White House vs FOX News: War in review

by Mark Silva and updated

After a week at "war'' with the FOX News Channel, the White House maintained today that it really isn't too concerned about what FOX says about the administration - and also gave new, high-level voice to its contention that FOX isn't really a news network anyway.

"Iit's not so much a conflict with FOX News,'' White House Chief of Staff Rahm Emanuel sad in an appearance this morning on CNN's State of the Union - the cable network where Anita Dunn, the White House communications director, last week lashed out at FOX as "an arm of the Republican Party,'' leading to a new assault against the administration from Glenn Beck.

"The way to look at it and the way we -- the president looks at it and we look at it -- (it) is not a news organization so much as it has a perspective,'' Emanuel said of FOX. "And that's a different take. And more importantly does not have the CNNs and others in the world basically be led and following FOX, as if that -- what they're trying to do is a legitimate news organization in the sense of both sides and a sense of value (and) opinion.

"But let me say this,'' the chief of staff said. "While it's clear what the White House and what Anita said, I mean, the concentration at the White House isn't about what FOX is doing.

"Its concentration is about, what does it take to make sure the economy is moving, creating jobs, helping the economy grow, making sure that we responsibly withdraw from Iraq, making sure what -- the decisions we make on Afghanistan, we ask the questions before we go ahead first into putting 40,000 more troops on the line and America's reputation, its most treasured resources, its young men and women, and its resources,'' Emanuel said. "That's what's occupying the decisions and the time in the White House. ''

It would be hard to tell that sometimes by the White House Web-site's monitoring of FOX facts for fact-checking, or by Beck's obsession with the administration - taking on Dunn last week for having said that Mao Zedong (and also Mother Teresa) is one of her favorite philosophers.

Michael Clemente, senior vice president for FOX News, issued his own statement this afternoon: "Surprisingly, the White House continues to declare war on a news organization instead of focusing on the critical issues that Americans are concerned about like jobs, health care and two wars. The door remains open and we welcome a discussion about the facts behind the issues."

Rupert Murdoch, the News Corp. chairman and owner of FOX, told his stockholders last week that the counterpoint with the White House has been great for the network's ratings.

Asked if the White House strategy of confronting FOX is simply "fortifying the enemy,'' David Axelrod, the senior political adviser to the president, said on ABC News' This Week today: "I'm not concerned, Mr. Murdoch has a talent for making money...

"If you watch - even - it's not just their commentators, but a lot of their news program,'' Axelrod maintained. " It's really not news, it's pushing a point of view and the bigger thing is that other news organizations like yours, ought not to treat them that way. And we're not going to treat them that way, we're going to appear on their shows and participate, but understanding that they represent a point of view."

This was after a week in which Dunn told The New York Times of FOX: "We're going to treat them the way we would treat an opponent. As they are undertaking a war against Barack Obama and the White House, we don't need to pretend that this is the way that legitimate news organizations behave."

The Times' David Carr notes in a Week in Review piece about "the battle between the White House and FOX "that, "It could all be written off as a sideshow, but it may present a genuine problem for Mr. Obama, who took great pains during the campaign to depict himself as being above the fray of over-heated partisan squabbling. In his victory speech he promised, "I will listen to you, especially when we disagree."

"People who work in political communications have pointed out that it is a principle of power dynamics to "punch up " -- that is, to take on bigger foes, not smaller ones,'' Carr wrote. "A blog on the White House Web site that uses a "truth-o-meter" against a particular cable news network would not seem to qualify. As it is, Reality Check sounds a bit like the blog of some unemployed guy living in his parents' basement, not an official communiqué from Pennsylvania Avenue.

"The American presidency was conceived as a corrective to the royals, but trading punches with cable shouters seems a bit too common. Perhaps it's time to restore a little imperiousness to the relationship. ''

HERE, COURTESY OF CNN AND ABC are the transcripts of Emanuel's interview on State of the Union and Axelrod's interview on This Week:

CNN's STATE OF THE UNION

CNN'S JOHN KING: We begin this Sunday with one of the most powerful men in Washington. He's President Obama's gatekeeper, determining who gets access to the Oval Office, and he also plays a key role in virtually every decision the president makes. The White House chief of staff, Rahm Emanuel, welcome to "State of the Union."
EMANUEL: Thanks, John.
KING: I want to begin overseas. There are reports that we are getting, hearing from U.S. officials, Western officials who have met with him and also on the ground, that President Karzai is resisting the findings that the fraud in the election was significant enough that there should be a runoff. In the view of the president of the United States, does President Karzai have a choice? Must there be a runoff?
EMANUEL: Well, first of all, what President Karzai must do and the process there is a credible and legitimate election or result, more importantly, for the Afghan people and for that government going forward, whether that's through a runoff, whether that's through negotiations. The process will be determined by the Afghan people. The result, for us and for the president, is whether, in fact, there's a credible government and a legitimate process; the Afghan people then think, this has worked, it's processed through. It's more important for the Afghans to come to that conclusion than what we say they have to do, because it's important for that government, whatever result or whatever process it takes, that the end result has a legitimate and credible government for the Afghan people.
KING: So at this point, since we do not view the prior election and the U.N. does not view the prior election as legitimate, is that then -- is the choice then a runoff election or a negotiated power sharing agreement with Mr. Abdullah?
EMANUEL: John, you've seen in the papers, you see the reports that are coming from Kabul. There is basically two roads there, or two basically processes. One is another runoff election between the two top candidates, or a negotiation between those candidates. But the end result must be a legitimate and credible government to the Afghan people. That's what's important. It's the Afghans making a decision about what type of government they're going to have and what road they're going to take to that point.
KING: And this plays out as the president faces a decision of enormous gravity, whether to send thousands, tens of thousands of more U.S. troops. Will the president wait and delay that decision until after you have a clear picture of the political situation?
EMANUEL: The review's going to continue to go on. That's not in question. The question, and one of the central questions of that review -- so we will continue. We've had five meetings. There's another set of meetings this week and the following week.
The question, though, and one of the questions is at the heart is -- and even General McChrystal's own report says -- the question does not come how many troops you send, but do you have a credible Afghan partner for this process that can provide the security and the type of services that the Afghan people need?
And you know, here in Washington, we want to have a debate, and you can't -- we would love the luxury of this debate to be reduced down to just one question, additional troops, 40,000. This is a much more complex decision. Even the general's own report and General Petraeus' own analysis says the question, the real partner here is not how much troops you have, but whether in fact there's an Afghan partner.
And when you go through all the analysis, it's clear that basically we had a war for eight years that was going on, that's adrift. That we're beginning at scratch, and just from the starting point, after eight years. And there's not a security force, an army, the type of services that are important for the Afghans to become a true partner.
So that is the question. And what I think it would be irresponsible -- and it's clear that as I saw the clip earlier, Senator Kerry said -- Senator Kerry, who's now in Kabul in Afghanistan noted, that it would be reckless to make a decision on U.S. troop level if, in fact, you haven't done a thorough analysis of whether, in fact, there's an Afghan partner ready to fill that space that the U.S. troops would create and become a true partner in governing the Afghan country.
KING: Whether the president sends more troops or not, how are we going to pay for this? Even if he does nothing more, there will be 68,000 U.S. troops on the ground in Afghanistan at the end of the year, maybe a little more than that, without a decision to increase them. Will the president have to request emergency funding to pay for that, or is that (inaudible)?
EMANUEL: It will be part -- I mean, if we did this, it would be part of what we have to do as we've done both for our Iraq and Afghanistan wars in the past. It would be part of that process.
KING: But the president said in April, he had hoped not to do that anymore. The president sent a letter to the House speaker, and he said, "this is the last planned war supplemental." And he said, you know, in the past, after seven years of war, the American people deserve an honest accounting of the cost of our involvement in ongoing military operations. Is this something that candidates can say one thing or a young president can say another thing that you learn that sometimes you can't ...
EMANUEL: No, I mean, one of the points is, is, what is the cost if we took this approach? And that's been part of the discussion. The first part of this discussion, John, has been about the fact that, where are we, what is the context, what is the assumptions built into this? One of the things that has been analyzed in all this is that, you know, and people would like to reduce this down and would like the luxury that, you know, send more troops, as if that's all that it takes.
You have to have a policy. It's important -- the policy is as important to protecting the troops as the equipment they have. And an analysis of where we are, what happened.
You have literally got into a situation, is there another way you can do this? And the president is asking the questions that have never been asked on the civilian side, the political side, the military side, and the strategic side. What is the impact on the region? What can the Afghan government do or not do? Where are we on the police training? Who would be better doing the police training? Could that be something the Europeans do? Should we take the military side? Those are the questions that have not been asked. And before you commit troops, which is -- not irreversible, but puts you down a certain path -- before you make that decision, there's a set of questions that have to have answers that have never been asked. And it's clear after eight years of war, that's basically starting from the beginning, and those questions never got asked.
And what I find interesting and just intriguing from this debate in Washington, is that a lot of people who all of a sudden say, this is now the epicenter of the war on terror, you must do this now, immediately approve what the general said -- where, before, it never even got on the radar screen for them. That -- everything was always about Iraq.
This is where Al Qaida is based. Not just in Afghanistan, it's clear that they're based in Pakistan. What is the relationship between the Taliban? Are there different grades of a Taliban? That is what the analysis is going on in the situation room, and I think the comfort for the American people is the president will not be rushed to making a decision without asking firm questions and challenging the assumptions behind those questions.
KING: A quick break with the White House chief of staff, Rahm Emanuel. When we come back, we'll bring the debate home, domestic issue. Will health care reform pass this year, and what about the record federal budget deficit? Stay with us.
(COMMERCIAL BREAK)
KING: We're back with the White House chief of staff, Rahm Emanuel.
You are deeply involved in this health care negotiations on Capitol Hill. Right now, behind closed doors in the Senate -- this is a story from the Washington Post today. "Small group now leads closed-door negotiations." And it quotes the president, from candidate Obama saying, we will have these discussions televised on C- SPAN, everybody will be at the table, we'll do this in an open and transparent way. Why does it have to be done behind closed doors?
EMANUEL: Well, John, first of all, I mean, you know very well that this has been -- the entire health care process has been fully public and...
KING: This is the most important part.
EMANUEL: And everybody is going to continue to be involved. We went up to have the first set of a series of discussions. You saw all the hearings. Many people said, you know, cover the hearings in five separate committees that had those discussions or discussions happening then, both at the hearing level, and also...
KING: So as you negotiate now...
EMANUEL: ... as you negotiate in private. But that doesn't mean that you can't have what's going on.
The key point in this debate about health care, John, isn't what's going on in a sense of just these negotiations -- those are key -- is what, at the end of the day, will the result achieve what I call the four C's. That is, are we going to control cost, expand coverage, give people choice, and competition in the system. And that's the goal the president set out. We went up there. You had two committee chairmen, as well as the Senate majority leader there. Everybody knows these issues that we're discussing.
KING: You have another stop, so I'm going to interrupt you, because you have another stop to make and my time is limited. In the C's, controlling costs...
(CROSSTALK)
EMANUEL: I was actually getting close to be (ph) a senator (inaudible) filibustering for a second.
KING: You were filibustering quite well. You're very good.
One of the controlling cost elements here is competition -- excuse me, here -- is would you have the public option. And on the Senate side, you know, it's harder to sell in the Senate, because you have more centrists involved. Is this an acceptable public option to Rahm Emanuel, the Olympia Snowe trigger plan, maybe with a combination of Tom Carper's proposal to let the states do it?
EMANUEL: Breaking news, John. Doesn't matter whether it's acceptable.
(CROSSTALK)
KING: It does matter whether it's acceptable, because you'll have to sell it on the House side.
EMANUEL: No, here's the deal. As you saw the president say in the joint session to Congress, he believes a public plan, a public option is important to competition. Because in many parts of the country, a single health insurance industry has 80 percent, 70 percent of the market. Let me go -- finish. It is also parts of -- that parts of the country where premiums are the highest. So if you don't have competition, an insurance company has the run of not only premiums, but what kind of health care you have.
And so the president believes in it as a source of competition. He also believes that it's not the defining piece of health care. It's whether we achieve both cost control, coverage, as well as the choice that...
(CROSSTALK)
KING: Is a trigger good enough for the president?
EMANUEL: The president of the United States will obviously weigh in when it's important to weigh in on that. There are key members of the Senate that want a public option. The Senator Snowe, who's also important, would like to see a trigger. But what's implicit in the notion of a trigger is that you should always have available that option of having a public plan to bring the type of competition that brings downward pressure on prices and price-effective health care costs.
KING: The way the Senate Finance Committee bill is paid for is a fee on these Cadillac insurance plans. And your friends in the labor movement say, no way. That what happens is you'll put a fee on the insurance companies, and they will backdoor that by passing the costs onto the consumers. Gerry McEntee, the president of the American Federation of State, County and Municipal Employees, says we "all worked for these people. We worked for Obama. What do we get for it? We not only don't get anything for it, we get a slap in the face." They say that it's a backdoor way of violating the president's promise not to raise taxes on the middle class. Will that be in the final bill?
EMANUEL: First -- one of the first things the president did when he got into office, was ensure the largest middle class tax cut in history. Because middle class had basically saw their incomes...
(CROSSTALK)
KING: But why does a labor leader call it a slap in the face?
EMANUEL: Well, that's his position. In fact, he spoke -- the president spoke to this in the joint session.
But I want to go back. Remember this -- the middle class received the largest -- one of the largest tax cuts in one of the first things he's done in the 45 -- in the first 45 days of his office.
Second, this is basically one of the ways in which you basically put downward pressure on health care costs. The president believes, as he said in the joint session, that while he opposed this originally, thinks that -- and based on the analysis -- it is helpful in getting costs under control. And it hits the insurance companies and the high expansive and expensive plans.
KING: We have a $1.4 trillion deficit this year. I know the president has said he will cut it in half in his first term. Health care reform will be deficit-neutral is the president's position, and yet...
EMANUEL: More than deficit-neutral, John.
KING: And yet...
EMANUEL: John, wait a second. Wait a second. More than deficit-neutral.
KING: You say it will help bring the deficit down.
(CROSSTALK)
EMANUEL: Also, let me make a point up here, which I think -- I really want to make this point. When the prescription drug bill was passed, in the '80s -- I mean, rather, in 2005.
KING: In the Bush administration.
EMANUEL: Yes, in the Bush administration, there was no pay-for. It was charged on the credit card. And it run up costs as far as the eye can see, basically for about $850 billion. This bill, somewhere will be about $850 billion, $900 billion, fully paid for, done within the health care system, and it brings down the deficit. And it's the first step, if you want to control...
KING: Except...
EMANUEL: As you know, John...
KING: The administration has asked the Senate to do this...
EMANUEL: ... if you want to control health care costs...
KING: ... $250 billion Medicare fix to doctors. The administration has asked the Senate to do that outside of health care reform. And right now, there is no way to pay for it.
EMANUEL: Yes, but, John, in fact is -- the president -- this is one of the gimmicks that was done year after year in Washington...
KING: So why do it now? If it's been done year after year, why not end it?
EMANUEL: And the president's budget, in fact, he included it in his budget when we negotiated that and we passed the budget. The first year, it's paid for.
What happens is, everybody says, you know, don't worry about it, and then they just pass it on. We've made a difference.
But the first piece of controlling the deficit is health care. I will also say the next step, is also important, is paying pay as you go. In the 2000 era, starting in 2001, the discipline of the '90s that led to a surplus was pay as you go. That was eliminated, basically allowed to lapse. And we passed three tax cuts, a prescription drug bill that led to $5 trillion of red ink run up -- the biggest red ink run-up in the shortest period of time in American history. Literally over half the nation's debt is accumulated in the last eight years.
KING: I traveled 40 states in the last 40 weeks, and people often use language for which you and I are known for using, mostly in private, not often in public, when they come to the issue...
EMANUEL: I didn't know you were a fellow traveler, John.
KING: They're watching Wall Street and they see the stock market going up, and many of them think that's a good thing, but they also see 9, 10 percent, if you go to Michigan, 15 percent unemployment. And they see this past week Citigroup gets $45 million in government bailout money, pays $5.3 billion in bonuses. Bank of America gets $45 billion in their taxpayer money, pays out $3.3 billion in bonuses. Is there anything the president can do about this?
EMANUEL: Well, one -- yes. And the level is -- and one of the issues is -- I mean, I think the American people have a right to be frustrated and angry, in this sense -- when the financial markets and the financial system had frozen up to a point that literally one of the reasons the economy was literally going towards a depression, literally head first. There's a one out of three chance we were going to get a depression. That basically the system came, and they only people -- the only place that you could actually resolve this situation was the government, which required the taxpayers putting up $700 billion. That as soon as stability was achieved, and things had a sense of normalcy, what are some of the titans in the financial industry do? Is they're literally going and fighting the very type of regulations and reforms that are necessary to prevent, again, a crisis like this happening.
And it's -- you know, as somebody who has literally sat once and was in Congressman Barney Frank's committee, the Financial Services Committee, that they're literally in that short of order, they assume everybody else has, you know, basically short-term memory problems around here.
The notion that they came, and I -- and I -- and the president understands, and it's why he's spoken to this, why the American people are frustrated. Not only do they come for a bailout, but in this short period of time where they have a level of normalcy because of what the government did to help them, they're now back trying to fight consumer offices and the type of protections that will prevent another type of situation where the economy is taken over the cliff by the actions taken on Wall Street and the financial market. And that is what's frustrating people. What's also frustrating to the American people, and the part on the bonuses, and I understand, as a former member of Congress representing people, is that while they see these bonuses going back and three see that as part of what the banks pay, is in fact -- there was an article the other day in the USA Today, incomes are at their 18-year low.
So while they're struggling to try to make ends meet, save for their retirement, pay for health care costs that are going up 10 percent next year, according to the Hewitt Associates, provide for their children an education -- while they're struggling to make ends meet, Wall Street is back doing what Wall Street did.
They have a responsibility to the whole system. And it starts with not fighting the financial regulatory system and the reforms that are necessary to protect consumers, homeowners, and others. They have a responsibility to come to the table and understand that taking -- that the risks that they took, took the economy to a place, it was near a depression, which we hadn't seen since literally the '30s.
They have a responsibility to be part of the solution, not part of being the obstacle and the forces, which is what the president is facing both on health care and the financial system, is fighting the very special interests that have vested interests in keeping the status quo and their friends up on Capitol Hill, who have actually been their advocates in keeping the status quo.
KING: You need to go, and so I'm going to ask you one more quick question. I let you answer that because I could see how important it was to you and I didn't interrupt you. I've known you for...
EMANUEL: That's so much like a family discussion.
KING: I've known you for 17 years, and we've been through a lot of campaigns together, you practice hardball politics with relish. I'm trying to get behind the curtain and understand why your White House has decided that it is in its interest to have this, boom, with our rival, FOX News, Anita Dunn, one of your staff, calls it the -- the communications director, the wing of the Republican Party. why?
EMANUEL: Well, no, it's not so much a conflict with FOX News. But unlike -- I suppose, the way to look at it and the way we -- the president looks at it and we look at it, is, it is not a news organization so much as it has a perspective. And that's a different take.
And more importantly, does not have -- the CNNs and others in the world basically be led and following FOX, as if that -- what they're trying to do is a legitimate news organization in the sense of both sides and a sense of value (ph) opinion.
But let me say this. While it's clear what the White House and what Anita said, I mean, the concentration at the White House isn't about what FOX is doing. Its concentration is about, what does it take to make sure the economy is moving, creating jobs, helping the economy grow, making sure that we responsibly withdraw from Iraq, making sure what -- the decisions we make on Afghanistan, we ask the questions before we go ahead first into putting 40,000 more troops on the line and America's reputation, its most treasured resources, its young men and women, and its resources. That's what's occupying the decisions and the time in the White House.
KING: I know you would rather be home with your children, I will let you go.
EMANUEL: Absolutely.
KING: Rahm Emanuel, the White House chief of staff, thanks for coming in to STATE OF THE UNION.
EMANUEL: Thanks, John.

ABC'S "THIS WEEK WITH GEORGE STEPHANOPOULOS"

SPEAKERS: GEORGE STEPHANOPOULOS, HOST

DAVID AXELROD, SENIOR ADVISER TO THE PRESIDENT

GEORGE WILL, ABC NEWS

PAUL KRUGMAN, NEW YORK TIMES

E.J. DIONNE, WASHINGTON POST

PEGGY NOONAN, WALL STREET JOURNAL

JAKE TAPPER, ABC NEWS

[*]
(BEGIN VIDEO CLIP)

STEPHANOPOULOS (voice-over): Good morning, and welcome to "This Week."

Wall Street is back, but what about Main Street?

(UNKNOWN): I was collecting unemployment, but unemployment just
wasn't enough.

(UNKNOWN): We have millions and millions of people being kicked out
of their homes.

STEPHANOPOULOS: The first Republican vote for health care.

SEN. OLYMPIA J. SNOWE, R-MAINE: When history calls, history calls.

STEPHANOPOULOS: But can Democrats bridge their differences?

SEN. CHARLES E. SCHUMER, D-N.Y.: We must have a public option.

SEN. JOHN D. ROCKEFELLER IV, D-W.VA.: Leaving 16 million men and
women and children uninsured is wrong.

STEPHANOPOULOS: This morning...

PRESIDENT BARACK OBAMA: I'm just getting started.

(APPLAUSE)

I don't quit.

STEPHANOPOULOS: ... critical questions at a crucial moment for the
president.

(UNKNOWN): Why do people hate you? And...

(UNKNOWN): Why are we still being nickel-and-dimed?

STEPHANOPOULOS: Our exclusive headliner, Obama's right-hand man,
senior White House adviser David Axelrod.

Plus, our expanded powerhouse roundtable, with George Will, Nobel
Prize economist Paul Krugman, Peggy Noonan of the Wall Street Journal,
E.J. Dionne of the Washington Post, and ABC's chief White House
correspondent Jake Tapper.

And, as always, the Sunday funnies.

JEY LENO, TALK SHOW HOST: A new study shows that the phrase most
often used by President Obama is "Let me be clear." The phrase he uses
the least often? "Let me be specific."

(END VIDEO CLIP)

ANNOUNCER: From the heart of the nation's capital, "This Week" with
ABC News chief Washington correspondent George Stephanopoulos, live from
the Newseum on Pennsylvania Avenue.

STEPHANOPOULOS: Challenges just keep coming at President Obama,
which gives us plenty to talk about with the man by Obama's side to deal
with all the incoming, White House senior adviser David Axelrod.

Welcome back.

AXELROD: Thanks, George. Good to be here.

STEPHANOPOULOS: There -- there is so much to talk about, but it's
all against the backdrop of a debate that's kind of swirling through the
political world right now, crystallized by the National Journal
magazine. We're going to show the cover of it right there, big picture
of President Obama, the question, "Is He Tough Enough?"

Inside, they quote the historian Douglas Brinkley, who says, "Obama
has created an atmosphere of no fear." And a Senate Democratic aide,
"Obama's style has to be more Lyndon Johnson, half I love you, but I'll
stick this screwdriver right through your heart in a second if it is to
my advantage."

Is that what the president needs to do? Is it time for him to get
tough?

AXELROD: Well, look, George, I think, if the president weren't
tough, we wouldn't be where we are vis-a-vis trying to deal with the
economy, two wars, and some -- remember what he inherited here. He
walked in the door, we had the worst economy since the Great
Depression. He had to take immediate steps to pull us back from what
many thought might be a Great Depression. He had to sort out in
Afghanistan a war where we had seven years of drift and no policy. And
he passed a series of things that are going to move this country
forward, from children's health care to pay equity for women, a series
of things.

This Congress has passed more legislation in the first term of this
president than any president in our lifetime. So I think he has been
plenty tough. I think people want toughness, but they also want to have
thoughtful leadership. And that -- and that requires reviewing these
issues, thinking them through clearly, and bringing people along, and
that's what he's doing.

STEPHANOPOULOS: So -- so you reject this argument that he has to
draw more lines in the sand, twist the arms of his opponents, now tell
people want he wants and expect it to get it done?

AXELROD: Let's take the issue of health care, because that's,
obviously, one of the things that people are referring to. We are
farther along than we've ever been in passing a comprehensive health
insurance reform in this country. It's something we've discussed for
100 years.

George, you were part of the last effort in 1994, never even got a
vote. We are on the doorstep of getting that done, and that's because
of the approach this president has taken.

STEPHANOPOULOS: And yesterday, the president in his radio address
took on the insurance industry, at least rhetorically, and he suggested
that he might be willing to take away their antitrust exemption. Was he
actually saying -- this has been -- the insurance industry for the last
60 years has had an antitrust exemption. Was he saying that he would
sign a bill that would take that away and open the door to premium caps
by the Congress?

AXELROD: Well, Congress is -- is reviewing that. He said it's
appropriate that they review that.

STEPHANOPOULOS: Would he sign it, though?

AXELROD: But let's talk about -- let's talk about the insurance
industry for a second, because most of the stakeholders in this health
care debate are at the table, they're trying to produce real reform,
because everyone knows the current system is unsustainable.

The insurance industry has decided now at the 11th hour that they
don't want to go along with this. One of the problems we have is we
have a health care system now that functions very well for the insurance
industry but not well for the customers.

STEPHANOPOULOS: So is he saying, if they don't play ball, they're
going to lose their antitrust exemption?

AXELROD: So what we need -- what we -- so we need these -- we need
these reforms. In the last year -- in the last 10 years, premiums have
doubled. You've seen the insurance companies take -- they -- they -- 10
years ago, 15 years ago, they spent 95 percent of their premiums on
health care. Now, 80 percent. More of the money is going to bonuses,
salaries, administrative costs.

This is -- this is not a sustainable path for this country. So we
need reform, and that's what he is arguing for.

STEPHANOPOULOS: But if they don't join the reform effort, will they
lose their antitrust exemption?

AXELROD: Well, we'll see what Congress -- we'll see what Congress
does. One thing we ought to do, the House bill has in it provisions
that -- that says that if they fall below a certain level of return of
these medical loss ratios -- in other words, the amount of money that
they spend on actual health care, that they -- they need to rebate some
of that money to consumers. That seems like a good idea.

STEPHANOPOULOS: But the president wants to throw out this idea of
taking away the antitrust exemption, but not willing to say today that
he would sign it if Congress passes it?

AXELROD: Well, let's see how that -- let's see how that -- that goes.

STEPHANOPOULOS: Let's go on to something else. You also saw in
advance in this week in the Senate Finance Committee Olympia Snowe, the
first Republican to vote for the legislation, and that -- that created
some -- I wouldn't call it a backlash, but some grumbling among some
Democrats, including Congressman Raul Grijalva in the House.

(BEGIN VIDEO CLIP)

REP. RAUL M. GRIJALVA, D-ARIZ.: I think it is a waste of time for
the White House and to some extent for leadership to continue to cater
to one vote.

(UNKNOWN): We can't sort of hedge and say, "What's Olympia going to
do?" We've got to decide what we want.

(END VIDEO CLIP)

STEPHANOPOULOS: They're saying, particularly on this question of the
public health insurance option, the president should listen to the
majority of Democrats who want a public option, not this single
Republican vote who doesn't.

AXELROD: Look, the president has very consistently and clearly
articulated his support for a public option. He thinks that having
competition within the health care system is healthy. There are some
markets where one insurance company can dominate 90 percent of the
market. We see that in some states. So he supports that.

But -- but that doesn't mean that we -- we halt the process. There
are people in the Senate -- Republicans and Democrats -- who have
objections to that. We have to work through these issues, and we're
going to do that. The important thing is to create...

STEPHANOPOULOS: But someone is going to have to blink, aren't they?

AXELROD: The important thing is to create a situation for consumers
in which they have choice, there's competition, they get the best deal,
and that's what we're after.

STEPHANOPOULOS: Who's going to win this fight, the House Democrats
or Olympia Snowe?

AXELROD: Well, we'll see. I think that we -- here's what I believe,
George. I believe that there is a fundamental belief on the Hill at
this time that we can't fail now, that we've come this far, the country
wants us to act, this is a problem that we've -- that's lingered for too
long, and we're going to solve it.
And I think that will will overcome these differences. There will be
compromise. There will be legislation, and it will achieve our -- our
goals, helping people who have insurance get more security, more
accountability for the insurance industry, helping people who don't have
insurance get insurance they can afford, and lowering the overall cost
of the system.

STEPHANOPOULOS: But you can't say today that the final bill that the
president will sign must include a public option, as called for by House
Democrats?

AXELROD: I think the final bill will achieve those goals, and a
public option would help in that regard.

STEPHANOPOULOS: Let me also get at the question of how to pay for
all this, because that is one of the -- the toughest issues to solve
here. And the Senate Finance bill got about $200 billion from this
excise tax on -- on -- on high-priced health insurance plans, but a
coalition of organized labor and about 178 House Democrats have said
this is going to be a middle-class tax increase on people who have
insurance.

Here's what the -- the unions wrote. They said that 40 percent --
the enormous tax would soon hit 40 percent of all plans. Mostly likely
to be hit: plans with people who are older or sicker or those who work
for small employers. That's not the change America voted for. A new
tax on the middle class is unacceptable.

Does the president agree with those unions who say that this excise
tax is a middle-class tax increase?

AXELROD: Well, the analyses of this have suggested otherwise, that
the bulk of it is not going to hit middle-class people. Because in his
-- in his -- in his...

(CROSSTALK)

STEPHANOPOULOS: ... percent.

AXELROD: In his campaign, as you know, he opposed John McCain's
proposal to completely eliminate the -- the tax exemption on -- on
health care benefits. And he still believes that. But this -- this is
a tax on insurance companies, a fee on insurance companies on high-end
policies. Everyone agrees that it'll help lower the growth in health
care costs, and it will help contribute to the reform we need.

STEPHANOPOULOS: But the...

(CROSSTALK)

AXELROD: But having said that, George, the president has -- we're
going through a process. The House has its proposals. The Senate has
its proposals. We will pass bills in both -- in both chambers. We'll
go to a conference, and we'll hammer these issues out.

STEPHANOPOULOS: Let me -- let me just press this one more time,
because it was -- this was not just any analysis. This was the Joint
Committee on Taxation. This is a bipartisan, bicameral body in the --
in the House and the Senate, and they say that this is going to hit 40
percent of all plans. That is going to reach in to the middle class.
If it does, would the president sign it?

AXELROD: Well, let's see what -- I think that this thing is going to
be adjusted as we go along, so let's see what the final proposal says
before we talk about what the president will or won't sign. The
president is going to sign a bill that will provide greater security for
people who have insurance, that will help people who don't have it get
it, and will lower the overall cost of health care. And if it doesn't
meet those standards, then he won't sign the bill.

STEPHANOPOULOS: The president has drawn one other very red line in
the sand, that he won't sign any health care bill that increases the
deficit.
(BEGIN VIDEO CLIP)

OBAMA: I will not sign a plan that adds one dime to our deficits,
either now or in the future.
(APPLAUSE)

I will not sign it if it adds one dime to the deficit now or in the
future, period.
(END VIDEO CLIP)

STEPHANOPOULOS: Yet just this week, the Senate majority leader,
Harry Reid, is going to bring a bill to the floor that -- Republicans
call this the first installment on health care, which is going to
permanently repeal savings gotten from payments -- Medicare payments to
doctors, $248 billion over 10 years. Must that be paid for, for the
president to sign it?

AXELROD: George, first of all, understand that that -- when the
Republicans say this is the first installment on health care, it's not
part of the health care bill. This -- this has been -- there's been...

STEPHANOPOULOS: It was in the House bill.

AXELROD: Yes, but the point is that, every year, this -- this
provision of the Medicare law goes into effect. Every year, draconian
cuts are proposed for doctors that would have a deleterious effect on
patients. And every year, the Congress acts on it and defers on that.
And the fact is, it's a charade.

Everyone in the Congress knows they're not going to let that go
forward. All that we're saying here is, let's be honest about it. The
president provided for it in his budgets, and we ought to acknowledge
that this is a -- this is an ongoing expense that we'll have to meet.

STEPHANOPOULOS: But isn't it actually -- isn't it also a charade if
you're saying, "We're going to do this. We're not going to pay for this
$248 billion," and that's the only way you can end up not increasing the
deficit...

(CROSSTALK)

AXELROD: Well, it will be -- it will be part of the budget. It will
be paid for as we move -- as we move forward. The fundamental health
reform, George, that we're talking about that would provide subsidies to
people who can't afford health care today and ancillary expenses are all
going to be paid for.

STEPHANOPOULOS: But will -- would this particular bill have to be
paid for? Because the House -- Speaker Nancy Pelosi has said that she's
not going to pass it through her chamber unless there are specific
things...

(CROSSTALK)

AXELROD: As I said, the president's provided for it in his -- in his
budget, and we will account for it.

STEPHANOPOULOS: Let me ask -- on this question of the deficit,
another question about jobs. We saw a $1.4 trillion deficit announced
on -- on Friday. And I know that you're not ready to say the president
-- which proposals the president specifically is going to look at now to
help create new jobs in the future, but just as a matter of principle,
does the president believe right now that this problem of 9.8 percent
unemployment has to take precedence in the short term over reducing the
deficit? And so is he open to more job-creation measures?

AXELROD: Yes, look, we -- when we came to office, we were handed two
problems. One was the $1.2 trillion deficit, and the other was the
worst economic crisis since the Great Depression. We have to solve that
economic crisis. We have to get the economy moving.

We've made some progress. There's an anticipation that there may be
growth in the third quarter. We've slowed the -- the -- this
catastrophic loss of jobs significantly. We have to turn that around.
And that is a priority.

I think history shows us that the worst mistake you can make is to
pull out of your -- your recovery efforts too early, because you could
send the economy cascading backward into a recession, so that has to be
a priority, but that doesn't mean that we don't look to the mid- and
long term for deficit reduction.

The president is going to be addressing this at some length in the --
in the State of the Union...

(CROSSTALK)

STEPHANOPOULOS: But the deficit may go up...

AXELROD: ... have to...

STEPHANOPOULOS: ... before it comes down, in order to create jobs.

AXELROD: Well, we need to account for the things we're doing. We
have a stimulus program in place, an economic recovery program in place,
that is not even 50 percent through. We have to see that through. And
we'll see what other measures we need to take.

STEPHANOPOULOS: Let me also ask you a question about Wall Street.
We saw Wall Street for about -- for a moment this week top 10,000 on the
strength of some pretty stunning earnings out of big banks, like
JPMorgan and Goldman Sachs. And we've also seen now that Goldman Sachs
is likely to pay out more bonuses this year, $23 billion, than it did at
the peak of the market, in 2007.

Here's what the president had to say about bonuses back in January.

(BEGIN VIDEO CLIP)

OBAMA: There will time for them to make profits, and there will be
time for them to get bonuses. Now's not that time. And that's a
message that I intend to send directly to them.

(END VIDEO CLIP)

STEPHANOPOULOS: So is it OK with the president now for banks like
Goldman Sachs to pay the biggest bonuses ever?

AXELROD: Well, look, the bonuses are offensive. And to the -- for
the firms that still have federal TARP money, there's some
jurisdiction. The paymaster at Treasury is -- is working on that, to
try and limit that. You've seen a lot of firms go to stock rather than
cash, so at least people have a stake in the success of their company
and they're not just walking away with cash, making short-term decisions
that are bad for their institutions and the economy.

But here's the bigger thing, George. The most offensive thing is, we
haven't seen the kind of increase in lending that -- that we should.
There are a lot of small businesses, creditworthy businesses around
this country who still can't get the capital they need to grow, which is
important for our economy, and you've seen these same institutions spend
tens of millions of dollars lobbying the Congress to -- to try and --
and stop financial regulatory reform, to stop the kind of reforms that
we need to prevent the disaster we just saw and to protect consumers.
And that -- that is most offensive.
And the thing the president, his priority right now is to pass that
financial regulatory reform, defeat the lobbyists for the banks...

STEPHANOPOULOS: But what does the president...

AXELROD: ... and do what's right for the country.

STEPHANOPOULOS: What does the president say to Goldman Sachs right
now about those bonuses?

AXELROD: Well, they ought to have -- they ought to -- first of all,
we have, as I said, limited sway other than moral suasion with some of
these -- a lot of these institutions.

STEPHANOPOULOS: They are getting an awful lot of money from the Fed.

AXELROD: They ought to -- they ought to -- they ought to think
through what they're doing, and they ought to understand that, a year
ago, a lot of these institutions were teetering on the brink. The
United States government and taxpayers came to their defense.
They have responsibilities. They ought to meet those
responsibilities. And they ought to express them by increasing lending,
which is what we need right now, and by standing down and allowing the
kinds of reforms we need to protect consumers and protect the country
from the sort of disaster we've seen.

STEPHANOPOULOS: And rethink the bonuses?

AXELROD: Well, they should do that. I think that -- I think what
they need to understand is, on the same day that you saw stories about
these bonuses, you saw a story about how wages are at a 19-year low.
The American people have limited -- limited tolerance for this. They
want -- they don't begrudge success, and we ought not to be in the
business of micromanaging how companies compensate their people. But
they ought to do the things that they should to help this country, and
that's lending, and that's -- and that's standing down on financial
regulatory reform and letting -- letting us move forward on the reforms
we need.

STEPHANOPOULOS: Final question. Your colleague, Anita Dunn, told
the New York Times this week that Fox News was undertaking a war against
the White House and said the White House would treat Fox the way we
would an opponent. Here's what Rupert Murdoch had to say about that.

(BEGIN VIDEO CLIP)

RUPERT MURDOCH, NEWSCORP: There were some strong remarks coming out
of the White House about one or two of the commentators on Fox News.
And all I can tell you is it has tremendously increased their ratings.

(END VIDEO CLIP)

STEPHANOPOULOS: That does seem to be true. Are you worried that
your strategy is fortifying your enemy?

AXELROD: Well, I don't -- you know, I'm not concerned. Mr. Murdoch
has a -- has a talent for making money, and I understand that their
programming is geared toward making money. All -- the only argument
Anita was making is that they're not really a news station, if you watch
-- even -- it's not just their commentators, but a lot of their news
programming, it's really not news. It's pushing a point of view.

And the bigger thing is that other news organizations, like yours,
ought not to treat them that way, and we're not going to treat them that
way. We're going to appear on their shows. We're going to participate,
but understanding that they represent a point of view.

STEPHANOPOULOS: OK. David Axelrod, thanks very much.

AXELROD: Good to be here.

ROUNDTABLE:


STEPHANOPOULOS: We're going to go straight to the roundtable. So
as our panelists take their seats, take a look at how "Saturday Night
Live" handled the toughness question.

(BEGIN VIDEO CLIP)

(UNKNOWN): So are you going to get angry with them?

ARMISEN: Now, Katie, no. You know I don't get angry.

(UNKNOWN): It's not that we want health care to fail. We don't.
We just want you to fail.

(UNKNOWN): Oh, my god. What happened?

(UNKNOWN): When you make him angry, he turns -- he turns into "The
Rock" Obama.

(END VIDEO CLIP)

STEPHANOPOULOS: And with that, let me bring in the roundtable. I
am joined, as always, by George Will, Peggy Noonan of the Wall Street
Journal, our chief White House correspondent, Jake Tapper, E.J. Dionne
of the Washington Post, and Paul Krugman of the New York Times.

And, George, you just -- you heard David Axelrod deal with this
question, which really has picked up here in Washington and -- and
around the country. Does the president have to do more to demonstrate
toughness?

WILL: I hope not, because -- we have a record on this, and that is,
when Jack Kennedy, President Kennedy, in his first year, went to Vienna
and was treated badly by Khrushchev, he came back and told James Reston
of the New York Times...

STEPHANOPOULOS: Khrushchev cleaned his clock.

WILL: He was rude to him and dismissive, contemptuous. Kennedy was
shaken, came back and told Scotty Reston he had to find somewhere to be
tough, and he picked Vietnam. Now, the danger is that this narrative
about him not being tough enough occurs in the midst of, A, the argument
about Afghanistan, where to prove you're tough, you might want to
escalate, and, B, when he has to make a decision about the public
option. One thing he could do is jettison the public option, offend his
left and make himself look moderate, but can he offend his left on the
public option and escalate in Vietnam -- in Afghanistan?

(CROSSTALK)

STEPHANOPOULOS: So the question is, how does he show his
toughness? It does appear to be, E.J., that most of this on pushing to
be tougher is coming from liberal Democrats, particularly in the House?

DIONNE: Well, actually, it's coming from two places. It's also
coming from neoconservatives and others who say he needs to be tough on
foreign policy. And let's take it there first.

I mean, the notion that -- he speaks softly, but sends in the
drones. I mean, if you look at what he's done in foreign policy, he's
gone after Al Qaida in Pakistan, in Indonesia, in Somalia. He went
after those pirates. That wasn't actually an easy decision. We forget
about that.

STEPHANOPOULOS: Could have gone badly, really badly.

DIONNE: And it takes a lot more toughness to say to your generals,
"No," or, "Tell me why you really want to do this," than it does to go
along with the generals. So I think on that front, it's wrong.

Yes, on domestic policy, you could say he could get tougher on Wall
Street. He let a lot of the attacks on health care go in the
summertime, and that hurt him, but I don't think that's about
toughness. That was strategy and tactics. LBJ, they say, "Be like
LBJ." He had 295 House Democrats, 68 Senate Democrats. He could avoid...

STEPHANOPOULOS: It was very different.

DIONNE: It was a lot easier for him.

STEPHANOPOULOS: Peggy, then Paul?

NOONAN: I think it is an old cliché in Washington that a leader, a
president must be both feared and revered. I think this president's
problems don't have to do with his personality and fearsomeness. I
think it has to do with policy issues.

I think the Democrats who are talking about his weakness are not
able to see that the president has made some policy judgments that are
problematic. I think they -- they just sort of don't see it and the
president's weakness has to do with policy judgments. If his political
judgment were more respected, I think he'd be in a better position. But
it's not that people don't fear him.

KRUGMAN: Two things. First, I think a lot of people are basically
just complaining that he's a Democrat. You know, this -- it's -- you
know, Will Rogers, more than 70 years ago, said, "I am not a member of
any organized political party. I'm a Democrat." I mean, Democratic
presidents can't lead the same way Republicans can.

STEPHANOPOULOS: And they let the process work its way through.

KRUGMAN: Right. And so there's some of that. Now, this complaint,
this is a weird time to be holding this narrative forth, right? I mean,
in the spring, when they were going easy on the banks, when they were
sort of low-balling the stimulus, that's a time when you could say,
"Well, you know, he's not being tough."

But right now, he's about to get the health care reform. He's about
to get the biggest change in our system since -- since Medicare. That's
not the mark of a president who's showing himself insufficiently tough.
Sure, he doesn't swagger. He doesn't say, "I'm going to get -- I'm
going to get Osama bin Laden dead or alive," and, eight years later,
neither, you know, this is -- he's not talking tough, but he's actually
getting stuff done now, which is what matters.

STEPHANOPOULOS: Jake, David Axelrod kept his cool under the
question. He just sort of brushed it off. But this -- this is a
narrative that kind of irritates the White House. Do they think they
have to do anything about it?

TAPPER: No, I don't think so. What you hear from -- from them,
when you ask them about this narrative, is, yes, we've heard this
before. Is he tough enough to beat Hillary Clinton? Is he tough enough
to beat John McCain? I think they think that they proved -- I think
empirically they proved that -- that he was able to do both those things.

I will point out, in addition to the pirates, there are a number of
people associated with the car manufacturer restructuring, both Rick
Wagoner, who was deposed, and a lot of the people who own stock and bond
in those car companies who would say that this White House was perhaps
bullying.

That said, there are a number of Democrats on Capitol Hill who want
the president, if not to be tougher, to at least be clearer about what
he wants. Now that the five bills have passed committee, they want
President Obama to say, "This is what I want, and this is not what I
want." They are calling out for that sort of leadership.

STEPHANOPOULOS: And it's -- and it's pretty clear David Axelrod at
least in public is not prepared to do that yet, even though Rahm Emanuel
is in all of the meetings in both the House and the Senate.

I want to come back and talk about that and the economy. And we
might even get a little balloon boy after this break.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

(UNKNOWN): We're about to hit 10,000. I mean, do you hear...

(CROSSTALK)

(UNKNOWN): Here we go.

(UNKNOWN): Here we go.

(UNKNOWN): You should put your hats on, guys.

(UNKNOWN): You should put your hat on now.

CAVUTO: Ten-k is back.

(UNKNOWN): A blockbuster day on Wall Street. The Dow back about
10,000.

(UNKNOWN): The Dow Jones Industrial Average hit 10,000 this afternoon.

KUDLOW: It is a milestone.

(UNKNOWN): It's really one of the most remarkable rallies we've
ever seen on Wall Street.

(UNKNOWN): It's an amazing snap-back.

(UNKNOWN): When you see people beating raised forecasts, that's
good news.

(END VIDEO CLIP)

STEPHANOPOULOS: Now, it didn't last long. The Dow slipped back to
9,995 on the final day, but still a huge gap between Wall Street and
Main Street. We want to talk about that now on the roundtable with
George Will, Peggy Noonan of the Wall Street Journal, Jake Tapper, chief
White House correspondent, E.J. Dionne of the Washington Post, Paul
Krugman of the New York Times.

And, George, we did see something pretty remarkable this week, that
that 10,000 barrier blown through again, not the kind of celebrations
you saw -- like we had back in 1999, but a remarkable comeback for the
Dow in the face of persistent long-term, high unemployment.

WILL: That's right, and it persists. That's the problem, is that
once the country decides that there's a disconnect between what -- what
the stock market does and what the job market does, it seems to me
you're going to have great difficulties. And the -- the administration
-- I'm not sure what's left in its quiver to throw at this problem.

I am the only one of the six of us -- I'm about to get $250 from the
government as part of this super entitlement. I'm entitled...

STEPHANOPOULOS: That's the -- the Social Security.

WILL: ... to a cost-of-living adjustment to Social Security.
You're entitled to that when the cost of living goes up, and you're
entitled to this entitlement when you're not entitled to it. It's the
ultimate expression of our culture.

STEPHANOPOULOS: And that -- and that, Paul, I think the president
believed that there's no way he could get health care through if he
didn't do that. But on -- on the economic question, Alan Greenspan has
said several times that this run-up in the Dow in and of itself is an
economic good, that it's going to create a feedback loop that will start
to really feed in to the economy, but we're not really seeing it yet.

KRUGMAN: Well, you know, actually the economy, if you measure it by
stuff produced, is growing. It's probably growing at 3 percent to 4
percent annual rate. So if you're look at industrial production, it's
growing at a more than 5 percent annual rate. What's not growing is jobs.

So we actually are seeing, you know, by -- by the standard of, is
GDP going up? The recession is over. The economy's growing. So there
is a disconnect between even the real economy and the job market. It --
the stock market will help.

STEPHANOPOULOS: What's...

(CROSSTALK)

KRUGMAN: We're not that sure. You know, we're -- partly, it looks
as if businesses are really being reluctant to hire because they don't
trust the recovery, little bit like all of us. They don't really trust
the recovery.

But there is -- unemployment is higher than it should be, given the
state of GDP, given the state of industrial production, so something is
a little bit funny here. All that the White House can hope for is that,
whatever the mystery factor is, it goes away in -- in the next year or so.

But, look, I mean, this is not the worst situation we've seen. We
stepped back a couple of feet from the edge of the abyss. But we've got
to see that job growth. And the -- the White House has got to do
something to make it happen.

STEPHANOPOULOS: And it seemed pretty clear, E.J., that David
Axelrod was signaling that the White House was prepared to do more, even
if it meant another short-term increase in the deficit.

DIONNE: Yes, they're going to do a second -- depending on how you
count them -- or a third stimulus, and they're not going to call it
that. They may even do it piecemeal.

They face -- this is a case where their political interests and
their economic interests coincide. They do not want to be going into
next year's election in November with unemployment where it is now or
going up, and so they need to do something about it.

And substantively, it's very bad for the country. It has long-term
effects to have that much -- that many people in the country unemployed
over the long term. And you've got a problem where a lot of employers
have people on short hours, so they're going to put those people on
full-time before they take on new employees, so they've got to do something.

NOONAN: It almost looks like to me, hitting 10,000 this week, as if
New York or Wall Street has its own reality based on its own forecasts
and America has a wholly different reality. It seemed to me there was a
greater detachment between the country and -- and Wall Street this week.

We can all guess about what's behind the 10,000, but it could not be
more serious that unemployment is expected by everybody, not just at
this -- on this table, but everybody, to either stay high or go up.
That would give everybody in the America the jits (ph).

But beyond that, I think the biggest thing giving everybody the jits
(ph) and a sense of uncertainty and a sense that they don't want to hire
or expand is this sense of debts and deficits, this sense that their
country -- people understand the moment their nation is in. They have a
sense of a trajectory, and they're not happy about it.

STEPHANOPOULOS: But that's what creates the dilemma. That is
precisely what -- I -- I couldn't agree with you more on the politics of
that. I think the country is very angry about it. Yet when you look at
the economics, not only Paul Krugman, but, you know, Fed Chairman Ben
Bernanke say the biggest mistake people made during the Depression was
to worry about the deficits too singularly.

KRUGMAN: Let me say something. There's -- there's something that
-- there was, I think, a little bit of bad reporting. When we got that
$1.4 trillion deficit number, that was terrible, but it was actually
$400 billion below what people were forecasting just a few months ago.
The deficits are actually -- the surprises on the deficit are actually...

(CROSSTALK)

KRUGMAN: ... on the downside.

STEPHANOPOULOS: ... world-record deficit.

(CROSSTALK)

KRUGMAN: I know. I know, but the fact of the matter is that...

NOONAN: Three times bigger than ever.

KRUGMAN: ... that -- that if we were sort of, you know, dealing
with, relaxed with the prospect of a $1.8 trillion deficit a few months
ago, we should not be panicking, pulling back on stimulus, pulling back
on support for the economy, when the actual deficit comes in $400
billion less than you were thinking it was.

STEPHANOPOULOS: And, Jake, do you agree the White House is not
going to be cowed by this, that they are prepared to put much more on
the table in stimulus?

TAPPER: Yes, they're talking about tax credits for job creation.
But they have a problem coming up at the end of the month, the state job
numbers created from the stimulus package, the $143 billion that's been
spent. Those actual numbers, auditable jobs, those numbers will come
out, and they will be much less than the 1 million jobs the
administration says have been created. Of course, they're using --
using different ways of calculating this.

(CROSSTALK)

TAPPER: No, I know. But I'm just saying, perception-wise, the
administration's talking about jobs directly created and indirectly
created, you know, the people that make the -- the pavement that the
workers who are directly paid by the stimulus pave with, et cetera, the
people who give them sandwiches.

But the state jobs numbers are going to be much lower, and they know
that they have a problem here, because $143 billion, even though that's
ahead of schedule, that money, because this stimulus was to go out, and
-- throughout the two years, and not just one big chunk, they know that
there is an impatience among the American people and even among
Democrats on Capitol Hill that want more jobs more quickly.

STEPHANOPOULOS: But they can't, George. They're not going to come
out with huge new proposals. I think E.J.'s right. They're going to go
for piecemeal proposals after they expect, they hope, passage of -- of
health care. Are you as confident as Paul is that this is done for this
year, this is going to get done, health care reform?

WILL: No, I'm not. I'm very puzzled by the argument about how
we're going to pay for this, which seems to be the big problem right
now. This is a government that right now is borrowing 43 cents of every
dollar it spends. We're going to pay for this the way we pay for
everything. We're going to borrow the money from the Chinese.

STEPHANOPOULOS: The president says we're not. He says if it
increases the deficit, he's not going to sign it.

WILL: I know...

(CROSSTALK)

WILL: ... sentences that begin, "The president says," are not as
impressive as they used to be. They're going to -- they're supposed to
pay for this by taxing the Cadillac plans, the rich insurance plans.
They're not going to do that, or at least they're going to scale it back
a great deal. They're going to increase access to Medicare. They're
going to increase access to -- to Medicaid.

What's going on now is the Baucus bill is being melded with the Dodd
bill, and all the melding moves it to the left, makes it more expensive.

STEPHANOPOULOS: But...

DIONNE: But moving it to the left does not automatically make it
more expensive. In fact, what a lot of the progressives want to do is
to figure out how to hold down the costs by holding down what you pay
out to the insurance companies.

Secondly, if they weren't paying for this, this would be a whole lot
easier. It was a lot easier to pass a prescription drug benefit under
President Bush, because they never paid for that, adding $800 billion to
the deficit. One of the big problems they're having is to figure out,
who is going to pay for it? So you've got the fight about the Cadillac
plans. Or do you do it by taxing the rich or various other proposals?
So they are paying for this thing.

STEPHANOPOULOS: The complaint about the Cadillac plans -- it's
true. But I think, in some ways, that's the most important fight right
now, $200 billion. It not only helps gets your deficit number, but it
also is probably one of the biggest drivers of actually controlling
costs over the long term.

Yet, Paul Krugman, it is clear that when you've got every single
major union and 178 House Democrats saying they're not going to go for
it, then it's not going to pass.

KRUGMAN: So they'll adjust it. It'll -- you raise the threshold at
which that tax cuts...

STEPHANOPOULOS: So it doesn't hit the middle class.

KRUGMAN: That actually -- that exempts a lot of people, while not
cutting the amount of money you raise that much. That's one of those
things where you just look at the way it works.

And, you know, $200 billion is not really a lot of money over 10
years, right? You have $200 billion here, $200 billion there, and soon
you're talking about real -- but $200 billion is actually, relatively
speaking, pocket change. There's lots of way to raise that much money.
I don't think this is an obstacle.

STEPHANOPOULOS: Wait a second. I mean, you say there's lots of
ways to raise that much money. We've been sitting here for six months
throwing out ideas.

KRUGMAN: Because we know that somebody's going to pay it and the
argument is about who, and it's not really an argument about whether.
It's an argument about who pays.

WILL: Yes, and we know the answer to that. It's our children,
because at the end of the day, we're going to borrow it from the Chinese.

KRUGMAN: No, not going to do it.

DIONNE: Do you know what the problem is, is that it's perfectly --
just to go back to the economy -- it's extremely rational to run big
deficits when we need the stimulus from the government. What they can't
do is to say, look, we're going to do that now and then we're going to
pay for it later, and here are some tax proposals that will kick in down
the road. And politically right now, it's poisonous to say we're going
to spend money now and have tax increases later, but that is how we're
going to do it in the end, even though I don't think they're going to
say so.

STEPHANOPOULOS: Meanwhile, Peggy, Olympia Snowe became the most
powerful Republican in Washington, at least for a week. And what's your
sense? You know, she -- she stayed in the game throughout these -- all
these negotiations. Most Republicans were betting she would vote no,
but in the end, she decided to keep her seat at the table. Is this
something where, if the bill starts to move in the direction of the
House Democrats, does she succumb to this feeling that David Axelrod was
talking about, "We've just got to pass something"? Or do you think
she'll have the strength and -- is she willing to then switch her vote,
go no?

NOONAN: Well, she said, when history calls, history calls, you
know, which is one of those sort of...

WILL: Totality.

NOONAN: ... yes, but also has a sort of portentous sound. I guess
everybody will be focused on her now and wondering if, as the Baucus
plan bill becomes the Baucus the final votable bill, what she will do.

I think the great insight this week from anybody in Congress about
the health care plan as it exists now is Congressman Paul Ryan's simple
statement.

STEPHANOPOULOS: Republican of Illinois.

NOONAN: Republican of Illinois, House...

WILL: Wisconsin.

STEPHANOPOULOS: Wisconsin, sorry.

NOONAN: Wisconsin, sorry, House Banking, who said, look, they're
going to pass this thing. It's going to be cut down, it's going to be
CBO-neutral, and then they're going to add on everything they cut. It's
going to cost a lot of money.

STEPHANOPOULOS: Well, and that is -- we're seeing this, this week
with this Medicare...

TAPPER: Yes, I mean, they're -- they're...

(CROSSTALK)

STEPHANOPOULOS: ... that was part of the 1997 budget balancing act.

TAPPER: ... $247 billion in Medicare to -- to repair the fact that
doctors now get -- are paid according to regular inflation and not
health care inflation, $247 billion. That is separated from this health
care bill so that the health care bill is under $1 trillion. And now,
you could argue this is a fix that would happen whether or not there was
a health care bill. But at the same time, it's -- it's impossible to
argue that this $247 million going to doctors is not part of health care
reform. It is.

WILL: How do you say "a quarter of a trillion dollars" in Chinese?

(CROSSTALK)

KRUGMAN: I will say that, at the margin -- at the margin, this
money is not coming from the Chinese. We're actually borrowing a lot
less from the Chinese when -- when we were. So that's -- that's an easy
line. I've used it myself.

WILL: That's in real terms?

KRUGMAN: But it's not actually a good story here now.

WILL: That's in real terms? Or that's...

(CROSSTALK)

KRUGMAN: That's in real terms, that's all around, and because,
basically, our borrowing needs as a country have dropped, despite those
federal deficits.

STEPHANOPOULOS: But how about the broader criticism? Because,
again, that -- I think this Medicare issue is -- is -- is telling. That
was the way that members of Congress said they achieved a balanced
budget back in 1997. And for a time, we actually had a surplus before
the Bush tax cuts. But every single year for the last four, it has been
undone, and it makes people skeptical of the savings that are promised
in this bill.

KRUGMAN: Well, sure. But, you know, the point is, though, that
this is -- this is actually what health care reform is ultimately
supposed to bring you around to being able to address. And I know
that's a long road.

But what we know from international experience -- remember, we have
-- we're the only country that doesn't, among the advanced world, that
does not have universal coverage. We also have, by far, the highest
costs.

All the evidence suggests that the root to effective cost control
runs through universal health care, that once you make it a national
responsibility that everybody's going to be covered, once you no longer
have the safety valve of dealing with runaway health care costs by just
throwing more people into the abyss, then you actually come to confront
the health care costs.

So I don't think you want to think of this as an argument against
health care reform. You want to think of this as an argument for it.

STEPHANOPOULOS: To do it right. Let's -- let's turn to the
politics now. We've got three special elections, three big ones coming
up this year. We've got the governors races in New Jersey and Virginia,
also a special House race up in northwestern New York.

And -- and I want to show the Democratic candidate for governor in
Virginia, Creigh Deeds, a big ally of President Obama. Virginia went
for President Obama last year, but he is not highlighting his ties in
his campaign ads.

(BEGIN VIDEO CLIP)

DEEDS: Frankly, a lot of what's going on in Washington has made it
very tough, and we had a very tough August, because people were just
uncomfortable with the spending. They were uncomfortable with a lot of
what was -- a lot of the noise that was coming out of Washington, D.C.

(END VIDEO CLIP)

STEPHANOPOULOS: This is the race, George, that Democrats most
likely to lose. There's been a Democrat governor, but the Republican,
Bob McConnell, pretty -- has a pretty healthy lead right now.

WILL: Republicans expect to win that. Republicans believe that
Congressman Castle of Delaware, who's decided to leave the single seat
-- he runs at-large in Delaware -- and run for the Senate, that he would
not have done that if things hadn't shifted dramatically in the
Republicans' favor, one measure of which is this. In the generic
ballot, "Do you prefer Republican or Democrat?" it's now dead even
between the two parties. And among independents, Republicans are up 9
percent.

STEPHANOPOULOS: And that is a big change, E.J.

DIONNE: Well, the big problem for Deeds, he has two problems. One
is that, during the summer, Democratic numbers in Virginia really
dropped sharply, just generic support, identification with the
Democratic Party, that hurt him. He also, you know, spent everything in
the primary and really wasn't present in the summer. He reorganized his
campaign.

And he's got a problem vis-a-vis Obama, which is that he is counting
on some conservative Democrats in his southwestern part of the state.
He doesn't want to get too close to him. But he needs Obama to turn out
young people and African-Americans.

But to go to George's point about Mike Castle, Republicans have a
real problem, because to win some of these seats, such as Delaware, they
need moderate candidates, like Mike Castle, but look at that race in
upstate New York.

STEPHANOPOULOS: The House race.

DIONNE: The special election for the House, where the Republicans
nominated a moderate Republican, Dede Scozzafava, and then the
Conservative Party in New York state put up a right-wing candidate
supported by the tea baggers. That right-wing candidate is cutting into
the moderate's votes, and the Democrat is ahead in a district that is
very Republican. That's a real challenge long term for the
Republicans. Can they nominate moderates?

STEPHANOPOULOS: E.J., he brings up an important point. Now, Stan
Greenberg and James Carville did a study this week of the Republican
base of voters. And one of the things they found out, this hardcore
part of the base is in a world unto its own right now, the tea bag
movement. And, you know, they're sort of driven by the idea that
President Obama, the Democrats, have a secret plan to impose socialism
on the country.

NOONAN: Well, I don't know about that. You know, in the case of
New York, the conservative, who is making real inroads and threatening
the official Republican nominee, that conservative's voting record has
more in common with the fellow who just left that office than the
Republicans' does. I can't help but think a lot of this stuff is -- is
exaggerated, in terms of calling it "tea baggers" and all that stuff.

Look, this country saw this summer an awakening, if you will, an
August awakening, of people at town halls coming forward, Republicans
and independents and some Democrats, saying, "Wait a second. We're not
liking the way they're doing it right now in Washington." That is
creating, I think, something of a wave that perhaps, if Virginia and New
Jersey seem to be going Republican, may lead to something serious in 2010.

I mean, E.J., there were 49 congressmen who are up for re-election
in 2010 who are Democrats who came from districts that McCain won, so
that shows you, in a way, how delicate things are for them.

STEPHANOPOULOS: And it goes up to 82 if you add McCain and Bush and
calling...

(CROSSTALK)

DIONNE: ... Republicans from Obama districts.

TAPPER: Virginia's a bad bellwether, though, because it -- since
1973, it always switches party from that. I mean, George W. Bush could
not have been more popular in November 2001, and the Democrat won the
governor's office.

STEPHANOPOULOS: I think that's a good point. I think that the
bigger concern for the White House and for Democrats is looking at this
wave that Charlie Cook, probably the best political analyst of House
races, has said could be coming.

And, Paul, that all does come back to this whole question of
unemployment. It's hard to imagine Democrats not facing a wave if
you're looking at unemployment topping 10 percent next summer.

KRUGMAN: A couple things. First, the generic congressional
ballot. We actually -- political scientists have looked into, what can
you infer from that at this point in an election cycle? And the answer
is nothing. It has no predictive value.

What does have some predictive value are two things, the popularity
of the president, and if you want...

STEPHANOPOULOS: Still above 50 percent now.

KRUGMAN: Yes. If you look at Obama's numbers now, they look like
Bush at this point in 2003, not like Clinton at this point in 1993. So,
actually, Obama is not remotely in the position that Clinton was in,
very unlikely to lose the Congress.

The other thing is the state of the economy. And, yes, if the
unemployment rate is still rising as we go into late 2010, then we've
got a problem.

STEPHANOPOULOS: But, see, you actually -- you just brought up an
important point. The absolute number may not be, E.J., what's most
important. It could be the trend as we move from the summer to the...

KRUGMAN: The trend, if it's falling. If it's falling, then -- then
the Democrats are in fine shape.

DIONNE: But you're looking -- you can look at '94, which was a
Republican sweep. You can also look at 1982. Unemployment hit 10
percent about a week-and-a-half, two weeks before the 1982 election.
The Republicans lost ground, but they held. They lost 26 seats in the
House. And I think there is a good chance that, if this is a bad night
for the Democrats, it will be more like '82 was for the Republicans than
like '94 was for Bill Clinton.

STEPHANOPOULOS: I think that's probably right. We just have a
couple of minutes left, and I can't leave without talking for a second
about this issue that gripped -- and I shouldn't say issue, the story
that gripped the nation on Thursday afternoon watching that flying
saucer...

NOONAN: Oh, yes, you could.

(LAUGHTER)

STEPHANOPOULOS: Well, I want to bring it to you. But we just --
what we saw with this -- you know, the -- the flying saucer go off, the
family all across morning television the next day. Now we're hearing
that they're likely to have charges pressed against the family for
perpetuating a hoax. And -- and, Peggy, I was just wondering what your
thoughts on -- what do you think this says about the country, about the
media? Do we pay too much attention...

(CROSSTALK)

TAPPER: We're all living a nightmare out of Paddy Chayefsky's dreams.

KRUGMAN: And -- and -- and inflation is still a danger.

NOONAN: Oh.

TAPPER: That's...

NOONAN: It is a rich and varied nation. We have many interesting
individualists living here. I think the disturbing thing we saw,
probably, was interesting parenting styles with regard to the poor
little kid who -- who seems to have been problematic within his family
and got sick on live TV.

STEPHANOPOULOS: He got sick on live TV, George Will. And Diane
Sawyer actually had to tell the parents, do you want to go take care of
your kid?

WILL: First things first. We walk into this studio every Sunday
morning past a big inscription on the wall outside from Richard Nixon
that says, "The American people don't believe anything until they've
seen it on television." There just has to be a coda, "Don't believe
what you see on television." We'll be all set.

DIONNE: You know, I like the idea of moving from car chases to
balloon chases, but as soon as you exploited the kid, you said, oh, my
god, you took this delightful story and turned it into a terrible story.

NOONAN: Yes.

KRUGMAN: No further comments.

STEPHANOPOULOS: He's going to say inflation is still a danger when
we --you folks go into the green room. You can all check it out later
on abcnews.com. And you can get political updates all week long by
getting our daily newsletter, which is also on abcnews.com.