'Journal Editorial Report': Closing State Budget Gaps

This is a rush transcript from "The Journal Editorial Report," November 13, 2010. This copy may not be in its final form and may be updated.

PAUL GIGOT, HOST: This week on the "Journal Editorial Report," a showdown looms as Republican prepare to make their mark on fiscal policy. But is the president ready to retreat on taxes?

And with states facing their own budget shortfalls, Texas Governor Rick Perry tells us how he'll close the gap without Washington's help.

Plus, the Bush legacy. From the financial crisis to his freedom agenda, does the former commander-in-chief have any regrets? He tells our own Kim Strassel.

Welcome to the "Journal Editorial Report." I'm Paul Gigot.

Lawmakers return next week for a post-election lame-duck session. The issue of extending the Bush-era tax cuts will be at the top of the agenda. And this week, the White House signaled that President Obama may be ready to cut a deal, accepting a temporary extension of the cuts for high earners to win renewal of the tax breaks for the middle class. Senior advisor, David Axelrod, is denying it's a retreat. So why are liberals howling?

Joining the panel this week, Wall Street Journal columnist and deputy editor, Dan Henninger; assistant editorial page editor, James Freeman; and Washington columnist, Kim Strassel.

Dan, what a difference an election makes. David Axelrod is getting pounded, I think, for acknowledging the obvious, which is that the president now has to deal with a Republican Congress. Are the tax cuts going to be extended, all of them, and for how long?

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: Before we get to whether they will be, let's describe what will happen if they did extend them. If they extended all of those tax cuts for three years, I think it would just be the biggest check booster we've seen. Cash will start to be unlocked from corporations and the stock market would go up. What are the chances? You know what? I'd say about 25 percent.

GIGOT: Twenty five percent?


GIGOT: To be extended for three years?

HENNINGER: Yes, that's right.


HENNINGER: You mind if I get real?

GIGOT: I put them higher than that.

HENNINGER: Allow me to get cynical.


I think this is a trap, Paul. I really do. I don't think that the administration or the Democrats are going to deal in good faith. I think the game is just what it was before the election, paint the Republicans as the party of obstruction, and specifically tee up John Boehner as the Republican Pelosi. And you know, this new kinder John Boehner is not the real John Boehner. Make him pop and put him in opposition with the smooth, cool President Obama. I think that's what the game is here.

GIGOT: That means, Kim, all the tax cuts would expire because presumably the Republicans aren't going along with a partial extension, at least that's what they're saying now on some of the tax cuts. Do you see that same kind of a train wreck scenario?

KIM STRASSEL, WASHINGTON COLUMNIST: No, I guess I'm more optimistic with you. I do think there are a lot of congressional Democrats that are not very thrilled to play ball. And their original attention was sort of go into the lame-duck and try to jam the Republicans with some legislation that they would not be very happy with, either. One idea is to permanently extend the middle class tax cuts and temporarily extend the higher rates. Another one —

GIGOT: Right, that's what they want. But I don't see Republicans agreeing to that kind of a dichotomy. I think the Republicans say let's move together and move ahead together or we'll let them expire.

STRASSEL: Yes, coming off this election, they've got a lot more experience. and they also know there's a lot of Democrats who are very nervous about this issue, right now, and are probably going to see the wisdom of simply extending them all at least for some temporary period of time. It's the smartest way that they can go for sure.

GIGOT: All right. We have a fight among Republicans, Kim, over earmarks. This is these special pork projects that members put into bills. And the House already said it wants a moratorium, House Leader Boehner, but the Senate is resisting. Who's got the better argument?

STRASSEL: Yes, they went a whole week without having a fight with themselves.


The problem here, you've got some guys, Senate Minority Leader Mitch McConnell, Jim Inhofe, some of these guys, they —

GIGOT: He's the Oklahoma Senator and conservative, Inhofe is, so he's a big earmarker too.

STRASSEL: He is. And he also — He is because he has a lot of sway over the highway bills, which tends to have a lot of earmarks in it.

GIGOT: All right.

STRASSEL: But these guys are saying, we don't want to give them up, we don't want to give them up. And now you have all of these new reformers coming in, who just won election, and Senator Jim DeMint who has offered this moratorium that would be only binding on Republicans, or I should say nonbinding on Republicans, but going forward. And now they've got a fight and are going to have a vote on it next week and it's not sure it will pass, which would be a terrible message.

GIGOT: Who do you think is going to win in the Senate?

STRASSEL: I think that there — right now, it's totally equal. They're split on the votes. They've got about 20 Republicans that haven't decided. It's going be to a landslide one way or the other. Someone is going to break the — they're either going to go with Mr. McConnell or break from Mr. DeMint and you'll probably see a bigger side on that side one way or the other.

GIGOT: Yes, I think the symbolic politics here, James, are really significant. The first thing Republicans do is say earmarks as usual. That's going to sour an awful lot of people out there on this new — this recent election.

JAMES FREEMAN, ASSISTANT EDITORIAL PAGE EDITOR: Yes, as Kim pointed out in her Friday column, this is one thing they can control. They can unilaterally say we're not going to do this anymore. So maybe we should be optimistic about that. And I'm more optimistic about the tax cuts getting extended. You look at the —

GIGOT: Three to one against Henninger on this.


FREEMAN: All of a sudden, the Democrats in moderate swing states, up in 2012, a huge incentive not to have a tax increase. Liberals are howling, but remember, this is all a fight over, are you going to maintain the status quo. They're not asking Mr. Obama to embrace radical tax reform.

GIGOT: Right.

FREEMAN: It's just saying don't raise them right now. We might —


GIGOT: And the president wants to win reelection and he does want the economy to be good between now and then. And I think some of his own advisors wonder in fact you don't extend the tax cuts, it's going to hurt the economy, Dan.

HENNINGER: Well, yes, I think some of his advisers do. I'm sorry, I believe that the Oval Office is bloody minded, the same way that Nancy Pelosi insists on being minority speaker. That seems impolitic. Well, I'm afraid the White House is marching to the same drum.

GIGOT: The path to a one term.

Well, if you think the federal government has money problems, wait until you get a load of the states. When we come back, Texas Governor Rick Perry tells us how he plans to close his state's $20 billion budget gap without Washington's help. Why he disagrees with fellow Texan George Bush's compassionate conservativism, and why, if he has his way, trial lawyers could soon be fleeing the Lone Star state.


GIGOT: As a showdown over taxes and spending looms in Washington, governors in 39 states are facing big budget shortfalls of their own. In Texas, where voters reelected Governor Rick Perry last week, the projected budget gap could exceed $20 billion.

I sat down with Governor Perry earlier to talk about his new book, "Fed Up: Our Fight to Save America from Washington." I asked him what one thing John Boehner and a Republican Congress could do to help the economy in Texas.


GOVERNOR RICK PERRY, R-TEXAS: Stay out of our business would be the one thing that I would tell them.

GIGOT: Just that?

PERRY: But from a more global standpoint, if you will, allowing these job creators to have some certainty in the tax structure. Nobody knows what the capital gains tax is going to be next year. They don't know how they're going to be impacted. That is the single most important, I think, piece of information that job creators and the people that are going to go out and risk their capital need to have right now.

GIGOT: So hold out for keeping the current tax rates on dividends, capital gains and income where they are. One year, two years or permanent?

PERRY: Well, permanent would be better, but I don't know if you can get permanent with this administration, but get what you can get out of this administration and try to leverage them as much as you can. I suppose they want to run for a second term.


We'll find out over the course of the next 18 to 24 months.

GIGOT: OK, you just won a fourth term in Texas as governor, and your reward looks like it's going to be a budget deficit. Some people are estimating $20 billion for a two-year legislative cycle.

PERRY: Right. Let me clear up one thing. We don't have budget deficits in Texas. We have a balanced budget amendment. We have a projected shortfall —

GIGOT: Shortfall.

PERRY: — that maybe — we don't know yet. We've been creating jobs. Our comptroller has reported that our tax revenues have been up anywhere between six and eight percent per month for the last eight months.

GIGOT: Much better than most states.

PERRY: Yes, it is. But the fact is we're probably going to have some type of shortfall. But we treat it no differently than you do in your personal budget or small business men and women do. When the revenues slow up, we will prioritize what's important. That's going to be keeping the economy going, of course, and security, safety for our citizens, and educational opportunities for their children. Those are the three things that people really care about. Fund those. And we'll reduce spending. We did it in 2003.

GIGOT: Well, the last time I think you had a $15 billion shortfall, something like that, and you had help from the federal stimulus. I know your arguments you have with them.


GIGOT: But that money did help cover that shortfall. You're not going to have that this time.

PERRY: In 2003, there was a $10 billion budget shortfall. We addressed that. We reduced our spending, and filled that $10 billion gap without raising taxes. We're going to do the same thing this time.

GIGOT: You're saying no tax increase.

PERRY: Absolutely not.

GIGOT: You don't need another federal stimulus dollar.

PERRY: Don't want another — matter of fact, we've turned back stimulus dollars through Race to the Top. They also tried to blackmail us with unemployment insurance money, which was our dollars to begin with.

GIGOT: Right.

PERRY: But they had the strings attached. We'll take the dollars from Washington D.C. My hope is that we can come up with ways where we don't send so many dollars up to Washington D.C.

GIGOT: You've now got a victory in the legislature, pretty close to almost a veto-proof majority in the House.

PERRY: Right.

GIGOT: No excuse for Republicans not getting what you want done through the legislature. What are your two or three main priorities?

PERRY: Obviously, we work together. So it's not just what I want.

GIGOT: Understood.

PERRY: I work with the lieutenant governor and the speaker and those members of the legislature. But obviously, keeping the Texas tax burden light, the regulatory climate predictable and fair, we may expand — you know, we've passed the most sweeping tort reform in the nation and it's paying great dividends —

GIGOT: I remember.

PERRY: Tort reform may be on the agenda. Again, I will suggest to you it will, to the tune of loser pays. Loser pay may be one of those issues —

GIGOT: Somebody — if you sue, but you lose the case —

PERRY: You pay the court costs and legal fees.

GIGOT: — you pay the court costs of the defendant. That's right. That's the British system.

PERRY: We think — we think that will clear up a lot of the over suing that still we see in Texas, the frivolous lawsuits, the kind of the shotgun approach, if you will. And I can assure you, we're going to have a very good discussion on it. I don't think I'd want to be a Republican member of the legislature that voted against loser pay with the powerful message that was sent last Tuesday.

GIGOT: Interesting. Now I noticed that another Texan has a book out, former President George W. Bush. At the same time you're both selling books, about the same time. But in your book, you criticize the former president for his compassionate conservativism. Explain that.

PERRY: I think that George Bush will go down as one of the great presidents in history. His work and his focus on fighting the Islamic terrorists in its war against the West, some of the most important work of the 20th and 21st century to date, but —

GIGOT: That's foreign policy.

PERRY: But there were issues dealing with budget that I disagreed with the president on. And, you know, the fact of the matter is that the Republicans in control of Congress, in the mid 2000s, spent too much money on programs, whether it was Medicaid, Part D, whether it was No Child Left Behind, programs that cost too much money.

GIGOT: That were sold in the name of compassionate conservatism.

PERRY: Yes. And I will tell you, I think those were wrong. And we have the chance now, as we go back into session in January, to redo a lot of those. And I think the American citizens sent a clear message: We don't want you spending all of these dollars on these programs that we don't necessarily want.

GIGOT: So if compassionate conservativism isn't the slogan, what should be?

PERRY: I don't —

GIGOT: Small government conservatism?


PERRY: Fiscal conservativsm. I talked about fiscal conservative and small government. People get that. I mean, the Tea Parties were spot on when they focused in on the spending.

GIGOT: Right.

PERRY: That's what they cared about. There was every kind of person in the world there. But the fact is people want to see small government and fiscal conservativism at play.

GIGOT: All right, Governor, thanks for being here.

PERRY: You're welcome, Paul.

GIGOT: Good to see you.

PERRY: My honor sir. Thank you.


GIGOT: You just heard Governor Perry's criticism of George Bush's compassionate conservativism. So does the former president have any regrets of his own? Kim Strassel recently sat down with him. She'll tell us about it.

Plus, our panel weighs in on the Bush legacy after the break.


GIGOT: You just heard Texas Governor Rick Perry's critique of George Bush's domestic policies. But in his memoir out this week and in an interview with our own Kim Strassel, the former president defends his record on the economy and spending. And he also makes the case for his freedom agenda.

So, Kim, you sat down with the former president. Was there anything that surprised you about the interview and the president's mood?

STRASSEL: I went to his house a couple of weeks ago, his new house in Dallas. And I don't know if I would call it surprising but, by far and away, the most notable part of that interview was this is a guy who is not wringing his hands over what history's judgment of his presidency is going to be. This is a very controversial president. The left despises him for his wars, for his tax cuts, for his plans to reform Social Security.

GIGOT: Right.

STRASSEL: The right was unhappy with him over the prescription drug program and No Child Left Behind. Some people actually believed he laid the groundwork for President Obama. And yet, when you talk to him — his book and the interviews, there were some regrets. He did acknowledged mistakes. But on the big issues that he did, he seemed to be very comfortable and very confident that history would see it in a favorable light.

GIGOT: All right.

James, in the Governor Perry versus President Bush debate over spending and the Bush record, who do you think gets the better of the argument?

FREEMAN: Well, clearly, Governor Perry. If you're talking about spending — I mean, I should say, I think that Bush had some — President Bush had some notable achievements — 2003 tax cuts, two great additions to the Supreme Court, extended the Internet tax moratorium, which I was a fan of. But on the spending, you have to say he dropped the ball there. And as someone who was working on the Hill at the time, he had Republicans on the Hill to work with him. And even nondefense, non-Homeland Security spending was rising rapidly. And you saw what happened. Ultimately, he took, as a share of GDP, took government spending from roughly 18 percent up to almost 21 percent.


GIGOT: He just refused — well, until, I guess six years into his term, to veto any bill.


GIGOT: He wouldn't veto what Republicans would send him in terms of spending.

FREEMAN: The classic question is, are you going to pay for guns or butter, and he just said yes.


And I think, you know, people wanted those vetoes, but he also — I think, it's fair to say, in his last year, you look at Bear-Stearns and then you get to the end of the year and you're bailing out General Motors. I mean, this is an extreme intervention in this economy which I think absolutely set the table for Barack Obama's stimulus and other spending.

GIGOT: Yes, but when a Fed chairman and a Treasury secretary come to the president and say, look, the economy is going over a cliff, you've got to do something, most presidents, I would argue every president, is going to do what Bush did, at least in the case of Lehman Brothers and so on and TARP. He's going to go with that instinct, because that's — you're an information taker in that kind of an instance.

FREEMAN: I would like a more skeptical president. You look at the Paulson book and the Bush book, he doesn't seem to push back much on the idea of bailing out —

GIGOT: I agree with that. That is notable.

HENNINGER: Let me try to explain why it wasn't a more skeptical presidency. This was, if nothing else, the 9/11 presidency. 9/11 was an experience that all of us had, but he experienced it in a unique way as president. He went and saw the Pentagon. He went to Ground Zero and saw that.

GIGOT: Right.

HENNINGER: And the country was in a huge crisis. And what George Bush concluded is that he must convey resolve and confidence, because the American people were thrown back, and show no doubt on anything he was doing. And he pulled that all the way through his presidency. And I think it affected his policies on Iraq and, indeed, at the crisis at the end of his presidency, which he called the second biggest crisis of his presidency.

There should have been more reflection when Iraq was going bad. He should have changed his generals sooner. And I think he could have had more internal debate on the financial crisis. But that was not the kind of persona that George Bush was going to convey.

GIGOT: And I would say to James, he really got caught by surprise by what happened in the financial crisis. And in the book, nothing of this — nothing comes through that he had any doubt at all when the housing market was going up, when the credit bubble was forming, there was no real sense that maybe this was something that was going to go bad.

FREEMAN: He was sort of — he was put in a tough situation. To his credit, he did try and reform Fannie and Freddie. But I think we would say he should have pushed harder. And there was a moment where Secretary of the Treasury Paulson decided not to push that issue very hard and Bush signed off on it. bloody minded. But I do think on the spending side, while the record is bad for President Bush, we ought to give him credit that he did try to reform that — that entitlement monster known as Social Security.

GIGOT: Right.

FREEMAN: The Republicans in the House kind of got weak knees on that, but he deserves credit for taking that one.

GIGOT: And the Democrats across the board on that one.

FREEMAN: Oh, yes, forget them as far as reform.

GIGOT: Dan, very quickly, do you think the president's legacy on Iran — Iraq and Afghanistan depends how the wars turn out?

HENNINGER: I think it's wholly linked to Iraq and Iran and Afghanistan. This was a war presidency. If that succeeds, his presidency will succeed.

GIGOT: All right, thanks very much.

We have to take one more break. When we come back, "Hits and Misses" of the week.


GIGOT: Time now for "Hits and Misses" of the week.

Kim, first to you.

STRASSEL: A hit to outgoing New York City School's Chancellor Joel Klein. When Mr. Klein came in, I think a lot of people viewed him as the standard reformer who'd nibbled around the edges. As he saw the dysfunctions, he became much more aggressive. He made attempts to shut down failing schools, to grade them, to expose bad practices and introduce concepts like merit pay. And this didn't earn him any fans among the teachers unions. But these days, in the area of school reform, that's the best evidence you're actually doing your job.



FREEMAN: A hit to former Alaska Governor Sarah Palin and also president-elect of Brazil, Dilma Rousseff. These two women, telling Federal Reserve Chairman Ben Bernanke this week that he's got to stop quantitative easing, stop printing money, that's not what we need and that's not going to fix our economic problems. And who would have thought that Sarah Palin, leading the world, a coalition of central bankers and leaders overseas, to get the U.S. to reform its monetary policy.

GIGOT: All right.


HENNINGER: Paul, a couple of weeks ago, I gave a big miss to the French students who were rioting over the proposal to raise the retirement age there. Well this week, it's merry old England, where they are purposing to raise the tuition fee at the universities $14,000. They had a demonstration. It turned really ugly. Mobs started ransacking the conservative buildings there. You know, the great British novelist, (INAUDIBLE) Paul, once wrote that civilization always has to guard against the jungle coming back in. And I'd say the Brits and the French have some civilizing cleaning up to do.

GIGOT: All right, Dan, thanks.

Remember, if you have your own "Hit or Miss," please send it to us at jer@FoxNews.com.

And that's it for this week's edition of the "Journal Editorial Report." Thanks to my panel and to all of you for watching.

I'm Paul Gigot. We hope to see you right here next week.

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