This is a rush transcript from "The Journal Editorial Report," September 18, 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," a stunning upset in Delaware has some Democrats celebrating. But is that voter uprising headed straight for them?

And it's Democrat versus Democrat on Capitol Hill as more of the rank-and-file break with party leaders over plans to raise taxes on upper incomes.

Plus, Chris Christie's pension fight. The unions are howling after New Jersey's governor unveils his plans to save a system that is only $46 billion in the red.

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

Tea Party Candidate Christine O'Donnell's stunning victory Tuesday over long-time Republican Congressman Mike Castle has many on the left celebrating and crowing about a Republican civil war. Well, Democrats may keep that Senate seat as a result, but is the wave of voter anger that swept Castle out now headed right toward them?

Joining the panel this week, Wall Street Journal columnist and deputy editor, Dan Henninger; Washington columnist, Kim Strassel; and senior economics writer Steve Moore.

So, Kim, this week, I got an e-mail from John Kerry, one of the mass Democratic e-mails, basically doing cartwheels — almost doing cartwheels on my computer screen, celebrating the result in Delaware. Should they be that happy?

KIM STRASSEL, WASHINGTON COLUMNIST: I don't think they should because this was the last primary and, right now, all the Republicans that might get swept out have been swept out, and the only people left to be swept out are Democrats this fall. And a lot of the things that were driving the anger in Delaware that led to Mike Castle's loss there had to do with the things that Democrats have got problems on too. I mean, he had a record. Castle had a record. People felt he wasn't good enough on fiscal responsibility. He voted for cap-and-trade. These are the hallmarks of the Democratic Party. And these voters are now coming to get them.

GIGOT: Steve, but does Christine O'Donnell have a chance to keep that seat or to take over that seat for the Republicans because it would be a net pickup?

STEVE MOORE, SENIOR ECONOMICS WRITER: Well, she — yes, she does have a chance, Paul. But certainly, Mike Castle would have had a better chance of winning. I'm actually kind of happy with the outcome. I think that if Mike Castle had been in the Senate as a Republican, he would have cut deals with — with Barack Obama on things like, you know, cap-and-trade legislation, tax increases, on union issues. And so, I have a sense that the Republican voters want people who really believe in the core Reagan issues. And that's one of the reasons you've seen the upsets, Paul, in states like Alaska, Delaware, Kentucky, and Nevada. I think the whole electorate has shifted to the right. And I agree with your premise that now you're going to see this hurricane that's hit the Republican, I think it's headed right smack towards Nancy Pelosi and the Democrats.

GIGOT: Yes, but OK, if it's a difference this seat, Delaware seat is a difference between only 49 Republicans in the Senate and 50 Republicans or 51 in the Senate where you have the ability to organize the Senate. Was it worth the trade?

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: Yes, I think ultimately it was worth the trade. I agree with Steve that the electorate looks like it's moving to the right. And the O'Donnell victory is more a reflection of the anger of the electorate than of Christine O'Donnell.

But I'd like to make a point about this, Paul. The John Kerry e-mail that you got. I read some of the commentary on the primaries and some of the liberal pundits, The New York Times editorial page, they're happy. They're saying this proves that the Republican Party is drifting over towards what Ed Rendell, the governor of Pennsylvania, called the crazies.

GIGOT: The nuts.

HENNINGER: The nuts. You know what? I'm beginning to think there is a risk here. In American politics, you can be marginalized by the mainstream media. If the candidates do not — or the Tea Partiers themselves do not start talking about what they actually stand for, Independents will get nervous. The Tea Partier's complaints are primarily economic.

GIGOT: They're fiscal.

HENNINGER: It's about spending. They're —

GIGOT: Sure. It's about spending. It's about the growth of government.


GIGOT: Since when are these radical ideas?

HENNINGER: They are not radical ideas, and the criticism of the Tea Partiers by the liberal pundits never mention any of that. I think the burden is now on the Tea Party candidates and Tea Party representatives to start talking about economic issues.

GIGOT: Well, Kim, can Jim DeMint, the Republican from South Carolina, who endorsed O'Donnell at the end, and Sarah Palin, do they have an obligation now to help her get across the finish line or can they just wash their hands of it and say, well, we conducted our intra party cleansing and now you're on your own, ma'am?

STRASSEL: No, they absolutely do. You know, the way they're going to have to do this — here is the problem with some of the candidates. This election ought to be about Democrats, their unpopular agenda and the problems that they've created for the country. The problem with some of these candidates is that they're just colorful enough that it allows the Democrats to do what they want to do, which is to say — as Dan said, say, these people are too crazy, don't worry about us, and what we do, these people are too crazy to give them the reins in Washington. If Jim DeMint and Sarah Palin and these guys are going to be successful, they have to coach the candidates to get the focus back on the Democrats. And that's the only way they're going to win —

GIGOT: I have to tell you, I have not seen a single poll, Steve, that shows that the Republicans are out of step here this year. It seems that this is — this argument, even the Tea Party argument seems to be directly where the Independents are in this election, which is concerned with the state of the economy, concerned with fiscal — with run-away spending and fiscal issues.

MOORE: Yes, this is what the left doesn't understand, is that the Tea Partiers have become the mainstream or maybe the mainstream has become Tea Partiers. I've been out on the mall with these hundreds of thousands of people, just observing what's happening, and it's an incredible phenomena.

As a conservative, Paul, I have to say I'm excited about the prospect of a Senate next year with not just Jim DeMint and Tom Coburn, but six or seven or eight more like him. As Jim DeMint told me in an interview last week, the reinforcements are coming. And that's a welcome thing if you're a conservative and believe in limited government.

GIGOT: Dan, take a look at a state like Wisconsin —


GIGOT: — where — it's hardly a right wing state. They've had two Democratic Senators for 18 years, a Democratic governor for eight years. Yet, the Republicans could sweep most of these — these statewide elections this year. What's going on in a state like that?

HENNINGER: Well, it includes David Obey's — David Obey is their Congressman who was elected in the 1960's, a progressive. He's not even a liberal.

GIGOT: Chairman of the Appropriations Committee.

HENNINGER: Yes, and his seat is a toss up. I think what's going on is — you know, a year ago, Rasmussen did a poll in which they asked people what they thought about Congress. Fifty-eight percent said they would like to change the entire Congress. That's a year ago. And I think people have just become disgusted with the political class and they literally want the whole thing to start over again. And that's true in places like Wisconsin, New Jersey, California. This is a historic off-year election, it really is.

GIGOT: 2006, 2008, Republicans suffered that wave.


GIGOT: And this time it looks like the Democrats are going to be the party that takes the hit.

When we come back, forget this week's Republican ballot in Delaware. It's Democrat versus Democrat on Capitol Hill as more rank-and-file members break with the president and Congressional leaders on a tax hike for higher incomes.



PRESIDENT BARACK OBAMA: Right now, we could decide that every American household can receive a tax cut on the first $250,000 of their income. But once again, leaders across the aisle are saying no.


GIGOT: Well, it's not just Republicans who are saying no to President Obama's plan to raise taxes on upper incomes. Thirty-one House Democrats, most facing tough re-election fights this fall, have signed a letter urging House Speaker Nancy Pelosi and House Majority Leader Steny Hoyer to extend tax breaks for all income levels, not just households making less than $250,000 a year.

Over in the Senate, Virginia's Jim Webb and Connecticut's Joe Lieberman this week brought the total to five Democrats calling for at least a temporary extension of the tax cuts across the board.

So, Steve, how wide is — widespread is this Democratic insurrection on taxes?

MOORE: You know, Paul, for the first time in my life I almost, almost feel sorry for Nancy Pelosi.


She's trying to put together this coalition. You know, last week, Stan Greenberg, as you know, the Democratic pollster, when to the House Democratic caucus and he told the members, look, the popular thing to do is raise the taxes on the rich and cut taxes on middle class. What happened at that meeting, according to my sources, Paul, is all the members looked at Stan Greenberg and said he's not polling in my district.


The truth is, cutting those taxes for everyone is what's popular, and I think the reason, Paul, is that our message that we've been saying on the "Journal" has really penetrated, that if you raise taxes on the rich, that hurts the economy, hurts small businesses, most American workers say, wait a minute, a rich person is the one who scenes my paycheck.

GIGOT: Kim, the president says that, like Stan Greenberg, this politics works. All you do is raise taxes on the well-to-do, don't worry, nobody will care. So that isn't flying in some of these blue-dog districts around the country, and do you think it's because of the shape, the state of the economy, the iffy state of the economy?

STRASSEL: Yes. No, look, right now this is the worst possible time Democrats could be dealing with the tax issue. They've got 9.6 percent unemployment. There's talk of a double dip recession. The business community has turned against them and is making an issue out of this, saying if you pass a new tax hike on us, on capital gains and dividends, you know, this is going to further impede our ability to grow the economy, and so they're out there. This message is not flying. If this was such a winner, you know, the president would have all of his people on board, wishing to do this. Instead, they're running the other way.

GIGOT: You know, Dan, I mean, the best thing for the Democratic party would be right now to extend those tax — those lower rates for two years, and you know, not make them permanent. I'd like to make them permanent. I think that would help the economy the most. But politically, for them, take this off the table this year, extend it for two years, and it will help them by removing the issue and would help the economy, which would help them. Why won't they do it?

HENNINGER: Because the president of the United States doesn't want to do it, Paul.


GIGOT: And why not?

HENNINGER: Why not? Remember the good old days when the liberals used to accused conservatives of being wedded to conservative dogma, dogma, dogma?


Well, this idea of raising tax rates on the upper one percent or people —

GIGOT: $250,000.

HENNINGER: $250,000 —

GIGOT: Which doesn't seem rich in New Jersey, New York, California —

HENNINGER: No, California, right.

GIGOT: — Connecticut, Maryland, Virginia, among other places.

HENNINGER: This is something that Barack Obama ran on in the election, before the financial crisis hit. It's something he was talking about the first month of his presidency. He will not let it go. It's — you know, we've described it as class warfare and I think we're right that the economic uncertainty has caused people to say, whoa, let's not fool around, let's just move ahead, let the tax cuts extend and we'll worry about it later.

GIGOT: John Boehner, this week, the Republican leader, got out on a limb when he said that maybe the — he would vote for the tax, to extend the lower tax breaks only for the middle class, Kim. He was taken to the wood shed by his own members. Was he not?

STRASSEL: Well, yes, he was, because he walked right into the Democratic crowd. This is one thing that they can hope to do with this debate, is to go out there and say, look, you are holding the middle class hostage if you — if you demand that we extend all of these taxes and this could fail and it will be your fault and the middle class will come after you. And he seemed to be nerved out by that prospect.

But the reality is, and as his party told him afterwards, if the Republicans can't run on universal tax relief right now, something that's popular, as you said, this year, a good year for them, when are they going to? So they have since then recircled the caravans and are trying to get back to the right positions.

GIGOT: Steve, where do you think this is going to come out? Do you think we could get them extended for the lower tax rates for a couple more years?

MOORE: I think there's so much disarray in the Democratic caucus right now, Paul, my bet is Democrats will do nothing, that they will go into this election — basically because they don't want to, you know, keep the rates low for the rich people, they're going to go into this election promising essentially to raise taxes for everyone, not just people who make over $250,000, but people who make $50,000. I don't understand the logic of that, Paul. I think they're running right into a buzz saw. They've had six years to fix this tax problem that's going to explode, but they just can't get their act together because of their class warfare ideology.

GIGOT: If that's the case then Republicans are going to be thrilled because they will have a tax issue this fall.

MOORE: To run on, yes.

GIGOT: OK, when we come back, he's picking another fight. New Jersey Governor Chris Christie rolls out his plan to save the state's troubled pension system. And the public employee unions, well, they're not happy.


GOVERNOR CHRIS CHRISTIE, R-N.J.: You may not like this today. But ten years from now, when you have a pension to collect and health benefits to collect, you're going to be looking for my address to send me a thank you note.




CHRISIE: What we need to do is reform the system so that there are pensions available for folks when they go to retire. This isn't about promises made and kept. This is about special interests squeezing benefits out of the government and out of the taxpayers that we can no longer afford to pay. And I'm not going to stand for it.


GIGOT: Never shy for a reform fight, New Jersey Governor Chris Christie rolled out his plan to shore up that state's troubled pension system this week. And the public employee unions are howling.

The plan would roll back a nine percent pension benefit increase granted in 2001, require most public workers to contribute 8.5 percent of their salaries toward their pensions, and have workers pay 30 percent of their health care premiums. The plan would also raise the retirement age to 65 for most employees. New Jersey's current pension system is unfunded by a measly $46 billion.

Assistant editorial page editor, James Freeman, joins us with more.

James, how good is this Christie plan?

JAMES FREEMAN, ASSISTANT EDITORIAL PAGE EDITOR: Pretty good if you're thinking about the finances of the state of New Jersey. You mentioned $46 billion unfunded. It's even bigger. It's about $67 billion on the health side.

GIGOT: Wow. $100 billion.

FREEMAN: He reforms both.

GIGOT: $100 billion combination?

FREEMAN: Yes. Well, I should say, that's the official estimates.


Some people say it's more like a couple of hundred billion.

GIGOT: Right.

FREEMAN: But he destroys most of that unfunded liability if he gets this plan through. He would —

GIGOT: And most of these would just put the state employees in line with what the people in the private business world already have to live with.

FREEMAN: If those people have jobs right now in private business.

GIGOT: If they have jobs. But the retirement age in New Jersey right now is it, what 60, for public employees?

FREEMAN: Well, it kind of depends. You — what you've been allowed to do there is retire relatively early and still get great benefits. And part of the plan is penalizing people for retiring early and making 65 the norm, which it should be.

GIGOT: One hole in this plan that I've seen is that there's no proposal to transfer public employees to 401K, defined contribution plan systems, which you have, Dan has, I have, most public employees have. There's very few pensions in the private sector anymore. They're in the public sector. Why did he not make that kind of reform?

FREEMAN: Yes. It's a disappointment. That's the real reform you're looking for. He tried to do it in the spring. You'll recall there was kind of a modest pension plan he designed. The legislature passed it and kind of nipped around the edges, focused on new workers. But he basically, after — after failing in that effort to get 401K's in there, he kind of abandoned it. It's a disappointment.


Because that's the structural reform, Dan, I think would headache this system solve it going forward for 20, 30, 40 years. The problem with cutting pension benefits is that the next time you get a governor in who is sympathetic to the unions, they could just restore those benefits.

HENNINGER: Yes, that's pretty much why we're in the trouble we're in. There is one distinction in this plan though that I think is worth pointing out. Governor Christie's proposal would apply to current state employees.

GIGOT: Right.

HENNINGER: And a lot of states have been doing reforms, Arkansas, New York, even Illinois, Missouri and Mississippi, but those are all for new hires.

GIGOT: Right.

HENNINGER: The one state that's already done it for current workers is Colorado. They are not getting a cost of living adjustment. They raised the retirement age. And last month, an auditors report said, in doing this — it's law in Colorado now — they're pretty much on road to solvency. That's the crucial thing. You've got to bite off going at the unions right now, not 25 years from now.

GIGOT: And Christie — and Christie is doing that. In fact, he is clawing back that outrageous nine percent increase that was given in 2001.

What's changed about the politics here, gentlemen? Why is this different this time?

FREEMAN: How was he able to go so far?

GIGOT: Well, this was always fatal. I mean, as recently — Arnold Schwarzenegger tried to do something similar and got demolished by the unions. Why is Christie willing to take that on?

FREEMAN: He's got a Democratic legislature, but they have to face the voters next year. I would think he has instilled some level of fear in them. He's taken a strong stand and it's kind of fun for people in New Jersey, who are used to our politicians being the laughingstock of the country, that he's kind of a national leader now.

GIGOT: And his approval rating has stayed above 50 percent, despite the — the difficult cuts that he's had to make.

HENNINGER: I think the public knows there's nowhere to hide. California issued IOUs to pay it debts last year.

GIGOT: You didn't get a tax return. You got an IOU for a while.



GIGOT: So the voters are ready to do it.

FREEMAN: Yes. The math is clear in New Jersey. It doesn't work and that's to his benefit as he tries to reform.

GIGOT: All right. I think it's a very important — for the national political system and reform in a lot of states, that Christie be able to make this work.

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.

Dan, first to you.

HENNINGER: Well, Paul, a potentially catastrophic miss for school reform. We've talked a lot on this program about D.C. chancellor, Michelle Rhee's reforms down there. And in the mayoral primary, her patron, Adrian Fenty, the mayor, lost to Vincent Gray, the head of the city council, who has been at odds with Ms. Rhee. It's not clear if he's going to reappoint her. Barack Obama has put school reform at the center of his agenda. And I think we could use a wink and a nod from the president in support of Michelle Rhee right now in Washington.

GIGOT: We sure could.


FREEMAN: This is a miss, Paul. Of course, the Bernie Madoff scam was a tragedy for investors, but it's become a windfall for the lawyers, and specifically the trustee overseeing the liquidation of the Madoff firm. Irving Picard and his law firm collected $35 million for just four months of work recently. So the argument is that he's not being paid by the victims here. That it's the government essentially who pays him, or all the investing public. But I think we can get a better deal than $100 million a year for the Madoff liquidation.



STRASSEL: A hit for Mississippi Representative Gene Taylor, who, this week, because the first sitting Democrat to sign a petition to repeal Obamacare. Mr. Taylor is a long-time incumbent, but he's in a very red district with a tough race. And this is why this is important. I think some Democrats are beginning to understand, it's not enough to have just voted against the Obama agenda, that they are going to have to step up and work with Republicans to actually repeal or fix part of it. So this is a big moment.

GIGOT: The Gene Taylor Save My Seat in Congress Act.



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. And we sure hope to see you all here next week.

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