This is a rush transcript from "Journal Editorial Report," February 8, 2014. This copy may not be in its final form and may be updated.

PAUL GIGOT, FOX HOST: This week on "Journal Editorial Report," the CBO's new report shows ObamaCare will cost millions of American jobs. But the White House says this is good. We'll explain.

Plus, the president said there wasn't a smidgen of corruption in the IRS. But does this explanation of the targeting scandal add up?

And with California in the worst drought in years, could Democratic

inaction turn the tide for the GOP in the Golden State?


DOUGLAS ELMENDORF, DIRECTOR, CONGRESSIONAL BUDGET OFFICE: By providing heavily subsidized health insurance to people with very low income and then withdrawing those subsidies as income rises, the act creates a disincentive for people to work relative to what would have been the case in the absence of that act.


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

That was Congressional Budget Office director, Douglas Elmendorf, telling Capitol Hill lawmakers that President Obama's Affordable Care Act is a disincentive for people to work, adding fuel to Republican arguments that ObamaCare will hurt the economy. But the White House vehemently disagrees.

Here is the chairman of the Council of Economic Advisors, Jason Furman.


JASON FURMAN, CHAIRMAN, COUNCIL OF ECONOMIC ADVISORS: Doesn't say "losing jobs." It says FTEs. This might be somebody who used to work 60 hours because they needed health insurance and that was the only job that offered it. Now they can get a different job at 35 hours that doesn't offer health insurance but they are getting it through this, and they are switching from one to the other, and that is a better choice for that person. This has given them that option that they didn't used to have.


GIGOT: So which is it? A disincentive to work or catalyst to give people the freedom to choose where they want to work?

Let's ask Wall Street Journal editorial board member, Joe Rago; Washington columnist, Kim Strassel; and assistant editorial page editor, James Freeman.

Joe, a little background. Congressional Budget Office isn't some right wing outfit. This is the group that was cited many, many times by the White House when it was promoting the Affordable Care Act as an authority on the law.

JOE RAGO, EDITORIAL BOARD MEMBER: Right. Nonpartisan official budget scorekeeper is its Washington image.

GIGOT: The reason this report got so much attention was because they had tripled their estimate of the potential reduction in work under the bill. They first said it was going to be 800,000 jobs, equivalents. Now,

2.5 million, potentially. This is a huge revision.

RAGO: Huge revision. About 1.5 percent to 2 percent reduction in the number of hours worked. This is going to be a big hit to economic growth and productivity over time.

GIGOT: What did they find? Explain that. Summarize what they found.

RAGO: Right. Because the subsidies -- ObamaCare subsidies phase out as your cash income rises, it gives people an incentive to stay poor and say I'm not going to work as many hours, I'm not going to accept a promotion, I'm not going to go after a different job because I want to keep getting those subsidies.

GIGOT: This is sometimes called by economists the "subsidy cliff." If you make an additional dollar of income, suddenly your subsidy falls dramatically or, in some cases, goes away. You have to make that calculation when you're deciding should I take that better job? Should I take that promotion if it means I'm losing health care subsidy.

RAGO: Right. This is the marginal tax rate on an additional dollar of income, the implicit marginal tax rate. In some cases, if you earn that extra dollar, you lose everything. In some case, it's over 100 percent.

You are worse off if you earn that extra dollar.

GIGOT: Until you make a lot more money, you'll be worse off.

RAGO: Right. Economists call this a poverty trap.

GIGOT: The poverty trap.

RAGO: You're stuck in that lower-income position.

GIGOT: ObamaCare deepens that poverty trap, James?

JAMES FREEMAN, ASSISTANT EDITORIAL PAGE EDITOR: That's why there are going to be a lot of personal tragedies behind the numbers here. ObamaCare is officially doing -- exacerbating the problem the president talks so much about, is the ability of people to rise from the bottom of the income ladder to the top. Now you have a huge disincentive to keep working or to work more.

For the record, I think I speak for all the staff when I say, if you say us you're cutting all our hours down to 35, I don't think any of us would look at that as progress --


-- something we want to occur. Sort of an odd formulation there. But I think the significance of the CBO critique this week is this is a group that was pro-ObamaCare, helped it get enacted with its rosy economic forecast, now saying the economics of ObamaCare are negative for the U.S.


GIGOT: So, Kim, why is the White House pushing back so much as this and even saying, redefining this and saying this is a good thing, this gives people an opportunity not to work if they don't want to work?

KIM STRASSEL, WASHINGTON COLUMNIST: Because they have no choice. If you pass a law that the entire country hates and that is getting slammed with headlines about how people are losing their health plans and their doctors and paying more, and now you also get hit with a report saying this is undermining the engine of the economy, you basically have no choice but to send out your economists and come up with a bizarro explanation somehow suggesting underemployment is awesome. Because that is basically what they said this week. So this is a political way of trying to extricate themselves from this poll. It's still a problem for them, especially with midterms coming up because this report adds yet another amount of fuel that Republicans will hit them on.

GIGOT: What about this point the White House brings up, Joe, which is that this actually liberates people from job lock. Where you feel you can't take a new job because you lose your health insurance if you do, that because of ObamaCare, that will no longer be a concern. So this is a net benefit.

RAGO: Job lock is supposed to be about the flexibility to switch jobs or start your own business. Here they are giving people an incentive not to work, to leave the labor force or to work less. I don't think that is a good thing. They are also saying these aren't lay-offs, it's just people choosing not to work. There's really no difference if you think about a job as a contract between a seller of labor and a buyer of labor. This is really reducing the number of jobs, reducing the number of workers, and harming growth over long term.

GIGOT: This calculation the budget office made does not include the jobs employers might not offer because they said -- because of the mandate or because of the penalties that increase costs. They said they couldn't include that calculation because it was hard to model and the law has been delayed for a year.

RAGO: Right. Too hard to calculate so we're just going to ignore that. I think this is a significant underestimate and we'll see much larger harms over the longer term.

GIGOT: Kim, what are the political implications of this going forward? Republicans have been making a big issue of this this week. But Democrats have been fighting back ferociously, as we've heard. Is this just going to be one of those academic debates or will this have real political consequences?

STRASSEL: No. The importance of this report is what's been happening up to now, is you've been -- Democrats have been swathed by headlines that have to do with the practical effects of the law. Again, how this is harming individual Americans because of the way it's changed their health care. What this adds is now a big macro-economic argument that the Republicans are also going to be leveling against Democrats this fall that

the law is undermining the economy.

And given how fragile the economy is, that is something that will resonate with voters.

GIGOT: OK, Kim, thanks so much.

President Obama insists the IRS did not specifically target conservative groups apply for tax-exempt status, that it was simply an oversight, but new evidence released this week may prove otherwise. That's next.



OBAMA: That's not what I'm saying. That's actually --


BILL O'REILLY, HOST, THE O'REILLY FACTOR: No, no, but I want to know what are you saying. You're the leader of the country.

OBAMA: -- corruption.

O'REILLY: You're saying no corruption?



OBAMA: No. There were some bone-head decisions out of --

O'REILLY: Bone-head decisions. But no mass corruption?

OBAMA: Not even mass corruption. Not even a smidgen of corruption.



GIGOT: That was President Obama affirming to Bill O'Reilly that there was no corruption whatsoever within the IRS when it came to targeting conservative groups applying for tax-exempt status. But new evidence suggests the IRS knew what it was doing as far back as 2012. An e-mail from the Treasury Department's Ruth Madrigal to a group of IRS officials, including Lois Lerner, who used to run the tax-exempt organization unit, says, "Don't know who in your organization is keeping tabs on (C)4s. But since we mentioned potentially address them off plan in 2013, I've got my radar up." And "This seemed interesting." Interesting for sure.

But other than sparks flying, what is going to come of this?

Kim, let's start with you. You were following the hearing this week.

What did we learn that we didn't know before?

STRASSEL: The Obama administration has this new line that there was no corruption, no targeting, this is just all caused by some low-level employees in the Cincinnati office of the IRS, who didn't understand a confusing law on governing 501(c)4 groups.


GIGOT: Right. But did we learn something that contradicted that this week?

STRASSEL: Yes. The entire hearing, in fact, contradicted that. We found out the administration appears to have been thinking about and working on these regulations to govern 501(c)4 behavior going back to 2011. We also heard House Ways and Means chairman, Dave Camp, lay out all his evidence, yet again, as to why that entire narrative is false, given the fact you have plenty of employees who have now testified that this was run out of Washington, and that there was no confusion involved in this at all, that this was all about some sort of political agenda from D.C.

GIGOT: There is new e-mail evidence that links the interest in the Washington headquarters in these tax-exempt status outfits. And do we have any doubt that the decisions on delaying these tax-exempt decisions were made in Washington?

STRASSEL: None. We do know there was a Cincinnati line screener, who initially looked at one of these and flagged one of these Tea Party applications and said this seems to be something that would get some media attention, given all the news about these groups. Sends it off to superiors. After that, this operation was run out of Washington, out of Lois Lerner's office and out of the chief council office at the time, who is one of the only political appointees at the IRS.

GIGOT: Lois Lerner has resigned, of course, I think, with a pension, if I'm not mistaken.


GIGOT: And she took the Fifth before Congress. If nothing is amiss, there is not a smidgen of trouble here, as the president suggests, why would she take the Fifth, James?

FREEMAN: Good question. I think he now owns this problem because, last year, when the scandal came out, he was keeping his distance from it.

He's now repeating this falsehood that it was rogue employees in Cincinnati. As Kim said, this week, and going back to last summer, a lot of sworn testimony from IRS officials saying, no, it was run out of Washington.

I also think what was interesting this week was interview excerpts released by House investigators from former IRS chief, Steve Miller, saying all this focus on (c)4s in terms of new rule making was not the result of some flaw in the law. It was not the bureaucracy. It was coming from politicians, specifically Democratic Senator Carl Levin on the Hill.

GIGOT: Kim, the IRS has issued, as you suggested earlier, a new draft regulation on (c)4s, which we should say are nonprofit groups that can participate in politics as long as their effort doesn't exceed 49 percent of their work. This rule has created a lot of controversy. I think it's more than 20,000 comments now. The vast majority of them negative against this draft rule. The Republicans have asked the IRS's new chief, John Koskinen, to withdraw that regulation. Is that going to happen?

STRASSEL: At the moment -- Koskinen talked in front of this committee hearing this week. He did not give any assurances he was going to withdraw it? But there's going to be enormous pressure on the IRS to do so because, in effect, what these regulations do is formalize the targeting that came out last year. And it will silence, for the most part, the White House's political opponents that work in the 501(c)4 area. It is causing enormous outrage.

What also caused some outrage this week, too, is that House Ways and Means chairman, Dave Camp, pointed out that because the White House is claiming that these regulations were the result of the confusion, they put these regulations to clear up the confusion. Given that we now know, in fact, they were being worked on years ago, that appears to be a falsehood, the argument for why these regulations were created.

GIGOT: Joe, what do you think about the politics of this? Good issue for Republicans going ahead? It's clear the administration doesn't want to concede any ground on this.


RAGO: No. They are even rubbing salt in the wound by restoring IRS performance bonuses this week just to sort of --


GIGOT: Make everybody feel better about the quality and efficiency of the federal government.


RAGO: I think the White House is undermining its own agenda in other areas by refusing to demand accountability here. You saw this week on immigration, for example, the House Republicans basically bowed out because they can't trust the president to enforce the law. I think that is really corrosive to relations on Capitol Hill.

GIGOT: Not doing anything, not holding anybody accountable for the IRS problems also hurts the president's credibility when it comes to the National Security Agency because people say, hey, can't trust the IRS, why should we trust people with the power of surveillance? That's a big

problem for trust in government.

Still ahead, this week, the House passed legislation to help ease a worsening drought in California. But the White House threatens a veto, and Governor Jerry Brown says Congress should stay out. The latest battle brewing in the Golden State when we come back.


GIGOT: California is suffering one of the worst droughts ever. In fact, coming off its driest year on record, it threatens to inflict the worst water crisis in state history. So this week, the House passed GOP- backed legislation billed as a response. But the measure now faces a possible White House veto and opposition from Senate Democrats who claim the bill is nothing more than a political ploy to get votes.

With more, we are joined by Wall Street Journal editorial page writer, Allysia Finley.

Drought is one thing we can't blame on politicians, much as we might like. But you are arguing that the effects of this drought are worse than they need to be on the state. Why?

ALLYSIA FINLEY, EDITORIAL PAGE WRITER: That's right. For the last 10 years, basically, the government, federal government and state government to an extent have imposed these water restrictions, pumping restrictions at the San Joaquin/Sacramento Red River Valley. That has restricted water going south of the delta to the farmers in central valley.

GIGOT: So they haven't gotten their full allotment -- the farmers -- of water that they should, that they'd been guaranteed under previous agreements since 2006.


GIGOT: Where is that water going?

FINLEY: It's going out into the bay in many cases. It's just being flushed out into the ocean, or to wildlife protections like the salmon or delta smelt, wildlife refugees.

GIGOT: Even when there is no drought, they've been taking the water, and instead of storing it somewhere for a dry day, they've been pushing it into the bay?

FINLEY: That's the big problem is they haven't been storing it. Even in the wet years, like 2010, 2011, which tended to be -- you had heavier precipitation, they do not have it stocked up now.

GIGOT: What is the delta smelt have to do with this? Delta smelt -- I grew up -- I like freshwater smelt. Good eating.


But what is it about the delta smelt, why is this complicating matters?

FINLEY: OK, Yes. It's a free-range fish. This may sound ridiculous but it's threatened under Endangered Species Act.


FINLEY: That means you cannot take it or harass it or -- there are a bunch of various restrictions. So basically, these smelt have a tendency to swim into the pumps at the delta, which causes them to -- they get captured. And this is illegal under the law.

GIGOT: So they get priority in terms of water allocation to try to make sure the delta smelt are surviving and prospering? And they get priority over farmers in the central valley? I don't want to oversimplify this, but am I being fair?

FINLEY: I mean, that's how ridiculous it is. The delta smelt do have priority. 300 delta smelts were caught in the traps like a year ago and so, as a result, they flushed 8,000 acre-feet of water into the ocean.


FREEMAN: Well, I'm glad somebody is standing up for the smelt. It is an adorable little critter. But whether it is in danger is a question. It is a question of how much -- where do you draw the line? How much are you going to pay for species versus people?

GIGOT: Right.

FREEMAN: Even within the category of people, who pays the bill if you really want to do an extra million board-feed a year for smelt and other critters? This is why the Democrats especially want no coverage of this issue at all. Because it raises very difficult questions that they would prefer not to answer, especially in a difficult economy where people are naturally thinking more about jobs.

GIGOT: Especially the balance between environmental regulation and the well-being of people and jobs.

What would the House bill do?

FINLEY: Basically, the House bill would allow -- would give farmers priorities over the fish once it starts raining. Right now, the environmentalists are saying, once it starts raining, we want the water to go to the fish and the wildlife protections that right now nobody is getting. We want fish to get the first priority. The House bill would give farmers the first priority.

GIGOT: One Democrat, Jim Costa, in the central valley, voted for the Republican bill. But two others, Jeremy McNerny and Bob Garamendi, did not. Could this be political trouble? Short answer.


GIGOT: For Democrats.

FINLEY: For Democrats.

GIGOT: All right. OK. Thanks very much, Allysia.

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

of the week.


GIGOT: Time now for our "Hits and Misses" of the week -- James?

FREEMAN: Paul, this is a hit to North Carolina Governor Pat McCrory and the members of the legislator there who, last summer -- last year, I should say, took the politically courageous step of cutting unemployment benefits, reducing them. Now this makes them look very hard-hearted. They took a lot of grief in the media. But the results are in. More jobs. In fact, North Carolina is really one of the country's job creation stars since then. It's for a lot of reasons, including heavy taxes have to pay for these benefits and these benefits discourage people from seeking work.

So good for them.

GIGOT: All right, James, thank you.


STRASSEL: A hit for U.N. Ambassador Samantha Power, who made a bold statement by meeting with two members of the Russian band, Pussy Riot, women who had been imprisoned for criticizing Vladimir Putin. Moreover, when Russia's own ambassador to the U.N. made a snide comment about this meeting, Mrs. Power rounded on him, publically slapping him down in a series of tweets, in which she expressed solidarity with Russia's political prisoners. This is the attention U.S. officials need to be directing at Russia's human rights abuses.



RAGO: Paul, a miss this week for CVS shareholders on the news that the pharmacy is going to stop selling cigarettes. That is a $2 billion hit to annual revenue. And once you're hostage to the public health lobby, the demands never end. Get rid of cigarettes, now candy, sugary soda, junk food. But maybe there is hope giving changing public health politics. No tobacco products at CVS, but maybe they can make up the money on recreational marijuana volume.

GIGOT: See how many states will legalize that.

All right, remember, if you have your own hit or miss, send it to us at jer@FOXnews.com. Be sure to follow us on Twitter @jeronfnc.

That's it for this week's show. Thanks to our panel and to all of you for watching. I'm Paul Gigot. Hope to see you right here next week.

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