This is a rush transcript from "The Journal Editorial Report," September 4, 2010. This copy may not be in its final form and may be updated.

PAUL GIGOT, FOX HOST: This week on the "Journal Editorial Report," facing a weak economic recovery and a revolt within their own party, Democratic leaders are scrambling to come up with their own tax cut plan, and fast. What's on the table?

And Social Security scare tactics. It's a time honored campaign tradition. And this year, Democrats are counting on it to keep control of Congress. Will it work?

Plus, unions are waging war on "The Los Angeles Times" after the newspaper publishes evaluations of thousands of that city's teachers. Is the data fair game?

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

With the most sweeping tax cuts in a generation due to expire in January, a showdown is brewing, when lawmakers return to Capitol Hill from summer recess. Worried about the fragile economy and their own upcoming elections, a growing number of rank-and-file Democrats are joining the Republican opposition to President Obama's plans to let the Bush-era tax cuts expire, even for the wealthy. So can Democrat leaders keep a lid on the dissent or are they quietly planning a tax cut and maybe some more spending of their own?

Joining the panel this week, Wall Street Journal columnist and deputy editor, Dan Henninger; opinionjournal.com columnist, John Fund; and senior economics writer, Steve Moore.

So, Steve, how serious is this rank-and-file Democratic revolt against raising taxes?

STEVE MOORE, SENIOR ECONOMICS WRITER: Well, it gets worse every week, Paul. And there's two reasons for that. Number one, the Democrats poll numbers keep going down week after week. And now they're in a bit of a political panic. And number two, we keep getting bad unemployment numbers. The new unemployment numbers this week show a continued increase in unemployment. Those two things have raised a lot of questions in Democrat's minds about the wisdom of raising taxes on anybody in 2011.

And don't forget, Paul, when you said that this is tax increase on the wealthy, our statistics show that about 50 percent of that income will fall on the backs of small business employers who need to be doing the employing to get Americans back to work.

GIGOT: I want to get into that debate, Steve.

But, John, we have a situation where the revolt seems to be growing. Before the recess, we had Evan Bayh, Ben Nelson — a Senator of Indiana, Ben Nelson of Nebraska. Ken Conrad, of North Dakota, a committee chairman say, let's not raise taxes on — in January. Now you see this revolt spreading across the board. How serious do you think it is?

JOHN FUND, OPINIONJOURNAL.COM COLUMNIST: Back in June, the White House told Democrats in Congress, don't worry, we have the summer of recovery tour. The summer of recovery tour became the summer of despair. Now Democrats are panicking. The White House has to do something.

I talked to a Democratic congressman who was in a town hall meeting, who said, someone stood up at the town hall meeting and said, look, your economic plan isn't working. Are you going to do something now or are you going to wait until November 2 when we send you a real message.

GIGOT: But they always thought, Dan, they could play a tax jujitsu, right?


GIGOT: They'd say, we're going to remove — we're going to let the tax cuts continue, the lower tax rates, for the middle class. And we'll sock it to the wealthy. And that kind of class war would trump any economic message. Seems that's reversing.

HENNINGER: Yes, it's kind of interesting we're having the discussion. I think it shows how disconnected the Democrats and the Democrats political professional class has become from the way that people live out there in the country. The Bush tax cuts were passed in 2001 and 2003. That was a long time ago. This set of tax regimes and rates is the status quo. It's what the country has been living with for a long time.

GIGOT: It's not a really a tax cut. It's a tax —


GIGOT: It's preventing a tax increase.

HENNINGER: Right. So the idea now that you're going to jigger this around in the middle of the tail end of an economic recession and try to manipulate it politically I think strikes most people as very upsetting.

GIGOT: The Democrats say, look, the tax increase — some of the liberal Democrats, Steve, just say, look, this is not really going to be that big of a problem economically because it's only three percent of all small businesses. How accurate is that argument?

MOORE: Well, it's not very accurate. Because the problem is that, of the people who do get hit with this tax increase, Paul, it's not the Lebron James and Taylor Swifts of the world. It's small businesses owners or investors, and half of that income does come out of the profits. We should call it a small business profit tax because that's what it is.

The other problem I think Democrats have is most of them really believe that this economic stimulus plan would work. We said consistently for the last year and a half it wouldn't. They are shocked at these bad unemployment numbers. And they don't have a plan B right now. They're flailing around with all sorts of different proposals.

GIGOT: But, Steve, that three percent of small businesses' argument is technically correct. The problem is it still hits 750,000 small businesses and 50 percent of all small business income.


GIGOT: And job creation is not made from people who don't make profits. Jobs are created, but from people who make profits.

MOORE: That's very well put. The companies that are most likely to hire are the ones that do have profits of more than $250,000 a year. And those are the ones that get sucked out of their paychecks with this tax increase.

GIGOT: John, what are the Democrats trying to come up with here? The White House is scrambling their leaks out, saying, we'll have our own cut procedure. What are they thinking about?

FUND: They're learned that only three percent of the stimulus money went to real bricks-and-mortar infrastructure, and tried to create an infrastructure bank for long-term spending. But that won't help them before the November 2nd election.

GIGOT: Float some bonds and put it in —

FUND: Right.


FUND: That's a good headline. In the short-term, they'll move to a payroll tax cut, which, of course, will affect everyone, including the poorest Americans.

GIGOT: Temporary payroll tax cut, not permanent, but temporary to boost hiring right now.

FUND: Right. Demand.

GIGOT: And get the jobless rate down immediately. But do businesses change their behavior, Dan, based on temporary tax cuts?

HENNINGER: No, I don't think they do, Paul. Look, the businesses are run by owners. The owners are the people who pay the taxes or talk to their tax accountant. They are acutely aware of this subject. And as I've said, they've been living with this range of rates for the last decade. And now the White House is suggesting that there's going to be this sort of set of brakes for them which may last a little while or may not last permanently. If you're trying to manage your business in this economy, and you have to make plans whether to commit to hire people through the long- term, I don't think that's a strong enough incentive.

GIGOT: You won't hire them for a year, if you have to lay them off —

HENNINGER: Right. And how do you know whether you have to lay them off or not?

GIGOT: John —

MOORE: And don't forget one other thing. You know, we talked a lot about taxes. I talked to small businesses, and what they're really afraid of, Paul, is the new costs associated with Obamacare or the new health care costs that are going to make the situation worse in terms of hiring new workers.

GIGOT: All right, John, what do you think is going to happen?

FUND: I think the Democrats are going to have to move to some kind of a tax cut, probably a payroll tax cut. There's a political danger there. Remember, seniors still think there's a trust fund for Social Security. You say there's going to be a payroll tax cut, that could be easily demagogued by Republicans, of all people, saying, you're draining social Security —

GIGOT: You mean, Republicans are not above demagoguery, John?


FUND: It's politics. Everyone is a demagogue.


GIGOT: All right. But I think they're going to try to rush through some kind of a tax cut because otherwise the Democrats are just panic right now.

And when we come back, the Social Security bait and switch. President Obama says he wants Republican help to rein in entitlement spending, even as he and his allies accuse them of trying to gut popular programs. Can Democrats scare their way to victory on Social Security in November?


PRESIDENT BARACK OBAMA: I mean, she wants to phase out and privatize Social Security and Medicare.



GIGOT: Well, with Democratic prospects for retaining control of Congress growing dimmer by the day, party leaders and embattled incumbents are desperate for an issue they can run on and win on. And it is becoming increasingly clear that they think that Social Security is that issue.

So as November nears, get set to see more ads like this one, which was rolled out this week by the Democratic Congressional Campaign Committee against the Republican Sean Duffy in Wisconsin's 7th district where Democrat Dave Obey is retiring after 20 terms.


AD NARRATOR: Politicians like Sean Duffy just don't get it. When we should be fighting to protect Social Security, Sean Duffy backed a plan to privatize it. Privatizing would cut the guaranteed benefit and gamble seniors' retirement on the stock market. Remember the crash? Families could have lost nearly 40 percent of their retirement benefits. Forty percent. The plan to privatize Social Security supported by Sean Duffy is the wrong choice for Wisconsin's families.

The Democratic Congressional Campaign Committee is responsible for the content of this advertising.


GIGOT: John, so why are Democrats raising Social Security now? Is this just a campaign tactic or is there a real governance debate to be had here?

FUND: Well, Bush advocated individual accounts in 2005 and dropped the idea very quickly.

GIGOT: There was never even a vote on the floor.

FUND: Exactly. Very few Republicans are running on this issue. So I think that ad has very, very limited appeal in most districts.

The real problem is the Democrats always go to Social Security because it's worked in the past. But this year, there's something different. Seniors have been following the news reports. There's a country called Greece, which had unsustainable debt and unsustainable spending, and what did they do when they finally went over the edge? They cut pensions 30 or 40 percent. People I think recognize the only way we are going to keep Social Security solvent is to tackle the debt and spending problems we have. These scare tactics aren't going to work.

GIGOT: Well, you're saying that Republicans should engage in the debate on Social Security and say, look, yes, we really do need to rein it in? Should they make Social Security a debate going into this election?

FUND: Since there's no Social Security trust fund, it comes out of general revenues, the only way to have a healthy federal budget that can afford the keep the Social Security promise is to have a healthy economy. You cannot have the debt and spending levels that we have and have a healthy economy.

GIGOT: But if you end up debating Social Security, Dan —

FUND: No. Only direct response.

GIGOT: No, but that means the Democrats want that debate because they want to change the subject from what's been happening the last two years. Wouldn't Republicans be taking the Democratic bait?

HENNINGER: You can't dodge this. The problem with this subject is that, you know, the Democrats have these little house gods with candles around them, Social Security and Medicare. If a Republican simply says the word Social Security, the Democrats say, see, he's going to destroy it. So you can't have a good-faith conversation with them on this subject.

The fact remains that Social Security is 20 percent of the federal budget. And where the Democrats are most vulnerable is, right now, is on the spending issue. And if Republicans can pivot this subject into a spending debate, then, I think, they can benefit.

GIGOT: Steve, John Boehner, the Republican minority leader in the House, did suggest recently that you could raise the retirement age on Social Security. It's going to phase in over time from 65 today to 67, when you and I retire. And he said, maybe we should raise that later. Was that smart politics or did that open Republicans up to this Democratic attack?

MOORE: Well, he's probably right that eventually we have to do that. We have to raise the retirement age because we're all living longer and we've got 75 million baby boomers about to retire.

But you know what really amazes me about that story, Paul, is the hypocrisy of the Democrats and the Obama administration. You played that clip from Barack Obama saying, you know, we all going to get together and we'll have a deficit reduction commission, we're going to tackle these problems. And when Republicans even open their mouth and suggest even the slightest reform in Social Security or Medicare, the Democrats pile on and say, see, there they go again, they're cutting them.

Republicans ought to take note of what the Democrats are doing right here. I don't think they will ever negotiate on entitlements in good faith.

GIGOT: Let's play a clip from one of the president's radio addresses in August talking on this point.


OBAMA: I'm committed to working with anyone, Democrat or Republican, who wants to strengthen Social Security.


GIGOT: If you're attacking the Republicans for wanting to gut Social Security, on the one hand, and then saying, please come join us in a bipartisan deal to reform it and fix it, contradictory messages.

HENNINGER: They are. And I think — back to John's point, I think he's right. The American public is now more focused on these economic issues than ever before. They are well aware of the problems of Social Security. And to demagogue it like this I think is not going to help the Democrats.

One point, you know, about this debate that gets left out and the Republicans should make is, they keep advertising they're going to take grandma's Social Security. People over 60 are grandfathered out of virtually any reform.

GIGOT: I think even as low as 55 or 50 for some of the plans.

HENNINGER: Right. Perhaps —

GIGOT: Really, this was two generations.

HENNINGER: This is about people in their 20's and 30's and middle- aged people. And they all are well aware of the fact they have a problem. They're open to debate on this.

GIGOT: John?

FUND: Notice Democrats are not going after Republicans on Medicare cuts because Obama's health care plan had savage Medicare cuts in Medicare Advantage.


So that issue, so far, is quiet.

GIGOT: And if Republicans take Congress, does this mean there couldn't be a deal between the president and Republicans or does it make it politically more difficult to get there?

FUND: I think we immediately go into the 2012 election. I think there will be no deal on entitlements until after that election.

GIGOT: Even though some Republicans are saying they hope there can be, to satisfy some of their spending cut partisans?

FUND: Not enough.


GIGOT: OK, John.

When we come back, the unions take on The Los Angeles Times over this week's publication of some 6,000 teacher evaluations. Why all the fuss? Find out next.


GIGOT: There's a battle brewing in Los Angeles between the teachers union and the L.A. Times, which, on Sunday, published evaluations of some 6,000 city school teachers based on how well their students performed from year to year on standardized tests. The Los Angeles Teachers Union is calling the publication of the data teachers bashing, and is urging a boycott of the newspaper. They planned a demonstration outside the Times office for later this month.

Wall Street Journal editorial board member, Jason Riley, joins us with more.

Jason, what is the teachers union's complaint?

JASON RILEY, EDITORIAL BOARD MEMBER: It's two fold. One is a privacy complaint, whether or not the public has a right to this information. But I think the larger problem they have is meaningful evaluations. That's really what the teachers are trying to avoid here. Right now, fewer than two percent of teachers are denied tenure. And student learning has nothing to do with the teachers' evaluation. It has no effect on teachers' evaluation.

GIGOT: You get tenure — you tenure after one year, two years?

RILEY: I believe it's after two years in Los Angeles.

GIGOT: Two years.

RILEY: Some states, it's three years. It varies from state to state. But it's usually two or three years.


RILEY: And then it makes you almost impossible to fire for performance after that.

GIGOT: So the school district is saying, look, we want to find a way to measure teachers much as some other districts, like Washington D.C., and hold them accountable.

RILEY: School districts and around 20 states already do this and —

GIGOT: Use this particular measure?

RILEY: Use this particular measure. And the idea here is that students all arrive in September at different levels of learning. And what you want to do is control for that, by just judging what that teacher does with that student while that student is under that teacher's supervisor.

GIGOT: So this measures how well the students in a particular classroom, let's say 25 students in a classroom, see how much progress they make over the course of the year.

RILEY: Individually.

GIGOT: Each individual.

RILEY: Right.

GIGOT: So how well that teacher does in raising those 25 students over the course of the year. Is that the total evaluation? Does that —

RILEY: No, and that's been a misleading talking point, I think, of the teachers unions. They keep saying, you know, a teacher's evaluation should not be based solely on test scores. No one is arguing that should be the case. The argument is that test scores of students should be part of the mix in evaluating a student's progress.

GIGOT: Dan, what about from a newspaper editor's point of view? You're a newspaper editor. Do you think it's fair for a newspaper to put 6,000 teacher evaluations, which is not being their total evaluation, performance evaluation, but one substantial part of it, putting it on the web, in print for everybody to read?

HENNINGER: You know, Paul, I think I've said before on this program that the failure of these inner city schools in places like Los Angeles is the biggest moral issue in this country. And what's there, what is unfair, is class after class of so-called seniors in these systems being swept over the falls, poorly educated, and nothing changes. So, I don't think — I don't have any problem at all with trying to kick the mule in the head by putting these numbers in the paper. And I suspect that the really good teachers would say, yes, I need an opportunity to actually show what I can do with the students, rather than being just part of a union in which everyone is treated the same.

GIGOT: But would you want your annual performance evaluation, or mind, put on the web for people to see?

RILEY: These are public employees and paid well. The spending on K through 12 education in California has gone up in the past two decades 191 percent. And the public has a right to know whether all of this money spent on education, now 40 percent of California's budget, is going towards just generous pension benefits or whether it's having some impact on student learning.

HENNINGER: Jason, think of it this way. We know that they spend about $30,000 a year per student, right, in Los Angeles.

GIGOT: What's the graduation rate, Jason?

RILEY: Forty percent.

HENNINGER: Forty percent.

RILEY: That is the lowest of any large school district.

HENNINGER: The number of students in the average middle school class is 35. Thirty times 35 is a million dollars. If the teacher is getting, say, $100,000, where is the rest of that money going?

GIGOT: So you're saying the taxpayers have a right to know, as rough as it is for some teachers to have this element of their performance online, for everybody to see, it's a kind of rough accountability that years of tenure and other policies warrant this scrutiny?

RILEY: Certainly. And I think it's also important to keep in mind that what the teachers unions really object to here is not this particular methodology and using value added. What they object to is any sort of meaningful evaluation that will actually have consequences.

GIGOT: All right, Jason.

Well, the Los Angeles school district is in the news these days for another story as well. Feast your eyes on this. The nation's most expensive public school ever, dubbed the Taj Mahal schools, Robert F. Kennedy Community Schools Complex, is set to open in over a week. It boasts fine art murals, a manicured public park and state of the art swimming pool. It's in the former Ambassador Hotel where RFK was assassinated in 1968. The price tag? $578 million. Los Angeles laid off nearly 3,000 teachers over the past two years and the district faces a $640 million budget shortfall. But, not to worry. District leaders say that the school that was funded by $20 billion in voter-approved bonds and no money comes out of the current school budget.

Well, thank goodness for that.

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


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

Jason, first to you.

RILEY: Well, Paul, Democrats can't run on their legislative accomplishments like Obamacare, because they are so unpopular with voters. So the strategy has been to run against Bush, just blame high unemployment and slow economic growth on the past president. A new poll in Ohio shows that by 50 to 42, voters would prefer to have Bush back in the White House over Obama today. Now, it's one state, one poll. But it is Ohio, a swing state that Obama won in 2008. I suspect if the trend continues —


— it will be much more difficult for Democrats to run against the Bush fright mask (ph) in November.

GIGOT: All right.


FUND: Ron Widen is the Democratic Senator who knows most about health care in that body. He voted for Obamacare but he also put in an option that any state can get a waiver from certain provisions, including the individual mandate. Well, last week, he wrote Oregon officials suggesting maybe it's time for you to ask for a waiver and get out of the individual mandate. Paul, Obamacare is not only unpopular. Some of its own supporters are having second, third and first thoughts.

GIGOT: All right.


MOORE: When Andy Roddick lost in the second round in the U.S. Open, it was a new low for American tennis. It now appears that only Venus Williams — is the only American hope to reach the quarter finals on the men or women's draw. What happened to the golden age of American tennis when we had Andre Agassi, Pete Sampras and Jim Courier? Paul, this is a plea to American parents. We need you to take your kids out to the tennis courts. We have too many soccer moms in America and not enough tennis moms.

GIGOT: Send your kids to tennis camp, Steve. All right.


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

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. Enjoy your Labor Day. And we hope to see you right here next week.

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