Economy's Impact on Midterm Elections

This is a rush transcript from "Special Report With Bret Baier," August 26, 2010. This copy may not be in its final form and may be updated.

(BEGIN VIDEO CLIP)

BILL BURTON, WHITE HOUSE DEPUTY PRESS SECRETARY: The p resident is doing everything that we think is appropriate to continue moving the economy in the right direction and he will be continuing to urge Republicans in the Senate to stop obstructing the important small business bill so they can end capital gains taxes for their investments so they can create jobs again.

MARK ZANDI, MOODY'S ANALYTICS: Across nearly every industry, we have been put through a lot. We suffered a very severe financial shock and a great recession. And people don't forget that very easily. So I think there is a lot of nervousness.

(END VIDEO CLIP)

BRET BAIER, ANCHOR: The president is vacationing in Martha's Vineyard, as we told you, but the jitters about the economy are continuing to rise. First, the unemployment situation -- obviously we're at 9.5 percent unemployment. That has not changed. A little more than 2.5 million jobs lost since the stimulus was signed in February 2009. Those are real jobs lost. The Congressional Budget Office says the stimulus may have saved or created 3.3 million jobs. That's a number the administration touts. Housing numbers did not look good this past week. Pre-owned homes dropped 27 percent, the lowest level in 15 years, new home sales off 12.4 percent, slowest pace on record, one in 10 households with mortgages at risk of foreclosure -- new numbers out this week. So what about this, the policy and the politics?

Let's bring in the panel, Chris Stirewalt, Fox News politics editor, digital; A.B. Stoddard, associate editor of The Hill, and syndicated columnist Charles Krauthammer.

Chris, first of all, what about the economic numbers and where we stand on this economy?

CHRIS STIREWALT, FOX NEWS POLITICS EDITOR-DIGITAL: Well, I think the political calculation here is this -- the numbers are bad. And we see the numbers and we look at these closely. But when you are talking about the reality for the election, you talk about what voters understand. And the voters don't have to look at the numbers to know that the economy is bad because they can't sell their house. They're afraid of losing their job. The kids may not be able to find work and they may move at home with them.

So you have this multiplier effect. So this is baked in the cake. And I think what you're seeing among Democrats now is the realization that this is the way it will be through November. That there is not any longer that hope of a rally that's going to leaven the cake for them in the end.

BAIER: A.B.?

A.B. STODDARD, ASSOCIATE EDITOR, THE HILL: I'm sort of surprised. I know the polling is alarming the Democrats and they hoped it wouldn't this bad in the battleground districts at this point.

But the economic data should not come as a surprise. The trend lines were never sunny. It was never going to be good. And talk of whether or not we near a double dip is just jargon. We're in recession, 9.5 percent unemployment and expected to stay there for another year or more. Businesses are telling us they have no incentive to hire and invest in new jobs because they don't have enough consumer demand. This is for the foreseeable future what we have. When you look at the voters, it's true. You can look at, measure different press release, the veracity of the charts and the press release about the stimulus program out of the administration versus the Congressional Budget Office assessment. The only assessment the voters know is this. We spent a lot of money. Yes, we did save a lot of jobs, probably a lot of public sector jobs. But we have lost millions of jobs as well and we're not in a good enough position. There was over-promising, the administration failed to manage expectations, and they're going to pay the price.

BAIER: Charles, the unemployment number is 9.5, but the underemployment number, the number you don't see, the people that have given up looking for a job, could be as high as 17-18 percent according to some.

KRAUTHAMMER: Historically high and the number of unemployed for over six months also historically very, very high.

I think there is something new happening in terms of the economy, at least the perception of it, and that is a return of fear. We had the full blown panic attack in September, October of 08 where everybody had a sense we had gone over a cliff.

What happened in 09 I think was a sense of yes, we're in a recession. Things aren't good. But as Obama himself said, we came, we were pulled back from the brink. And we were in a bad time, but not a scary time. We had improving numbers by the end of 09. At one point we had a recovery of the market to 11,000. And we had a GDP growth at the end of 2009 of five percent.

In 2010, we started slipping again, and slipping rather badly, GDP numbers sliding very much. They will be stagnant now. Shockingly bad numbers on housing this week. The idea that the Fed has run out of options.

And I think what is returning is a sense we might not just be in doldrums here of pause but headed to a double dip or worse. You see that in the jitteriness of the stock market.

And that I think is new. If economic times are bad, the party in power is in trouble. If people are seized with fear, the party in power has no chance whatsoever.

BAIER: Democrats, Chris, some of them are running now against their leadership. These are all Democratic ads around the country. Take a listen.

(BEGIN VIDEO CLIPS)

UNIDENTIFIED MALE: Bobby voted against the bailouts, against stimulus spending, against passing government healthcare.

UNIDENTIFIED MALE: We can't afford it and I'm not going to support it.

UNIDENTIFIED MALE: I'm independent. No doubt about it.

UNIDENTIFIED MALE: I like that Jason Altmire is not afraid to stand up to the president.

UNIDENTIFIED MALE: That's not who I am. I don't work for Nancy Pelosi or Harry Reid.

UNIDENTIFIED MALE: That may not be what the Washington crowd wants, but I don't work for them. I work for you.

(END VIDEO CLIPS)

BAIER: All these ads say "he is the most independent," "she is the most independent," "we don't work for Nancy Pelosi." That is an interesting trend in ads.

STIREWALT: It's something, you know, we have seen a trend line going this direction for several cycles that you have people want to away from Washington. And that is old. That is an established thing.

What you see now, and this is different and something to take note of, naming the president, naming the speaker of the house, naming the Senate majority leader, identifying them, putting their picture and putting their name in an ad from a person if your party. That's something I haven't seen. That is brand new kind of thing. I think it's indicative of a problem inside the party.

BAIER: A.B., some of the people are running that they're independent. They voted against all the things. But their leadership obviously is not on the same page.

STODDARD: What is interesting of the cycle of 2006 and 2008, the Democrats are now overexposed. They picked up so many Republican seats, they knew they were likely to lose them in 2010 midterms with a Democratic president.

What is interesting about the vote the leadership didn't -- on healthcare, maybe, they begged a few souls. But many times their frontline Democrats, the most vulnerable Democrats representing the Republican seats they could easily lose, their majority making Democrats were given a free pass to vote against these things. In fact they were advised to vote against it.

KRAUTHAMMER: If I were a Republican running against a Democrat running an ad like that, I'd say if you are so independent, why don't you run as an independent?

BAIER: OK. Up next, corruption in Afghanistan, in the government there, and how you are paying for it.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIPS)

HAMID KARZAI, AFGHAN PRESIDENT: We would make sure that the bodies are run, close without them, absolutely, full terms against corruption.

SEN. JOHN KERRY, D-MASS., FOREIGN RELATIONS COMMITTEE CHAIRMAN: I was very heartened to hear the president, members of his government, recommit themselves to significant efforts in the days ahead to guarantee the independent operation of their (INAUDIBLE) Afghan institution.

(END VIDEO CLIP)

BAIER: Senator John Kerry made an emergency trip to Kabul to impress upon Afghan President Hamid Karzai not to intercede in corruption proceedings against Afghan officials, one of them Mohammad Soli, the chief of administration of President Karzai's national security council charged with corruption.

Karzai went in and pulled him out of that whole proceeding. It turns out now, and FOX News confirmed, that this man Soli has been on the CIA payroll and is being paid by the U.S. Several other high-level officials in Kabul we're told are being paid by the CIA.

What about all of this and the complicated tale that this is? We're back with the panel. Charles, your thoughts?

KRAUTHAMMER: It's a very complicated story when a guy in the heart of the corruption industry in the capital is also a guy the CIA has bought. Your honor, I rise in defense of bribery, particularly in a war zone in a civil war. If you have to make a moral choice between killing in order to win a war or bribery in order to win a war, I would go with killing -- with bribery. Forgive me.

BAIER: Rewind.

KRAUTHAMMER: Rewind that. Bribery involves obviously the transfer of money. Killing is a far more difficult proposition. I'm a little bit skeptical and tired of those getting squeamish when we hear about corruption. We've always corrupt allies, particularly in wars of insurgency.

In this particular case, what we are dealing with is a man who we have purchased in a sense, and that's a form of corruption that we can tolerate. The problem is if he has a hand in killing his own people. That would prevent any success in the insurgency campaign. I think what we have to do is make sure our CIA is acting effectively but at the same time is trying to ensure whatever happens is between us and them and not between the people that we are supporting and robbing their own people.

BAIER: Afghan sources, others saying that Karzai's brother is on the U.S. payroll. He's the governor of Kandahar. A.B., this comes at a time obviously when Congress and the administration are trying to crack down on the Afghan government to avoid corruption. It just gets sticky.

STODDARD: There is a strong case to be made for why we stay in Afghanistan. General Petraeus has been trying to make it. President Obama not made it well enough, not made it often enough and political support for the evident is rapidly eroding.

I agree with Charles that it's often effective or the CIA to purchase intelligence overseas. But there will be questions about whether or not this time it's effective and whether or not this kind of corruption we're subsidizing undermines our mission there.

Our goal there, our current strategy, like it or not, is to win the hearts and mind and try to provide the Afghan people with a stable enough situation, a police force that protects the military and a government that is safe enough from the Taliban for us to leave.

And if we are playing in to the hands of the Taliban, which is what corruption does, we are undermining our own mission, losing men and women unnecessarily, and we are pushing off the dates by which we can actually begin to drawdown.

BAIER: Chris?

DIREWALT: Look, I think for the president this year that the political problem of Afghanistan is that people are uncertain why we're there and what we're doing. Poll after poll tells us that people aren't satisfied with the war effort. And that comes from the people hawkish and dovish. There is anxiety about what's going on.

Part of that comes from the fact as you say, the president overpromised that you could have a very happy ending in Afghanistan. This is not a happy ending country. History teaches this is not a place with just good guys and just bad guys. It's complicated territory.

And I think from a political perspective, what you are going to see is that claiming victory or claiming progress in Afghanistan is a fraught question for the Obama administration, much more fraught I think than they thought it would be when the president gave his West Point speech last year.

KRAUTHAMMER: It happens. In a country where corruption is endemic we're not going to cure it. Our best hope is to tamp it down and to have people on our side who will at least play us one way and not a two-way game.