This is a rush transcript from "Special Report With Bret Baier," July 2, 2010. This copy may not be in its final form and may be updated.


PRESIDENT BARACK OBAMA: The recession dug us a hole of about eight million jobs deep, and we continue to fight head winds from volatile global markets. So we still have a great deal of work to do to repair the economy and get the American people back to work.

CHRISTINA ROMER, COUNCIL OF ECONOMIC ADVISERS: I think what you are seeing is what is a fact of life about real recoveries, they come in fits and starts. No question, we are going through a period of turbulence now.  So that day where it's slow and steady and digging out what the president described as a very big hole.


BRET BAIER, ANCHOR: It seems like Christina Romer would be happy, just happy about most data. But the 9.7 to 9.5, the unemployment rate -- it did fall, but it's not exactly a great story overall for the administration, for this economy.

Here is what the minority leader in the House said about it -- "How much longer are we going to continue with this disastrous spending spree that is scaring the hell out of the American people and piling debt on our kids and grandkids? Instead of whining and making excuses, President Obama should rein in spending, keep taxes low, and give small businesses the certainty they need to get back on their feet."

The private sector added 83,000 jobs last month. That is 25 percent short of what analysts predicted.

Let's bring in our panel now -- Steve Hayes, senior writer for The Weekly Standard; A.B. Stoddard, associate editor of The Hill, and syndicated columnist Charles Krauthammer.


CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: I think one of the numbers that we see that is always misleading is the drop in the unemployment rate.  It went down, but that's because 650,000 Americans stopped looking for jobs. So that number, the way we count it, gets removed from the unemployed, so it artificially lowers the number.

If you were to count them, the rate would have gone from 9.7 to 10.1.  The other disturbing number, as you said, is that the private sector only produced 83,000 jobs, which is very weak, weaker than it was earlier in the year.

Now, some are predicting a double dip recession. That means we are now headed downward and we'll have a second recession. I think that is fairly unlikely. What you are getting I think is simply a slowdown in the rate of recovery, which means a fairly low slope for the recovery, which means it could be years of chronic unemployment, and that could be almost as bad.

I think the ones predicting the double dip are the ones on the left who want another $1 trillion stimulus. They're screaming the sky is going to collapse otherwise. I think that will be unwise. One of the reasons we're in trouble now is because of this huge amount of debt and people know we are look at high inflation or a financial collapse on European scale.  People are holding back on spending, and that's what's holding back the recovery.

BAIER: There is a consumer confidence problem, A.B.?

A.B. STODDARD, ASSOCIATE EDITOR, THE HILL: There is consumer confidence down, the housing market plunging, and then concern in the markets over the feeling across Europe and other countries overseas that they need to consolidate immediately and take care of their debt and deficit.

And that, I think if you look at the entire picture, you climb inside the numbers today from the report, it's very tough politically because it's so close now, the June jobs report is so close to the mid-term election, there is a permanent psychology that is going to set in with Americans and with voters that the Democrats can't really do anything in Congress to produce jobs, that the unemployment picture, the unemployment situation is stubborn and unrelenting, and that there is no silver bullet around or silver lining around the corner.

That this is going to be, we'll have a sluggish growth, and the potential for double-dip for a while, for a long time to come. And I think once that psychology takes hold, it's bad not only for the consumer confidence, for spending, but bad politically for the Democrats.

BAIER: Let's go back, Steve, to the president's speaking before, just weeks before the economic stimulus package was passed and what he was predicting back then:


OBAMA: The report confirms the plan will save or create three to four million jobs, and 90 percent of these jobs will be created in the private sector. The remaining 10 percent are mainly public sector jobs we save, like the teachers, police officers, firefighters, and others who provide vital services in our communities.


BAIER: That was ten days before his inauguration, and the administration has still tried to sell the benefits of the economic stimulus package. But you listen to that and look at that report, and it's not there.

STEVE HAYES, SENIOR WRITER, THE WEEKLY STANDARD: This is the key question going into the 2010 midterm elections -- who deserves the blame?  There is polling that shows that the voters were still were blaming as of a couple months ago George W. Bush more than they were blaming President Obama.

But I think because you have statements like that, then you go back and look at the speeches he was giving at the end of the 2008 presidential election. There is one I read today, October 13, 2008, in which he takes a lot of time basically laying out the stimulus. He called it his rescue plan and said this is what is going to save us and what is going to keep us fiscally solvent and put us on the track to recovery.

He then predicted that without the stimulus we could see unemployment of eight percent some economists are saying by the end of 2009. Here we are. We've done everything he said we were going to do. It has been 18 months. It hasn't worked. And at some point that reality I think is going to dawn on them.

Robert Gibbs sent out a tweet today on twitter essentially blaming the Bush administration again. It's not going to work.

BAIER: And obviously the Federal Reserve played a big part in keeping us from the precipice of whatever was lying out there.

KRAUTHAMMER: The maligned TARP, which I think was very important, a joint effort of Obama and Bush.

But what is really telling is the politics of this has so shifted. I think we're now at stimulus exhaustion. People looked at the stimulus of last year and they concluded it was worthless, a waste of money. On the voting for example for extending unemployment benefits, a lot of Democrats were against it, Republicans as well, because they are more worried about debt than about the sluggishness of the economy. That is new. Three months ago that wasn't the case.

BAIER: Quickly, A.B., how does it play politically, the unemployment benefits not approved by the Congress because of concerns of paying for it?

STODDARD: Very tough for the Democratic majority that go home for this July 4th recess and have to answer why they couldn't extend the benefit. What's going to happen to those benefits and cash-strapped state aid? It's very tough for them politically.

BAIER: But don't they just blame the Republicans and call it a day?

STODDARD: They do, but really, the Republicans still have the stronger message, which is they have the large majority in the Congress and they should be able to pass them. The nervous Democrats, nervous about the deficit are keeping them from getting this passed.

BAIER: Log on to the home page at FOXnews.com/specialreport. Let us know what you think the story that is most important this week. Up next, the Friday lightning round and your choice online, topic of the week.


BAIER: Every week on the FoxNews.com/specialreport homepage, viewers vote on the topic to discuss this in the Friday night lightning round. The winner is a 2010 race that gets more interesting. OK, that won. We're back with the panel. Let's start with Charles.

KRAUTHAMMER: Two races where the challenger had a good victory earlier last month in the primary and had a bump out of it, and is now losing it -- Sharron Angle in Nevada, ahead by 11 over Harry Reid. That's now shrinking. And Joe Sestak over Pat Toomey -- he was ahead of him last month, and he is now behind.

BAIER: There you see them. A.B.?

STODDARD: Remember Governor Charlie Crist of Florida who had to exit the Senate GOP primary because he went to freefall and was losing by 30 points to Marco Rubio, the former house speaker from Florida? Marco Rubio, a rising conservative star, and tea party darling, great hope of the Republican Party, named as possible VP contender for 2012, is now behind Charlie Crist in every poll. The whole race has blown up. Charlie Crist is racing around the state being the governor, managing the oil spill.

And the Democratic side has brought an eccentric billionaire in the race who is catching up with Kendrick Meeks, the congressman and leading contender to the point where Democrats are probably going to tacitly help Crist if he wins the primary, Jeff Green.

BAIER: Steve?

HAYES: Good race. Mine is a little more obscure. I'm interested in the race of John Spratt from South Carolina, the Democrat and chairman of the House budget committee.

And I think he's interesting because if this election broadly understood is about debt and deficits, this is a ground zero. He is someone who has decided to go along with the broader Democratic strategy of not passing a budget resolution which essentially doesn't -- it eliminates caps and allows Democrats to spend.

They say they will have a target for discretionary spending. That's nonsense. I think he has a serious challenger, an increasingly serious challenger in Rick Mulvaney, a real fiscal conservative who can take someone regarded as a real workhorse, John Spratt, liked by his colleagues, had been moderate, and could put his seat in jeopardy.

BAIER: Michael Steele, the chairman of the Relationship National Committee, coming under fire. In fact, Bill Kristol, editor of "The Weekly Standard" and FOX News contributor, is calling for him to resign because of something he said at an event Thursday, saying that Afghanistan was a war of Obama's choosing and that America should never get into a land war in Afghanistan because every time anybody does they fail. What about this comment and what it means? Steve?

HAYES: Has Michael Steele read a newspaper in the past decade?  Really, does he not know we're at war? It's just an absurd comment, something I think certainly should cause him to resign. I think it's unlikely that he will, in part because of the timing. It happened at the end of a big news week chocked full of news heading to a holiday weekend.  I don't think people will pay a lot of attention.

BAIER: The RNC put out a statement saying he is supportive of the war in Iraq and Afghanistan. What about this, A.B.?

STODDARD: The RNC can't walk back what was caught on a hidden camera at an event where he got the facts wrong about Obama choosing a war in Afghanistan.

And Bill Kristol is right. It's an affront to the men and women risking their lives over there for us. It is a war that begun in the Bush administration and obviously has been supported by President Obama. But he said to demonize the war in Iraq and Obama was being too cute by half, and he has the facts wrong, and he has offended many people.

I think it was -- it might be strange timing because of the holiday weekend, but I don't think he escapes this. There is a lot of other conservative voices joining with Bill Kristol to call for his resignation.  I don't think it will be long.

BAIER: Charles, no matter the flowery response, however they type it up, the comments are tough.

KRAUTHAMMER: They can't be undone. The RNC chairmen aren't supposed to invent their own foreign policy. I think he has to go. This is a capital offense.

If you look back, the Republicans have everything at their backs.  Democrats are really on the defensive this year, and they are making all these unforced errors. Joe Barton apologizing to BP, the president, the head of the RNC saying this, Boehner comparing the financial meltdown to an ant -- unforced errors helping the Democrats.

The best thing that the Republicans can do is go on vacation and stay on vacation.

BAIER: Last topic quickly, the Russian spy story got a lot of coverage this week and a lot of ink in tabloids around the country, especially one particular redhead Russian. But the Russian government got upset. The U.S. government did not.

KRAUTHAMMER: They were upset and they are caught red-handed, literally. This is serious spying. One of the charges was recruiting people who might end up in the government. This is long-range sleeper cells. Pretty or not, it's still a danger.

And to see our State Department essentially attacking the Justice Department for a role or independent operation saying on their own track we would never essentially have done this is astonishing.


STODDARD: I know we had a very happy, close meeting between President Medvedev last week with president Obama. I don't know how chummy they're feeling. I know he is seeking to really improve relations with Russia.

But the response from -- the fact there is no scrutiny about this, the fact that the Obama administration wants to move beyond the incident and not anticipating diplomatic response to the event seems very strange to me.  I wonder --

BAIER: Steve?

HAYES: The Russians after being offended initially we made the captures declare it will not affect the U.S.-Russians relations. So that was a big relief.


BAIER: They knew about it before the fries.