This is a rush transcript from "Journal Editorial Report," August 13, 2011. This copy may not be in its final form and may be updated.

PAUL GIGOT, HOST: This week on the "Journal Editorial Report," Wall Street's wild ride continues as markets here and abroad react to the credit downgrade and escalating debt problem. Is it 2008 all over again?

And is Obama losing the left. Conservative criticism of the president is nothing new. But now liberal elites are piling on.

Plus, big labor spends millions in Wisconsin's recall elections and comes up short. What the Republican victories means for other states attempting union reform.

Welcome to the "Journal Editorial Report." I am Paul Gigot.

First up this week, is it 2008 again? Many are asking that question after this week's market mayhem in the U.S. and across the globe. So what's different now and what is the same?

Joining the panel this week, Wall Street Journal columnist and deputy editor, Dan Henninger; columnist, Mary Anastasia O'Grady; and senior economics writer, Steve Moore.

Mary, the big question people want to know the answer to is, are we headed for another recession?



O'GRADY: You know --

GIGOT: That's what we pay you, Mary, to know.


O'GRADY: On the one side, you have a lot of talk about what great shape corporate balance sheets are in.

GIGOT: Right.

O'GRADY: But let me give you another statistic. The National Federation of Independent Businesses this week --

GIGOT: That is the small businesses lobby.

O'GRADY: Yes, they released their small business optimism index, which declined for the fifth month in a row. And 10 percent of the small business owners said that only 10 percent said they expected to increase employment. And 11 percent said they expected to have fewer workers over the next three months. Small business is such a key to the health of the economy that, if the small business sector is so negative, it is not a good sign about the health of the recovery.

GIGOT: Steve, the comparisons with 2008 are all over the place. What makes -- are we better or worse off than we were going into the recession?

STEVE MOORE, SENIOR ECONOMICS WRITER: Look, I don't think it is 2008 again. I believe what is happening now with the U.S. economy is a kind of repudiation of Obama-nomics. Virtually everything that Obama has done with the respect to the economy has been, in my opinion, negative and as actually and led to more unemployment. This is also a repudiation of the Keynesian economic model, Paul, where we have thrown amazing amounts of money, trillions of dollars of spending at this. And in addition to that, we have seen pedal-to-the-metal money creation as well --


MOORE: -- from the Fed, and I believe --

GIGOT: But, Steve --

MOORE: -- it hasn't worked.

GIGOT: OK, it hasn't worked, but then, why is it better than 2008?

MOORE: Well, because balance sheets are a little better off than they were back in 2008 --


GIGOT: Corporate balance sheets?

MOORE: Corporate -- and even household balance sheets have improved, some what. But the problem is government balance sheet is what looks really rotten. And I do think what has really sparked this market sell off and a kind of fear of recession was the debt deal, where people said, wait a minute, this is not good enough given the size of this enormous debt.

GIGOT: Dan, how do you see it?

DAN HENNINGER, DEPUTY EDITOR & COLUMNIST: Well, I think there are some similarities to 2008. They may not be economically technical similarities. But here, in 2008, what happened is Sunday evening in September 2008, Lehman Brothers goes down and suddenly we are into a financial crisis. That was the bursting of the housing bubble, the famous housing bubble. Prices had gone up to unsupportable levels. We had editorialized about it for at least two years. And then suddenly it goes like this.

What we are seeing now is the bursting of the federal spending bubble. And all we needed was S&P to sort of flip the switch and suddenly everyone realizes that what we have been doing 25 years is no longer supportable. So the question is, is the political market place going to put in the place the right policies to react to them as they did not do to the housing bubble and --

GIGOT: Housing prices have no fallen by 20 to 30 percent in an awful lot of markets. They can't fall that much.


HENNINGER: With the government doing all it can to thwart that repricing mechanism in the housing.


GIGOT: Sure, I agree with that. But how much further can they fall?

O'GRADY: I think there is another similarity there to 2008, and that is that markets are nervous about what is going on in Europe, and in particular what the nervousness is about is that U.S. money markets are holding a lot of exposure to the European banks which have exposure to European sovereign debt.

GIGOT: Especially, money market investment funds.

O'GRADY: Exactly. And what we are learning here is that every time the Fed keeps interest rates too low for too long, money markets and other people who are looking for yields start to go to the other places where there is more risk because they can pick up more yield. If all these money market funds couldn't get any return in the U.S. -- they have gone to Europe and they bought French banks, which have big exposure to Italy and Spain. And I think there's a lot of nervousness about what may happen now.

MOORE: But you know what, Mary? I think there is something else going on in Europe that is very much glossed over in the United States, Paul, which is Europe also has had for 40 years these obese welfare states, incredibly generous entitlement programs that are even more generous than in the United States. And I think the weight of that system is kind of collapsing on collective Europe. And that should be a warning signal, in my opinion, for the United States.

O'GRADY: Well, of course, Steve. But the fact of the matter is --

GIGOT: That's not news.

O'GRADY: -- the concern is the exposure --

GIGOT: Right.

O'GRADY: -- that U.S. Money market funds might have to that collapse.

GIGOT: All right, Dan, so the Federal Reserve this week said it will extend a near-zero interest rate policy for another two years, to the middle of 2013, to try to reassure people that interest rates are not going up any time soon. Is that the answer?

HENNINGER: That is most certainly not the answer. That so smacks of desperation, like the Fed is saying, what else are we supposed to do? Obviously, the Congress and the president have run out of ideas. The president certainly has run out of ideas.

To Steve's point, the White House for two and half years has been operating out of this Keynesian context, which is that you can inject a lot of money into a recessionary economy, you stimulate demand, and that revives the economy. That --

GIGOT: You substitute government spending for private spending.

HENNINGER: Right. Right. And that hasn't worked. We know it hasn't worked. And as to whether we are in a recession, it is really semantics. We are in a double dip something, obviously. You can't go through a recession of that depth and come out of it growing at less than two percent. So what is plan B?

GIGOT: Well, plan B in some minds is inflation of four to six percent.

Ken Rogoff, the distinguished Harvard economist recommends that as Federal Reserve target, Mary. Is that something that is -- is that the answer? That will certainly degrade the amount of debt.

O'GRADY: Remind me, Paul, of the time that the central banks said, OK, we are just going to have four percent inflation --


-- and it's going to stop right there.

GIGOT: On a dime. We'll just stop that on a dime.

O'GRADY: Yes --


GIGOT: 4, percent, no more.


O'GRADY: Exactly. That is really where the risk is. Of course, once people think that that is what they are going to do, you get inflationary expectations that tend to send inflation much higher. People start misallocating capitol, all of kinds of bad things happen.

MOORE: And gold goes to $2000.


GIGOT: Well, it is good if you are a gold investor, but not so sure how much that reassures everybody else.

OK, it is the "Bad News Bears" here.


But we'll keep watching this.

When we come back, the leadership vacuum. President Obama's response to the economic turmoil and why even liberals are beginning to the sour on the candidate who promised hope and change.



PRESIDENT BARACK OBAMA: Markets will rise and fall. But this is the United States of America. No matter what some agency may say, we always have been and always will be an AAA country.


GIGOT: That was President Obama on Monday, responding for the first time to last Friday's S&P downgrade. The Dow Jones Industrial Average, which had already fallen 410 points that day, fell another 20 while the president was speaking, and was down 634 points at the close, the worst one day drop since December 2008.

The president's response drew its share of criticism this week, not the least from the liberal elite. New York Times columnist, Maureen Dowd, had this to say, "His inability to grab a microphone and spontaneously assuage America's fears is strange. He doesn't like the bully pulpit, just the professor's lectern."

We're back with Dan Henninger and Steve Moore. And Dorothy Rabinowitz joins the panel.

Now, Dorothy, we have always known the president was more professor than populist tub thumper. So why suddenly is this seen as -- that was supposed to be an asset in 2008. Why is it suddenly a problem?

DOROTHY RABINOWITZ, EDITORIAL BOARD MEMBER: It is called repressed rage, I think.


GIGOT: On the part of whom?

RABINOWITZ: On the part of this left media that suddenly bellowed in one great big group this week. It came in a drove (ph). And you know, something about suppressed resentment makes it much more powerful. You had people, not just Maureen Dowd, but you had left wing sort of liberals -- Professor Drew Westen, who said, and I quote, "We are hostage to a president who is not just a Republican extremist, but a president who will do anything to get elected."

GIGOT: What is the root of this resentment, this rage? What are they angry about?

RABINOWITZ: It is hard to say. But basically, reality is hitting them hard in the fast. And Westen said he is not what we thought. And they thought wonderful things about him. He said, this is a man, who we forgot when we -- we forgot the fact that he had a completely, quote, "undistinguished record." He published nothing. He said -- he voted -- I forgot -- 200 some times --


GIGOT: This is not news, Dorothy. This isn't a criticism of him that conservatives offered, that many Republicans offered in 2008. What I want to know why is the left suddenly turning on him now? He gave -- he's done what they wanted. They wanted the stimulus, he gave it to them. They wanted national health care, he gave it to them. Yes, the public option isn't part of it, but it is the biggest victory for the state expansion --

HENNINGER: Dodd-Frank.

GIGOT: Dodd-Frank. He gave them an awful lot of what they want? What is the problem now?

RABINOWITZ: Well, the confrontation with reality is he is not what they think. There are things that you can't avoid, even if you are a complete partisan, and he looks, objectively speaking, quite terrible. His public performance is terrible. And the fact that you have one signal, two signals in the respectable left media, this guy is now who we thought, opened up the sluice gates of resentment of everything that they think.

HENNINGER: I think something else is going on. There is a kind of political infantilism that has crept into our politics.

GIGOT: Infantilism?

HENNINGER: Yes. It's puerile -- I mean, both sides really, they would rather engage in political street fighting with the other side, just have it out, then win. In this case, the left wants Obama to go out there, as MoveOn.org just did a contract with for the American Dream in which they have a 10 bullet points demanding massive spending and new taxes.

GIGOT: So is it a problem that he's not -- on the left, they're criticism of Obama that he is somehow too detached --


GIGOT: That he's not fighting hard enough for what they want?

HENNINGER: He's not attacking the right, the rich and the corporations hard enough to make them feel good. The same way we just went through this fight over the debt, and the right wanted to push the government into default, saying, if we just refuse to raise the debt ceiling, go into default, we'll win.


MOORE: Dan, I think there is one other thing that you are not touching on that I think is important that has developed in the last couple of months.

And, Paul, that is the issue of whether this president is up for the job, whether he can handle these big economic problems. He was a community organizer and he doesn't have any kind of business or private sector experience. And I think that is a big, big defect for him as he faces reelection.

It is interesting, if you look at the press conferences that he holds now. For the first two years, the press gave him worshipful treatment. Now they are starting to question him. They saying, wait a minute, don't you take responsibility for the kinds of things that are happening as he tries to blame it on Japan and high oil prices and the tsunami. So the press is turning on him as well?

GIGOT: But is all this happening because, in fact, the results have not --


MOORE: Yes, of course.

GIGOT: I mean, isn't that --


GIGOT: -- was this is all about.

MOORE: Of course.

GIGOT: If the economy were growing at 3 percent, wouldn't everybody be happy?


RABINOWITZ: Yes, but that is not happening. But give them credit on the left, which we never do. I wouldn't.


But in this case, they see that this cannot be defended. And I can say that when the election comes and there is effort, which will happen, on the part of the left media, to go back and say anybody but a Republican president, they will have to remember that the Internet never lies. And all of these pronouncements against Obama will be there in living color to remind them.

GIGOT: They will vanish into thin air, I will predict.

RABINOWITZ: They will not disappear.

GIGOT: Because they will come back and support him, because they fear Republicans --

RABINOWITZ: Oh, yes. Of course.

GIGOT: -- more than they are disappointed with Obama.

RABINOWITZ: Absolutely.

GIGOT: Steve, what about the president's proposals now on the economy? He has patent reform, extending the jobless benefits for even a greater period of time, extending the pay roll tax cut for another year, an infrastructure bank. Are these things that are really going to generate growth right now?

MOORE: Not only will they not generate growth, but I don't think even the American people really believe they are going to work. Most people understand the problem has been too much government spending and too much debt. When the president keeps loading on with essentially plan B being the failed plan A, I think it's simply says this guy doesn't have any new ammunition to shoot at the recession. I think that's a big problem with him.

And I think the biggest problem he faces electorally is not with the left, but it is Independent voters, who voted for hope and change, and now they are seeing hope and change is not working out so well.

HENNINGER: And he understands that. He understands that he has to attract the Independent voters --

GIGOT: Right.

HENNINGER: -- which is the reason he can't throw red meat to the left of his party.

GIGOT: That's why he can't go in for this agenda, which would be saying big government jobs program, with the government hiring, al la FDR, literally millions of Americans.


GIGOT: That's what the left really wants, is another $1 or $2 trillion stimulus. Is that why he can't do it?

HENNINGER: That is why he can't do it. But that's -- they don't believe that. They believe, if he does that, he will win. In fact, he will lose, and his people know that.

GIGOT: OK, All right.

When we come back, a bad night for big labor. After pouring million into Wisconsin's recall election, unions came up short on Tuesday. What it means for the other states that are attempting reform.





GIGOT: They promised political revenge and poured millions of dollars into the effort, but this week, big labor came up short in its effort to recall GOP lawmakers in Wisconsin who had supported Governor Scott Walker's push for collective bargaining reform. Four of the Republicans retained their seats, denying Democrats control of the narrowly divided State Senate.

Senior editorial page writer, Collin Levy, has been following this and joins us with more.

Collin, both sides are claiming victory. Republicans are saying, well, we kept the majority, but Democrats are saying, look, we won because we have picked up at least -- we picked up two seats. Who's right?


COLLIN LEVY, SENIOR EDITORIAL PAGE WRITER: I don't think there is any question the Republicans took the day. Unions really, this was supposed to be their big coup of political revenge and, instead, they picked up two seats. They might lose one -- another seat of a Democrat in recall elections next week. And in the end, they are going to end up having spent about $30 million. They're not going to have control of the legislature. And they ended up with pie in their face. Think about the way they've treated this. This was their --


This was their big battle. They had TV cameras everywhere, the protests. This was union's big moment to sort of reclaim the political momentum and they just didn't get it.

GIGOT: Governor Walker was quite conciliatory afterwards, saying, we need to work together, Democrats and Republicans. Do you think he and Republicans feel at all chastened? And maybe in that sense, Democrats achieved their goal. They'll try -- the Republicans will be less aggressive with the agenda?

LEVY: No. I think it's good that Walker was gracious here. That's probably the appropriate way to be. Quite frankly, there is going to be an effort to recall Walker at some point, and so he's going to want to keep the political tensions low. But there is no question that this took the wind out of their sails on that effort. And this is generally going to be a bounce for Walker. And you look at the way people responded to this. It is a boost for his economic policy. He passed comprehensive tort reform --

GIGOT: Right.

LEVY: And he passed a budget without raising taxes. And people are looking at that and saying, well, maybe it's time to move on.

GIGOT: What is the political lesson, larger political lesson, Dan, for other states that try this? You can try this and survive?

HENNINGER: You can and survive if you have the right policies. One of the things that has resulted from this reform is, for instance, local school districts in Wisconsin have been able to re-do their contracts and put their finances back on an even footing.

GIGOT: And avoiding layoffs.

HENNINGER: And avoiding layoffs. That was kind of the point. These states are somewhat analogous to what is going on with the sovereign debt crises in Europe. They were all under tremendous fiscal pressure. Wisconsin, New Jersey, California, they had spending that had outrun their financing. And that was the point of Scott Walker's reform, and now it seems to be working.

GIGOT: What will happen, Steve, in states like Ohio and elsewhere? We have something on the ballot in November that repeals what John Kasich has been trying to do with collective bargaining reform. Is this going to give unions a pause about whether to invest that much money in this cause?

MOORE: Look, I think this was a huge victory for fiscal responsibility, not just in Wisconsin but -- look, it the unions understood this wasn't just about Wisconsin, but about other states, like Ohio and California, and other states that have been trying to take on these excessive union benefits for public employees. This sends a resounding message that voters do want change. They do understand that when a public employee is getting benefits that are twice as generous as what the private-sector taxpayer is getting, that that simply is not fair. I think the implications for this for other states is very positive that we can turn these things around and balance state budgets.

LEVY: By the way, too, that is if other states hear about it. And if everybody hears about it, I think it is worth noting that when this whole battle was going on, the protests, do you remember? It was 24/7 coverage. It was unbelievable.

GIGOT: Right.

LEVY: Now there's been barely a blip. I mean, there's been a few editorials but no one has really noted the fact that the unions sort of got their --


-- got their --


HENNINGER: One other quick point, Paul. That reform included eliminating the automatic deduction of union dues for political purposes.


GIGOT: Right.

HENNINGER: And other states like Kentucky and Indiana and Florida are doing the same thing that. That is cutting off the political oxygen for the unions and the Democratic Party.

GIGOT: What about the larger lesson for November 2002, Steve? Does this mean that Wisconsin is safe for Barack Obama or is this a state now that maybe Republicans could pick up? They haven't won it in a presidential election in a very long time.

MOORE: I think it means, Paul, that the American people, voters, especially Republicans and Independents, are understanding that you have to bring the government spending under control. And it's going to take some tough love. And that's what happened in Wisconsin. And it is reassuring to know that voters are willing take dosage of that to get budgets balanced. So I think it's a very positive thing for Republicans with a fiscally conservative downsizing message.

GIGOT: OK, Steve, thanks.

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


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

Dorothy, first to you.

RABINOWITZ: Here is a hit to those sane people of London who signed a very much signed petition outlawing all payments, benefits to rioters and looters in London on the grounds --


-- that nobody, no taxpayer should have to contribute to people who destroyed, burnt and loitered and disrespected the country that nurtured them. So many people signed the petition that the site crashed yesterday.


GIGOT: All right, thanks.


O'GRADY: Paul, this is just what we need this week, a hit for human beings or at least human ingenuity. I am talking about the news that Apple is now the most valuable company in the U.S. And it took -- overtook Exxon as the most valuable in capital -- market capitalization. And some people argue that natural resources are necessary for prosperity. But I think the Apple sure shows that what it is about really is human ingenuity, allowed to flourish in the race for making us better off, I'd bet on that every time.

GIGOT: Hear, hear.

All right, Collin?

LEVY: Paul, this is a hit to NASA and the Virgin Group for announcing this week they signed a contract for the first space tourism company, which by the way has already gotten about $55 million in deposits for -- want to be space tourists. It is a good step for NASA, which grounded the space shuttle, so this is a good move to the new era. And since everyone thinks that Virgin Chairman Richard Branson is from another planet anyway, this --


-- should be put to good use.

GIGOT: All right.

This is a cheerful posse here.


We have to have you all back.


Everybody is spreading good news and good cheer.

Thank you all very much.

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

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

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