This is a rush transcript of "Special Report With Bret Baier" from August 21, 2009. This copy may not be in its final form and may be updated.

BRET BAIER, "SPECIAL REPORT" HOST: Looking live at the White House, it is a Friday afternoon in August. The president ha s just left for vacation, and the White House tells late this afternoon that they expect, the Obama administration expects the federal deficit over the next decade to be $2 trillion bigger than previously estimated. There you see the old estimate of $7 trillion. Now the new projection is for the def icit to be $9 trillion. This figure reflects a worse economic picture than expected earlier this year, the news coming late in the afternoon, and, of course, coming as the administration and the president continue to try to push health-care reform, and the cost of that factoring in. Let's bring in o ur panel — Steve Hayes, senior writer for "The Weekly Standard," Juan Williams, news analyst for National Public Radio, and syndicated columnist Charles Krauthammer. Charles, sometimes we get these late afternoon, Friday afternoon dumps. This one was a big one, and it is tough to get your arms around $2 trillion more. It is $2,000 billion more.

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: That is why the word "trillion" ought to be abolished. It does not have the gravitas, the enormity of the numbers of the zeros underlying it.

This is a huge increase in the deficit. And if you think of it, this is an estimate over a decade, which means that the annual will be nearly $1 trillion. It will be $900 million every year for ten years, which is unsustainable.

It will destroy the dollar, and the only way that kind of debt is paid off is not in taxes. It is in inflation, and everyone will see it coming. It will raise interest rates.

This is a crisis in and of itself. And one of the reasons health care is in trouble — there are a lot of reasons, but one of them is Americans understand that when you are looking at deficits which are for other causes, adding $1 trillion or $1.6 trillion, as the CBO has estimated in the Senate plan, adding that onto it gratuitously is insane.

If there are any increases in taxes that you're going to use within health care, those increases in taxes or reductions in spending ought to be to the existing deficit, which will destroy the economy.

BAIER: Juan, we talk about the political challenges this provides in the health care debate and other debates, but also for buyers of U.S. debt, this creates a lot of anxiety, I'm sure.

JUAN WILLIAMS, NEWS ANALYST, NATIONAL PUBLIC RADIO: Especially the Chinese, I would imagine, but everybody in general. It just puts pressure on the U.S. economy.

And the source of it, of course, is the fact the economy has not been producing, revenues have not been coming in at rates that was expected and had been predicted by the White House.

The other part of this is it comes really as a smack in the face to the White House where just earlier this week was pointing out that they thought the deficit would be smaller. Why? Because some of that they allocated for use for bank recovery efforts they no longer deemed to be necessary.

So they weren't going to use that money and they thought they were going to get some good news. This number comes out, and it really rocks them back on their heels. And it rocks them back on their heels in terms of the health care plan.

It knocks them back in terms of whether or not we're going to have what some have been calling a W-shaped recovery, which is to say that we are right now seeming given this week on Wall Street on somewhat of an upward path, but once you start to engage inflation, as Charles was saying, then you put the Federal Reserve in the position of having to take steps to try to put the brakes on an overheated economy, and that could plunge us back down into another recession.

I think, overall, we have been having a conversation about the economy even as we have labeled a conversation about health care. I think Americans are just anxious about what might be to come. And that's why a lot of the support for health care has sort of been up in the air and has been sliding.

BAIER: And, Steve, we look at the recent polls, and the deficit has increased as far as the concerns for Americans across the country. How big of a deal is this?


I think this does two things. It should be the mortal blow to health care. This should end the debate to health care, as far as I am concerned.

You can talk about health insurance reform, tinkering on the margins, but the broad —

BAIER: You mean the public government option?

HAYES: The public government option.

I think for broad health care reform of the kind the president has spoken, this should end it. This really should read. It is a big enough deal that I think you have the 80 blue dogs who have been nervous about the public option now going back to their constituents and having to explain this kind of additional spending, as Charles point out, $1.6 trillion more, certainly, in the face of this kind of news, I think is a huge problem.

But I do think this will bring up taxes. I think we are going to talk four issues in the fall, it was to be three — Guantanamo, Afghanistan, health care, and add to that, taxes. I think we will soon see a much broader and more vigorous discussion of taxes and how he can tax Americans and generate revenues without violating his campaign pledge. I do not think he can do it.

BAIER: Charles, another development today. Yesterday we saw the House Speaker saying that she cannot get a bill on health care reform out of the House without the public option, the government run option. Today the House Majority Leader Steny Hoyer said in a conference call that the public option may have to go in order to get a bill passed. This is the number one and number two Democrats in the same House of Representatives.

KRAUTHAMMER: This is a ritual dance. The Democrats understand that if they kill the public option openly and completely today, the left will make endless trouble, needless trouble right now.

All of the intimations that it's preferred, it's important, we want to keep it, is a way to douse the rebellion on the left. But in the end, they all understand you can pass it without a public option because, in the end, the bluff on the left to vote against is only a bluff. They are not going to destroy the health care reform and the president at the same time over that one issue. The issue is dead, but they cannot admit it.

WILLIAMS: I would agree they can't destroy the health care option, because, essentially, that is to destroy the Obama presidency. And what the White House has said repeatedly, coming from David Axelrod and Rahm Emanuel and others, to these very same House Representatives is you guys have to understand, you're fate is tied into this president, and to distance yourself is suicidal.

I think there are lots of Americans that think we need to reform health care. I disagree that it is dead because of this. But, again, it is just so anxiety provoking that people just are not going to listen. I think that's why the president has lost track and this month of August has been deadly to him.

BAIER: Up next, the reaction to release of a terrorist, hyping a book release, and a pro-football player who won't be released any time soon. The Friday lightening round is straight ahead.



ROBERT GIBBS, WHITE HOUSE PRESS SECRETARY: The images that we saw in Libya yesterday were outrageous and disgusting.

BERT AMMERMAN, BROTHER OF PAN AM 103 VICTIM: Perhaps, American officials protesting now. The one thing I have learned, when the United States doesn't want something, it doesn't happen, especially with the United Kingdom. So don't insult my intelligence that you're protesting. You have the deniability, and you've allowed this to take place.


BAIER: The only man charged with the killing — the bombing of the Pan Am 108 in 1988 was released from a Scottish prison. He was welcomed back home in Libya, as we saw there, at the Tripoli airport. There you see the reaction from the White House and a family member. It is the first topic in the Friday lightning rounds. We are back with the panel — Steve?

HAYES: Where are the results of Obama diplomacy? I thought once we were nicer to everyone, they would listen to us. And they asked for house arrest of this guy and they did not get it.

Libya is scheduled to take over the presidency of the U.N. General Assembly next week. The Obama administration should fight them and made them in a public fight.

BAIER: Juan?

WILLIAMS: This was outrageous. I couldn't agree more with what Robert Gibbs had to say.

I do not know why people would aim their ire at the United States, though. Where is the outrage at the Scottish government? Where is the outrage at the British government, which has such an intimate relationship with the Scots/

That is the problem. I do not know how this becomes the Obama administration's problem.

BAIER: Because the family members said there is some influence here.

WILLIAMS: Yes, we have influence all over the world. We are the world's superpower, but we do not tell the Scottish or the British what to do.

BAIER: Charles?

KRAUTHAMMER: This was an astonishing development, his release. This is really decadence masquerading as compassion.

Michael Rubin of "National Review" did the calculation. You know how much time this man spent for each of the murders he committed? Eleven days in jail. And the rationale was that the terrorists should not have to die on foreign soil.

Well, the people he killed, particularly the 189 Americans, all died on foreign soil in a terrible way. He should have also died on foreign soil.

BAIER: Former Homeland Security Secretary Tom Ridge is out with a new book called the test of our time, and in the pitch for this book, he writes that he was pressured to raise the nation's color-coded threat level on the eve of the 2004 election, but he refused.

Among the quotes in there, he said, "I wondered at the time, is this about security or politics?" Well, that was picked up all over the place.

But this quote was not, also in the book, about the allegations that the terror threat level was used for politics. "Let me make it very clear. I was never directed to do so, no matter how many analysts or pundits or critics say so." He says in numerous times in the same book.

Back with the panel on this one, Charles?

KRAUTHAMMER: Utter nonsense on a trumped up charge. The only evidence here is "I wondered." Where is evidence of any pressure? Whenever anything happens, you have a meeting of the principles.

Francis Townsend, who was the coordinator in the White House on terrorism, said that as a result of the Usama tape release on that day, threatened all kinds of attack in America, that there was a meeting, and of course you are going to have disagreements in calling something as amorphous as a threat level.

Everyone is going to have an opinion, and there is no objective way of determining it. There is not a scintilla of evidence of any pressure. It is a phony charge and a cheap one.

BAIER: Juan?

WILLIAMS: I think he's trying to sell a book, but I don't think he has the proof, and the problem here is that everyone thinks the color- coded system, now in disgrace, was political. And so in this situation, when he should have done was say either he believes it or does not. He does not even say that.

HAYES: The color code was stupid. I'm not sure it was political.

I think maybe Tom Ridge is especially susceptible to pressure. The other thing that his publisher said in this same promotional material was that Ridge was going to reveal how he was "pressured to connect Homeland Security to the international war on terror." Those things were connected it from the beginning from 9/11.

BAIER: OK, Plaxico Burress, one time Super Bowl star, accepting a plea bargain Thursday, a two-year prison sentence for accidentally shooting himself in the thigh at a Manhattan nightclub — Steve?.

HAYES: I think he deserves the punishment, frankly. The outrage here is that Dante Stahworth, who killed a man driving drunk spent 24 days in prison and is getting a one-year suspension from the NFL.

BAIER: Juan?

WILLIAMS: I understand that the Burress sentence is going to be suspended. He will be under some kind of parole and supervision for this two-year period. I do not know when the NFL will allow him back in.

The real problem is I do not understand how you can kill a man, run him over when you are drunk, and only get 30 days in jail. Talk about something that you should jump up and scream about.

BAIER: Charles?

KRAUTHAMMER: If it's really two years in jail, it is an outrage. I can understand you get two years for shooting somebody else in the leg, but shooting yourself? I would sentence him to a month of house arrest and mandatory target practice.


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