S&P Chief Explains Credit Downgrade; Rep. Paul Ryan, Bill Miller Talk Economic Policy; Tim Pawlenty on Iowa Chances

The following is a rush transcript of the August 7, 2011, edition of "Fox News Sunday With Chris Wallace." This copy may not be in its final form and may be updated.


A military helicopter is shot down in Afghanistan, killing U.S. Special Operations troops. We'll have a report.

And America's credit rating is downgraded for the first time ever.

Here sit Wall Street and Main Street. We'll talk about the hit Washington took Standard & Poor's in an exclusive interview with David Beers, head of the agency's government rating unit.

And with the U.S. deeply in debt, what can and should Washington do to boost the economy? We'll ask Paul Ryan, Republican chair of the House Budget Committee, and Bill Miller, head of Legg Mason Capital Management.

Then, it's showdown time in Iowa. We'll talk with a candidate who's got a lot riding on the first caucus state, Tim Pawlenty.

And from the Thursday FOX News debate to the crucial Saturday straw poll, the stakes are high. We'll ask our Sunday panel who has the most to win or lose in Iowa.

All right now on "Fox News Sunday."

And hello again from Fox News in Washington.

Before we get to the economy, we want to bring you the latest on that terrible story out of Afghanistan. Insurgents shot down a U.S. military helicopter Saturday, killing 38, including 22 Navy SEALs, most from the same unit that to took down Osama bin Laden.

FOX News correspondent Conor Powell has more from Kabul -- Conor.

CONOR POWELL, FOX NEWS CORRESPONDENT: Chris, this is a devastating blow to the very small, tight-knit community of Special Operations forces here in Afghanistan. It is a single deadliest day for American troops since the war started nearly 10 years ago. The military is still investigating the cause of the crash. But the Taliban were very quick to claim responsibility, saying they shot it down with a rocket-propelled grenade.

Now, details are sketchy, but it appears that this force was beginning to launch a raid on the Taliban compound in Wardak province just southwest of Kabul when a Taliban rocket did take this helicopter down.

Now, in recent months, the U.S. military here in Kabul has been fond of saying that they wrestled the momentum away from Taliban, but this attack, this very deadly attack is all the more evidence that the Taliban are still capable of launching attacks against U.S. and Afghan forces, and, Chris, this war is nowhere near game over.

WALLACE: Conor Powell reporting from Kabul -- Conor, thanks for that.

Now, the U.S. economy.

Standard & Poor's has downgraded the U.S. credit rating Friday night for the first time ever from AAA to AA-plus. That means U.S. treasury bonds are no longer considered the safest investments in the world.

Joining us now, David Beers, head of S&P's government debt rating unit.

Mr. Beers, what's the practical effect of your downgrading. If the U.S. debt is now riskier, does that mean that investors can and should demand higher interest rate to buy U.S. treasury bonds?

DAVID BEERS, STANDARD & POOR'S: Well, I guess there two parts to that. One is that in lowering the rating one notch to AA-plus, what we actually are saying is this, that a mild deterioration in the U.S.'s credit standing relative to AAA and we'll find out tomorrow what the market makes with that. But based on historical experience, we wouldn't expect that much financial impact in terms of higher interest rates for example.

WALLACE: Well, let me ask you, though, about the markets. The Tel Aviv stock market, one of the few that is in operation on Sunday morning, closed -- rather opened 6 percent down and then they had to close it for a while because of the volume of trading.

Can we expect the same kind of very strong downward pressure in Asia tonight and in the U.S. markets tomorrow?

BEERS: Well, you know, I'm no better than you in forecasting the stock market. But I think it's important to put this in perspective for your viewers -- because a lot of what's worrying the markets is the unfolding story in Europe and also a perception from a global economic perspective that the world economy may be slowing down.

So, I think the markets are reacting to a lot of factors, not just what S&P said on Friday.

WALLACE: Your downgrade -- and I read it -- focuses much on the political gridlock in Washington as it did on the economic situation in this country. Do you hold Republicans or Democrats more responsible for dysfunction here? And any compromise that they end up coming up with it, do you need to see a mix, a combination, of both entitlement reform also revenue increases?

BEERS: Well, Chris, you know, in this country, Congress and the administration are jointly responsible for the conduct of fiscal policy. And -- so, this is really not about either political party. It's about the difficulty of all sides in finding, you know, a consensus around fiscal policy choices, now and in the future.

WALLACE: But do you need to see the mix? Does any compromise have to have both entitlement reform and revenue increases to be credible? BEERS: Well, we think credibility would mean that would -- any agreement would command support from both political parties because, of course, the composition of Congress and, of course, the administration could change from 2012 onwards. But the key thing is -- yes, entitlement reform important because entitlement is the biggest component of spending and they are the part of spending where the cost pressures are greatest.

WALLACE: The White House, as you know, is not happy with this decision and, in fact, they have accused S&P of amateurism. They say when they went through your numbers, they found a $2 trillion overstatement of what the debt would be. And when they pointed that out to you, they you simply changed the rationale but continued to downgrade the debt.

BEERS: Now, of course, that's a complete misrepresentation of what happened. And here, we're talking about highly technical assumptions about projecting, you know, budget base lines far into the future. And when we made the modifications that we did after a conversation with the treasury, it doesn't change the fact that in our estimation, that even with the agreement of Congress and the administration this past week, that the underlying debt burden of the U.S. government is rising and will continue to rise most likely over the next decade.

WALLACE: I got about a minute left and I want to ask you two questions. So, I'm going to try to get my questions brief and I'll ask you to do the same with your answers.

S&P is widely seen as one of the villains in the housing bubble for the strong rating that you gave for the subprime mortgage securities. Some people are suggesting that this downgrading is an effort to get your reputation back?

BEERS: Yes. Well, that's completely untrue. And as a matter of fact, the group that rate, the one that rates government ratings has an excellent track record in terms of what ratings are designed to do, which is to provide a meaningful indicator of credit risk.

So, as far as the track record of our ratings are concerned, we think they are very robust. Other people think they are robust, too. And we think that will continue to be the case.

WALLACE: And very briefly, Mr. Beers, given the economic and the political situation in the U.S., which will we more likely to see -- an upgrading of U.S. debt back to AAA or further downgrades?

BEERS: Well, we have a negative outlook on the rating and that means that we think the risks currently or the rating are to the downside.

WALLACE: Mr. Beers, we're going to have to leave it there. We want to thank you so much for coming in and talking with us today, sir.

BEERS: Thank you, Chris.

WALLACE: The S&P downgrade was one more blow in a week when the Dow Jones fell almost 6 percent. And the latest jobs report showed unemployment still over 9 percent.

Here to discuss what can and should be done to bolster the economy are Congressman Paul Ryan, Republican chair of the House Budget Committee who's in his home state of Wisconsin. And here in studio, Bill Miller, head of Legg Mason Capital Management, who beat the S&P 500 index for 15 straight years.

And, gentlemen, welcome to "Fox News Sunday."


WALLACE: Let's start with the S&P downgrade.

Congressman Ryan, what do you think of the decision, if U.S. is forced to pay more in interest rates to borrow, to go further into debt, isn't that going to add tens of billions of dollars to the deficit?

REP. PAUL RYAN, R-WISC.: If we go up another point, it adds about $1 trillion or more over the 10-year window. So, yes.

Clearly, I'm not very surprised of this downgrade. We more or less saw this coming because we're on the wrong fiscal path. We'll find out tomorrow what kind of spike in rates we're going to get.

But, obviously, not only does it hurt the federal government in its ability to close the deficits, but it hurts people. You know, car loans, home loans, all these things are going to go up.

And so, it's because Washington has not gotten its fiscal house in order. To me, this is more vindications of our action. We passed a budget which according to somebody from S&P yesterday would have prevented this downgrade from happening in the first place.

We passed a budget that would make debt peak in two years at 74.5 percent GDP and it goes steadily down from thereon after. So, we put out a plan, very specific plan to address the situation, pay off the debt, balance the budget, reform the tax code to create jobs in the economy. You got to have two things, spending cuts and debt reduction, along with economic growth and job creation. And this isn't going to help us get that.

WALLACE: But, Congressman Ryan, I just want to follow up on that before I bring in Mr. Miller. Isn't that a little bit like a doctor saying, "I did the operation perfectly" but the patient died?

RYAN: Well, no, we haven't done the operation.

WALLACE: Sir, let me just finish. In its announcement S&P condemned the political dysfunction here in Washington, the gridlock here in Washington. Let's up what they said.

"The political brinksmanship of recent months highlights what we see as America's governance and policymaking being less stable, less effective and less predictable than what we previously believed."

I mean, what they seem to be saying, and there's no question that if they had pass your budget that would have solved the debt problem. But the chance -- well, they weren't going to pass your budget unless all the Democrats and the president simply killed over it (ph).

Isn't the failure to compromise, the two sides, isn't that part the problem?

RYAN: Let me first say, both political parties are responsible for the mess we have right now. This is not a Republican or Democrat only problem. This is both parties got us to where we are.

I would argue though that over the last couple years, we're going deeply in the wrong direction. The kind of compromise you need to actually fix the structure of our debt, just like the gentleman just said previously, our entitlements. And, unfortunately, our partners on the other side of the aisle, the president and the Senate, have always been unwilling to put a specific plan out there to address entitlements, specifically health care entitlements.

The president just created two health care entitlements, expanded Medicaid a third and then put this new rationing board in charge of Medicare. And so, they are unwilling to open up and restructure these entitlements which according to S&P are the primary drivers of this debt.

So, yes, we haven't been able to get the kind of compromise because our partners in the other side of the aisle have been unwilling to reform the programs out of the claws of our future debt problem, and the reason for this downgrade.

WALLACE: Let me bring in Bill Miller on this one.

How do you expect the markets to react to the downgrade? And do you think that the downgrade will cause interest rates to rise both for the treasury, our government borrowing debt and filtering down to somebody who wants a home mortgage or somebody who wants a car loan?

MILLER: The Tel Aviv Stock Market gives you a good early indication of at least the initial reaction of markets. The S&P downgrade injects further uncertainty into the markets. The markets hate uncertainty.

But contrary to what I think people may expect, I don't expect we'll pay more for interest rates. The downgrade was not an economic event. It was a symbolic and psychological event, an important one.

But, usually, what the S&P gentleman said about it's a meaningful indicator of credit risk -- the U.S. is not a worse credit risk now than they were two weeks ago. We have our own reserve currency. We can print money, and our fiscal situation has not changed in the last couple of weeks. We'd actually made a move to do it better, make it better.

WALLACE: I want to get back to the market side, though, because obviously, that's what people are really focusing on immediately. You predict a bad day on Wall Street tomorrow?

MILLER: The Wall Street had a bad week last week. There was a lot panic overall on the markets. So, I'd expect a lot of volatility. And again, it's all uncertainty, Chris. That's the big issue. We just don't know. We'll just see how the markets react.

WALLACE: All right. I want to get to the central question, which is, at a time when growth for the first quarter of this year was less than 1 percent in the first half of the year, what can Washington -- what can and should Washington do to boost the economy?

Mr. Miller, let me start with you. The debt deal that was signed this week -- and let's put it up on the screen, will cut $25 billion in 2012, $47 billion in 2013, and $59 billion in 2014. Will that put a drag an already weak recovery?

MILLER: Well, those numbers are not very large. So, that by itself won't put a drag on the recovery. The issue is the opposite, which is there is very little on the fiscal and spending side that the government can really do to stimulate the economy in the short run.

On the monetary side, interest rates are already zero. So, there's very little the Fed can do absent a new series of large scale asset purchase. That's what got market worried, which is the normal policy levers are not in place to stimulate economy, at least in the short run.

WALLACE: But the spending cuts don't worry you at this point.

MILLER: Not those levels of spending cuts. I do think there are some automatic triggers that may come in and will cause problems in fiscal 2013.

WALLACE: Congressman Ryan, let's talk about, you know, what fiscal leverage maybe left. The president wants to extend the payroll tax cut. He wants to extend unemployment benefits. He wants to put some seed money into an infrastructure bank.

I know the stimulus is a dirty word. But could you support any of those as a short term way to maybe give a little boost to the economy?

RYAN: I don't want to repeat the same mistake. This is the same economic reasoning, policies and logic that the president used to sell his stimulus. He said it would keep unemployment from getting above 8 percent. It didn't. It gave us $1 trillion in debt hang over. It would simply exacerbates our debt problems in my opinion. I won't go through every one of those individual issues like unemployment insurance and others. But I really think we should do tax reform.

See? Those things are all temporary. They are demand-sided. And they are proven not to work and they still facilitate uncertainty for businesses.

And so, what's plaguing our economy today, especially for the small businesses who create most of our jobs is this just increases the amount of uncertainty as to what the future holds for them on regulations, on taxes, on interest rates and all of those things. So, this exactly exacerbates those problems.

We think more certainty. More certainty on regulations, on taxes, on spending, on debt, on price stability with sound money are the key to this. And so, I really think the best thing we can do right now in divided government, I would love to see, is fundamental tax reform to get us a tax system that's internationally competitive and does not penalize businesses from making things in America and for hiring people.

We have a very uncompetitive tax code, riddled of special interest rates and loopholes. Let's deal with that and I think that would be a pro-growth strategy. It's what we propose in our budget. I hear talk from some Democrats that they are interested in taking look at this. So, I've always that tax reform is the best to go. And I do believe that getting a trajectory in place, real entitlement reform that shows the world and the country we are getting our debt under control. It will help take pressure off future tax increases and interest rate increases and will help the economy today.

WALLACE: Mr. Miller, let's lay this out in this kind of a side by side comparison. Let's them put up on the screen.

As we said, the Democratic plan to boost the economy is to extend the payroll tax cut, extend unemployment benefits and create an infrastructure bank.

The Republican plan and, obviously, we're just doing this in bullet points is cut corporate taxes, rollback regulations, and expand the U.S. energy production.

Question, in very broad strokes, when you look at the Republican plan, the Democratic plan -- which is the better and the more effective plan to boost economy and which would get more buy in from the markets?

MILLER: I agree with Congressman Ryan. What the markets want to see is reduction in uncertainly. So, fundamental tax reform on the corporate and on the individual side, broadening the tax base, lowering marginal rates I think is critically important.

Some of the Democratic plan, the short term payroll cut, that's a good idea. Unemployment extension, that's a good.

So, there's part of both. But, fundamentally, we need tax reform.

WALLACE: Congressman Ryan, in the next two weeks, congressional leaders are expected to name -- in fact, they have to name the members of the so-called super committee, which is going to have to try to come up with another $1.5 trillion in deficit reduction by Thanksgiving, talk about having a deadline.

Have you been told that you're on the committee? And do you to be on the committee?

RYAN: No, that's a good question. No, I have not been told. I haven't talked to the speaker. He hasn't made his selections yet. He has until August 16th to make his selections.

I would put this committee in perspective. I wouldn't call it super. It's a select committee, tasked with getting about $1.2 trillion to $1.5 trillion in savings and spending cuts as we see them. We proposed $5.8 trillion.

So, we obviously have shown plenty of ways of arriving at this kind of a number. We just have to find out whether our bipartisan friends on the other side of the aisle can get to that number. If we do, then we have another good down payment on debt reduction. We got $1 trillion in savings from government budgets with this deal. We want to get another $1 trillion or so in savings from entitlement spending. It is not enough to fix this problem, but it is a down payment on the problem.

And, look, Chris, we wouldn't talk about these savings, these spending cuts had we not taken the majority and gotten this kind of an agreement. The president started off with this debt limit thing, wanting a blank check just to raise the debt limit. Then the wanted tax increase, which will hurt the economy.

So what did we end up with? We ended up with cutting more of a dollar of what they're spending for every dollar of debt limit increase. And I hope that this select committee makes good on its word in cuts about $1.2 trillion to $1.5 trillion in spending.

WALLACE: Let me ask and this should be an easy question to answer. If Speaker Boehner comes to you and says, Paul, I want you on that committee, you're Mr. Budget, would you go on?

RYAN: Yes, I would if he did that.

WALLACE: You want to be on it?

RYAN: Well, look, I think --

WALLACE: You care about these issues.

RYAN: -- I'm not putting all my stock in this committee. I'm putting my stock on this committee. I just don't want to -- I think people are overemphasizing what this committee is going to achieve. I don't think this committee is going to achieve a full fix to our problems because Democrats have never wanted to put their health care bill on the table.

They have not wanted to address -- they haven't put a plan out. We haven't seen a budget passed in the Senate in two years. The president hasn't put out a specific plan to fix this problem, and they don't even want to go with structural entitlement reform which is what you have to do to fix this problem, prevent this downgrade and get this economy growing.

WALLACE: Let me --

RYAN: And so, I will this but I want to sure people understand that I don't think this is going to be that's going to fix all of our fiscal problems. I hope this is committee that's going to get another single or double, which is a down payment on our problems.

Ultimately, Chris, I really think you need to change in leadership in Washington if you want to fix this problem. Look --


WALLACE: Let me -- let me jump in here because, actually, you are bringing up a bunch of points I'm going to ask you about, because you talked about the lack of open-mindedness and production and not passing a budget by the Democrats -- all fair points.

WALLACE: I want to ask you about your open-mindedness. If you were on that committee and you get a deal, let's say $3 or $4 in spending cuts, in entitlement cuts, for every $1 in revenue increases, and the revenue increases came through tax reform where you lower rates but you also close the loop holes and some of the deductions and use some of that for revenue. And Speaker Boehner agreed to use 800 billion dollars of that at least temporarily, would you be open minded to including some of that revenue as part of the debt deal?

RYAN: It all depends on the spending side of the ledger. Here's what I mean when I say that, can you get higher revenues through broad based tax reform that gets more economic growth and therefore higher revenues. The answer I believe is yes.

The question really is, and we have yet see a response to this question, are we doing the things we need to do to get the spending line down, down to 20 percent of GDP. It's going to 40 of GDP by the time my kids are my age. And we have yet to see three to one, two to one, four to one, whatever you call it. We have yet to see any commitment to actually bring the spending line down.

So if you just raising revenues to chase ever higher spending that is not good policy. And I don't think that's a good agreement. If we are convincingly restructuring these entitlement programs and getting that spending line down to meet that revenue line, then can you have higher revenue growth through more economic growth and tax reform, yes -- the answer is yes.

But I don't see any agreement from the other side getting anywhere close to doing that.

WALLACE: Let me bring in Mr. Miller. And I have one last question for you. Mr. Miller, is this super committee, select committee a formula for another stalemate? Or do you see the chance, particularly with the pressure now from the downgrade that there could be a grand bargain in entitlements and tax revenues?

MILLER: I think it is a start -- at best it is a start. It's likely to be staffed on both sides by people that the leadership want to represent their positions, so it's probably a greater than 50/50 chance that they have a stalemate.

But I think that the issue here is that -- the key issue for markets is long-term entitlement reform. Discretionary spending doesn't matter at all in this thing, except that it will be a little bit of drive in the economy. It's pro-growth polices and fundamental entitlement reform especially on health care that are the key things to our long-term fiscal health and therefore, the long-term confidence of the markets in the country.


Finally, Congressman Ryan, you talk about changing of leadership in Washington. I've got 30 seconds left. And I have to ask you the obligatory 2012 question. You said recently you want to see how the GOP presidential field develops before you make up your mind. I know you say you've already got the best job in Washington. But it sounds like there are some circumstances under which you would consider running for president. What are they?

RYAN: My answer is still no. That question was, I misheard the question. I thought he was asking me who I was behind, supporting that is.

So, look, my answer is still the same as it always has been the last time you asked me.

And let me just conclude with this, I don't think a grand bargain is going to come out of this, because they're not put health care reform on the table. And that's why I'm hoping for just a decent down payment on debt out of this select committee.

WALLACE: Gentleman, we want to leave it there. Really, an interesting discussion. Congressman Ryan, Mr. Miller, thank you both. Thanks for joining us. And we'll be really watching this to see what the markets do tomorrow.

Thank you gentlemen.

Up next, it's also a big week in Iowa for the 2012 Republican presidential field. We'll ask Tim Pawlenty what's at stake for him when we come right back.


WALLACE: Now we continue our series of 2012 one on one interviews with GOP presidential candidates with a man who hopes to boost his chances in the Fox News debate and in the Iowa straw poll.

Joining us from West Des Moines is Tim Pawlenty. And Governor, welcome back to Fox News Sunday.

Governor, can you hear me?

FORMER GOV. TIM PAWLENTY, PRESIDENTIAL CANDIDATE: I can now, Chris. I lost you there, I am sorry.

WALLACE: Well, good. I am glad we got you.

Iowa reporters and some top state Republican officials are saying that your campaign is starting to pick up momentum. Are you going to surprise people with the showing in the Ames straw poll?

PAWLENTY: Well we're going to show good progress in the Ames straw poll. My record of cutting government spending, appointing conservatives justices, doing health care reform the right way and more is now getting out as we've had TV ads and radio ads and spending a lot of time here in Iowa. So I think we'll show good progress for the Ames straw poll. But our real goal is those caucuses next January and February. That's the ultimate objective for Republican candidate in Iowa.

WALLACE: Well, despite all this talk, and there is talk on the ground about momentum, we got to go at least for now with the hard numbers and those are not encouraging. Let's put them up on the screen.

You have spend 42 days in Iowa and held 102 events. And yet according to Real Clear Politics it's average of Iowa polls, Michelle Bachmann is leading with 27 percent, Romney is just behind at 22.3 percent and you are a distant third at 7.5 percent.

When you have campaigned longer and harder why is Congresswoman Bachmann beating you?

PAWLENTY: Well, as you know those early polls don't predict the final outcome almost ever. And so we're not too worried about the early polls. They predicted anything, Rudy Giuliani would be president or Hillary Clinton would. But more importantly, we are seeing momentum on the ground, you are going to see good progress. And a week from yesterday, like Saturday at the Ames straw poll, the proof will be in the pudding. And I think you'll see our campaign moving up from back of the pack to closer to front of the pack, because my record of Minnesota's governor in getting those things done in a very liberal state like I said of cutting government spending, health care reform the right way, appointing conservative justices.

People in Iowa are now seeing that record. They see that I did it under the most difficult circumstances. And they're responding to it.

WALLACE: You know, obviously you and Bachmann both from Minnesota, both appealing to a lot of the same voters -- evangelicals, social conservatives, Tea Partiers. And you have been taking some shots at Congresswoman Bachmann recently. You say that she has no accomplishments in congress, that she makes a lot of speeches, but doesn't get results.

The question I have is, is that fair? The congresswoman founded the Tea Party in the House. She was the first congressperson to call for a repeal of Obamacare. Given the fact that she was in the minority until just this January, aren't those accomplishments?

PAWLENTY: Well, a couple of things. One is I think I'm unique in the race in that I can unite the whole conservative movement. It consists in part of economic conservatives, social conservatives, libertarian and Tea Party conservatives, and a few more. I have got a record that can authentically and genuinely appeal to the whole thing. Many of the other candidates appeal primarily to one chunk of that, but not all of that. So that is one of the advantages I bring forward.

And as the Congresswoman Bachmann or any other candidate in this race, I think one of the minimum prerequisites for being the next president of the United States in these most challenging of times is to have had executive experience, that you've run a large enterprise with a public component to it and achieved results. I have done that.

And my comments of her record, if you just looked at her record in congress, you know there's great comments, and you know, offering amendments that didn't pass and the like, but as to these things that we're concerned about -- cutting government spending, getting health care done the right way -- not talking about it, but actually doing these things, accomplishing these things, getting results. I said her record is nonexistent. That's not disputable, that's a matter of fact.

WALLACE: Well, I mean she was in the minority. She couldn't defeat Obamacare by herself?

PAWLENTY: Well, we are all held to our results. And so whether you have talked about it, whether you have given it rhetoric, is one of the themes I think in this race is going to be -- after Barack Obama, he came through Iowa and other places, gave these soaring speeches, these incredible comments, people here, the Democrats brought it in Iowa. And then catapulted him to the presidency of the United States.

And we now know he wasn't prepared for the job. He hadn't run anything. He hadn't done anything. And his record of results are essentially nonexistent. We don't want to repeat that mistake.

WALLACE: Well, I have to ask you, are you comparing Bachmann to Obama in terms of not being prepared for the job?

PAWLENTY: Well, again, whether it's any candidate, I don't think it's unreasonable or inflammatory or even disputable to say that the next president of the United States should have executive experience with results running a large enterprise. I have that kind of experience. It's one of the strengths I bring to the race.

WALLACE: Well, let's talk about your record, because the congresswoman has fired back at you. She says that you were a big spender, big government, compares you to Barack Obama, and says that you left a $5 billion budget mess in your state, which is one of the reasons that we had this shutdown in Minnesota.

PAWLENTY: Well, look, my record in Minnesota is one of the best of any governor in the country. The Cato Institute, which is a Libertarian grading organization, gave only four governors in the country an A grade. I'm one of those four, and the other three aren't running for president.

Anybody who looks at my record of taking spending from historic highs to historic lows, appointing conservative justices, health care reform the right way, public employee compensation reform before it was cool and popular, and on down the list, everything that Republicans are talking about needing for the country to need, I have actually done, Chris. I don't just flap my jaw, I don't just say maybe I'll do it someday. I don't talk about the hopes of getting it done, I have done it under difficult circumstances in Minnesota.

And my record -- look, I've been in the battle. I've got a few battle scars, like everybody does, but my record is one of the best, maybe the best, of any governor in the country.

WALLACE: Governor, let's talk about the downgrade of our credit rating, which we've been talking about so far on this program. S&P blames the political gridlock in both parties. They're bashing both Democrats and the Republicans.

You say that you don't support the compromise that, after weeks and weeks of negotiating, all sides finally came up with. If the problem of gridlock, wouldn't President Pawlenty be a part of the problem?

PAWLENTY: Absolutely not. Again, I have a record of getting things done. I never had a Republican legislature fully in my state, and yet, all of those things I mentioned we got accomplished.

One of the ingredients of breaking the gridlock is having a leader. In this case, a president of the United States who has the courage and the experience and the fortitude to lead.

And look at this president. We can't find him, Chris. Where is his specific public plan on Social Security reform? Where is his specific public plan on Medicare reform and Medicaid reform?

We shouldn't have to play come out, come out where ever you are with the president of the United States. He has an obligation and a responsibility to lead, and you can't find him.

He should step forward to the microphone and lead this nation on the most pressing, challenging financial issues of our day. And he is not in action. He's hiding on these issues, he's ducking on these issues.

He should be leading. He has an obligation and a responsibility to do it.

WALLACE: You were talking before about the fact that you were back in the pack in the early polls and you think you're going to be up near the lead when we get results from the Ames straw poll next Saturday. As we said, you spent a lot more time and a lot more money in Iowa than Congresswoman Bachmann. Don't you have to beat her on Saturday in Ames?

PAWLENTY: No, I don't. I think we've got to move from the back of the pack and show some progress towards the front of the pack.

These things sort out over a long period of time. And look, everybody's records are going to get scrutinized. This is a long journey for a reason.

The American people and people in Iowa want to kick the tires. Hopefully they'll limit it to kicking just the tires. But I feel very confident our campaign in Iowa. I think we're going to do well in Ames.

I don't think we have to win it. We have to show progress. But then we'll be in position to win those caucuses next January or February, and that's the ultimate objective here.

WALLACE: Well, let me ask you about that though. You, as we just said, are third in the polls now, somewhat distant, but you are third. Don't you have to finish at least third in Ames to remain a credible candidate?

PAWLENTY: I thought you said I was not third earlier, Chris.

WALLACE: No, no. I said you were third.

PAWLENTY: Well, in The Des Moines Register poll, which I think, by most accounts, is the credible benchmark poll here in Iowa, had me in sixth or seventh place just a few weeks ago. So our goal is to move from the back of the pack standing to something closer to the front. I don't think we need to win it, but we do need to show good progress, and I'm confident that we will as that record from Minnesota that I talked about continues to get out.

WALLACE: Governor Pawlenty, we want to thank you so much for joining us today. And we will see you Thursday night in Ames for the Fox debate.

PAWLENTY: I'm looking forward to it. Thank you, Chris.

WALLACE: We are, too.

Coming up, our Sunday panel weighs in on the GOP field and who is likely to come out on top in the Iowa straw poll.



NEWT GINGRICH, PRESIDENTIAL CANDIDATE: See, everything that President Obama and his appointees believe in is a kind of bureaucratic socialism where they want to micromanage the entire country from Washington, D.C.

REP. MICHELE BACHMANN, PRESIDENTIAL CANDIDATE: This president has destroyed the credit rating of the United States through failed economic policies and his inability to control government spending by once again raising the debt ceiling.

PRESIDENT BARACK OBAMA: Yes, we can. Thank you.

OBAMA: If I don't have this done in three years, then there's going to be a one-term proposition.


WALLACE: Well, some of the Republican presidential field ramping up their rhetoric against President Obama as they prepare for a big week in Iowa.

And it's time now for our Sunday group -- Byron York of The Washington Examiner; Susan Ferrechio, also from The Examiner; Kirsten Powers, a columnist for The New York Post; and Fox News political analyst Juan Williams. And we want to point out Byron and Susan will be two of the questioners at the Fox debate on Thursday.

All right. Byron, break it down for us. Who has the most riding this week on the debate and in the Ames straw poll?

BYRON YORK, THE WASHINGTON EXAMINER: I think Tim Pawlenty has the most riding in the straw poll, without a doubt. He's backed off. He said we need to show good progress. He gets to define what good progress is.

I think you've got Michele Bachmann in the lead. I think you have somebody other than Bachmann in you have Mitt Romney, who will be in the debate, but will be in New Hampshire for the straw poll. So he's kind of pulled himself out of this.

On the other hand, look at the results of straw polls in the past. Sam Brownback, Tom Tancredo, Ron Paul were top finishers in straw polls earlier. Steve Forbes, Elizabeth Dole and Gary Bauer finished two, three and four in the straw poll in 1999. Sometimes it doesn't tell you who's going to get out in the caucuses.

WALLACE: Well, that's right. The person who wins the straw poll often doesn't win the caucus, and the person who wins the caucus recently hasn't won the Republican nomination. But we're still going to cover it, so it's a big deal.

Susan -- and we've been touching on this -- one of the big storylines clearly in the debate and in the straw poll is Tim Pawlenty versus Michele Bachmann. They're both counting on a strong showing in Ames. They both appeal to Tea Partiers and social conservatives.

What are you looking for from those two specifically?

SUSAN FERRECHIO, THE WASHINGTON EXAMINER: OK. Pawlenty's probably got the better ground game. He's more organized, he's got a great grassroots effort there. He's been there longer, working harder.

He could pull off, you know, a surprise, placing first, second or third, and kind of steal the spotlight away from Bachmann even if she does better than him, because she's newer at this, she's not as well organized. So she could -- as well as she's doing in the polls, she may fare more poorly, because the Iowa straw poll is all about organization. It's about getting people out.

It's difficult to get people to come to this thing and vote. That's going to be the real fight here, who is better able to get people to the polls. And at this point, people are looking at Pawlenty as someone who could pull off a win here because he's been working harder at it and he's got a really good ground game.

WALLACE: Yes. We should point out to folks that if you think the caucuses are an organizational battle, the straw poll -- really, it's only a matter of a few thousand votes. And it's who can get people to Ames, Iowa, to an auditorium, on buses. They rent space and hold barbecues to get people to eat and then to vote, which if somebody gave me food, I'd vote for them, too. And so it really is an organizational battle, and it will be a real test not of just general support in the state of Iowa, or let alone the country, but of who can get people Saturday afternoon into Ames.

I want to talk about somebody else who is not going to be participating in the Ames straw poll, Kirsten, and that's the front- runner in the polls, both in the polls and the fund-raising, Mitt Romney, who has held remarkably few public events, really has flown under the radar for a front-runner. Politico, the Web site, this week talked about the "Mittness Protection Program," which I think was a pretty good line, as if he was in hiding in Arizona or something.

So far, it doesn't seem to be hurting him. Do you expect his rivals to go after him in that debate? And how do you expect Romney to respond?

KIRSTEN POWERS, THE NEW YORK POST: Well, I think that he is the one to go after. And I think that the debate is going to influence what happens in Ames as well. I think it's not just organization. This is an opportunity for people to sort of break out.

Pawlenty, last time, as you know, really didn't go after Romney, so I'm expecting him this time to come ready to go after him, because people need to start going after the front-runner. What Pawlenty just was doing in the interview with you, which was sort of taking swipes at Michele Bachmann, I think will backfire on him, saying things like, "I'm not just flapping my jaw," implying that she's just flapping her jaw. He really should be going after Obama and Romney.


JUAN WILLIAMS, FOX NEWS POLITICAL ANALYST: Well, I think it's going to be a rough ride for Mitt Romney, if it's ever going to come. And from what I've been hearing, he's supposed to begin a new stage of his campaign now. He's supposed to emerge, come out of the cocoon. I think people in Arizona may have some feelings about what you said about hiding in Arizona.

WALLACE: No. That is just where a lot of those monsters end up. That's all.

WILLIAMS: I'm teasing you. Just take it easy.

WALLACE: People of Arizona, I just want to say in no way did I mean to disparage you.

WILLIAMS: Oh my God.

WALLACE: Phoenix --

WILLIAMS: Are you taking up my time?

WALLACE: Well, you attacked me. I have personal privilege.

WILLIAMS: Look, I just think he's going to have a rough time, because Pawlenty made a huge mistake last time. He came on this program with you, Chris, and debuted this term "Obamneycare," did not use it then in the debate, looked like he was a meek, mild fellow lacking spark, did not appeal to the Tea Party folks who are looking for someone who is willing to go bash President Obama.

So the question is, then, on the establishment side of the ledger, is he going to emerge as sufficiently strong to go forward against Romney? He's got to take on Romney.

Now, you guys are going to have nine people on the stage for your debate on Wednesday.

WALLACE: Actually, eight. But who's counting?

WILLIAMS: All right, eight.

WALLACE: Because Rick Perry won't be there.

WILLIAMS: OK. But this is going to be very difficult for any of them then to make a strong impression. They've got to be very singular and focused in terms of their criticism. And my bet is the entire target here is Mitt Romney.

WALLACE: Let me bring up in the time we have left, Byron, one other person. And that is Texas Governor Rick Perry, who we're all talking about, is he going to get in, isn't he going to get in? Yesterday, he held a big prayer rally in Houston. Let's take a look.


GOV. RICK PERRY, R-TEXAS: Our heart breaks for America. We see discord at home. We see fear in the marketplace. And for that, we cry out for your forgiveness.


WALLACE: Perry is a devout Evangelical. But from a purely political standpoint, should he be focusing -- and that's the first time a lot of Americans have seen him -- focusing on that, or more on his strong record of job growth in Texas?

YORK: I watched his performance, and I think he kind of raised the bar for open displays of religiosity among candidates. When he enters the race we're going to find out that he is not really the cup of tea for a lot of Republicans. The economic Republicans are not going to really love that.

But as far as Iowa is concerned, remember the last Iowa caucuses were won by a preacher. And the Iowa caucuses before that --

WALLACE: Mike Huckabee.

YORK: Exactly -- were won by George W. Bush, who, in a debate in Des Moines, had said that Jesus Christ was his favorite political philosopher. So that kind of religiosity is not going to hurt him in Iowa.

WALLACE: All right.

We have to take a break here, panel, but when we come back, a wild week on Wall Street, and now the first downgrade of the U.S. credit rating ever. We'll talk about the fallout and what it means for tomorrow's market open.



OBAMA: When I said "Change we can believe in," I didn't say change we can believe in tomorrow. Not change we can believe in next week. We knew this was going to take time because we've got this big, messy, tough democracy.


WALLACE: President Obama, trying to buy more time this week for his economic policies.

And we're back now with the panel.

Well, we talked with the market experts. The question though is, how big a deal will the downgrade, the S&P credit rating downgrade, be in the political arena?

Juan, what do you think it will be just generally here in Washington? And will the president get most of the blame because, rightly or wrongly, he's the man in charge?

WILLIAMS: He is the man in charge, and I think we're at the point where people are going to have to make some judgment about his ability to handle this economy. You can't just keep blaming what happened in the past, although, by my estimates, he did get a bad economy. He was handed a bad deal when he came in economically.

But going forward now, the question is, who gets the blame? As you were saying.

And if you look at the polls right now, the American people don't think well of President Obama's handling of it. His numbers are down. I think his numbers are down at a historic low now by 40 percent, although "The New York Times" has him a little higher.

But who gets really smashed in the polls, Chris, is economists. They're at eight percent, six percent in some polls.

Everybody thinks what happened here was a travesty. So it's basically, throw the bums out. People are sick of what's going on in Washington. People want to see somebody come in who's actually going to put the country first, get to the serious business of handling it.

And I think that's the importance of S&P thing. It's psychological, it's symbolic, as we said earlier in the show. But what it does suggest, if you really said what's the moment here in terms of American history, is people think that the political leadership in the country, at a moment of high unemployment, economic crisis overseas -- Italy particularly at risk right now -- think that this government isn't able to respond effectively.

WALLACE: Let me pick on that with you, Byron, because the buck may stop with the president, but Republicans drove a very hard bargain in these debt talks, and the polls seem to indicate that voters don't approve of that. And let's put this up on the screen.

A "New York Times" poll found 47 percent disapproved of Obama's handling of the debt talks, while 46 approved. Sixty-six percent disapproved of congressional Democrats, and 72 percent disapproved of congressional Republicans.

And Byron, public opinion towards the Tea Party is turning more negative because they were driving a lot of the hard bargaining here.

YORK: It certainly is. The polls are what they are. And the public does not like the way Republicans are performing on this.

On the other hand, even though David Beers said he thought that the market reaction, or at least the interest reaction, will be very minimal from this --

WALLACE: This is the S&P official we talked to.

YORK: The S&P analyst, there are parts of that report that read kind of like punditry. Like, they are saying they don't like politicians bickering at each other. And there are other credit ratings that have not lowered the United States' ratings and have said, well, what politicians say is important, but what they actually do is more important. And the fact is, this Republican-driven plan has come up with a plan to reduce spending by significant amounts over the next 10 years, which should help the debt situation.

WALLACE: Susan, what we see -- and Juan referred to this -- most of all is just general disgust with Congress. In The Times poll, 82 percent now disapprove of Congress. That's Republicans and Democrats, which The Times pointed out was the highest number since they started asking the question back in 1977.

I know it's early, but are we conceivably headed towards another change election as we have in 2006 and 2008 and 2010, where they just want to see huge turnover? Voters want to see huge turnover both in Congress and in the White House?

FERRECHIO: If the economy doesn't improve, we're at risk of that happening in this next election. People are impatient.

No one is working. Their housing value has dropped. Everyone wants to see something happen.

And what they see in Congress is a lot of fighting. They don't see anything getting done.

Now, I'm there every day, and I'll tell you, things do get done. It just takes a lot of work and effort, because both sides are so philosophically divided over how to move forward with this big deficit.

Is it raising taxes that's bringing revenue into the Treasury, or is it cutting taxes and spurring economic growth? And they are so far apart on that issue that every time they try to move forward with trying to resolve the problem with the deficit and with the jobless rate and with the economy, they come to a big stalemate.

That's what the public sees. And the end result is people are still out of work. And so they think, this isn't working, time for something new.

WALLACE: Susan, let me pick up on that with you, because we saw in 2008, when TARP was going to be passed and the House defeated TARP -- and I'll never forget the split screen showing the action in the House defeating TARP the first time it came up and the stock market going down 780 points. And I think everybody got terrified by that, including the politicians.

Could you see a combination with the downgrade, conceivably a very negative reaction from the markets, where Washington -- and I include everybody, Republicans, Democrats, the president -- everybody gets scared straight?

FERRECHIO: That's exactly right. And yesterday, S&P said -- they warned there could be a second downgrade.

This first downgrade isn't necessarily going to hit you in your pocketbook. You may not see your interest rate go up. But they're warning it's a negative outlook. It means things could get worse.

The warning is: Congress, do something, fix this. And I think that's the very thing that could get them past their usual gridlock, because they did pass the TARP. They stumbled at first, but then they passed this massive package in record time for the size and scope of that package.

And it's that kind of thing that gets Congress off the gridlock, something like that, something really scary economically, to get them to move and say, look, put the right people on this super committee that they're talking about and come to a compromise that I do believe will include brining in revenue, as well as big cuts. It won't just be one way or the other.

WALLACE: Kirsten?

POWERS: Yes. I mean, I think it is really scary when you consider the facts of what you were just saying, that it takes that to get some to focus. And I think that that was what so much of this report was about, really.

As much as it was punditry, it wasn't them saying that the U.S. economy is necessarily a bad economy. It was them saying that we're looking at the future, we're looking at the debt, and we're just saying you people are not capable of actually fixing this problem.

And that's the concern, is that if this isn't dealt with in the future, that the country is just going to continue to be in decline. You had Warren Buffett coming out basically saying, I think the rating was wrong. I would have given the U.S. a AAAA rating if I could.

So it's not about the fact of where we are now. It's about them saying that people in Congress and the president need to figure out how to work together.

WALLACE: And what do you think are the chances that the combination of the downgrade and maybe -- and we hope it doesn't happen -- a negative reaction on Wall Street will shake Congress and the White House and get them to come off the dime?

POWERS: I would say that it's like 50-50. I feel like that they've been so irresponsible, that the chances are equal that they could not do what they need to do or do it.

WALLACE: Thank you, panel. See you next week.

And don't forget to check out "Panel Plus," where our group picks right up with the discussion on our Web site, FoxNewsSunday.com. And we'll post the video before noon Eastern Time.

Up next, a special program note.


WALLACE: And now a couple of program notes. Be sure to watch our Fox News/Washington Examiner GOP presidential debate next Thursday from Ames, Iowa. Byron, Susan and I will be asking questions, while Bret Baier moderates. That's 9 p.m. Eastern, next Thursday, live on Fox News Channel.

And next weekend we'll be reporting from Ames with the results of the big Iowa straw poll. Our guests will include Congresswoman Michele Bachmann.

That's it for today. Have a great week, and we'll see you next "Fox News Sunday."

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