Gene Sperling Gives White House View of Debt Talks; Rep. McCarthy, Sens. Durbin, Kyl Talk Compromise

The following is a rush transcript of the July 31, 2011, edition of "Fox News Sunday With Chris Wallace." This copy may not be in its final form and may be updated.

BRET BAIER, ANCHOR: I'm Bret Baier, in for Chris Wallace.

The debt ceiling deadline is looming large. But now, there is strong new optimism that a deal can get done.


With time running out to forge a deal, we'll get the White House view of where things stand from Gene Sperling, the director of the National Economic Council.

Then from Capitol Hill, key members of Congress are working to craft a compromise. We'll get the latest from two key senators: Republican Jon Kyl and Democrat Dick Durbin.

And we'll hear from the House majority whip, Republican Kevin McCarthy.

Also, the recovering economy takes another hit. We'll ask our Sunday panel if the debt ceiling standoff has made matters worse or if a deal might ease our economic pain.

And we'll look back at what rollercoaster of a week it was here in Washington.

All right now on "Fox News Sunday."


BAIER: Hello, again, from Fox News in Washington.

After a tension-packed day on Capitol Hill filled with bitter partisan sniping, both Republicans and Democrats are now saying significant progress has been made toward a deal that would avert a government default.

We'll take a look at the framework of the compromise with two Senate leaders and a top House GOP official.

But, first, we begin with the White House view and Gene Sperling, the director of the National Economic Council.

Director Sperling, welcome back to "Fox News Sunday."


BAIER: Saturday, the debt ceiling negotiation shifted back to the White House.

Here is what we are hearing, reporting about a potential a deal: A debt ceiling increase of about $2.4 trillion into 2013, but in two stages; spending cuts upfront, roughly $1 trillion; a special committee to recommend cuts of $1.4 trillion or a total of the debt ceiling increase; committee must make recommendations before Thanksgiving recess; if Congress does not approve those cuts by late December, automatic across-the-board cuts go into effect, including Medicare; but lawmakers would then vote whether significant defense cuts or tax increases would also be included.

Is this accurate?

SPERLING: Well, Bret, there is no question we're approaching the final hour. And there is no question as the president has said repeatedly, if there is a will, there are multiple ways to get there.

And if you look at what Senator Reid had proposed and what Speaker Boehner had proposed, the president repeatedly if there is a will to compromise, we can -- we can get there.

And the thing to really recognize is that what the president has asked for and what we're trying to achieve is an agreement based three basic ideas. One, that we should have a down payment on deficit reduction, and that that down payment can focus spending cuts. Secondly, that need to come back for a second round of deficit reduction, more serious deficit reduction that has to have a combination of serious entitlement reform and a tax reform that we'll ask those who are most well-off to contribute. And that, third, we should have an action-forcing event, we should have something that forces all us to get our work done, that that enforcement mechanism should not be threatening the default of United States of America.

And so, as you know, the president has said that for deal to take place, we can't have at cloud of uncertainty either hanging over our heads now, or just a plan that would kick that down the road to Christmas and have us going through all of this again in such a short time.

BAIER: I know things are fluid, but does that framework sound accurate to you?

SPERLING: You know, I have bee happy to be on show, but I can't actually negotiate the details on the show.

BAIER: OK. How about this? The joint -- a lot of talk about the trigger.


BAIER: The joint committee of lawmakers who would be designed to get more cuts, significant cuts. If they don't find those cuts, it's possible that increases or revenue increases will not be part of the trigger or penalty.

Is the president OK with that?

SPERLING: Well, here's what I can say. The president has absolutely supported the idea that Majority Leader Reid has had of having a commission that has a goal of reaching more significant amount of deficit reduction through a combination of entitlement and tax reform. He has supported that. He would like those who appoint members of that commission, to appoint people who will try very hard to get the kind of bipartisan agreement.

And he supports having some kind of straitjacket on all of us that says if you don't get your work done, there will be action taken that make sure we do get deficit reduction. Here is the key: whatever that enforcement mechanism is, it has to give both sides an incentive to compromise, to come to the table, work something out.

There is more than one way to come up with an enforcement mechanism that gives both Democrats and Republicans an incentive to compromise on a balanced deficit reduction plan.

BAIER: So, that's the most fluid part of this whole deal right now?

SPERLING: Well, there are some important details that still need to be worked out. But I'll say, there have been serious discussions going on with the leaders of the Republican and Democratic Party and the White House over the last 24 hours. But as we've learned repeatedly, don't want to sound like Yogi Berra, but it ain't over until it's over.

BAIER: OK. So, we're not going to go down that road further on specifics.

What is the contingency plan if this does not come together or if whatever compromise happens doesn't get through the House of Representatives?

SPERLING: Well, you know, I will tell you that while the our Department of Treasury is no question working on a contingency plan and while I think every American can rest assured that before we come to point where we have missed our deadline, we will brief people on what the impact would be on failing to raise our debt limit by the deadline of August 2nd.

But, right now, our focus is on this agreement, because the key thing to understand, Bret, is that we have $500 billion of debt that comes due and has to roll over in August. We have 100 million checks that go out to Medicare, Social Security recipients, soldiers.

So, while there are contingency plans being done, there are no good options. They are all very, very dire, and that's why the focus has to be on finding a bipartisan agreement as quickly as possible.

BAIER: For the first time in American history, the U.S. is on the verge of a downgrade. Do you think the administration could have done anything over the past 18 months to try to prevent this crisis?

SPERLING: Well, I don't know much harder this president could have tried to get a bipartisan agreement than he has. Five days after we finished the budget in April 8th, he put forward a $4 trillion deficit reduction plan over 12 years. And as you know, he has either convened or personally led bipartisan negotiations with the leadership of the Republican Party.

BAIER: That plan was voted down 97-0 in the Senate.

SPERLING: No, no. This is --

BAIER: The budget plan, original budget plan.

SPERLING: No. But, Bret, the framework that he put out on April 13th was not what was voted down. That was $4 trillion deficit reduction plan over 12 years, which he put forward as a basis to enter bipartisan negotiation. As we're seeing right now, having specific dueling plans just reflect the ideal preferences of either party when you have divided government is not how you get the agreement that helps us protect our credit rating -- our credit.

What protects our credit and prevents us from getting downgrade is the confidence that divided government can actually work to bring the deficit down. And that only happens when you forge a bipartisan compromise.

BAIER: In May, Austan Goolsbee, chair of the Council of Economic Advisors, called tying the reduction of the U.S. deficit to the debt limit, quote, "Quite insane." The administration is was pushing for a clean debt limit with no cuts, not strings attached.

On a conference call Thursday, officials with Standard & Poor's said this, quote, "$4 trillion, depending on whether it's front-loaded or back-loaded, is not going to do the trick in terms of stabilizing U.S. government debt-to-GDP ratios. $4 trillion would be a good down payment. We thought if policy makers could deliver the goods on that, then that would be a strong sign."

So, all signs point to deal here of roughly $2.5 trillion, well short of $4 trillion. So, wasn't the country already heading for a downgrade possibility, credit downgrade, even before this debt ceiling increase?

SPERLING: No. I think that it has been this recent crisis that has really provoked the greatest fears of a downgrade.

But you're right on the following: we as a country need to not only lift our debt limit and take away the specter of default, the heavy cloud of uncertainty created by default of our economy. We also need to engage in a serious deficit reduction plan. That's why the president --

BAIER: Do you think substantial cuts --


BAIER: -- deficit reduction would have happened without tying it to this debt limit, debt ceiling increase? Do you think it would have happened without this cliff that we're now facing?

SPERLING: You know, Bret, as you know, in the '90s, there were three deficit reduction agreements -- 1990, '93 and '97. I was happy to be part of two of those. We were able to do three deficit reduction agreements that took us from high deficit to balance.

And guess what? We didn't need the threat of the constitutional amendment. And we didn't need the threat of default to do that. We did what the American people wanted. We showed that divided government didn't have to be dysfunctional government. That people of different views could compromise for what's necessary for the country.

So, no, I don't think you need the threat of default to make people work together. I don't think that's what people at home expect.

SPERLING: And since you mentioned Standard & Poor's, they explicitly said that having multiple loads on the debt limit, multiple loads that raise the specter of default is a negative in making a decision by them as to whether to downgrade the United States from historic AAA credit rating.

BAIER: I'd like to ask about economy overall.

Friday, the new gross domestic product number came out. The GDP, the best measurement of how the economy is doing -- the economy grew at a weak 1.3 percent in the second quarter. Most analysts had predicted higher. You know, when helping in creating jobs, the economy grows at an annual rate of 3 percent.

But analysts say more troubling where the revisions to previous quarters. The first quarter was adjusted from 1.9 percent down to just 0.4 percent growth. And growth in past quarters, you can see on this chart, it's been called tepid, and flat, anemic.

You colleagues in the administration have said that this shows the recession was far worse than first thought.

But two and a half years into the president's first term, does it also show that his policies, including the stimulus, have not worked?

SPERLING: No, quite the opposite. What that revision showed is that what the president was actually the worst six months of growth since Franklin Delano Roosevelt inherited the economy in the Great Depression. So, what you saw was that what the president inherited was a much deeper recession than anyone projected.

So, yes, the hole the president inherited was much deeper. And we have made a lot of progress. Not enough.

But just remember, that first quarter that the president was in, the first three months, our economy lost 2.3 million private sector jobs.


SPERLING: Over the last 16 months, we have gained 2.1 million private sector jobs. Certainly, we have head winds. We have had headwinds that have hurt this economy -- higher oil prices, supply chain disruptions from historic earthquake in Japan.

BAIER: Understood.

SPERLING: But those are things outside of our control, Bret. What is inside our control is to not add the cloud of uncertainty that comes from the American public thinking that we are on the verge of default. And that has hurt confidence and hurt our economy over the last few months. No question.

BAIER: Ten days ago, the president said in an interview, the economy was on a good trajectory.

After this GDP number, the revisions, the unemployment rate rising for the past three months, 9.2 percent now, consumer spending flat, retail sales stalled, manufacturing with its weakest quarter since 2009.

Is there anything to back that statement up?

SPERLING: Well, I think most private sector forecasters, Bret, still believe that we could have growth in the second half at 3 percent growth or above. But most of those forecasters will say that one of the headwinds that hangs over our economy was the uncertainty created about whether our country was going to default for the first time in our history --

BAIER: Wait a second.

SPERLING: -- and be serious about --

BAIER: So, you're tying all of this negative to the debt ceiling debate?

SPERLING: No. I'm not tying all of it. As I said, and I just said very clearly, the headwinds that we have we faced from higher gas prices to the unrest in the Mideast --

BAIER: But, is this a good trajectory, Gene?

SPERLING: Bret, the supply disruption in auto in growth -- an auto production in second quarter -- absolutely were a major factor in the lower growth number. What I said is that those are things that are outside of our control. When we allow the uncertainty created by whether our country is going to go to default, to create uncertainty for investors, for job creators, that's a self-inflicted wound. That's something that we can correct.

And you saw a lot of economic forecasters say that if you could take that cloud of uncertainty off our economy --


SPERLING: -- the chances of us having 3 percent growth in the second half of this year were significantly higher.

BAIER: So, you're not worried about a double dip?

SPERLING: I am worried that we are going to have a double dip recession. But I think, we -- but I think it's imperative on all of us to do everything to reduce even the smallest chance of that and to increase chance that we get the rebound in growth that many private sector forecasters are still projecting, if we can take the specter of our nation's first default -- take that cloud of uncertainty off our economy.,

BAIER: Mr. Sperling, thanks for the time.

SPERLING: Thank you, Bret.

BAIER: Joining me now with perspective from Republican leadership in the House, House Majority Whip Kevin McCarthy from California.

Congressman, thanks for the time.


BAIER: Senator McConnell, Republican leader in the Senate, just said that they are very close to a deal. He feels confident that the debt ceiling will be increased without raising taxes. He is saying it's a $3 trillion deal and he's close to recommending an agreement to lawmakers in his party, and he expects significant percentage of sign- on to this plan.

Now, you've heard the outlines of this compromise. Can this get through the House?

MCCARTHY: Well, first up, we look at the details. But remember how far we've come. Three months ago, this president laid out that he wanted a debt ceiling with no cuts whatsoever. A short time ago, he just wanted more trillion stimulus.

Now, we're talking something more -- much different, as many cuts before you get to raising. The idea of no tax increases that this president wanted.

So, it's moving in the right direction. It looks as though people are talking about in a framework which passed that House. And what's so ironic is here, this chamber in Congress, with the new e Republican majority, is the only one that passed two bipartisan bills off the floor. And it looks as though the framework could be there, but we'll wait to see the details.

BAIER: So, if a balanced budget amendment vote is promise of a vote and it's not a requirement tied to debt ceiling increase, is that something that you can push? Will that fly in the Republican Caucus in the House?

MCCARTHY: Again, that's one element. We have to look overall. We have laid out a clear framework -- no increases, no increase in the debt limit without the cuts equal to that. We want to see a balanced budget.

Bret, we want to see a balanced budget.

Think for a moment, 16 years ago, we came one vote short in the Senate. Imagine what this Sunday show would be about today, it wouldn't be about a debt limit increase. It would be about what we'd be investing in America.

We realize you've got to have cuts today. You've got to have some spending controls, because discretionary spending under this president has gone up 84 percent in the last three years. And we want to make sure that in the future, we're not back here again.

So, we'd like to see a balanced budget.

BAIER: Can Speaker Boehner pass this bill, whatever it ends up being, with more Democrats than Republicans and still retain his speakership?

MCCARTHY: Well, first, let's think about this. You are asking if this bill is what the Democrats wanted. The Democrats wanted tax increases and a debt limit improved. That's what the Democrats are trying to offer, with no cuts.

Instead of spending trillions, we are now cutting trillions.

Look, Speaker Boehner has been the leader on this of changing Washington. First and foremost, now, we're cutting. Before, we are spending.

The president, to me, has been somewhat -- look, you cannot be the leader of the free world and sit on the sidelines and tweet and think you're going to get the job done. We have been out front, negotiating, talking, but we've laid out a clear set of principles that we're going to bring accountability back and we're going to change the way Washington works.

BAIER: There has been considerable grumbling among House Republicans about Speaker Boehner spending so much time on a grand deal. That the speaker spent too much time with a president who was unlikely to give him what he wanted.

Did he spend too much time on that front end?

MCCARTHY: Because the speaker was willing to try to work with the president?

BAIER: I'm talking about what other House members in your caucus had been saying.

MCCARTHY: Look, I think there's grumbling throughout this country because of the joblessness (ph). There is grumbling and we hear them. We want them to even speak louder because we want to have more help in changing Washington. We've got a big direction of where we are changing so it far, we need more help to go the other direction.

And this clearly shows why, because Obama is still preside and he still wants tax increases, and he still wants to spend more.

The speaker tried to layout a framework that stuck to our principles, but would create jobs with new tax reform and would also lower the spending in Washington.

BAIER: This is what The Wall Street Journal editorial page said Saturday about House Republicans. Quote, "A GOP faction is fixated on a balanced budget amendment. After Thursday's stall, the new Boehner plan will only authorized the second tranche of debt if two-thirds of both chambers pass such an amendment and send it to the states for ratification. This will not happen. Republicans are not looking like adults to whom voters can entrust the government."

How do you respond to that?

MCCARTHY: I would respond, why do you believe it could not happen? I believe in this country. I believe this country is worth fighting for.

And if 16 years ago, if wad that one more vote, we wouldn't be in this problem today. So, yes, we're looking at how to solve the problem right now, but also looking for the future to our children. We think the best days are still in front of us and we realize that 49 states either have a balanced budget or statute to it. And this country should have it as well.

We listen to the American people. The American people support the idea of a balanced budget. So we're going to continue to fight for it. And in the end, we will win.

BAIER: Understood. But to try to pin you down, if this compromise does not have a balanced budget amendment vote on the front end, and it's somehow tied to this trigger, and it's just a vote. It's not it has to pass -- which was in the speaker's bill. Can you get that through as whip of the Republican Caucus?

MCCARTHY: Look, members come in and they're going to look everything in the bill. But let me tell you this, if not having a vote on this, it's going to be a hard way, because Harry Reid will never allow the senators to take up a balanced budget. Why? Because the American people want it. He's got his whole leadership on the line because they're up for election and they're taking the wrong position.

BAIER: Well, you know there's different versions of the balanced budget amendments.

MCCARTHY: There are different versions.

BAIER: And the version you have has a two-thirds, a supermajority that would be required to get taxes to be increased.

MCCARTHY: Look, we are a broad spectrum in the Republican Party. We have a lot of versions out there. I like to see the Democrats stand for any version. I think the American people want to see a balanced budget. And that's where we stood and that's what we'll fight for.

BAIER: Will Speaker Boehner weaken politically by this process?

MCCARTHY: I don't know. If you look at all the leaders, the president has stood on the sideline and tweeted, Harry Reid hasn't produced the budget in two years, has not produced a debt ceiling, any type of bill, off the floor. And you know what?

MCCARTHY: What Speaker Boehner has done? He's produced a budget in four months that changes the direction and he's also moved two bipartisan bills off the floor of Congress that cut spending, did not raise taxes, and made sure that this country would be able to have the resources to continue forward. That is fundamental difference. I would compare that to any other leader. And I think only one has stood out.

BAIER: The most recent poll to ask these questions was Thursday. CNN/ORC poll found that 63 percent believe that Republicans were not acting responsibly, 51 percent said Republicans will bear the brunt of the blame of the debt ceiling is not raised, compared to just 30 percent who would blame President Obama, 15 percent who would blame both.

Do you think you've lost some of the political capital that you had after the November 10 election?

MCCARTHY: It's only in Washington do you get rewarded for doing nothing. Sometimes when you lead, you get shot at. We did not get elected to worry about the next election. We got elected to worry about this country. We're going to do what's right and that's what we're setting out.

Maybe we're going to ruffle some feathers but you know what? We're tired of the gimmicks. We're tired of the budget tricks. No more broken promises.

The American people have the right to know the truth. And that's exactly what we're doing and we're going to ruffle some feathers to do it.

BAIER: The past two weeks, past month, has been about the debt ceiling, the national debt. Critics say Republicans are not focused on the most important thing, and that's creating job, especially with this latest GDP number.

Would you characterize House leadership as focus on the growth agenda, job creation? And how do you answer your Democratic critics who say, "Where are those bills?"

MCCARTHY: Well, they can look right on the floor and you can see that they have passed the House. If you score counting how many jobs our bills would create, we're in to the hundreds of thousands of jobs that sit on the Senate. Like everything else, nothing moves off. But the number place you have to look is small business. You know, I created my first business when I was 20, an entrepreneur. The difference between an entrepreneur and someone who takes a job is: all we do is create. We don't take one from somebody else.

If you look at the last process, just in last year, lowest job creation in 17 years. If you look at under this president, we've lost jobs. This is an opportunity to focus and change.

And the Republican plan that we have through small business growth, through lack of not raising the taxes to hurt the job creation, but actually create jobs is a fundamental difference than where Obama is going.

BAIER: Congressman, thank you very much. You may have to order a of lot pizzas.


MCCARTHY:I think we're going to make real change in Washington.

BAIER: Thank you very much.

Up next, two of the Senate's top party leaders on what's behind the overnight optimism about a possible debt ceiling deal.


BAIER: Joining us now are the two Senate whips whose job it is to round up the votes of their respective parties: Senator Dick Durbin, a Democrat from Illinois, and Senator Jon Kyl, an Arizona Republican.

Welcome back to you both.

SEN. DICK DURBIN, D-ILL.: Thanks, Bret.

BAIER: Well, let's try to characterize at this point where this compromise is. Senator McConnell has just said he is very close.

As you see it, how do you characterize it? Senator Durbin?

DURBIN: I would tell you, I have a much more positive feeling than I did 24 hours ago. There is an active negotiation underway. I think some of the things that are coming forth hold promise. Key elements are still being resolved. I know Gene Sperling was in a painful position earlier on your show.

We want to move this forward. We want avert this economic disaster that would occur if we default on our national debt for the first time.

BAIER: Senator?

SEN. JON KYL, R-ARIZ.: I dis -- excuse me -- I agree with what Dick just said. Republicans have also been very focused on in ensuring that we do not get into a position where we can't pay our bills, where the things that American people rely on, will still get to them in time. And as result, the leaders in both parties were fixed on the August 2nd date. Too bad we had to this closed to it, but at least it focuses the mind to get them to really agree to what it will take to resolve the situation.

BAIER: So, Senator Durbin, just to dig down into this a little bit. Is it your understanding that the broad outline is pretty much locked in, and that there is some negotiation on the trigger -- this thing that the second stage of this funding would be tied to, the joint committee?

DURBIN: That has been the sticking for quite a few days now. Initially, it was whether or not we were going to do the debt ceiling in two phases. The president said, absolutely not. And our position was absolutely not.

And that's why the Boehner approach that was sent to the Senate was rejected by a bipartisan roll call, 59 to 41.

BAIER: Although this looks a little bit like Boehner with --

DURBIN: Key element: we're not returning to this before Christmas. We're going to do this in a way so that the economy is not in suspense and doubt about our future.

But in terms of where we're going, down payment, agreed -- that we're going to make some down payment on the deficit, a significant one. Secondly, the establishment of a joint committee to move forward, to find longer deficit reduction and the trigger, which is the enforcement mechanism for those who aren't it too closely. And that has really been the toughest part.

BAIER: So, if it doesn't include tax increases, revenue increases in that trigger, are you OK with that?

DURBIN: I think it's bad policy. I sat on the Bowles-Simpson commission, and with the "gang of six" -- and we came to the conclusion, if you are serious about real long-term deficit reduction, put everything -- underline everything -- on the table. Keeping revenues off the table, I think, is a serious mistake.

BAIER: And if it includes serious defense cuts in that trigger, are you OK with that?

KYL: That would be a real problem for Republicans.

But if I could back just a moment and set the stage for where we come, remember, three months ago, the president insisted on a clean debt ceiling extension. Clearly, we will have a significant amount of spending reductions in this proposal.

The second thing was he insisted on revenues, as he called them, tax increases. There will not be tax increases in this proposal. Third, both sides agreed that we needed to have mechanism for moving forward in the future so that we could look at both the entitlement side of the ledger, as well as the discretionary side of spending and make recommendations to the rest of Congress about how to provide some accountability for the future. That is embedded in what I understand would be the key part of this agreement.

So, Republican principles I think will be significantly advanced by this proposed agreement.

BAIER: Is there a balanced amendment vote?

KYL: I think it probably will involve the opportunity to include a balanced budget amendment. But it would not be an essential element in order to move the agreement forward.

BAIER: Senator Kyl, when you hear the president say this no way to run the government, you know, that we'll likely also face another standoff at the end of September when the continuing resolution runs out and government funding -- you know, we're up against another government shutdown. You know, former White House chief of staff, Rahm Emanuel, once famously said, "Never waste a crisis."

Do Republicans now risk become the -- becoming the party that's always pushing up to the cliff, always using that cliff to try to extract concessions? I mean, do you fear the American people will have crisis fatigue, if they don't already, and that it will hurt your party?

KYL: You mentioned the possibility of a continuing resolution. Why would Congress have to pass a continuing resolution? Because the Senate Democrats now, for the third year in a row, will not have passed a budget. That's their job.

The House Republicans have passed a budget. Senate Democrats said no to that budget. So I think it's very unfair to suggest that Republicans are responsible.

We don't have the votes in the U.S. Senate. But where they do have the votes, in the House of Representatives, they've done their job.

BAIER: Senator Durbin, why haven't the Senate Democrats passed a budget?

DURBIN: It's called 60 votes. And what it boils down to is this: we have 53 Democratic senators.


DURBIN: Well, but I can tell you, when we get through all the procedural tangles that we face in getting through this budget resolution, it is not just a matter of finding some agreement, but getting it executed on the floor.

The point I want to make is this: this, as I understand it, the negotiation that we're talking about, will include some budget targets for at least the next fiscal year. So we won't revisit this kind of crisis politics when it comes to our spending bills for next year.

BAIER: But do you think this kind of deficit reduction that is happening this week, whatever this deal ends up being, would have happened without leaking it to the debt ceiling increase?

DURBIN: Well, I understand the brinkmanship that's necessary to sometimes bring this matter forward. But let me say, the president did create a deficit commission. I sat on it, a bipartisan commission, and voted for it. And I had at least two, maybe three Republican senators who joined me in that vote.

BAIER: But it didn't make the needed vote to bring it to the --

DURBIN: That's exactly right. We tried to follow up, the Gang of Six. Again, a bipartisan effort. There has been a commitment from the president, as well as many in the Senate -- I just speak for the Senate -- to move forward in a responsible bipartisan way to deal with the deficit.

BAIER: But actually doing it, Senator, actually seeing the cuts, there are many people who believe that if it wasn't linked to this debt ceiling vote, that it really wouldn't be happening.

DURBIN: Well, I can tell you that if we have to risk our economy, a very weak economy, with so many people unemployed and businesses facing higher interest rates, which is bound to happen now because of this brinkmanship that we're engaged in here, that is not a good way to run this nation or the economy. And if that is the strategy coming from the House Republicans, it is not good for our long-term economic growth.

BAIER: Senator Kyl, your colleague, Senator John McCain, read from a Wall Street Journal editorial this past week on the Senate floor speculating about the thought process for Tea Party Republicans in the House who refuse to raise the debt ceiling and believe that the blame would fall to President Obama.


SEN. JOHN MCCAIN, R-ARIZ.: Then Democrats would have no choice but to pass a balanced budget amendment and reform entitlements, and the Tea Party hobbits could return to middle Earth having defeated Mordor. This is the kind of crack political thinking that turned Sharron Angle and Christine O'Donnell into GOP Senate nominees.


BAIER: Senator, do you agree with that characterization of Tea Party Republicans?

KYL: Well, the Tea Party folks in the House who say they're standing on principle not to raise the debt ceiling remind me a lot of Senator Barack Obama, who did the same thing, voting against the debt ceiling increase when he was in the Senate. Sometimes people are just so firm in their beliefs, that they think that they have to vote against the debt ceiling increase even though the majority of us in both the Republican and Democratic Parties believe that that would be a mistake. That is to say that we need to extend the debt ceiling so that we don't get into the economic problems that would exist if we didn't.

But I would disagree a little bit with my colleague Dick Durbin here. While it's true that it's not a good thing that we use the debt ceiling to focus the debate on reducing spending, it has resulted in a change in the president's attitude from a plea debt ceiling -- that is to say, no spending reductions at all -- to an agreement where we will have over $1 trillion in spending reductions now and, in the future, another $1.5 trillion, at least.

BAIER: Let me go back to 2010 quickly, Senator Durbin.

Senate Majority Leader Harry Reid had many opportunities to raise the debt ceiling with a Democratic Senate, a Democratic House, and a Democratic president at the end of 2010, when it would have been sure to pass. He was blunt that, really, what it was about was politics.

Here's what he said in December, 2010 about raising the debt ceiling.


SENATE MAJORITY LEADER HARRY REID, D-NEV., MAJORITY LEADER: Once the Republicans have some buy-in on the debt -- they're going to have a majority in the House. I think they should have some kind of a buy-in on the debt. I don't think it should be when we have a heavily-Democratic Senate, heavily-Democratic House, and Democratic president.


BAIER: So was that a mistake?

DURBIN: Well, I can tell you, it reflected the reality of the situation. Bret, let me give you an example of what we face.

Many of the most conservative members of Congress on the Republican side, House and Senate, have been urging us to stay in Afghanistan, to continue to spend $10 billion a month. We know we borrow 40 cents for every dollar that we spend, so it means $4 billion every $10 billion each time that they want us to spend needs to be borrowed. Now when the president comes in and says here's the debt ceiling, now we have to borrow the money to continue the war -- that's one example -- that you all are in favor of, they're saying we're not going to touch it, we're opposed to the debt ceiling.

What Harry Reid is saying is, if you're going to stand for policies that spend the money, for goodness sakes, responsibly stand up and vote for the extension of the debt ceiling.

BAIER: Sure. But when you're upset about the situation you're in now, and you look back to December, 2010, you could have taken care of it then.

DURBIN: Well, maybe. I don't know if that could have been part of the grand deal that extended the tax cuts across America and unemployment compensation benefits. That's Monday morning quarterbacking.

BAIER: OK. Let's do one last thing. Do you think that this deal, whatever it is, can get through the House?

DURBIN: You're asking me? I don't know the answer to that.

I can tell you that the president is reaching out to both political parties. We're hoping it will be bipartisan in both the House and the Senate, and we'll allay the fears that people have across America that this weakened economy will be hurt more if we continue the showdown.

BAIER: Senator Kyl?

KYL: It's important that we extend the debt ceiling, but it's also important that we look at the details of the agreement. That's what our constituents want us to do, and I'm sure that's what we will be doing over the next several days.

BAIER: Well, good luck, Senators. Thank you.

DURBIN: Thank you.

BAIER: Coming up, our Sunday group on the debt negotiations and the bad news this week about the struggling economic recovery.

Back after the break.



SENATE MINORITY LEADER MITCH MCCONNELL, R-KY.: The only way we're going to get an agreement before Tuesday is to have an agreement with the president of the United States. I think we've got a chance of getting there.

REID: There are negotiations going on at the White House now on a solution that will avert a catastrophic default on the nation's debt. And there's still a distance to go before any arrangement can be completed.


BAIER: The Republican and Democratic leaders during a late-night Senate session, signaling a debt deal could be reached. And it's now time for our Sunday group: Bill Kristol of The Weekly Standard; Charles Lane from The Washington Post; Steve Hayes, also from The Weekly Standard; and Fox News political analyst Juan Williams.

The politics of this compromise, Bill?

BILL KRISTOL, THE WEEKLY STANDARD: Assuming it happens, I think Republicans will have to say to their constituents and to the country, you negotiated a debt ceiling increase with the president you have, this was the best we could get, we thought it was the responsible thing to do. But they should not oversell it.

It is not a great deal, in my opinion. It's an adequate deal, perhaps, if defense isn't gutted too much. And it certainly doesn't fundamentally deal with the debt problem we have or the economic problems we have.

So I think Republicans should probably -- will have to take the deal that's being negotiated today, but they should not make it seem as if this is some great victory. They need to say we need a different president in 2013.

BAIER: Congressman McCarthy, Chuck, probably has his work cut out for him as the whip in the House, whatever comes over from the Senate.

CHARLES LANE, THE WASHINGTON POST: Absolutely. I mean, just look what happened to the first Boehner bill. There was a mini rebellion and quite a few Republicans wouldn't vote for that. They had to postpone it.

There's still going to be that issue of whether this deal is going to be acceptable to a certain number of House Republicans. And then there will be the additional complication of whether they're going to try and do it with Democratic votes that Nancy Pelosi might have to supply. So, even though -- I think what Mitch McConnell is trying to do in this is come up with something that, in his view, will be acceptable to Republicans, but those guys are unpredictable.

BAIER: Steve?

STEPHEN HAYES, THE WEEKLY STANDARD: Yes, I think those guys are unpredictable. But one of the key parts of this potential compromise, as I think your interviews raised this morning, is this question of defense cuts.

I mean, you know, the word coming out of Capitol Hill this morning is that, if these triggers after this committee -- if these triggers have to go into effect, one of the things that would be cut most would be defense. Up to potentially 50 percent of the across-the-board cuts could come from defense. Medicare cuts would be capped, some other cuts might be capped. Defense would not.

I think Republicans in the House and potentially in the Senate might have a real hard time swallowing that, even if they understand that the alternative is voting for a bill that could lead to default. I think default, still, at this point is unlikely, but the defense cuts, if they are as word is coming from Capitol Hill last night and this morning, I think that could be very hard for Republicans to swallow.

BAIER: Juan, the president, it appears, is actively involved right now. But he's spoken about the debt ceiling increase no less than a dozen times over the past month -- various addresses, news conferences -- yet his approval rating continues to drop. The Gallup daily tracking poll on Friday had him at 40 percent, the lowest of his presidency. And the Pew Research Center, for the first time, a majority of Independents, 54 percent, disapprove of President Obama's performance.

So we hear a lot about Tea Party Republicans and the public relations hit that they've taken, but is this stalemate really hurting this president?

JUAN WILLIAMS, FOX NEWS POLITICAL ANALYST: Well, yes, it is hurting the president. I think the numbers are very real, and I think the numbers could get worse, Bret, because I think if the economy goes over some cliff, I don't think there's going to be any, "Oh, gee, I don't like Democrats or Republicans." I think the American public is going to say, a pox on all your houses.

We've had a series of wave elections in this country in which we keep throwing out the bums. I don't think there's any question Barack Obama would be one of the bums if the economy went into the tank.

But let me just quickly say I think the story of the last week has been the fight between the old bulls on the Republican side and some of these young guns, people like Kevin McCarthy, you just had here. And I think that the challenge has been for the old bulls, Mr. Kristol being one of them, to set straight some of these young guns who think, oh, I'm going to change everything right now and put the economy at risk. And I think that it's because they sense Republicans are being blamed and could even be given responsibility for the economic troubles of the country, economic troubles that Republicans want to foist on President Obama in the course of the 2012 election.

KRISTOL: Well, they should foist those troubles on President Obama, because we pursued his policies with a Democratic Congress for two years and they haven't worked. The economy is slowing.

Weren't all of these Keynesian policies supposed to lead to a healthy rebound, not to a slowing rebound?

BAIER: Speaking of that, the GDP Friday was 1.3 percent for the quarter. But perhaps more telling was the revisions of the previous quarters. And there you see .4 percent for Q1. And that's a telling graph. And you heard Gene Sperling trying to talk about that.

KRISTOL: And what struck me about what Mr. Sperling said also is that he seemed confident that once we got this debt ceiling cloud removed, the economy would really pick up. I hope it does, but it's taking the country. If it doesn't though, the president has no excuses. These are his policies, and I just saw one study -- Jim Pethokoukis cited it -- a Federal Reserve study. When we've had two quarters in a row of below 2 percent growth since 1947, half the time we've had a recession within a year.

I do not want a recession, but these numbers are scary. And what's happening in Europe is scary. And I think as a political matter -- I mean, I don't know -- there are many policies we could argue about, about how to perhaps help avert this recession, if it's still avertable. I'm not sure it is. A lot of this stuff is already happening.

The Republicans need to have the view, in my view, from a political point of view and from a substantive point of view, that we -- President Obama has pursued his policies with a Democratic Congress, it's his economy.

BAIER: Chuck, do you sense that if there was the political will, that this administration would be pushing another stimulus?

LANE: Well, absolutely. And I think that's their preferred setting.

One of the big victories the GOP has won through all of this is to completely move the debate in the direction of spending cuts. But they almost -- or they're still, I'd say, at risk of snatching defeat from the jaws of victory by overplaying their hand and insisting on their way or the highway. The difference, I think, is I think the hit the GOP is taking from all of this, as your polls have shown, is probably more transitory.

Obama has still got to run on the national economic situation in 2012. He can't escape that. For him, the important number is not the debt ceiling number, it's the unemployment number. And I think that's the real risk he faces. This is -- his loss is now a little shallower than the GOP's, but I think they're longer lasting.

BAIER: Steve?

HAYES: Well, he's got an argument. I think one of the things the White House wanted out of this whole debate is that, well, Republicans, by forcing this, really put the economy at risk. And you're seeing this.

You saw this in your interview with Gene Sperling this morning. This is coming from Bill Burton, who runs Obama's outside PAC. This is becoming the main Democratic talking point.

They're trying to get Republicans to own part of the economic difficulties that we're in. I don't think it will ultimately succeed, but for the first time, I think the White House thinks that they have an argument.

They can't defend the stimulus. They can't defend 1.3 GDP, which, given the other revisions downward, might be optimistic at this point. They can't defend the performance of the economy.

So they've got to try as hard as they can to shift blame to Republicans, or get them to own it. I think it's a tough argument.

BAIER: What do you say?

WILLIAMS: I don't think that it's hard in a situation where Republicans seem as if they're unreasonable in the course of negotiation. And that's why -- you know, we talk about President Obama's declining numbers. There was a poll this week that showed public approval of Congress is six percent. That's a historic low.

People are sick of this kind of fighting and paralyzed politics.

HAYES: The slowdown started five quarters ago, in January of 2010.

WILLIAMS: Let me just say, when you have two wars that you don't put on the books, when you pass Medicare Prescription D and don't fund it, as happened under a Republican president, and lead us into a recession, and say it's this president's policy, it drives people crazy. If Republicans have good ideas for improving this economy, let's see them.

BAIER: Juan, do you think the president owns this economy?

WILLIAMS: Owns it? I think he's -- at this point, many of his policies have been in place for a sufficient time for Americans to judge it. But is it the case that he inherited a good economy and that we can say it's just his fault? No.

BAIER: Panel, we have to take a break right here.

But when we come back, how the faltering economy and debt deadline negotiations will play out in the 2012 campaign trail.

Back in a moment.



REP. MICHELE BACHMANN, R-MINN.: I can't support any plan that begins with the assumption that we have to raise the debt limit and yet doesn't offer a fundamental restructuring of government spending habits.

JON HUNTSMAN, PRESIDENTIAL CANDIDATE: The president has shown no leadership. He doesn't have a plan on the table. My opponents in this race haven't even come up with what they support.


BAIER: Two GOP presidential hopefuls offering their views on the debt ceiling debate.

And we're back now with the panel.

How this plays out on the 2012 campaign trail, Juan?

WILLIAMS: Well, right now, I think most Republicans are playing to the base and the idea that, gee, you know what? The Tea Party brought us to the party here, got us control of the House in 2010, and they're afraid to say we need to be responsible here and have some kind of compromise.

BAIER: Steve?

HAYES: Well, it's been interesting that Republican candidates, as a class, haven't really come out and laid out their own plans for addressing this debt limit. They haven't come out with something. But their lack of eagerness to do that on this issue, I think, is a striking contrast between their timidity, of their timidity on the Paul Ryan budget plan, where they sort of held it at a distance, didn't want to run out and embrace it.

I think the lasting impact of the debt ceiling debate is likely to be the administration's efforts and Obama's political team's efforts to get Republicans to own some of this by trying to shift the blame for the faltering economy on to this debate itself.

BAIER: Almost all of them were for Cut, Cap and Balance, the first that came out of the House. But as far as the nuance here, Chuck, there hasn't been a lot of speaking about it.

LANE: Not a lot of it. Well, Michele Bachmann's statement which we just saw, to me, is a declaration of non-seriousness as a national candidate. It might play well in the Iowa caucuses, but to be the only major candidate position as being against voting for the debt ceiling even practically under any circumstances is not a winning play. I mean, if she ever got the nomination, I think that would come back to haunt her a little bit.

But again, I keep coming back to how this works out in November, and I really think that while it will have a big impact on Senate and congressional races, I think when it comes to picking the president, the number that's going to matter is GDP and unemployment. And if a Republican makes it through this process, able to hammer on that, he might have a chance.

BAIER: All right.

The NFL is back in. Many fantasy football teams will start forming soon. Well, Bill Kristol's fantasy GOP ticket was in action over the past couple of days.


REP. PAUL RYAN, R-WIS.: Let's pass a bill to cover the moon with yogurt that will cost $5 trillion today. And then let's pass a bill the next day to cancel that bill. We could save $5 trillion.

SEN. MARCO RUBIO, R-FL.: I do not understand how an issue of this magnitude, of generational importance, the president of the United States has not offered a plan. If someone has seen the president's plan, please send it to me.


BAIER: So, Bill, is it Rubio/Ryan for you, or Ryan/Rubio?

KRISTOL: I think it's Ryan/Rubio. But if Paul Ryan is a little hesitant to seize the moment, I think Marco Rubio will have to do it and make Paul Ryan his president. But Ryan/Rubio or Rubio/Ryan would be a very strong ticket. These were two pretty spectacular speeches given on the floor of the House on Thursday night and then on the floor of the Senate by Rubio yesterday.

BAIER: Any chance that that happens?

KRISTOL: Yes. Yes, because the presidential candidates -- Michele Bachmann is against any deal, Jon Huntsman is for any deal. The rest of them have been ducking, or as we say in the Obama era, leading from behind.

I think Republican primary voters would welcome a Ryan/Rubio ticket.

BAIER: Thanks, panel. We'll see you next week.

And don't forget to check our "Panel Plus," where our group picks up right here with this discussion and that discussion on our Web site, We'll post the video before noon Eastern Time.

Up next, the week that was in The Great Debt Divide.


BAIER: There were primetime addresses, dueling news conferences, and fiery floor speeches in both the House and the Senate. All and all, there was plenty to talk about this week in "The Great Debt Divide."


PRESIDENT BARACK OBAMA: The American people may have voted for divided government, but they didn't vote for a dysfunctional government.

SPEAKER OF THE HOUSE JOHN BOEHNER, R-OHIO: The president has often said we need a balanced approach, which in Washington means we spend more and you pay more.

OBAMA: The power to solve this is in our hands. And on a day when we've been reminded how fragile the economy already is, this is one burden we can lift ourselves. BOEHNER: I stuck my neck out a mile to try to get an agreement with the president of the United States, but a lot of people in this town can never say yes.

REID: The president knows what I have put forward is good for the country. The president will sign my legislation. My friend says that he wants something the president will sign. He will sign this. He'll sign it.

MCCONNELL: He is the leader of the Democratic Party. He is the president of the United States. He needs to indicate what he will sign, and we are in those discussions now.

REID: I've spoken to the White House quite a few times this evening. They've asked me to give everyone as much time as possible to reach an agreement, if one can be reached.


BAIER: We'll see.

That's it for this show. Have a great week. I'll see you on a special Sunday edition of "Special Report," 6 p.m. Eastern, on the Fox News Channel.

And Chris Wallace returns here for the next "Fox News Sunday."

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