Transcript: 'The Journal Editorial Report,' July 21, 2007

This is a rush transcript from "The Journal Editorial Report," July 21, 2007.

STUART VARNEY, FOX GUEST HOST: This week on the "Journal Editorial Report,"

(BEGIN VIDEO CLIP)

FRAN TOWNSEND, HOMELAND SECURITY ADVISER: It hasn't worked for Pakistan. It hasn't worked for the United States.

(END VIDEO CLIP)

VARNEY: A new intelligence report says Al Qaeda regrouped has along Pakistan's border, citing Pervez Musharraf's hands-off approach to rooting it out. Should the U.S. continue to back the Pakistani president?

Democrats in Congress are quietly lay groundwork for a government take over the health care system. It is Hillary Care on the installment plan. And we'll tell you who's paying for it, after these headlines.

(NEWSBREAK)

VARNEY: Welcome to the "Journal Editorial Report." I'm Stuart Varney, in for Paul Gigot.

The national intelligence estimate released this week warned that al Qaeda has regenerated finding safe haven in the north western tribal region of Pakistan. That's a country that President Bush sees as a key ally in the war on terror. The news comes as the Pakistani government scrambles to salvage a peace accord with tribal leaders and as violence and unrest elsewhere in the country raise new questions about the stability of President Pervez Musharraf's military government.

Max Boot is a senior fellow at the Council of Foreign Relations. He's also the author of the book "War Made New," which comes out in paperback in August.

Max, if there were regime change in Pakistan, for any reason, would we get an Islamic government, would we get another military dictatorship or would we get some form of democracy?

MAX BOOT, COUNCIL OF FOREIGN RELATIONS SENIOR FELLOW & AUTHOR OF "WAR MADE NEW": I think the best bet in Pakistan is, in fact, democracy because this is a country that has a tradition of democracy. Musharraf, himself raises the specter if he is gone, he will be replaced by some kind of fundamental Islamic regime. But I think that's unlikely given the fact that, in the previous election, the Islamists parties only received 11 percent of the vote.

I don't think this is a situation like the Palestinian Authority where if you open it up to elections, all of a sudden, the Islamists take over. I think, in fact, the secular opposition parties are much stronger in the case of Pakistan.

If Musharraf holds elections, as he should, I think there is a good chance we will get a more moderate secular government in his place with more democratic legitimacy.

VARNEY: So it is your opinion that this would be the best outcome and it is also the likely outcome?

BOOT: I think it is the likely outcome if free and fair elections are, in fact, held.

VARNEY: Are we going to get those elections?

BOOT: I think we should. And I think the United States should insist on it. We have leverage with Musharraf. Because we have given him over $10 billion in aid since 9/11. And we should be asking him to transition back to democracy as he has repeatedly promised to do. But he has always broken his word.

I think we have made our best that he is our best guarantee of keeping the Islamists at bay, but what we've seen in the last few years he is not keeping the Islamists at bay. He is not truly fighting the terrorists.

He is allowing them to take over the northwest frontier province which has become a safe haven of Al Qaeda, as the national intelligence estimate said.

VARNEY: But the counter argument is surely this could be another shah of Iran situation. We pushed out the shah under Jimmy Carter and we get the ayatollahs. Surely there is a strong chance that precisely the same thing could happen in Pakistan if Musharraf were pushed out.

BOOT: That could, in fact, be the case if there were, in fact, a revolution led by the Islamists, but I don't think that's the likely outcome. I don't think that's happening now.

What you're seeing is that the biggest mass movement in the street of Pakistan is being led by the secular middle class. It's being led by lawyers, by journalist who are upset that Musharraf fired the chief of the supreme court in Pakistan.

There are certainly Islamists activities going on. They are setting off bombs. They're killing people. But they are not gaining popular support.

In fact, the opposition parties were in support of Musharraf when he raided the Red Mosque in Islamabad a week and a half ago. They want to crack down on the Islamists as well. And the Islamists are not generating mass protest like you saw in Iran in 1979.

VARNEY: Would the Islamists gain strength if America were to use its air power against known terrorist suspects hiding out in the safe haven of Kohistan.

BOOT: That's the argument you often hear, but what we see is they are gaining strength even when we refrain from using our military power against the terrorist strongholds across the border from Afghanistan. We have been cautious about doing anything to undermine the Musharraf regime, but the result of that has been a consolidation of al-Qaeda and Taliban authority in those regions where they are exporting terrorism to Afghanistan and also plotting attacks against us, as we now hear.

I think we have to step it up a little bit and be a little bit more active in going after some of these terrorist concentrations that we identify, and a little less concerned about the political ramifications, although we have to keep those in mind.

VARNEY: Do you think America will do that?

BOOT: I have no idea what's in President Bush's mind, but I suspect that's more likely now after the NIE came out. And, in fact, we have done some of these operations in the past with some degree of cooperation from the Pakistanis, but we try to keep it low profile and not publicize when we do these kinds of efforts.

VARNEY: President Musharraf cleaned out the Red Mosque in Islamabad. He put down the Islamist student rebellion. Do you think that marked some kind of turning point in the way Musharraf governs the country?

BOOT: It is hard to say. Musharraf has clashed with the Islamists in the past but has also cut deals with them. We saw this happen last year where he basically turned over northern Kohistan, south Kohistan and other parts of the frontier region to Islamic control. He turned it over to the radicals. And they have, in fact, set of training camps have been active in exporting revolution.

So Musharraf plays this double game wherein sometimes he takes on the Islamic radicals but other times he cooperates with them. In fact, the military, which he represents, has a long history, going back to the early 1980s, of using the radicals to further Pakistani foreign policy exporting revolution to Kashmir, to Afghanistan and elsewhere.

I think we are being very naive if we expect Musharraf will turn decisively against the radicals because he is playing a delicate balancing game where he needs some degree of support from the radicals within Pakistani politics.

VARNEY: But to sum it all up, the big picture I'm hearing from you is one of optimism, that a democratic outcome it is a strong possibility here, that Musharraf will oppose significantly the Islamists in his own country, that America will take action in Kohistan against established terrorist training camps or whatever. You are an optimist in this situation.

BOOT: Well, I am cautiously optimistic. I think there is also reason for concern. I think if we continue backing Musharraf blindly and simply write him a blank check and tell him to do whatever he wants, I think that is a very bad deal from our standpoint because it is turning the people of Pakistan against the United States. And Musharraf is not delivering on his promises. He is not doing as much as he claims to fight the radicals.

I think there are grounds for optimism if we push Musharraf to hold free and fair elections in the fall, in which he allows exiled opposition leaders like Benazir Bhutto and Nawaz Sharif to run.

If he throws open Pakistani democracy, I think the outcome is probably likely to be a good one. However, if we continue backing this military strong man, I think we are in for some real trouble. So I think we need to rethink our current policy toward Pakistan.

VARNEY: More on this. Max Boot, please stay with us. More on the problems in Pakistan when we come back.

Plus, move over Michael Moore. Democrats in Congress are quietly pushing for a government take over of the health care system. We'll have the details on this stealth socialism when the "Journal Editorial Report" continues.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

TOWNSEND: The Pakistanis understand the threat that al Qaeda and violent Islamic extremism pose to their country. We will continue to press them to take action to ensure that no part of Pakistan remains a safe haven for terrorists.

(END VIDEO CLIP)

VARNEY: That's Homeland Security advisor Fran Townsend addressing a new intelligence report that says al Qaeda has regrouped in Pakistan's northwestern tribal region.

We are back with Max Boot of the Council on Foreign Relations.

And joining the panel this week, "Wall Street Journal" columnist Bret Stephens, editorial features editor Rob Pollock and editorial board member Jason Riley.

Bret, all of the discussion on Pakistan is always about terrorism, politics, diplomacy. How is Pakistan actually doing economically? Because that counts.

BRET STEPHENS, WSJ COLUMNIST: Ironically, Pakistan has had the longest period of uninterrupted economic success almost in its history under the current regime. That's not to excuse what the regime has done elsewhere. But Musharraf has brought in a very talented prime minister, Shaukat Aziz, who used to be a senior executive at Citibank, and the economy has been prospering under him.

It stands in rather striking contrast to the economic records of his civilian predecessors Nawaz Sharif and Benazir Bhutto who terribly mismanaged the Pakistani economy. And I think it raises some real questions about the wisdom of seeing at least those two particular people once again reinserted in Pakistani political life.

JASON RILEY, WSJ EDITORIAL BOARD MEMBER: Bret makes a good point. At the end of the day, Musharraf is the devil we know. Pakistan has nuclear arsenal. We have to be concerned about that falling into the hands of fundamentalist. And we don't have great intelligence in Pakistan. So we have to be worried about what a free election will bring.

ROB POLLOCK, WSJ EDITORIAL FEATURES EDITOR: Look, I think our intelligence is perfectly good in Pakistan. This is not a closed country. I have been there. They have a vibrant secular intellectual class. A very good press. Those are reasons to be perfectly confident. I think, as Max said, if we go forward with a free and fair election, we are going to get a reasonably good result.

The way to strengthen the extremists is to continue doing what Musharraf has been doing now, which is suppress political life in the country.

VARNEY: We are not getting clear picture here, are we? We constantly hear of the Islamists threat in Pakistan, the safe haven in Kohistan. We are not getting a clear picture of the strength of the Pakistani middle class, its business class and its pro-democracy movement.

BOOT: What we mainly hear about are the radicals who blow things up. That is not, in fact, the majority sentiment of Pakistani society. We can have some degree of confidence that if we, in fact, throw open free and fair elections, the result will not be the empowerment of the radicals.

I think we have to be careful to avoid the mistake that we made with the shah. There's two to look at it. One way is precipitously withdrawing our support from one dictator and getting a far worse dictator. But the other way to look at it is, I think that we gave a blank check to the shah for far too long to suppress the forces of descent with his own society, and the result of that was an explosion in which, in fact, the Islamists did come to power in 1979. We have to avoid making that mistake in Pakistan.

VARNEY: Is there general agreement that a shah of Iran type situation in Pakistan, the take over by the ayatollahs, and next time around maybe take over Islamists -- is there general agreement that is unlikely in Pakistan?

STEPHENS: No, I don't think it's a situation we should rule out. And the comparisons are made often with the Philippines where we eased out Ferdinand Marcos in favor of a genuine democrat in Corazon Aquino. But the Philippines is very different from Pakistan and our considerations also have to be very different.

For one thing, the Philippines wasn't a nuclear power. The next thing, it wasn't a predominantly Islamic state with a large radical population.

And I think we also have to take into account the fact that Pakistan is now experiencing a wave of jihadi terror. And that's not a tribal fact.

POLLOCK: Yes, that's fine and great, but so is Iraq experiencing a wave of Islamists terror. As we know from having elections there that, when people got to vote, they largely don't elect the Islamist radicals.

(CROSSTALK)

STEPHENS: I am not opposing the idea of elections. I am not opposing itself idea of easing Musharraf out. How we do it, and the language we use is, I think, fairly critical. And we should not forget that Pakistan suffered under its civilian leadership. Pakistan has been addicted to a series of civilian people, like Benazir Bhutto, who remains popular, but whose regime was riddled with corruption. And I should add that it was under her that the military developed nuclear weapons that the A.Q. Kahn network furbished.

POLLOCK: But don't throw up Bhutto as the alternative. There are lots of other secular politicians. In fact, its...

RILEY: There are things short of using Musharraf -- this Red Mosque incident from a few weeks ago, I think, gives Musharraf an open here. The tribal leaders are blatantly violating these treaties now. And he should use that as an opening to, first of all, declare them null and void. I'm not saying he has to launch a ground invasion into tribal areas, but there are things he can do.

We can also step up our air strikes. We have done them in the past. Musharraf has given us a little more of a green light to be aggressive there. And we should take advantage of that.

VARNEY: Do you think that's likely, that we are, in fact, going to step up our air strikes?

(CROSSTALK)

RILEY: NIE, the National Intelligence Estimate, I think, is a nice excuse to do that.

VARNEY: The gamble...

BOOT: We don't have to tell Musharraf leave tomorrow. All we have to do is say abide by terms of the constitution, hold a free and fair election and also don't be both commander in chief of the army and president at the same time. Choose between those positions. That's what the majority sentiment in Pakistan is.

VARNEY: And if he doesn't do that, what do we do?

BOOT: We have to start rethinking our complete support for him. We have to make this a bigger issue in our relations was him. We have a lot of leverage because we have given the guy $10 billion since 9/11. Where is that money going? Is it being well spent?

VARNEY: But haven't we putting on this kind of pressure for five, six years now?

BOOT: This is not where we -- no, we have not because we basically said to him, go pursue the radicals, pursue the terrorists and we don't care what you do on the human rights or democracy front. We only paid lip service on those areas.

But, in fact, I think we need to elevate that in our relationship with him and make that more important so we don't repeat the mistake we made in the past of simply backing dictators and not getting the results we hoped for.

VARNEY: Max Boot, thanks very much for joining us this week. Appreciate it.

BOOT: Thanks for having me.

VARNEY: All right, when we come back, socialism on the sly. Democrats in Congress are quietly orchestrating the government take over of the health care industry. Is it the return of Hillary Care? Find out when "the Journal Editorial Report" continues.

(COMMERCIAL BREAK)

VARNEY: Call it Hillary Care on the installment plan. Democrats in Congress are quietly laying the groundwork for a gradual government take over of the health care system.

We are back with Bret Stephens, Rob Pollock and Jason Riley. And joining us, the panel, from Washington is columnist Kim Strassel.

Kim, you first. The latest health care proposal from the Democrats is to expand government coverage to more children. Is that really socialism on the sly? Is that really a government take over of the health care system?

KIM STRASSEL, WSJ COLUMNIST: It is a beginning of it. Look, the Democrats back in the 1990's tried Hillary Care and they were roundly defeated. And they have bad memories of that.

The vast amount of Americans don't like the idea of socialized medicine. So they've got a new plan, which is rather than have an honest debate, put forward legislation about socialized health care.

What they want to do is take the programs that exist in Washington already and expand them. SCHIP is the beginning of this movement. What they want to do, it was supposed to be for very poor kids. They want to expand it to encompass more kids and adults. At the same time, there are discussions about lowering the age for Medicare so that many more people will be encompassed by that program.

VARNEY: You said the SCHIP, that is the State Children's Health Insurance Program. The Democrats want to expand it by $35 billion, I believe, to include more children. That's it?

STRASSEL: They would like to expand it by even more than that. The administration is advocating a $5 billion increase. The Democrats would love to have it at $50 billion to $60 billion. Right now in the Senate, they are talking about a $35 billion compromise.

VARNEY: A compromise? OK, I'll take that.

Rob Pollock?

POLLOCK: No, I agree fully with what Kim said. It's the strategy is poor people and old people. Look, the Democrats don't even have to lower the age for people to get into Medicare. All they have to do is wait for demographics trends to continue and more and more Americans will be moving into the Medicare system in any case. What is going to happen over time, if nothing new happens, is our system become more socialized?

VARNEY: Why is it that I have heard nothing from the Republicans? I have never heard anything about market-oriented health care solutions.

RILEY: The Republicans are really on their heels here. They don't want to appear to be against children and health care for children. And Hillary Clinton and Barack Obama have already come out and said Bush wants to cut health care for children and wants to punish children. And the Republicans don't want to be on the receiving end of that criticism...

VARNEY: Have they got a point?

RILEY: That's the problem, they...

STRASSEL: They do have a plan.

VARNEY: They do, Jason?

STRASSEL: I mean they are having a discussion at least, in the back rooms of the Senate, in particular. They are trying to decide whether or not they want to get behind the president's plan, which came out in the State of the Union, which would offer a standard deduction to every American family, or if they want to get behind a different tax plan, which would be a tax credit. They are having this fight behind the scenes.

The question is, if they get their act together soon enough to actually put it forward as a viable alternative to what the Democrats are offering.

VARNEY: What's the point of a $15,000 standard tax deduction for everybody when more than half of the people in this country do not pay federal income tax? What am I missing here?

POLLOCK: The point of it is to equalize the tax treatment of health insurance. Right now, if you get it from your employer, that's a tax-free benefit. If you are not lucky enough to get it from your employer, you have to buy it with after-tax dollars.

What we want to do, if you believe in the market, is break down this employer-based system so people will own their policies, have portable policies, will take them with them when then switch jobs. That's a major source of health insecurity right now, just changing jobs.

RILEY: And the other thing that will do is reduce the costs. Because right now this third-payer system, third-party payer system, that Rob was describing, spikes costs. When people are spending other people's money, they care less about the treatment they are getting.

What we want to do is remove this distortion in the tax code, lower the costs for everywhere and make health care more accessible to the lower- income people that we are trying to help.

VARNEY: When you say you are doing something for the children, you can't lose politically now, can you?

(LAUGHTER)

Kim, what do you say?

STRASSEL: No. This is a problem Republicans face at the movement. Unless they have a plan, what they are basically faced with saying is we care about the children, too, just not as much as you.

So this is what's happening at the movement. Unfortunately, you see Republicans who are so scared of this debate they are compromising. They're agreeing to raise taxes, tobacco tax, in order to fund this. They are giving up on their principles because they don't have something to stand behind.

VARNEY: Bret, you have been strangely quiet in the health care debate. Why don't you muscle in some?

STEPHENS: No, look, I think that the issue here is how Republicans fight ideological debates. And we have a 40-year history of Republican policy, which says we are in favor of what the Democrats are in favor of, only less so. I think that, exactly as Jason put it, the Republicans have to articulate a set of clear free-market principles that don't seem politically to be penalizing preferred groups, children, the elderly or so far. If they don't do that, they're going to be steamrolled.

RILEY: I will tell you who else has been very quiet on this is the Republican presidential candidates, who I think are in the same position as the Republicans in Congress.

POLLOCK: No, no. I respectfully disagree on this. But you have got -- on one side, you have got Mitt Romney who is running a sort of quasi- socialist experiment he did in Massachusetts. But you have also got Rudy Giuliani who has came forward with some very interesting market-oriented ideas, building on the tax cuts, but also pushing for interstate commerce in health insurance, which is currently not allowed and would make a major difference in improving the market.

RILEY: I am speaking about the SCHIP debate, however. You have see Hillary and Barack Obama jump right in and attack. You haven't seen the Republican presidential candidates.

VARNEY: Last word to Kimberly. Do you think, at the end of the day, there is a compromise possible between more state help for children, health wise, and more market help for children?

STRASSEL: Well, I don't think -- you either have one or the other. Because SCHIP is about bringing people into a government system. But what you really would hope here is that Republicans simply, instead of saying, okay we will go with you, they come out with something on their own and don't force the president to veto this.

VARNEY: Fair enough. Kimberly, thanks very much.

We have one more break to take. And when we come back, our "Hits and Misses" of the week.

(COMMERCIAL BREAK)

VARNEY: Winners and losers, picks and pans, "Hits and Misses," yes, it's our way of calling attention to the best and the worst of the week.

This week, earmark follies. Kim starts us off with a doozy, courtesy of New York Congressman Charlie Rangel -- Kim?

STRASSEL: Yes, it's earmark season. And wait until you hear this one. Harlem Congressman Charlie Rangel is asking not just for a $2 million earmark, but a $2 million earmark in his name. He wants to create something called the Charles B. Rangel Center for Public Service.

Now, if you are wondering what is going to be in this as-yet-to-be- created center, we found a brochure that explained. It went to say that, for one, it will provide a, quote, "well-furnished office for Congressman Rangel." It will also have the Charles Rangel Library, which will tell the story of, quote, "one great man."

(LAUGHTER)

VARNEY: Earmark follies.

STRASSEL: The good news is Americans get to hear about this because of earmark disclosure. The bad news is that Republicans failed to actually strip this earmark out this week. So business as usual.

VARNEY: Hold it. It doesn't end there. He's famous for the bridge- to-nowhere. Remember that one?

All right, Rob Pollock, what is Alaska Congressman Don Young doing these days?

POLLOCK: Well, as we remember from the last Congress, of course, pork is a bipartisan obsession in Congress. And you have Don Young, of bridge- to-nowhere fame, a $315 million project to benefit essentially a few people in Alaska.

Well, not only was he not chastened by the Republican loss last term, but he took to the House floor and went on a tirade about other Republicans trying to take away more of his special interest money, saying, "It's my money. Come of my money."

VARNEY: My Money? Direct quote, my money?

POLLOCK: Yeah, my money.

(LAUGHTER)

VARNEY: All right. Good one.

All right, finally, it is not an earmark, but it's equally outrageous. Bret, Bill Clinton criticizes President Bush on the Iraq war?

STEPHENS: Yeah, well, there used to be a very fine tradition in this country in which ex-presidents made a point of not criticizing their successors. They respected the difficulty of the office they inhabited.

Of course, all that changed with the ex-presidency of, who else, Jimmy Carter. I am sorry to say that Jimmy Carter has found his own successor as an ex-president in Bill Clinton. The other day on Dianne Sawyer, Mr. Clinton took the opportunity to score Mr. Bush on Iraq and also to say that there is no military victory here.

Now, I think that's unfortunate for what it says about Clinton's views of his successor. It is unfortunate for what it says about Clinton's view of the military.

And really, coming from someone who bequeathed us so much of the Iraq problem that we face, I think it is chutzpah.

VARNEY: I think it's only Republican ex-presidents who do not criticize their predecessors. I think that's the way it works.

(LAUGHTER)

VARNEY: All right, that's it for this week's edition of the "Journal Editorial Report." Send your e-mails to jer@FOXnews.com. And visit us on the web at www.foxnews.com/journal .

Paul will be back next week.

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