about what's happening in the economy?  The economy is coming back. It's growing. But we are focused on a simple fact: for too many decades with stagnant wages, the middle class has not gotten its fair shot. We're going to make sure that it does. We'll keep pushing this. This we will not trim our sails on.

WALLACE: Mr. McDonough, thank you, thanks for coming in today. Always good to talk with you, sir.

MCDONOUGH: Great to be with you, Chris. Thanks a lot.

WALLACE: I always enjoy it.


WALLACE: Good. Up next, our Sunday group joins the conversation about Speaker Boehner's invitation to Israeli's Prime Minister Netanyahu and the worsening situation in the Middle East.  Plus, what would you like to ask the panel about the dustup over Netanyahu's visit? Just got to Facebook or Twitter @FoxNewsSunday, and we may use your question on the air. 



REP. JOHN BOEHNER, R-OH, SPEAKER OF THE HOUSE: I don't believe I'm poking anyone in the eye. There is a serious threat that exists in the world and the president last night kind of papered over it. 


WALLACE: House Speaker John Boehner announcing his decision to invite Israeli Prime Minister Netanyahu who address Congress in March without notifying the White House.  And it's time now for our Sunday group: syndicated columnist, George Will, Ron Fournier of The National Journal, Fox News contributor Liz Cheney, and Charles Lane from The Washington Post. George, was Boehner wrong to invite Netanyahu to Congress without consulting the White House? Was Netanyahu wrong to accept the invitation? 

GEORGE WILL, SYNDICATED COLUMNIST: Neither were wrong. Congress is a co-equal branch of government, with many responsibilities in foreign policy. Second, the president has gone out of his way to show disdain for both Congress and foreign and domestic policy and for Mr. Netanyahu in particular.  Steve Hayes, FOX News contributor makes a point in Weekly Standard today that it is by no means good protocol to have a prime minister of another country, Mr. Cameron, lobby our Congress about policy favors -- 


WALLACE: Let me just quickly point out, Cameron called members of Congress to say don't pass a sanctions bill, threatening sanctions against Iran. 

WILL: Correct. 

WALLACE: The president's people were apologizing to members of Congress this week for not consulting them on Congress. We may be sure that if a deal is reached with Iran by June 30th and if a climate deal is reached in Paris, the president will try to treat both of those as something other than a treaty and go around Congress.  Israel lives in a tough neighborhood, 726 days the president will be gone, they will still live in a tough neighborhood. And they're not going to worry about showing manners to this man who has such bad manners. 

WALLACE: We asked you for questions for the panel and we got mixed reactions on this subject from you. Dee McWilliams writes on Facebook, "Boehner doesn't have to ask Obama who he can invite to speak at the House. Does Obama ask Boehner who he can invite to the White House?" But Tamara Hyland sent this, "Bibi accepted -- that's Netanyahu -- Bibi accepted the invitation, isn't that kind of a slap in the face for Obama?" Ron, where do you come down on this? 

RON FOURNIER, THE NATIONAL JOURNAL I think George is right. Constitutionally, everybody is acting within the right parameters.  But politically, if you're not looking at this through one of your ideological prism, on the right or the left, or you're just an average American out there just kind of plugging into this, you're asking yourself first of all, why is the House speaker embarrassing the commander-in-chief? Why is the president refusing to meet and snubbing the Israeli prime minister? And why is Netanyahu mucking around American politics? I think politically, everyone needs to realize that we're all on the same side and the common enemy here is Iran, the potential of them getting a nuclear weapon. We can disagree how we go about doing it, but we shouldn't play petty political games along the way. 

WALLACE: You know, Liz, I was thinking this week when President Bush and your dad were in the White House, if Nancy Pelosi had invited a foreign leader to come address Congress to basically criticize Bush's policy on an issue, wouldn't the guys in that White House have hit the roof? 

LIZ CHENEY, FOX NEWS CONTRIBUTOR: You know, I think that one of the things that they believed, that I believe strongly, is in the importance of a powerful executive. Part of the challenge we've got here is we don't have a powerful executive.  At the bottom of this whole debate and argument is the substance of the policy. You know, the president stood in front of Congress in a State of the Union Address and said that we've halted Iran's progress towards nuclear weapon, which is just absolutely nonsense.  And you have a situation where the White House is pushing very hard for this deal with the Iranians. Each time the Iranians fail to meet their obligations, the White House extends the deadline again. A week before the president's State of the Union Address, the Iranians announced they are going to build two new reactors. The IAEA says that they've been feeding uranium hexafluoride gas into the centrifuges in Natanz that they were supposed to shut down.  Yes, there's this political debate going on. I think Boehner was absolutely right to invite Netanyahu. I think Netanyahu was right to accept. But we've got to remember, this at bottom is about a very grave, dire and growing imminent threat that the United States and Israel face from a nuclear armed Iran. 

FOURNIER: The vice president would have accused Democrats of being unpatriotic if they invited the French president in 1993 to eat Freedom fries on Capitol Hill.

CHENEY: Well, in '93, that was Al Gore. 

FOURNIER: 2003, yes.


WALLACE: 2003.  But any way -- OK, Chuck, let's take a look at the bigger picture that Liz was talking about because this is -- there's a lot of news out of the Middle East this week. Our strongest Arab ally in the Middle East, the Saudi king has died. The government of Yemen, which was helping us fight al Qaeda in the Arabian peninsula, AQAP, that government has collapsed. ISIS is continuing its murderous ways and yet in a State of the Union Address, when the president was talking not only about domestic policy but also foreign policy, he said, we need to talk about turning the page, the shadow of crisis has past.  I guess my -- and I thought as I heard him, what's he talking about on the foreign side? 

CHARLES LANE, THE WASHINGTON POST: Well, what looks like happening right now in the Middle East is a kind of broad Iranian push on a number of fronts. The southern Iraq, where they're essentially behind the government there and their own troops are fighting in Iraq against ISIS. Yemen, the rebellions back by Iran, et cetera, they're doing all this under the umbrella of this nuclear program.  And there is a sort of archipelago of influence if not an empire that they're trying to build in the Middle East.  So, the idea that the shadow of crisis has past is -- we haven't talked about Russia, by the way, where the president said in the State of the Union that Vladimir Putin is isolated and his economy is in tatters. And Putin's response was to launch a new initiative in Ukraine.  So, maybe the shadow had passed kind of momentarily and the president mistook that for something permanent.  Let me ask you about that, Liz. I mean, your thought. He wasn't -- forgive me, saying mission accomplished. He was declaring an interim victory when he talked the shadow of crisis has passed in the war on terror. 

CHENEY: Look, this is just more of what we've seen from this president which is frankly very hard to understand. Again and again and again the president seems to think that if he says something it will make it so.  We have now got Iran with -- if not control, major influence over four capitals in the Arab world, Sana'a, Baghdad, Damascus and possibly Beirut as well. At the same time, they're on their way to a nuclear weapon. We've got ISIS having spread its influence across the region, al Qaeda having spread and grown in threat.  The notion that the president will say to the American people somehow the threat has past and think we are all naive enough to say, OK, that's great, we feel good ability is frankly terrifying, given the threat we face. 

FOURNIER: I agree, this is the equivalent of saying "mission accomplished", and it is irresponsible and wrong, it's part of the patter of the White House thinking that all they have to do is get past one cycle, one media cycle and not worry about the future. 


LANE: It communicates a little complacency, too. It communicates a little complacency that people like Putin react to and take advantage.

WALLACE: All right. We have to take a break. We'll see you a little bit later. What do you think about the power of Yemen and what could it mean about our war against AQAP? Let me know on Facebook or Twitter @FoxNewsSunday, and use the #fns.  Up next, the big first cattle call of the 2016 presidential campaign. We will find out what happened in Iowa.  And Ohio Governor John Kasich is pushing a balanced budget amendment to the White House. Is that a step to the White House? The governor joins us next.


WALLACE: One year before the Iowa caucuses, a number of potential GOP. Presidential contenders gathered there this weekend to speak to grassroots activists. We'll have an exclusive interview with Ohio Governor John Kasich, who is getting ready there in a moment.

But first, Fox News chief political correspondent Carl Cameron is in Des Moines with the latest from the Iowa freedom summit.



CARL CAMERON, FOX NEWS CORRESPONDENT: Wisconsin Governor Scott Walker tried to position himself to the right of potential 2016 rivals, with a list of accomplishments that drew enthusiastic applause.

SCOTT WALKER: We passed prolife legislation and we've defunded Planned Parenthood.


WALKER: We lowered taxes on employers, on individuals, on property, our property taxes are lower today in Wisconsin than they were four years ago. How many governors can say that?

(on camera): That was seen by many as a shot at among others, Chris Christie, governor of New Jersey which has some of the nation's highest taxes. When hecklers interrupted the sometimes abrasive governor, he seemed to take the bait.

CHRIS CHRISTIE (R) NEW JERSEY: Don't they know I am from New Jersey?


CAMERON: But Christie has been invited to campaign on behalf of Republicans in Iowa for years and turned the tables.

CHRISTIE: If I was too blunt, too direct, too loud and too New Jersey for Iowa, then why do you people keep inviting me back?


CAMERON: Protesters also disrupted former Texas Governor Rick Perry as he blasted the Obama administration for failing to secure the Texas/Mexico border. Front runners in the polls, Mitt Romney and Jeb Bush did not attend, but Donald Trump did. And rallied Iowa's GOP right against both as damaged goods.

DONALD TRUMP: So you can't have Romney. He choked. You can't have Bush.

CAMERON: The potential caucus candidates were here to make new friends, not news. So they stuck to their talking points, were largely gaffe free and all live another day. It's also clear that Mitt Romney and Jeb Bush have a lot of work to do in Iowa, Chris.

WALLACE: Carl Cameron reporting from Des Moines. Carl, thanks.

Now, let's bring in Ohio Governor John Kasich who wasn't in Ohio on Iowa this weekend, but has been on a cross-country tour, increasing chatter he may run for president in 2016. Governor Kasich, welcome back to "Fox News Sunday."

JOHN KASICH: Always good to be with you, Chris.

WALLACE: In his -- in his -- excuse me, in his State of the Union address, President Obama talked about middle class economics, raising taxes on the wealthy to help secure working families. What's wrong with that?

KASICH: Well, raising capital gains taxes, Chris, is just a prescription for economic slow-down. You know, I was budget chairman in '97, the last time we balanced a budget and the first time since man walked on the Moon, we cut capital gains taxes and we ended up with a surplus of $5 trillion surplus that was quickly spent unfortunately by Republicans. But the fact is that you cannot build a little guy up by tearing a big guy down. Abraham Lincoln said it then and he is right.

In our state, what we tried to do is we've tried to reduce -- we haven't tried, we have, we have had the largest tax cut in America over the last four years. We lower the top rate, but we also provide tax relief for those at the bottom to encourage more work. But the idea that raising capital gains tax is going to somehow help your economy it is just -- isn't going to work.

WALLACE: But let me point out and some conservatives have hit you on this what you said in your second inaugural address this -- couple of weeks ago. Here it is.


KASICH: Economic growth isn't an end into itself. Economic growth provides the means whereby we can reach out and help those who live in the shadows.


WALLACE: Governor, you accepted federal money -- under Obamacare. You accepted federal money under Obamacare to expand Medicaid. You are calling for new taxes on cigarettes and natural gas drilling. You quote Matthew 25 about fitting the hungry. Some people say you're too close to Barack Obama.

KASICH: Well, Chris, listen, we're running a billion and a half surplus in the state. We're structurally balanced when 20 other states are not able to do that. We are up almost 300,000 jobs and, you know, we are structurally balanced. I mean I've always been fiscally responsible. But let me just speak to that issue of helping other people when economic growth provides you an opportunity. I will not turn my back on the mentally ill, who live under bridges too often of the time in this country. I will not turn my back on the drug addicted and I won't turn my back on the working poor. I'm a believer that as a conservative that everybody has a God-given purpose and it is our job on a temporary basis to try to give them a chance to fulfill their God-given purpose by helping them.

Now, it can't be a way of life. It can only be a situation where you help them for a short period of time. And we demand and are going to demand in our new budget, personal responsibility that they begin to get training. That we include the business community and we get people from welfare to work and to more progress. But at the same time, tax reform isn't order of the day. What we need to do is to make sure we are able to provide strength for those that want to invest and risk take and that's exactly what our tax plan is going to be. It's going to help small businesses. We have made significant progress in helping small business. But the proof is in the pudding. We're balanced. We're running surpluses. We have the lowest unemployment in 14 years.

Chris, it's all working. And in Ohio, everybody feels included and finally in our state of Ohio, which is a microcosm of the country, I won 86 out of 88 counties and 64 percent of the vote and I won a county that Barack Obama won by 40 points. The fact is what Americans want is they want everybody to share an opportunity, everybody to be helpful, and that's what we do in our state. And it's something that the country can learn from.

WALLACE: All right. I want to talk about something else you think the country could learn from because you are touring the country right now, pushing for a constitutional convention to pass an amendment to the Constitution for a balanced federal budget. Why?

KASICH: Chris, we're 18 trillion in the hole. And I went to the Republican Convention and that's all they talked about. Now, I hope they'll do something about it now that they have a majority. The fact is, when I left Washington after being one of the architects for a balanced budget, they blew a $5 trillion surplus. This is about protecting our kids, the next generation and providing economic growth today. And just think about a convention, if we would go to a convention instead of kids focusing on Justin Bieber and Tom Brady and deflated footballs, maybe they would start thinking about Ben Franklin and Jefferson and Madison and Monroe and we can renew our country. It can be exciting to force the Congress to be responsible. That's why I'm out there doing this.

WALLACE: Forgive me for interrupting. But we've got limited time. Here is the knock ...


WALLACE: Here is the knock on a balanced budget amendment that there are times when the economy is weak when you need some deficit spending to prop up people, for instance, when a lot of people were out of work and you need to pay more unemployment benefits. And also, for instance, Social Security would only be able to spend the amount of money that it takes in that year and so a lot of critics say you would end up cutting benefits. Your response?

KASICH: Chris, we are 18 trillion and we keep fiddling, we're going to be 30 trillion. We are fiddling around while Rome burns. Now, of course, any kind of an amendment can have appropriate exceptions, economic calamity, war, but the fact is most of the time when you keep doing things that we don't do in the states and families don't do, which is spending without regard, we are mortgaging our children's future. This is not a new thing for me. I have been pushing this since I was 27 years old and I'm going to keep pushing it.

Presidents come and presidents go, but changing the culture in Washington and locking in a balanced budget amendment will provide for economic growth today and a hope for our children tomorrow, Chris.

KASICH: Governor, let's talk about a couple of issues involving you that are red meat for conservatives. You say opposition to common core educational standards is, quote, your word, "hysteria." We had Bobby Jindal, the governor of Louisiana on here, a couple of weeks ago, and he said, common core is a stalking horse for federal takeover of education.

KASICH: Well, I mean these were governors that helped create common core. Chris, the common core was written by state education superintendents and local principals. In my state of Ohio, we want higher standards for our children and those standards are set and the curriculum is set by local school board. Barak Obama doesn't set it. The state of Ohio doesn't set it. It is local school boards driving better education, higher standards, created by local school boards. I've asked the Republican governors that have complained about this to tell me where I'm wrong. And guess what, silence.

But you know, part of the problem is today politicians are running to try to get votes. You know what we try to do out here, we run out here trying to solve problems. And we have a problem with the education standards and our children's ability to compete in the world. We're not going to turn this over to Washington or even to Columbus, our state capital. It's local schools with local school boards and high standards. I don't know how anybody can disagree with that unless you're running for something.

WALLACE: Well, let's talk about running for something, Governor, because I'm sure, lot of people are hearing you and thinking why the heck doesn't that guy run for president? You have said and you've been very cautious about this, you're open to it, you're not closing any options off. How are you going to decide what are the factors that you're going to take into consideration and when are you going to make up your mind?

KASICH: Well, initially I'm introducing a budget in another week that will be another significant reform budget. That's what we do out here. And remember what it was like when I came in, 8 billion in the hole, the loss of 350,000 jobs, now we're structurally balanced, we have surpluses, we cut taxes to $3 billion and we are including everybody, including our minorities that need to be paid attention to. So, what I'm going to do is focus now. I got to get this budget going, Chris. I have not taken any options on the table. There's plenty of time for me to decide. And you know what? Ohio is a microcosm of America. And when you're doing things in a state like this where things are getting better, people are more hopeful, that's an important message to take around the country, whether I run or not. And the balanced budget amendment gives me a chance to tell people about what this country needs to do to grow and to stop fighting every single day. All I hear is fighting. You know what, people don't want fighting all the time. They want people to agree and move our country forward.

WALLACE: Well, you could do that if you ran for president.

KASICH: Well, you know, I said, options are still on the table. We'll see. But you know, let me tell you, Chris, I love my buckeye state. I love what we're doing out here. And in some respects what we're doing here -- if you listen to some of the rhetoric of the people running for president now, it's interesting how many of them are using these comments about caring for people. You know how many Republican governors are trying to figure out how to expand Medicaid? I took all the hit, which -- it doesn't bother me in the least. But now we have a bunch of Republican governor say, let me see if I can get into that program. I just want to be a good leader. I want people to feel like they have got a chance no matter who they are and I tell you one interesting thing, Chris, I was in Utah and I was walking through the Capitol and I saw a bunch of inmates. I don't know what they were doing there. Maybe cleaning things up. And I walked up, Id shook every one of their hands. And you know what I told them, God has a purpose for you. You're in a tough spot right now. You may be in a tough spot later, but remember, the Lord has a purpose for you. Be hopeful. I want people to feel like they've got a chance and their kids have a chance.

WALLACE: Governor, thank you. Thanks for talking with us. I hate to say this as a big wolverine fan, but congratulations on your national football championship.

KASICH: You know, that's a shame Michigan ...

WALLACE: Yes, sir.

KASICH: It's a shame Michigan gave up playing football.


KASICH: Maybe they'll take it up again someday.

WALLACE: Well, I guess you're not planning (ph) on getting any electoral votes there. Thank you very much, governor.


WALLACE: Always good to talk to you.

KASICH: Come on out and see us, Chris. God bless you.

WALLACE: You bet.

Up next, President Obama talks about bipartisanship and his State of the Union speech, but doubles down on his agenda. We'll bring back our Sunday group.


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OBAMA: America, for all that we have endured, for all the grit and hard work required to come back, for all the tasks that lie ahead, know this -- the shadow of crisis has past. And the State of the Union is strong.


WALLACE: President Obama sounding like anything but a lame duck when he addressed the new GOP-led Congress in his State of the Union speech this week. And we're back now with the panel. George, not a mention of the mid-terms, no reference whatsoever to new Senate Majority Leader, Mitch McConnell, are you surprised the president decided to act as if November never happened?

WILL: No, ignoring reality is part of the job description of being a progressive, so you ignore the majorities that are out there. The fact is I think Mr. Obama believes that anything he has to do collaboratively is beneath his dignity, and that therefore the remainder of his term is to set up the 2016 election. And therefore, why believe that -- to coin a phrase he made famous -- elections have consequences.

WALLACE: Well, I was, you know, it is the question that I asked Dennis McDonough at the top of the show, the White House chief of staff that president has already issued nine veto threats, it's only been a couple of weeks since Congress came in. He is promising more executive orders. Republican leaders say that the proposals he made in that speech are not dead on arrival, they're dead before arrival. What's the White House game here?

FOURNIER: I don't know. I don't think they're trying to set up 2016 because if they are, they're making a mistake. I think this is all about his legacy. I think President Obama sees himself almost like TR did where he set up 20 years of progressive change in the country. He is looking long view. For 2016, if you ask smart Democrats, including people who are working very closely with Hillary Clinton, they're worried that what the president did with his very muscular, very non-bending State of the Union address is put her in a box, that she is going to be forced to let quicker and harder than she would like to be to be elected in a general election.

WALLACE: Liz, you know, the fact is, and the White House is quick to point it out, there is some good economic news, growth is up, unemployment is down, gas prices are way down and in a new pole, Washington Post poll out this week, the president's approval rating back up to 50 percent, which is tremendous for him after where he's been.

What about the argument the White House makes he enters this debate this confrontation with Congress with some of the wind at his back?

CHENEY: Well, as you pointed out, Chris, in your interview with Dennis McDonough, a large part of the economic growth that we're seeing now is as a result of the energy revolution that we've undergone. And energy revolution for which the White House wants to take credit, but frankly has happened completely in spite of them. The reality is we have the potential here for a true economic renaissance. And I think that the, you know, effective point for the 2016 Republican candidates to be making have to do with that economic renaissance. And that what we have got to do is unleash the potential of the private sector. Unleash the potential of this energy revolution, put us in a situation where there is true economic growth, the kind of which we'll be able to frankly help the private sector and get government back, get government out of our lives.

We need to be rolling back many of the regulations as president's attempting to impose through the EPA and other ways and that's what will cause growth. We're not going to have that. You may see some small areas where we've got cooperation, but we're not going to have the kind of unleashing of our potential until we frankly have a president who believes in the market economy.

WALLACE: So, Chuck, does anything get done over these next two years?

LANE: Well, you heard both Republicans and Democrats for all the conflict of the last couple of weeks, all of them have said we can do trade. So I do think that there will be some movement on that ...

WALLACE: But I mean, forgive me, we're talking about fast-track trade authority --

LANE: Yes.

WALLACE: With all the problems this country has with jobs and the economy.

LANE: Well, you asked me if anything --

WALLACE: No, no, no. OK. But I mean is that it?

LANE: No, I think that is pretty much it. And in fact, one of the big implications of the president's speech is he kind of blew up tax reform. Because by making these big tax moves, you know, to tax the rich more heavily and spend it on a lot of tax credits that would go down lowering the income distribution, whatever you think about that politically, that blows up the whole paradigm of, you know, broader base, lower rates that was basically going to be the way comprehensive tax reform would work. I mean I think -- I think what the president was up to in the State of the Union was to some extent claiming victory for many of the reasons that you outlined, namely that his approval is back up, the economy is on track, there's a little bit better feel in the country than there was even as recently as November. And, of course, the risk in that is maybe this victory isn't so permanent or maybe the better climate in the country doesn't necessarily reflect approval for every little policy.

But I think he really felt personally vindicated, you know, that we've come through six years and after all the criticism he's been through that the economy is growing again.

WALLACE: Ron, final thought on that?

FOURNIER: What's the problem, he does feel personally vindicated. But the presidency is not about the president. It's about the American people and they're still struggling and they know that we're not out from the worst of 9/11 and they know that they are not even benefiting totally from this one or two-month economic gain.

WALLACE: You know, the question I didn't get to ask Denis McDonough, but if you look at median household income, it's down about 2,000 dollars per household from when he came into office to where it is now, so the middle class hasn't done so well under the middle class economics -- this president.

All right, we have to step aside for a moment. When we come back, the really big story this week and certainly got most of the attention as we get ready for Super Bowl XLIX our Sunday group tackles Deflate-gate next.



BILL BELICHICK, NEW ENGLAND PATRIOTS HEAD COACH: I believe now 100 percent that I have personally and we as an organization have absolutely followed every rule to the letter.


WALLACE: New England Patriots' head coach, Bill Belichick trying to turn the page on accusations his team tampered with footballs by purposefully deflating them during last week's AFC Championship game. George, you have made it abundantly clear that you think that pro football is inferior to baseball. What do you make of Deflate-gate or Ballghazi or all the things it's being called?

WILL: Well, much though, I would like to pile on the NFL here, I must say baseball has its fair share of this. They tampered with themselves, with performance enhancing drugs, they've tampered with their equipment, with cart bats, they've even tampered with the playing field in baseball, putting in a water puddle next to first base when Mario Wilson is on base. So, I'm going to stay out of that one.

WALLACE: What about Deflate-gate? You have got something to say about that?

WILL: Well, yes, the idea that a quarterback as gifted as Brady would field these balls and not see anything unusual, or that a martinet such as Belichick would say, this is detail beneath my dignity to look at is passing believable.

WALLACE: Ron, you know, it now appears from comments that they made the other day that the NFL is not going to conclude its investigation until after the Super Bowl, which means no punishments, no discipline, nothing like that and our accusations until after the big game, smart damage control strategy?

FOURNIER: It's damage control strategy. But it's not very smart. It's pretty consistent with the way the NFL has acted. Look, they haven't even interviewed Brady yet. You call this investigation? I think as cynical look at this and say, why are we worrying about Deflate-game when the heaven is burning? Hey, sports family look at this and say, why is the NFL focused on this? Why is the sports press focused on this when we have rampant steroid abuse in pro-football, we have the severe problem with the concussions with men dying early with brain damage, and we have domestic abuse and criminal problems that are covered up and lied about at the highest rankings of the NFL. Those to me are much bigger problems than the size of the footballs, actually.

WALLACE: But this is the problem we're dealing with, Lis. It's like you've got to go to -- with the Army you have -- so do you have a strong feeling about footballs and their inflation per square inch?



CHENEY: I've been losing sleep over that, Chris, actually. No, look, I think that there's a cottage industry of hating the Patriots. I think that that's part of what you're seeing in terms of the attacks on Tom Brady and the Patriots. There's an investigation that's underway. We'll see what happens. I think Tom Brady was right, this isn't ISIS. Ron is right. The fact that we're focused on this when the Middle East is burning, you know, tells me, that we're not focused on what we should be, which is that, you know, both teams that are going to be playing next week about great seasons and it's going to be a great game and I'll go with the Patriots by three.

WALLACE: Wow. Chuck, I think the thing that surprised me the most and Liz kind of referred to this is that this story has gotten so big. This led the evening newscast a couple of nights last week.

LANE: You know, I don't know why everybody is being so serious. I like "deflate-gate." I am pro "deflate-gate."


LANE: Because I like puns. And puns have had a field day during this whole thing. In fact, George himself said it was all passing strange, without even realizing that he was punning in the middle of this. Twitter blew up with juvenile puns. And puns have had a field day during this whole thing. So, in fact, George himself said it was all passing strange. Without even realizing that he was punning in the middle of this. Twitter blew up with magnificent plural (ph) juvenile puns. And, look, it's sports. (INAUDIBLE). Used to throw us ball. In college basketball, certain teams make the net tighter so the ball goes through slower so they can set up their press. They beat them 45-7, Chris. I think if the balls had been 13.5 pounds per square inch, it might have been 52-3.

WALLACE: George, I can't let today pass without a much more serious subject and that is the passing of Ernie Banks, Mr. Cub. And you know and as a young kid growing up in Chicago, I know just how big a figure he was. He died Friday night at the age of 83. Explain to folks who Ernie Banks was and the significance of his passing.

WILL: Well, it was the first African-American player on the Cubs. Like Stan Muserman (ph) in St. Louis, Bob Feller in Cleveland, Tony Gwynn in San Diego, Cal Ripken of Baltimore. He was the face of the franchise. He had 512 homeruns. For the Cubs, there was no one fearsome batting behind him to make the pitcher throwing strikes. He still hit .512. He had this pretty natural cheerfulness. But remember, he attended Booker T. Washington High School, in racially segregated Dallas. He came to the Cubs in September, 1953 and three days later they brought up Gene Baker, an African-American second baseman because it was just assumed they had roommates in those days that a white man wouldn't room with Ernie Banks. He became as I say, the toast of the town.

WALLACE: And also most valuable player two years in a row for a fifth-place team. Thank you all, panel, for covering a range of subjects. That's it for today. Have a great week and we'll see you next "Fox News Sunday."

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