This is a rush transcript from "Special Report," December 17, 2010. This copy may not be in its final form and may be updated.


PRESIDENT OBAMA: The final product proves when we can put aside the partisanship and political games, when we can put aside what is good for some of us in favor of what is good for all of us, we can get a lot done.

If we can keep doing it, if we can keep that spirit, I'm hopeful we won't just reinvigorate this economy and restore the American dream for all who work for it. I'm also hopeful that we might refresh the American people's faith in the capability of their leaders to govern in challenging times.


BRET BAIER, HOST OF “SPECIAL REPORT”: President Obama today before signing the tax rate compromise bill in to law ensuring that the rates stay the same. There are also a lot of other things in the bill. We'll talk about those.

This is how the House vote broke down right around midnight. You can see the Democrats 139 yes, 112 no, despite all the back and forth with the Democratic caucus about pushing back on the tax rate bill. Let's bring in our panel, Steve Hayes, senior writer for the Weekly Standard, Nia-Malika Henderson of the Washington Post, and syndicated columnist Charles Krauthammer. Steve, thoughts on winners and losers in this deal?

STEVE HAYES, SENIOR WRITER, THE WEEKLY STANDARD: Well I think probably the first winner was your earlier guest, Mitch McConnell. He had a good week in bringing together this tax compromise and brokering it and keeping taxes from going up on January 1st. So I think that’s a feather in his cap.

I also think that he deserves credit, a lot of credit for killing the omnibus. This puts the Republicans in control of spending going into the next year in a way they wouldn’t have been had the omnibus passed. He did it by all accounts by talking to appropriators in the Senate, the big porkers who were likely votes for the omnibus bill. He got them together and said don't do this, it wouldn’t be good for the party or the country, and persuaded them.


NIA-MALIKA HENDERSON, WASHINGTON POST: I think one of the big winners here, and Charles might agree, is Barack Obama. The White House certainly thinks he came away to separate himself from Congress and looked at that signing bill. You didn't see Nancy Pelosi or the progressive Democrats there. So he in many ways was able to reset his presidency.  He came away seeming bipartisan.

Of course he’s been dogged by kind of the charges of being, you know, too liberal and too progressive, and he seems to have emerged from this with a compromise. It's sort of a bipartisan change.

BAIER: Charles?

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: I hate to agree with that, but I think it's true. It's pretty obvious the president, the way he appeared today and he had these huge majorities in the House and Senate. Remember, he governed for two years on a radically partisan style without getting a single Republican on healthcare, getting only a few on the first stimulus bill. So I think that makes him look very centrist and it could reposition him.

And compare him to where Clinton was after his shellacking in the midterm election. It took Clinton basically, a year to get his stature back, his relevance back. This was a press conference in April that was about half a year after the election where he was asked a question are you still relevant? He is the president, because the Republicans have taken over.  So that's how low he was.

I think Obama basically a month after the shellacking he took is now a player. He is the one who brokered the deal. As I said on a night that Obama announced it, as a candidate in 2012, just as analytical point not arguing this with McConnell, I think as a candidate he has helped because he got $1 trillion of debt to the budget to give the economy sugar high right into the election in 2012. The piper will be paid the year after and year after, but if you are a candidate, that's what every candidate wants, a huge injection of money in the economy.

BAIER:  Senator McConnell said here and I'm sure he said it in the green room that most of the bill was the Republican policy and that to have the president sign on to the Republican policy, even though they have to swallow whatever percentage was Democratic policy, was a win.

KRAUTHAMMER: He said it even more emphatically in the green room, I can assure you.


Look, just because a policy is something that Republicans wanted, doesn't negate the fact that it adds to the deficit. It adds $1 trillion to the deficit. I don't think it's what you want when your party ran for a year controlling the deficit spending and trying to have a new kind of rationality in Washington. I think it contradicted that and it will hurt the Republicans going in to the future when people expect that kind of restraint which wasn't shown I don't think.

BAIER: We have been around this barn a few times, Steve, on this issue. Let's go to the omnibus, Nia. This was a backroom deal that essentially Senator Reid found out he didn't have the votes to push it through. Now they're doing temporary continuing resolution to fund the government. Probably until February or March. Do you think it gets done?

HENDERSON: I think that gets done. They don't have a choice.

BAIER: the Senate doesn't swallow a year of continuing resolution that the house sent over. They do their open deal.

HENDERSON: They will do their own deal. The White House doesn't want this fight right away, the conversation about spending. So they push for longer deal out of the Senate and not something that will last until February because they don't want the conversation on their hands.

BAIER: OK and the House Democrats are pushing for the Senate to take action on DREAM Act, the immigration act. Steve, any chance of this gets cloture and comes to the floor?

HAYES: Harry Reid says he wants to move it tomorrow morning. I think the prospects for ultimate passage of the DREAM Act are slim to none at this point.

I would say, however, where we were looking two days ago on to "don't ask, don't tell" and on the start treaty, those might have flipped.  It's probably more likely that we get "don't ask, don't tell" passed and less likely that we have START pass. Primarily because McCain can cane has his back up and is causing problems in the Senate.

BAIER: Conservatives call it the beginning of amnesty, the DREAM Act.  You don't think the votes are there?

KRAUTHAMMER: I think deservedly it will not succeed. It's larger than it appears. It's been sold as helping unfortunate young folks born here but it will have ripple effects that will include families ultimately.  It's a huge step to general amnesty before we shut the borders. That I think is the problem.

BAIER: And the schedule, it seems like they're going to get all of this in.

KRAUTHAMMER: They probably get a vote on start. It will hinge on McCain, whose protest is on missile defense, which is the key issue here.  He wants assurances. I don't know if he will get them. But if he doesn't he should oppose the treaty.

BAIER: What do you think the couple of weeks will tell us about the how the next Congress deals with President Obama?

HENDERSON: It obviously will be a different congress. It will be more Tea Party based. You've got Senator Paul, you know, in the Senate, out of Kentucky, folks in the House. That is the place that took the shellacking in November. The president tried to sort of set a tone of compromise. You will have fighters on the hand.

BAIER: Is his problem from the left?

HAYES: Yes, in the short term it might from his left. But in the long term this will unfold to typical boundaries. People are talking about the bipartisanship because of the tax compromise. Make no mistake the feelings on the hill right now as we speak on "don't ask, don't tell" and on start are very strong. People are taking partisan shots at one another.

KRAUTHAMMER: I would discount squawking and dancing and protest on part of the congressional left. They do that habitually. It was done on Obamacare and they folded and tax cuts, and in the end they have nowhere else to go. They will never have a president as left as Obama is and they know it.

BAIER: And is president Obama negotiating with this new Congress?

KRAUTHAMMER: I think he's trying to reposition himself. I think it started with the tax cut deal. I think he will stand firm on Obamacare.  If there is an attempt at repeal, but if he wants reelection he needs center, which he lost in midterm election. He knows that. He's a smart guy. I think he'll go for it.

BAIER: Who do you think is most responsible for the passage of the tax rate compromise? Go to the homepage at FOXnews.com/specialreport.  Vote in the online poll. The Friday lightning round is next.   


BAIER: Every week on the foxnews.com "Special Report" homepage viewers vote on the topic to discuss this on the Friday lightning round.  The winner this week, the third war, U.S. border. That won with 61 percent of the vote. Take a listen.


VOICE OF STEPHEN MCFARLAND, U.S. AMBASSADOR TO GUATEMALA: When you have drug traffickers afraid of other drug traffickers and things are getting bad.

BRUCE BAGLEY, DRUG TRAFFICKING EXPERT: They use what I call terrorist tactics. They're not terrorist organizations and they're not jihadist.  But they use tactics to intimidate the police.


BAIER: Take a look at the stats just out. In Mexico in 2010, more than 30,000 deaths, 3,000 in Juarez just across El Paso, Texas. A serious situation. We start there on the lightning round. Steve?

HAYES: The U.S. government has, in this sense, one job, to keep it from coming over the U.S. border. We have seen now with the death of Agent Terry this week we might getting to seeing this. But the question is its isolated or the continuation of a trend. If it is, we have to do everything we can to beef up the presence on the border.

HENDERSON: I think, you see the Senator Kyl calling for more security down there, calling for something like 6,000 more troops along the border.  Across the border you see increase of American deaths. You had something like 39 were American, 36 last year. So I think it will take more, more of the violence to really put this on the map of the federal government and nation.

BAIER: Does the administration policy change at all with the developing? It seems like it's getting worse.

KRAUTHAMMER: It doesn't sound as if the administration is giving it a lot of attention or increasing its concern about this. There is one element of this no one will talk about. You want troops and guards down there. You also put up barriers. That's how they seal themselves off from other countries everywhere in the world if necessary, with fences. I think that's where you start.

But ultimately, the fact you had overwhelming vote among the viewers on this, over 60 percent, indicates how the public is way ahead of the government understanding how serious of an issue it is.

BAIER: North Korea, the South is getting ready for another live fire exercise. You'll remember, North Korea fired artillery shells on a South Korean island and killed South Koreans there. Now we hear that New Mexico Governor Bill Richardson is in North Korea and talking to reporters, saying that the situation is tender box and urged extreme restraint, and said there is enormous potential for miscalculation. Charles?

KRAUTHAMMER: The reason it's dangerous now is North Koreans cross the threshold when they attacked civilians in the attack last month. That's the first time since armistice at the end of the Korean War. It created a huge reaction in population of South Korea which had been passive. It also has a tougher government.

It will do live exercises starting from the same island between now and Tuesday. The other side said it might retaliate and it could explode.

HENDERSON: I think there is a test for President Li who campaigned, saying --

BAIER: The president of South Korea.

HENDERSON: Right, saying he would take a tougher stapes on North Korea. So it will be interesting to see. The exercises are supposed to go on Saturday. The State Department said that South Korea should proceed with caution. See if it happens.

BAIER: The attack on the 23rd. Steve, is this the right time for Richardson to be is there?

HAYES: No, not at all. It's a glory trip. The State Department gave him approval but people in the administration are not happy him being over there. It sends mixed messages when we're trying to be tough with North Korea and China. Richardson raises the prospect that there is some easy diplomatic way out by rewarding the North Koreans for their bad behavior once again, which is what he has done in the past.

BAIER: Quickly, uncertainty in Europe about protests, the future of euro, a complex issue. Down the line quickly about explosions over the economy.

BAIER: What we saw in Italy was more political event than an economic event because it was a vote of no confidence for Silvio Berlusconi in Italy. He survived it. They came back. There are longer term economic problems but what we saw in the video was political.

HENDERSON: This is a crisis in Europe that is rooted in debt and government spending. The question is whether the politicians and citizens will look at that and take cue to see it as a way not to go or end up.

KRAUTHAMMER: It's one domino after another. It started out with Greece and Ireland. Now Belgium is wobbling and Spain where the bond rating is lowered. Interest rates are shooting up as a result of no confidence in them. In the end, the euro is threatened. They may end up with euro as the only way out because of disparity between strong and weak economies.

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