This is a rush transcript from "Special Report," November 9, 2010. This copy may not be in its final form and may be updated.


SENATE BUDGET COMMITTEE CHAIRMAN KENT CONRAD, D-ND: We are borrowing 40 cents of every dollar we spend. That cannot continue for much longer. It is totally unsustainable. If we stay on the course we are on today, we are headed for a debt that will be 400 percent of the gross domestic product of the United States.

People on the left who don't want to touch entitlements, that is just unrealistic. The idea that nothing has to be done is divorced from reality.

SENATOR EVAN BAYH, D-IND : I would say look at other countries and see what happens to the most vulnerable when those countries have become deeply indebted.


BRET BAIER, ANCHOR: Two moderate Democrats talking out about the entitlement issue, how crucial is it to deal with it quickly despite that many Democrats on the campaign trail, including Nancy Pelosi and even President Obama, talked about Republicans wanting to privatize Social Security and Medicare and use the issue in the election leading up to Election Day.

This comes on a day when a non-partisan foundation Pete Peterson started running ads to instruct people about the issue. Let's bring in the panel about the debt and deficit, Steve Hayes, senior writer for the Weekly Standard, Mara Liasson, national political correspondent of National Public Radio, and we welcome Tim Carney, senior political columnist at the Washington Examiner.

Tim, let's start with you. Listen, it's not a surprise that these are moderate Democrats speaking about the issue, but it is fairly stark this close to the election to hear this opposed to some of the things the Democrats said on the stump.

TIM CARNEY, SENIOR POLITICAL COLUMNIST, WASHINGTON EXAMINER: Because the Republicans were running against the overspending, so they had to defend some of their spending and thus downplay the problem of the debt.

But you will see already Democrats are talking about the tax hikes part of the solution to this. And so I wonder are tax hikes dead on arrival in a Republican House? I would think they are.

MARA LIASSON, NATIONAL POLITICAL CORRESPONDENT, NATIONAL PUBLIC RADIO: It depends what you mean by "tax hikes." Is raising the retirement age, is that something Republicans would reject, raising the money taxed for Social Security, is that considered a tax hike? There are a lot of things you can do to Social Security other than raising the Social Security taxes.

But I think just as Senator Conrad just said that the people on the left don't want to touch entitlements, you had Republicans in this election running against Medicare cuts, saying the Democrats wanted to cut your Medicare.

BAIER: They did.

LIASSON: Yes, but the point is they are going to do that, that is not a good predicate having what they call "an adult conversation," which is what they say they want about entitlements.

But I do think this is a big issue and an important first step toward getting the United States on a more competitive growth model. You have to do something about the debt and deficit. And you are going to have a commission to report something, even if it's not a 14 out of 18 vote for a unified proposal, it might be a bunch of propsals but they are going to report something on December 1.

BAIER: You're talking about the president's debt and deficit commission on September 1. What is the hope there, Steve? Is there a hope?

STEVE HAYES, SENIOR WRITER, THE WEEKLY STANDARD: Very little. There are reasons to be optimistic. For the first time I think in years, maybe even decades, we're actually having this conversation. There are people, not many, Paul Ryan, Jeff Flake, Mitch Daniels, others who are willing to talk about it in a straightforward and forth right way.

You ask Mitch Daniels, you see him on "Fox News Sunday," what should we do about this? It usually results in politicians hemming and hawing. This is a serious question. Mitch Daniels say we need to consider raising the retirement age. Boom.

BAIER: Or means testing.

CARNEY: Right. You have the politicians, people in office willing to actually have that discussion for many years what is called a third rail of American politics. I think it is to a certain extent, but you have him talking about it.

The problem is they aren't going to do anything. There's going to be some talk about this, then everybody demagogues everybody else.


LIASSON: Why doesn't the leadership line up behind Paul Ryan?

HAYES: They should. If I could direct them to do it, I'd say do it.

BAIER: At this point aren't Americans ready for adult conversation?


CARNEY: I don't think people are. The fact that Republicans successfully ran on Obamacare cut you Medicare, that's a little bit embarrassing. The fact that Republicans put out their contract for America thing, their pledge to America, and basically said we are going to cut non- defense discretionary spending. That's 17 percent of the pie basically that they're willing to take a scalpel to.

Do they have the will to go after entitlement and defense spending, I don't see that yet.

BAIER: You are putting the onus on the House Republicans who are coming in and obviously will take charge in January of the House. But is there some onus on president Obama and the Senate and the debt commission?

LIASSON: Absolutely.

CARNEY: Even to talk the president's language of getting more revenue, one thing I see him talking, we are going to hike rates on the highest earners. But he is multiplying these tax credits. You get a tax credit if you convert your car to an electric car and a tax credit if you build a windmill even if it never spins.

So he's multiply these tax credits, use a tax code to modify behavior. Yet still he thinks the right thing to do is go out and increase rates. He's not doing adult discussion even on taxes.

LIASSON: Although people have been talking about tax expenditure and spending, some surprising conservative voices on that. And that's at least a little bit hopeful.

HAYES: I don't think the Republicans should make any apologies for the fact that the tax hikes as tax hikes should be off the table. It cedes the debate about the size and scope of Government to Democrats.

If you suddenly say we should consider tax hikes, and I guarantee when the deficit commission comes out, you will have professional Washington scolds saying Republicans aren't serious because they won't raise taxes. There is a reason they don't want to raise the taxes, and it's because it gives away the argument about the size and scope of the government from the beginning. Don't raise taxes. Cut spending and cut it in serious ways. We really have to have a discussion about the fundamentals here, about shuttering departments, big picture things in addition to entitlement spending in addition to the smaller things.

BAIER: But this far out to the next election, Mara, can the American people handle talk of under a certain age cutting benefits?

LIASSON: Well, if that is the Ryan plan, which is basically under 55 you voucherize Medicare. Now if the Republican Party, even just the Republican Party in Congress is willing to get behind him, then the conversation could start. But he doesn't have a whole lot of takers in his own party.

BAIER: Next up, earmarks. Before we start, logon to the home page at FOXnews.com/specialreport. Tell us what you think should be done about them in our online poll. We will be right back.



SENATOR-ELECT PAT TOOMEY, R-PA: I want to abolish earmarks, a very wasteful process that actually contributes to growing spending in other unrelated areas because people get co-opted when they get earmarks and they feel obligated to vote for other bills.

SENATOR JIM DEMINT, R-SC: We're not going to have earmarks so it's really silly for some senior Republicans in the Senate to try to block it.

SENATE MINORITY LEADER MITCH MCCONNELL, R-KY: I think all of you know you could eliminate every congressional earmark and it would save no money. It's really an argument about discretion.


BAIER: People look at that, the Senate minority leader talking about earmarks in this environment, and say how can he say that? How can he say that? Earmarks are placeholders. They are not actual spending. They are not appropriation. They are placeholders for local pet projects that lawmakers put in bill.

The appropriations for these different agencies and departments have already been submitted. They're already there, the lump sum. The lawmakers direct these specific pet projects where some of that money is going to go. That is the discretion part.

Senator Jim Inhofe has put out a huge paper defending the earmark process, essentially, saying this whole issue about banning earmarks is bogus. He says "By banning it, in other words, Republicans are resolving not to appropriate or authorize spending, which is precisely what the constitution directs members of Congress to do."

He calls a moratorium on spending "It doesn't save money. It merely sends it to the executive branch." In other words, President Obama and the administration decide where exactly it will go.

What about this issue of earmarks? We're back with the panel. Steve?

HAYES: Well, I don't agree with him. If you would have told me a week --

BAIER: But that is the explanation.

HAYES: Look, it's a fair explanation. We got into this a little bit last night. Technically you can say earmarks add earmarks don't add to bottom line of spending. What earmarks do and the reason so many of us find them so insidious is they grease the wheel for bad spending.

So you may have senator "x" who doesn't care whether HUD gets a 20 percent budget increase in any given year, but he has a project for $37 million in his district or in his state that is going to be the senator "x" center for excellence, for congressional excellence, you know, praising himself. And he doesn't care about the overall spending, but he really wants the senator funded. So he will vote for a bill he wouldn't have otherwise voted for.

And I think that's where it becomes insidious. It adds to the corruption and the perception of corruption in Washington. Technically I think you can say it doesn't add to the bottom line. But does it fuel greater spending and bad spending? I don't think there's any question about that.

BAIER: Mara, I want to be clear I am not defending earmarks. I'm explaining what McConnell and others are saying.

LIASSON: The distinction is does a bureaucrat get to spend this money, or should we get to tell them to spend it on a bridge to nowhere, which was a famous one.

But here's what I think about earmarks. As a political fight they are extremely important. As fiscal amount they're tiny and insignificant, but they are a very important symbol. And they're also the very first test of the DeMint Tea Party Senate caucus, whatever we call them, versus the establishment.

Mitch McConnell decided to be on the other side of this even though it certainly seems when you read the list of sponsors that DeMint has lined up, you have to chuckle. Its like every single freshman plus a lot of other, everybody wanting to make peace with Jim DeMint and the new freshman is signing on the bill.

The president is for this, John Boehner is for this. This just seems to be something coming down to pike and is going to be hard to stop.

BAIER: Tim, Rand Paul is obviously an incoming member, member of the Tea Party, and he was talking to the "Wall Street Journal" and here is what they wrote about it.

"In a bigger shift from his campaign pledge to end earmarks, Paul tells me that they are a bad symbol of easy spending, but he will fight for Kentucky's share of earmarks and federal pork as long as it's doled out transparently at the committee level and not parachuted into the dead of night.

"I will advocate for Kentucky's interests," he says," according to the "Wall Street Journal." Is that dispiriting for Tea Party folks?

CARNEY: I think it certainly is dispiriting and I hope that Rand Paul doesn't go around doing too much earmarking. And I think Steve hit on the problem. As we Catholics would say, it's an occasion of sin. It puts you in a situation where you're beholden to, as a senator you're beholden to Mitch McConnell or the other leaders, appropriators, to make sure you're bringing home the bacon.

BAIER: But if it is in the light of day at committee level, doesn't that essentially mean that's where you steer the money and everybody sees it.

LIASSON: That's not an earmark.

CARNEY: The Citizens against Government Waste has a definition of earmark that might be different than other peoples. They say if it's authorized by an authorizing committee, it's not an earmark. If it's debated and included in a committee, it's not an earmark, or if it's debated on the floor and voted on up or down -- they say it's not pork barrel. You can draw that line.

But every time you draw these fine lines, you take a lot of the air out of the Tea Party spirit. There are two wings in the Republican Party. There's the K Street wing with the lobbyists, Bob Dole and Trent Lott and their friends on Capitol Hill, and the Tea Party wing. Who will win over the heart of the Senate conference? That is a question going forward, and that's where DeMint is coming down.

HAYES: The bureaucrat argument, the argument is will you let Obama administration bureaucrats make decisions where this money goes instead of members of the Congress closer to the people. I get that argument. But the senior Republicans want to be in this political environment or any political environment defend practice of earmarks because Congress has done such a great job --

BAIER: They do say that we're going to cut spending overall, so the big pots of money go down.

HAYES: This is the point that Mara was making. They'll say this is a distraction. Earmarks don't amount to much and it's just a side issue. If they had bills on the floor right now to reform Medicare or to change the way we structure Social Security, I would say you know what, that is a good point. Go for that and do the big stuff first. They don't. It's not serious.

BAIER: That is it for the panel and probably not it for this topic.

Content and Programming Copyright 2010 Fox News Network, LLC. ALL RIGHTS RESERVED. Copyright 2010 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.