Secretary Lew defends Obama budget priorities, IRS investigation; Sen. Lee talks budget battles, 'phony scandal'

The following is a rush transcript of the July 28, 2013, edition of "Fox News Sunday With Chris Wallace." This copy may not be in its final form and may be updated.


The president tries to change the conversation back to the economy.


PRESIDENT BARACK OBAMA: An endless parade of distractions and political posturing and phony scandals can't get in the way of what we need to do.

SPEAKER OF THE HOUSE JOHN BOEHNER, R-OHIO: The speeches are not to be all sizzle with no steak. That's assuming that there is any sizzle left after you reheated this thing so many times.

WALLACE: We'll talk with Treasury Secretary Jack Lew about the president's plan to help the middle class.

And we'll discuss the budget battles ahead with Republican Senator Mike Lee.

Plus, Anthony Weiner admits, old habits are tough to break.

ANTHONY WEINER, NYC MAYORAL CANDIDATE: I said that other texts and photos were likely to come out, and today, they have. There's no question that what I did was wrong.

WALLACE: His wife by his side, he says he's not dropping out of the run for mayor.

HUMA ABEDIN, WIFE OF ANTHONY WEINER: I love him. I have for given him. I believe in him.

WALLACE: We'll ask our Sunday panel about the New York City's soap opera.

All, right now, on "Fox News Sunday."


WALLACE: And hello again, from Fox News in Washington.

President Obama was out campaigning this week, pushing his plan to boost the economy buy helping the middle class, and attacking Washington as too focused on, quote, "phony scandals." Republicans say they have heard it all before.

On Friday, I sat down with Treasury Secretary Jack Lew.


WALLACE: Secretary Lew, welcome back to "Fox News Sunday."

TREASURY SECRETARY JACK LEW: Good to be with you, Chris.

WALLACE: President Obama keeps calling for more spending to pay for infrastructure, to pay for education, to pay for clean energy -- all things he's been pushing for almost two years and all things that Republicans have repeatedly rejected. The president says that the GOP's attempts to repeal ObamaCare over and over again are meaningless. Isn't this just as meaningless?

LEW: You know, Chris, I think what the president has been talking about this week, what' he's going to be talking about in the coming weeks is what we need to do to build a better future for America's middle class, how to have a future of better opportunity for jobs, how to have security in education for your children, and health care, and retirement security, how to be secure in your home. These are the things that the American middle class worry about, and it's what they want us in Washington to worry about.

So, we will keep talking about these things because it's what the American people need for us to do.

WALLACE: But isn't it just as meaningless as -- because it's been rejected, whether it's good ideas or not, as the Republican continue to talk about repealing ObamaCare. That's not going to happen either.

LEW: I have worked in Washington for quite a few decades. I don't know a lot of people on either side of the aisle who don't believe in infrastructure. And I don't know a lot of people on either side of aisle who don't believe in educating the next generation.

WALLACE: But they think that we have a deficit problem and that we can't afford to spend more money.

LEW: Chris, I think that if you look at where we are today, you have to realize we're not where we were in 2011. We've actually worked together, it's been a messy process, but we've worked together and we've reduced the deficit considerably. In the Budget Control Act, we reduced the deficit on the discretionary spending side. This year, at the beginning of the year, we enacted some tax legislation that raised the tax rate of the very top for the highest income.

We still have more work to do and the across-the-board cuts that kicked in are not good policy, we think they should be replaced by sensible alternative entitlement and tax reforms, but we've actually accomplished roughly the amount of deficit reduction we all set out to accomplish a few years ago. We're now arguing about the composition.

We need to get on with the business of the American people who don't want us arguing about the numbers. They want us to build a better future for the American middle class.

WALLACE: Let's talk, though, about the budget because the government runs out of money on September 30th, which raises the possibility of still another drama and another government shutdown. And while the president talks about higher taxes and more spending or investment as he puts it, the GOP says that the sequester must stay in place, $109 billion in the next fiscal year, starting in October, maybe reconfigured, but $109 billions, plus billions of dollars more in spending cuts. They say cut spending.

Other than the Republicans surrendering, what's your plan to avoid a government shutdown?   LEW: You know, Chris, if you look at what's going on right now, in terms of our deficit, we are reducing the deficit at the fastest rate since the demobilization after World War II we need to talk about growth. We need to talk about how do we build that better future for America's middle class.

WALLACE: So, are you saying we don't have a deficit problem anymore? We're $16 trillion in debt, sir.

LEW: Well, I'm telling you that we have a set of short term and long term challenges. And the short term, if you look at the amount of deficit reduction we're doing, we're just criticized by the IMF for doing too much too soon, that we should do more later and less now. In the international community -- I just came back from meeting with finance ministers around the world -- there's I think a consensus in the world community that we need to focus on growth, that you cannot just cut your way to growth. You need to have policies in the short term, which help the economy grow, and medium and long-term reforms that put things in the right place for the long-term.

WALLACE: Well, Republicans would agree that you need more growth. They'd say the way to do it is to lower taxes and to reduce the regulatory burden.

Let me ask you a specific question --

LEW: We have seen the result of both approaches. That approach did not work.

WALLACE: Well, we'll talk about the Obama approach and how much that's worked in a moment.

But, the Republicans say, we want the sequester. That was part of the deal of the Budget Control Act that you talked about, the response in 2011 -- $109 billion in spending cuts in the next fiscal year starting in October.

Will the president sign a government bill, a funding bill, a continuing resolution or some kind of budget bill that includes $109 billion in spending cuts even if it's configured?

LEW: Chris, the president has made clear, he's told Congress he will not sign a bill, if it fixes defense at the expense of domestic spending. I think we've seen in the House, the Republicans have been writing bills that do exactly that. They don't -- I think they have a way to solve their own problems without that and I don't think that they could even pass the bills that would result in terms of the cuts to education, to health, to all the things the American people care about.


WALLACE: So, are you saying that the president would veto a bill, a resolution to the budget shut down, the budget crisis, at the end of September that included $100 billion in new spending cuts?    LEW: Chris, what I'm saying is that Congress has to write bills that meet the challenge that that the president sets forth, to start investing in our future. And Congress cannot steal from the domestic priorities to fix problems that across the board cuts have caused in defense. I think the right solution would be to get together and have a sensible set of alternatives to replace across the board cuts that were never meant to take effect. They were meant to be bad policy that would drive Congress to do its work and adopt sensible policy.

WALLACE: Will the president veto a bill that House --


LEW: The surprising thing is, that, you know, a couple of years after, everyone agreed this was bad policy, there are people who are now claiming credit for things that were designed to be bad policy and senseless across the board cuts. That's truly surprising.

I think if you look at the way Congress has been dealing with these across the board cuts, it reflects a substantial division even on the Republican side. You see senators like John McCain and Kelly Ayotte and Lindsey Graham, who think it's terrible for our national defense to leave those across the board cuts in place.

WALLACE: All right. Let's --

LEW: There's a better alternative.

WALLACE: Let's switch to the debt limit.

House Speaker Boehner said no increase in the debt limit without an equal or a greater amount in spending cuts. When, first of all, are we going to hit the deadline? I know you are shifting money around.

And secondly, short of a Republican surrender, are you going to make a deal to how do you avoid going into default?

LEW: Chris, to be clear, we hit the debt limit in May. We have been using what are called extraordinary measures. Since then, to pay our bills --

WALLACE: And when do you hit the deadline.

LEW: Congress needs to do its work. It has to stop looking for what's the last possible moment. No one can predict with absolute accuracy and they can't take a risk of making a mistake. They should get back after they take their time off in August, and they should finish their work and get it done, so that there's no uncertainty about America's ability to pay its bills.

I've got to tell you --


WALLACE: What's your plan to avoid the default -- what's you plan to avoid the default when Speaker Boehner said there got to be spending cuts?

LEW: And 2011 was the first time in American history that you had one side arguing that default was an option. It was not an option and cannot ever be an option. They may know that. They have to do their work. They have to pass it.

The president has made clear: we cannot negotiate about whether or not the government of the United States would default. It was a mistake in 2011 to have that debate. It's hurt the economy. And I think Congress knows that it has to deal with this.

WALLACE: But, Secretary Lew, this idea of a clean debt limit bill is not written in stone. The fact is when you were deputy director of OMB, back in 1997, that Bill Clinton signed an increase in the debt limit that was tied to balancing the budget, a deal with Congress.

So, it happened. It was good enough for Bill Clinton. Why can't Barack Obama make the same deal?

LEW: You know, Chris, things changed in 2011. In the 1990s, in 1980s, all the previous debt limit debates, there were discussions about what should be done as the debt limit is resolved. 2011 was the first time there was debate about whether or not to default, where there was actually one side arguing that default could be managed.

That is just wrong. It would be terrible for the U.S. economy. It would be terrible for the world economy. It's irresponsible. And I think Congress learned that lesson in 2011.

WALLACE: All right. You talked about the economy and you talked about the president. I want to put a couple of statistics up here.

First of all, let's look at growth. Growth in the fourth quarter of last year was 0.4 percent. It was 1.8 percent in the first quarter of 2013. There's a lot -- a lot of people believe it's going to be less than that close to 1 percent in the second quarter of 2013.

I also want to put -- because the president talked a lot about inequality. I want to put up some statistics about the middle class and how it's done under President Obama. Let's put those on the screen.

Medium, real household income is down 5 percent. That's $2,718 a year on average since the recession ended in June of 2009. So, in the recovery, medium real household income is going down. The percentage of Americans in the workforces has dropped from 65.7 percent to 65.3 percent, again, since the recession.

Quite of all this, a lot of numbers, the middle class has fallen behind -- for all this talk of equality, the middle class has fallen behind under President Obama.

LEW: So, Chris, you just made the case as to why the things the president was talking about this week are so important. We need to focus together in a bipartisan way on the things we can do to help America's middle class.

The truth is the core of the economy is strong, it's resilient, and we've been growing. We've been growing for 40 months. We've seen job growth for 40 mounts, GDP growth, economy growth for four years.

It's not fast enough. We want to do everything we can to speed the pace of economic growth and job creation. That means we need to address the issues that the president laid out this week. We need to do things to help build the foundation for better jobs.

WALLACE: Let me ask you one question. If you're so interested in creating more jobs, why not approve the Keystone pipeline which would concrete tens of thousands of jobs, sir?

LEW: Chris, I think, as you know, the Keystone pipeline is being reviewed. It's been in the process that was slow down because --

WALLACE: Several years it's being reviewed. I think, what, three, four years.

LEW: It was -- there were some political games that were played that took it off the trail, past its completion. When Republicans put it out there as something that was put on a timetable where it could not be resolved, it caused a delay. We are getting to the end of the review, and we'll have to see where that review is.

But I think playing political games with something like this is a mistake.

WALLACE: I want to ask you about what other part of President Obama's speech this week. Take a look.


OBAMA: With this endless parade of distractions and political posturing and phony scandals, Washington is taking its eye off the ball. And I'm here to say, this needs to stop.


WALLACE: Question, does the president think that the IRS targeting of conservative groups is a phony scandal?

LEW: The president has made clear, I have made clear, that the mistakes that were made in judgment, very bad judgment, managing the 501(c)4 program were unacceptable and they had to be fixed.

WALLACE: That was not a phony scandal?

LEW: Well, he appointed an acting IRS commissioner, who has taken decisive action, clearing out all the people who had supervisorial responsibility for any of the decisions leading up to that. He's put in place methods to make sure it doesn't happen again.

I think that we have to like look at the facts. There had been a lot of investigations. There had been a lot of hearings, I.G.s, the Justice Department. There's no evidence of any political decision maker who was involved in any of those decisions. And I think the attempt to try to keep finding that evidence is creating the kind of sense of a phony scandal that was being referred to there.

WALLACE: Let me --

LEW: There was a problem. The problem has been addressed and there was no political involvement that there's any evidence of.

WALLACE: Well, let talk about that. On May 15th, the president directed you to investigate the IRS scandal. Again, take a look.


OBAMA: I directed Secretary Lew to follow-up on the I.G. audit to see how this happened and who was responsible and to make sure that we understand all the facts.


WALLACE: So, if this is supposedly behind us. It's been more two months since he directed you lead the investigation, explain to me how it was that conservative groups were targeted by the IRS.

LEW: Now, look, first of all, Chris, what we found out as we went through to find the facts is that there was equal opportunity and bad judgment. It was conservative groups. It was progressive groups.

WALLACE: At equal numbers or not -- grossly disproportionate conservative groups over progressive?


LEW: There aren't equal number of groups. The bad judgment was equal opportunity.

WALLACE: But not the number of groups.

LEW: No, but it was --

WALLACE: It was over a hundred compared to a dozen.

LEW: You have to look at how many cases of each there were.


WALLACE: And who were responsible for it, sir?

LEW: Look, there were a number of supervisors of course, all career, who exercised bad judgment, who were relieved of their responsibilities. I think what happened there is unjustifiable. It is not acceptable to have the kinds of screening, left or right, liberal or conservative, where you are targeted in any ways for your views. There's no political official who condoned it or authorized it.    WALLACE: Well, let me ask you about that, because an IRS official, Carter Hull, told Congress this week, that he was ordered to send applications from two Tea Party groups, for tax exempt status, to send them to the IRS chief counsel's office. That's William Wilkins, who was a political appointee. As a political appointee, he reports to you, to your office.

Have you asked William Wilkins, the IRS chief council appointed by President Obama, what involvement he or his office had in all of this?

LEW: Chris, to be clear -- there's 1600 lawyers in the chief council's office, and there was no suggestion that this went to the one political person in that office. There's no evidence of it. There has been no evidence of it.

WALLACE: Well, wait a minute, have you asked him?

LEW: Chris, I'm leaving the investigation to the proper people who do investigations. I don't think it's appropriate for me to do the investigation.


WALLACE: Has somebody in the Treasury Department asked William Wilkins what he knew about this?

LEW: Chris, there is no evidence that this went to any political official.

WALLACE: Well, there hasn't been an investigation. The Justice Department investigation isn't complete. The inspector general never conducted an investigation. He conducted an audit.

So, who -- where is the investigation --

LEW: An awful lot of time has gone into asking a lot of questions of a lot of people. I'm not saying it's done, and we will cooperate with all of the ongoing investigations. We have and will. I'm just challenging your assertion that something has been show, when no evidence has been produced to show it.

WALLACE: I'm just wondering the questions haven't been asked.

LEW: Well, you have to look at evidence that comes forward and respond to it.

WALLACE: Finally, on a different note -- when you were nominated as treasury secretary, and let's put this up on the screen. Your signature, that's the upper one, and it got a lot of kidding, in fact from the president who said it looked like the icing on a Hostess cup cake, below is the signature that's going to start appearing this fall on money, because you're as a treasury secretary, it appears on money, that that's going to be on the $5 bill, and it looks different now.

So, the questions I have are: one, why did you change your signature? And two, how did you change your signature?

LEW: Chris, I have been working on my handwriting for many decades, and I obviously still have some more work to do.

WALLACE: But, I mean -- did you decide that isn't going to do for the currency of the United States, I've got to have a different signature?

LEW: Chris, I will confess to having a challenge with penmanship and I always do my best.

WALLACE: Mr. Secretary, thank you. Thanks for coming in. We very much appreciate it. Please come back. Always a pleasure, sir.

LEW: Good to be with you, Chris. Thanks.


WALLACE: Up next, we'll hear what a leading Republican has to say about the president's economic plan, the so-called "phony scandals", and why Congress must stop founding ObamaCare, even if it means a government shut down.


SEN. MIKE LEE, R-UTAH: This is our last chance. This is the last stop on the ObamaCare express before the law fully kicks in.


WALLACE: Senator Mike Lee joins us next.


WALLACE: President Obama ratcheted up the debate over the economy in the coming budget battle this week. Treasury Secretary Lew just made his case. Now, we want to hear from a key Republican and favorite of the Tea Party, Senator Mike Lee of Utah.

And, Senator, welcome back to "Fox News Sunday."

LEE: Thank you.

WALLACE: I want to get your reaction to several things that Secretary Lew said. First, on the IRS targeting of conservative groups, he said, quote, "The problem has been addressed and there is no evidence of any involvement of political appointees."

Your reaction?

LEE: Well, I think you need to ask some of the people who were affected by this, how they feel about it, whether or not this is, in fact, behind us.

I don't think this has been investigated to the extent that we know everything there is to know, nor do I think we should give up. Look, we know how this works. We know that when you put this much discretion, and this much discretionary power in the hands of the few, eventually, it may well be abused for partisan political purposes. That happened here and we've got to get to the bottom of it.

WALLACE: And he was somewhat evasive on the question of whether or not anybody in the IRS has directly spoken to William Wilkins, the chief counsel of the IRS. Is that a hole in the investigation on whether this problem has been addressed?

LEE: Yes. And this is one of the reasons why his answer itself supplied some of the answer to your question, which is the fact that he was being that evasive, means he either doesn't know or perhaps got something to hide. Either way, we've got to get to the bottom of that. We've got to find out who knew what and when they knew it because this is a big problem. There's a big deficit of trust with this administration, particularly when it comes to the IRS, an agency that was given too much power and that's about to get more powerful.

WALLACE: On the economy, Secretary Lew said that we are doing a good job of bringing down the deficit. In fact, he said that our European partners in the IMF are saying that you are going too hard on austerity. He said the key now is growth. And he said the best way to build the middle class is through more government spending, investments, they call it, on things like infrastructure, and education, and manufacturing.

LEE: I beg to differ. This is the same, tired old message that we have been hearing from this president and his administration from day one. And the fact is, it hasn't worked. The fact is, that if you want to help the middle class, the best you can do is limit the federal government's profile, not expand it.

ObamaCare is one of many examples of this, and why we need to move away from this law, which is going to be bad for the middle class.

WALLACE: Well, we're going to get to ObamaCare in a second. But what's wrong with government spending on things like infrastructure, which will create jobs, some things like education of workers who may have to shift from one career to another. Wouldn't that help the middle class?

LEE: Yes. I'm certainly not saying that there's no role for government in any of these areas. But we do have to ask the question, which government? Is that a proper federal role in every instance or should it most of the time be a prerogative of state governments to look out for things like education?

We also have to look at how far we've already gone in with the federal government. This president seems to be using kind of a one- way ratchet, always expanding the role of the federal government, even as we're $17 trillion in debt and we are increasing that debt at the rate of about $1 trillion a year.

WALLACE: One of the things I talked to Secretary Lew about is the question of the sequester, because we are facing that as the government begins to run out of money at the end of September. He said that Congress should find way out of the sequester, which would be another $100 billion in spending cuts over fiscal 2014, beginning next October. But he said that Republicans, and he could have mentioned you, because I know it's something that you feel about are trying steal from domestic programs to bail out the Pentagon by stopping some of the Pentagon cuts that are happening.

The nonpartisan Congressional Budget Office made another point this week. I want to put it up on the screen. The CBO says that if you were to cancel the sequester spending cuts, it would create 900,000 jobs next year and boost growth by 0.7 percent GDP by almost a full point next year.

Question, isn't the sequester a drag on the economy?

LEE: The sequester is problematic on several levels. It's problematic because it tries to cut too much disproportionately out of our armed services. What we need to do is make sensible cuts, not back away from the cuts, but make sure that we're not taking them disproportionately out of those brave men and women who are protecting us.   WALLACE: Let's turn to ObamaCare which is, I know, a special subject of interest to you. The government runs out of money at the end of September and you are making a push to say, that you will not support, and you've gotten some Republican senators on board, you will not support any resolution to the budget shut down, the idea that the government might be shut down, because the government runs out of money in September -- you will not support any solution that includes continued funding of ObamaCare.

Don't you run the risk, because you know the president is never going to go for that, of a shutdown?

LEE: You know, we always knew ObamaCare was going to be unaffordable. We now also know that it's going to be unfair. The president has said that he's not ready to implement this law. And because he's not ready to implement it, he's going to selectively enforce it. He is going to, you know, give a big pass to big business while simultaneously telling hard working Americans, individuals that they have to comply with these laws demands or else they'll face stiff penalties under federal law.

So, what I'm saying is that if the president is not ready to implement the law, if the law is not ready for prime, Congress shouldn't fund it.

WALLACE: But, again, I mean, regardless of the logic of your argument, the president isn't going to go for it. Democrats in the Senate aren't going to go for it. They're not going to accept it. Are you prepared to shutdown the government over this issue?

LEE: Look, Chris, we all know that the government is going to get funded. The only question is whether the government gets funded with ObamaCare or without it? And what I'm saying is that the president has said he's not ready to implement the law, he said that the law isn't ready for primetime. And so, if he's not ready, if the law is not ready, we can't fund it.

WALLACE: Democrats are bashing you over this stance, but you're also taking some heavy fire from fellow Republicans in the Senate, and other places. Let's look.


REP. TOM COLE, R-OKLA.: It seems to me there's appropriate ways to deal with the law. But shutting down the government to, you know, get your way over an unrelated piece of legislation is political equivalent of throwing a temper tantrum.

KARL ROVE, FORMER BUSH WHITE HOUSE ADVISER: I'm suspect about it because it gives the president the bully pulpit and a gigantic stick on which to beat us.


WALLACE: Five Senate Republicans who originally signed on your effort -- no government funding unless you stop funding ObamaCare -- have now dropped out of your effort and one of your Senate Republican colleague is calling it, his words not mine, "One of the dumbest ideas I've ever heard."

LEE: Well, Chris, the fact is that this really isn't about Republican versus Democrat. It's not about liberal or conservative. This is yet another instance of Washington versus everyone else.

And we've got to stop Washington from dividing the American people. We've got to stop Washington from hurting the American people. That's what's happening here.

The fact is that Americans, by a margin of about 2-1, believe that this law will make their health care situation worse, not better. Only 12 percent support the individual mandate.

Businesses don't like it. Individuals hate it. Union leaders say it will be bad for workers. And even the law's principal author in the Senate describes it as a train wreck.

The law is bad. The law is certainly not ready to implement and we shouldn't fund it.

WALLACE: But Republican leaders, finally, would make this point -- they say a funding bill, funding the government is only going to last for a year or even less. So, even if you got what you wanted, you wouldn't kill ObamaCare. You would simply delay it for a year. They also say, if we were to follow your logic and end up either with a government shutdown or if you tied it to an increase in the debt limit, that it's precisely the kind of action, which you heard from Karl Rove, that it's going to make it hard for Republicans to keep control of the House and have any chance of winning the Senate.

LEE: Look, I understand that there's some in the Washington establishment, some from both political parties that we weren't happy with me over this. And in this instance, I'm going to take that as a compliment, an indication that I'm doing something right.

The fact is that we can delay this bill, maybe we can't repeal it right, but we can delay its funding. And if we can delay it, we can stop its consequences, at least for now. And we have to do that.

There are many of us who were elected specifically with this mandate, that we've got to stop this law. We have an even stronger reason to that now because the president has said he is not going to enforce it. He is not ready to enforce. And so, he is going to selectively implement the law.

Holding hardworking Americans to the fire, subjecting them to these horrendous fines, while simultaneously exempting big business, that's not fair. It's not right, and we shouldn't fund that effort.

WALLACE: Senator Lee, thank you. Thanks for coming in today. And we will be following the battle of the budget. Thank you, sir.

LEE: Thank you.

WALLACE: Now, a live look at Rio de Janeiro, where Pope Francis is holding mass today on Copacabana Beach. Rio's mayor estimates there's many as 3 million could turn out. Brazil is home to the world's largest Catholic population and the pope is making his make first overseas trip to celebrate World Youth Day.

Up next, more violence in the streets of Egypt. Dozens are killed and hundreds wounded, as supporters of ousted President Morsi defied authorities and hold mass protest. We'll have a live report and then our Sunday panel, next.


WALLACE: Washington is keeping a close eye on the Egyptian military's violent crackdown on the Islamist protests during this weekend, the deadliest since security forces ousted President Morsi almost a month ago. Secretary of State John Kerry calling on our ally to take a step back from the brink. Conor Powell has the latest from our Mideast newsroom, Conor.

CONOR POWELL, FOX NEWS CORRESPONDENT: Chris, the chances for a political solution to this ongoing peace (inaudible) violence in Egypt appear to be fading as protests continue to grow in Egypt as some pro- Morsi supporters continue to take to the streets and violence is erupting now in an effort to clear the pro-Morsi Muslim Brotherhood supporters from the streets. The Egyptian military opened fire on peaceful demonstrations yesterday killing at least 70 people, wounding hundreds more. Egypt's top military commander General al-Sisi called for supporters to take to the streets Friday to "give him a mandate to tackle terrorism." This statement is widely understood as a request to crack down on the Muslim Brotherhood, this is the second time the Egyptian Army has used deadly force to try to clear out pro-Morsi supporters. The violence, though, is dividing the pro-military transitional government with several members of the coalition really complaining and voicing concerns about the violence. Supporters of this military coup that -- took place about a month or so ago, to remove President Morsi, have justified it on the grounds that it would be used to remove and to add stability to the country. It appears to be doing just the opposite.

WALLACE: Conor Powell reporting. Conor, thanks for that.

Time now to bring in our Sunday group. Brit Hume, Fox News senior political analyst, Amy Walter from the Cook Political Report, Nina Easton of Fortune magazine and Fox News political analyst Juan Williams. So, a violent crackdown on the Muslim Brotherhood across Egypt, authorities now saying that they have launched an investigation of ousted President Morsi on charges of espionage or allegations of espionage and murder.

Brit, how do you assess the situation and what is one of our closest analyzers ...


BRIT HUME, FOX NEWS SENIOR POLITICAL ANALYST: It is the regular myth, Chris, no question about that. I think the administration's position of ambiguity, at least, about whether this was a coup and the question of whether to cut off aid to the Egyptian military is probably the right course. I don't think anybody knows what's going to happen over there, but I do think a couple of things. One is, I think that the Morsi government was unpopular and he remains unpopular. The military when it called for a protest to supporting it, got a pretty big response to that. I think that people are broadly speaking or backing the military. The problem now is with this outbreak of violence and what -- 70 or more people dead, is that you can open wounds that you cannot heal and that the hopes of reuniting this country are diminished by the day and that is the disturbing prospect.

WALLACE: Amy, let's pick up on this question of the Obama administration. This week, they made a gesture of modest disapproval by announcing that they are suspending the sale of four F-16 jet fighters to Egypt, on the other hand, they announced they are going ahead with military exercises with the Egyptian military. What is the message? Frankly, what's the Obama administration's policy towards Egypt?

AMY WALTER, THE COOK POLITICAL REPORT: Well, it goes back to what Brit is saying, which is I don't think we have much of a choice when it comes to foreign aid. You can make some little changes, like with the F-16, but at the end of the day, you know, you have three problems here: the first is, cutting off aid could destabilize the region even more than there is, which is hard to believe, but it's true. The aid program is also a real pillar of the relationship between Egypt and Israel. And certainly, Israel is already letting the American government know that they would not be excited about fact of moving away from aid to Egypt and finally it costs us money. You know, when we have already made these contracts, the American government has made contracts with a lot of these defense contractors to supply these weapons and other military things, equipment, and bottom line is, when you cut that off, you are still, the American government is still paying the bills for that. So it's not saving us any money to actually cut off that aid.

WALLACE: You know, President Obama faces a real dilemma here, because on the one hand, he did not like the authoritarian government that Morsi and the Muslim Brotherhood had set up in Egypt. On the other hand, Morsi was the democratically elected president of the country. So, the authority now seems to be the military of a small group of generals and the mob in the street. What is the president doing here?

NINA EASTON, FORTUNE MAGAZINE: Well, the problem is tit for tat suppression in violence does not a democracy make. This is not a building block for democracy to fight the public support that the Army has. You have to think back to 1992 when the Algerian army canceled elections to prevent Islamists from taking over and it plunged that country into a civil war, ten years. This -- and I think that Secretary of State John Kerry was right when he said, we need to step back from the brink. I mean this -- the Muslim Brotherhood -- and Morsi was elected with 52 percent of the vote. The Muslim Brotherhood, for all of its authoritarian tendencies, all its, you know, horrendous things they did over the past year, it's not going away. And to be shooting protesters in the head, this investigation of Morsi, it divides the country. And I think, you know, on the question of foreign aid, it is time at least to use the foreign aid for some leverage. To say, look, we have got to move, you've got to unite this country and you've got to move towards elections.

WALLACE: Juan, to Nina's point, the Secretary Kerry was making precisely that point, that the military needs to reach out to the Muslim Brotherhood and find, it is pretty hard when you are killing dozens of protesters, some basis for reconciliation, the people in charge and the regime in Egypt seemed to have ignored that.

JUAN WILLIAMS, FOX NEWS POLITICAL ANALYST: Well, it's hard to talk about reconciliation when it's the Islamists who are trying to expand their camp. That is what sparked this latest round of shooting and violence. And secondly that their basic demand, Chris, is that Morsi be reinstated. That is what they want. And that's exactly what they are calling for, a reinstatement of a government that was failing, a government that had ruined the Egyptian economy, and they are saying he was legitimately elected and must be put back in place. Well, I think what you are then saying is, Egypt then would be an Islamist state, that it is going to go with Morsi and the Muslim Brotherhood and I think the people of Egypt have rejected that. The military could not be doing what it's doing, unless the people of Egypt had said clearly, we reject Morsi and the is Islamists and I think that, you know, Nina rightly said, it looks like you are on the verge of civil war here, but how can you say to the military, how can the United States say to the military, oh, you guys ease up. If they ease up, they are giving in to the Islamists. I think when you deal with extremists that is what you get.

WALLACE: We've got a couple of minutes left, I want to talk about something else, Brit, that was the fascinating split inside the Republican Party over national security this week. The House narrowly blocked a measure that a lot of conservatives were supporting, which would have limited the ability of the government to do this kind of massive phone surveillance, and New Jersey Governor Christie, Chris Christie, went after Rand Paul on the question of setting limits on government surveillance. Take a look.


GOV. CHRIS CHRISTIE, R-N.J.: These esoteric intellectual debates, I want them to come to New Jersey and sit across from the widows and the orphans and have that conversation. And they won't. Because that is a much tougher conversation to have.


WALLACE: Rand Paul responded saying there's nothing esoteric, using Christie's words, about constitutional rights of privacy.

HUME: This is a battle that is real within the Republican Party, it is a strong and deep disagreement between internationalists and those who are in some way have been labeled isolationists. It has been going on for a long time. It has subsided for periods of time. And now it's back. The party is going to have to have this out. Whether Chris Christie's harsh approach to it, somewhat reflected the piece he played, is the right way to start it or to get it under way, I don't know, but this is real, it's out there and it's going to go forward.

WALTER: Well, in the Tea Party wing of the party is clearly in the Rand Paul camp, I mean if you are talking about where they stand, there's a new pole out Pew did a poll out this week, 62 percent of Tea Party Republicans said they disapprove of the NSA program. So, when you're talking about that battle within the party right now, Rand Paul is on that side.

WALLACE: All right. We have to take a break here, but when we come back, politicians on both coasts admit to behaving badly with women, but both refuse to end their political careers. Our Sunday panel takes on the Anthony Weiner and Bob Filner.


WALLACE: Still to come, our Power Player of the Week.

ROBERTA FLACK, SINGER: Scary, overwhelming, frightening, unbelievable.

WALLACE: She started piano lessons at age nine. Six years later, she had a music scholarship to Howard University.

FLACK: If you have fundamentals, you can go anywhere.

WALLACE: Stay tuned, we will be right back.



ANTHONY WEINER, NEW YORK CITY MAYORAL CANDIDATE: I have said that other texts and photos were likely to come out and today they have.

SAN DIEGO MAYOR BOB FILNER: I will be entering a behavior counseling clinic to undergo two weeks of intensive therapy to begin the process of addressing my behavior.

HOUSE MINORITY LEADER NANCY PELOSI, D-CALIF.: The conduct of some of these people that we are talking about here is reprehensible, is so disrespectful of women and what is really stunning about it is they don't even realize it.


WALLACE: House Democratic leader Nancy Pelosi denouncing New York City Mayoral candidate Anthony Weiner and San Diego Mayor Bob Filner. Both former Democratic House colleagues now caught up in sex scandals, and we are back now with the panel. Weiner admits he continued having sexually explicit contact over the Internet with at least three women, a year after he had resigned and said he was going to get help. Filner says he is getting two weeks of therapy after allegations he groped several women and more coming out of a closet, but neither is going to leave politics. Brit, what do you make of this?

HUME: Well, I think they are both political walking dead. You've got the fanny pincher in San Diego and the exhibitionist in New York refusing to move -- Filner says he is going to take two weeks of therapy. One might think he would need a little more than that. And Weiner is not apparently taking any therapy, and he may need it even more. I mean, it seems to me this is a sick puppy and he has real problems. And, you know, watching this play out in public is painful and embarrassing. If the people of New York were to accept him as the mayor, it would be quite something. I suspect it will not happen.

WALLACE: Well, let me pick up on that with you, Amy, because interestingly enough, before this latest revelation, Anthony Weiner was leading in at least some of the polls, let's put him up on the screen, in the race for mayor of New York City. Until this latest revelation, but you can see there he has now fallen dramatically behind the front-runner Christine Quinn. And now, in San Diego, there's an effort to recall Filner as the mayor. What do you see happening to both of these guys?

WALTER: Well, I think that Brit is absolutely correct. Anthony Weiner is not going to be elected mayor. And I think that you're going to see those polls continue to drop. He just lost his campaign manager this morning. Also, this morning, you saw that Senator Dianne Feinstein from California came out and said that Bob Filner should resign, so the drum beats are beginning. I don't think they have much time there. I just want to pull back for 30,000 feet, though, for a second, which is part of what gets them going is the fact that they are being covered constantly, I mean the microphones and the camera are their oxygen, and if we pay more attention to them, they love this. When we take those cameras away, I don't think they sort of cease to exist.

And the more that we focus sort of on the freak show element of politics, unfortunately, what it's doing, is I think it's only encouraging that freak show to run.

HUME: Do you think that Bob Filner was grabbing women in the hope that he would ...

WALTER: No, he's a different -- no, no, no. Weiner is one of those.

HUME: Do you think Weiner was sending these text messages in the expectation, in the hope that they'd be found out to get publicity?

WALTER: No, I think he likes -- I think he likes getting the attention that he's getting in this run. This is part of what makes him exist -- is getting the P.D. cameras, the microphones. You take those away from him, what does he have?   HUME: I suspect he would have preferred to have done without these problems.

WALTER: I don't know.

WALLACE: Nina. Let's get back, we can let them continue in the ...

EASTON: We don't get to comment on the ...



WALLACE: Let's move to the main subject today, which was the economy. And the president's effort to reframe the debate over the economy in advance of these budget battles, which we are going to see coming up in September and October and November, first over government funding and the possible shutdown of the government and then over raising the debt limit and a possible default. What do you think of the basic argument that the president was making all week? And the Treasury Secretary Lew made again this morning?

EASTON: Well, whenever this president talks about the economy, he talks some about growth, but he mostly talks about inequality. But what you have to look at is how middle class lower income people have fared in this economy since the recovery. It's been pointed out earlier on the show, the median household income has dropped by five percent. You've got disability roles exploding. What -- what is it doing for people when people are on disability, they are in poverty. I mean this is a very low level income.

WALLACE: The answer is ...

EASTON: It's not an escalator ....

WALLACE: The answer is more government spending ...

EASTON: It's -- well ...

WALLACE: Infrastructure and job retraining.

EASTON: We've tried that. It was called the stimulus bill, and we still have an economy that's barely crawling along. The rich are doing fine, by the way, in this economy.

EASTON: The stock market is exploding, thanks to the Fed. Housing prices are going up. The rich are doing fine. What is missing in this conversation is the fact that this president's policies have not helped the middle class, and particularly the lower middle class.

WALLACE: Juan, let me bring you in, because I mean, this is the basic philosophical conversation that has divided Washington, divided the parties for years now. What is the best way to boost the economy, what is the best way to help the middle class? Is it more government involvement, more government spending, or is it lower taxes, lower -- less regulation and get out of the way?

WILLIAMS: Well, I think it's, you know, let's go to the economists. Ben Bernanke, who will soon be leaving, there's now a large argument at the White House about who his successor should be, but he's soon leaving. He said, as your charts demonstrated earlier in the show, that if the Congress and the government would simply get back in the game, they are a major engine of economic activity, and they are right now causing some of the slow in terms of the recovery.

WALLACE: What about the stimulus? We spent over $800 billion?

WILLIAMS: Well, we still also went through a terrible recession in the country, and there have been attempts at spending, and of course we have seen Republicans respond that it's a waste of money, and that austerity is the order of the day. President Obama is coming back and saying, if you're truly caring about resuscitating the fortunes of the middle class in this country, you have to spend some money.

EASTON: Well, after a severe recession in the early '80s, there was faith in the private sector to take over, and median incomes grew. People -- everybody -- that's not been the case--


WALLACE: I've got to interrupt for a second, because I want to get to one last subject, and that was the other part of the president's message this week, the phony scandals. And we heard it from the president, we heard it a little bit more subtly from Jack Lew. Do you think that the president really thinks he can make Benghazi and the IRS and the snooping and spying on reporters and the American people go away?

HUME: No, I do not. I think it may help him with his base in some way to belittle these cases as phony. A lot of his supporters on the left and on the journalistic left believe that about them. But I think certainly the people in the public are head up about these things, and I don't think it makes them go away at all. And in the end, the effect of them will turn on what is ultimately discovered about each and all of them.

WALLACE: Let me ask you about that, Amy, because clearly, it was a steady drum beat, the talking point was out there. We heard it from Jay Carney before the president's speech, we heard it from the president, repeatedly. We heard it from Jack Lew. Phony scandals. Smart political move? And what is the thinking behind it?

WALTER: It's a smart political move because it takes the focus off of the actual event and focuses it on the question of is this a scandal or is this not a scandal, not on what actually happened.

WALLACE: And the tactics of Republicans.

WALTER: Right. And the tactics of the Republicans. Exactly.

And look, Republicans, where their approval ratings are right now, it's hard to believe they could go lower, but they have continued to (inaudible).


EASTON: I agree, I think it does stick. It's one of those things that -- it sticks for the president. The question that is going to be interesting is whether these scandals have any legs in the midterm elections.

WILLIAMS: Well, I think it does stick, because balloons, you know, balloons are real, but if you fill them with hot air and pop them, they are gone.

WALLACE: We will have to think about that. Thank you, panel, see you next week. Remember, our discussion continues and we will continue that discussion every Sunday on panel plus. You can find it, again, on our website,, and make sure to follow us on twitter, @foxnewssunday. Up next, our power player of the week, still going strong after 40 years in the music business.


WALLACE: She has been part of the soundtrack of our lives for more than 40 years, and as we reported last November, her songs of love and loss reflect her own life. Here is our Power Player of the Week.


FLACK: I'm still here. I am still here, you know.

WALLACE: At age 74, Roberta Flack is indeed still here. Still captivating audiences with her magical voice and music.


WALLACE: It started so easily. Back in 1973, she won the Grammys for record and song of the year for "First Time Ever I Saw Your Face."

What was that like to just it big?

FLACK: Scary, overwhelming, frightening, unbelievable. There is one. Is this me?

WALLACE: Then a year later, she won the Grammys again for "Killing Me Softly."

Two years in a row, you had the song of the year and the record of the year, did you just think this is going to go on forever?

FLACK: Yes, you always do, but why not?

WALLACE: But Flack suddenly stopped recording and gave few concerts.

Three years. You did not release an album.

FLACK: Why didn't I release an album? I don't know. I think I didn't have anything to say.

WALLACE: She also had serious throat problems. But as Flack says, she is still here. Now, 40 years after her big break, she has released an album of Beatles song, inspired by living next door to John Lennon when he was writing "Imagine."

FLACK: The wall for my computer room is also the back wall of his music room, and I'm hearing.

(singing): Imagine there's no heaven.

WALLACE: It's hard to imagine Roberta Flack's history. She grew up in a largely segregated Northern Virginia, but she started piano lessons at age 9. Six years later, she had a music scholarship to Howard University.

What are you doing in college at the age of 15?

FLACK: I don't know. I could have gotten there at 14, except they said I was too short.

WALLACE: Flack was classically trained. In fact, her real ambition was to be a concert pianist. Which may be why seven years ago, she started the Roberta Flack School of Music in a charter school in the Bronx.

FLACK: You can become the next Jay-Z or Beyonce or whomever, Barbra Streisand, but there has to be some basic fundamental.

WALLACE: Speaking of fundamentals, Flack still takes voice lessons.

FLACK: You keep polishing the tool. You keep warming it up. You keep shining it, making it brighter.

I want to sing until I can't sing anymore, and play until I can't play anymore.

WALLACE: What is the excitement when you get on the stage?

FLACK: The song.


WALLACE: Roberta Flack hopes to open more music schools here in Washington and in Barbados. And she says she intends to keep on singing. And that's it for today. Have a great week, and we'll see you next "Fox News Sunday."

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