America's left turn in 2012

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America's left turn in 2012

A look back at the year in politics from the elections to the Supreme Court's landmark health care decision

This is a rush transcript from "Journal Editorial Report," December 29, 2012. This copy may not be in its final form and may be updated.

PAUL GIGOT, HOST: This week on the "Journal Editorial Report," a look back at the year that was, and ahead to what's in store for 2013. 2012 was tough year for conservatives on the national level, but in the states, some hopeful signs of reform. And looking forward, is the economy headed for a rebound or recession? Will the New Year finally bring a showdown with Iran? Our panel is here with their predictions.

Welcome to this special edition of the "Journal Editorial Report" as we look back on the year that was and the challenges facing us in 2013.

First to our big stories of 2012. America's left turn. From the Supreme Court's landmark health care decision to the re-election of President Barack Obama, politics on the national level, headed in a decidedly liberal direction. So what happened and what does it mean for the country going forward?

Joining the panel this week, Wall Street Journal columnist and deputy editor, Dan Henninger; Political Diary editor, Jason Riley; and Washington columnist, Kim Strassel.

So, Dan, we like to say for a long time that we live in a center-right country. If you look at the last two presidential elections that doesn't

seem to be the case. Are we living now in a new progressive era?

DAN HENNINGER, COLUMNIST AND DEPUTY EDITOR: In terms of the presidency, I think we are, Paul. I'm not so sure about the country. But Barack Obama I think is the most center-left, even left-wing president since the Great Depression. And I think that what Barack Obama has in mind to do is, indeed, to redistribute income from the top, downward; not to cut spending, but to increase spending, it's explicit, from a historic 20 percent of GDP to about 25 percent GDP; and rather than cut spending raise taxes as necessary to support that spending. And I would say that is, in fact, essentially the French model. The question is whether it can support enough growth to support jobs in the economy.

GIGOT: No question, Jason, taxes are going up. We know that. Spending, going up for sure, even before the health care law kicks in. So, we are moving in that direction, particularly in the entitlement state.

JASON RILEY, POLITICAL DIARY EDITOR: Right.

GIGOT: Not reforming it, but actually expanding it.

RILEY: And what happened this year was the Supreme Court helping this along. You have the justices essentially rewrite legislation, changing the plain text that Congress passed in order to declare ObamaCare constitutional, which is a little scary, that that highest justices in the land would take that sort of activist role.

And you mentioned France, Dan, that's what's really scary, that the backdrop of this whole presidential year was Europe. We know where this path leads. And the turmoil, these huge welfare states, and how unsustainability they are, and the low productivity and the high unemployment that comes with them, and that was the backdrop of our presidential campaign.

GIGOT: OK.

And the voters said, yes, we're going to keep moving in that direction, Kim. I mean, how -- what do you think the electorate is here? Is it really behind the kind of choices that Jason just suggested they might be?

KIM STRASSEL, WASHINGTON COLUMNIST: Barack Obama won this election by very effectively making this a referendum about his opponent, Mitt Romney. So if you went out and you asked most Americans, do you think Barack Obama did a great job in his first term? Do you want significantly higher taxes? Do you want the government to do nothing about spending? Are you happy with Obama-care? Most would say no.

But in the end, the choice was between a president, who said things aren't great, but I'm still going to try to make them better, and a guy he painted as not having a plan and not identifying with the average wants and needs of middle class Americans. And in the end, people decided to stick with the devil they knew rather than the one they didn't.

GIGOT: So the election -- the Republican defeat was big, but it wasn't overwhelming in a sense of repudiation, in your view, Kim, of the Republican platform or of their agenda?

STRASSEL: No, and I think the reason -- look, this country did have the opportunity in this election to once again hand completely controlled government to Democrats. Everyone in the House was up for reelection and, yet, they continued to give Republicans the majority there. They liked divided government. And I think you've got to look to the number of states that have elected very conservative governors, who are doing the exact opposite of what Barack Obama is doing at the federal level.

GIGOT: Dan, there are some real implications, consequences to the direction, the policy direction the president is setting, one of which, there's going to be a lot less money for defense. So the American ability to project power abroad is going to decline and maybe rapidly.

HENNINGER: Yes.

GIGOT: The key question, of course, economic growth. Can we get out of this one percent to 2.5 percent band we've been in for four years now and break out of that? And if we can't, the kind of commitments the government makes, the government is making are just going to be unaffordable.

HENNINGER: You know, I think I've previously cited the Nobel economist, the Nobel Laureate, Robert Lucas, University of Chicago, who looked at this closely and said, why are we not getting economic growth in the United States and cited Europe, which, in the 1970s, fell off its growth path around three percent after World War II. And he concluded, it was because, as Jason was just suggesting, the welfare commitments they'd made. It was unsustainable and their growth rate dropped permanently. And Lucas raised the question whether the United States itself was on this lower, long-term growth path. That's the question.

GIGOT: So, Jason, what's -- where do we go from here? Particularly, if you're conservative, what are your -- where does the comeback begin? Does it begin in somehow accommodating the middle and, saying, look, it's a progressive year and we've got to be a little less progressive, a little more efficient in terms of administration, or do you put both colors out there as an alternative?

RILEY: I think it starts with the GOP expanding its current coalition. Ad I think that Hispanic voters are one way to go.

You have to remember, just eight years ago, 44 percent of the Hispanics voted for the Republican presidential candidate. Four years ago, it was 31 percent. This year, it was 27 percent. This is a swing voting block, and Republicans need to go after it.

And you know, Paul, I consider recognition of a problem to be progress in and of itself.

(LAUGHTER)

And maybe the GOP is finally going to reach some -- come to grips with the

demographic reality.

GIGOT: Yes, I think so.

And, Dan, what about this idea of, do you go to the middle or do you fly with both colors?

HENNINGER: Well, I don't -- I think they -- it will be hard to go entirely to the middle because I think the electorate -- the ones who did not vote for Barack Obama voted against this vision and voted against it very strongly. And I think the Republicans would put that at risk if they went too far to the middle.

GIGOT: OK.

When we come back, states have changed. From Kansas to Michigan to Rhode Island, reform is in the air. Find out how some states are bucking the Washington trend, next.

(COMMERCIAL BREAK)

GIGOT: Well, Washington may have made a big left turn this year, but in states across the country, another kind of reform is in the air. We begin in Michigan, which this month became the nation's 24th right-to-work state.

We're back with Jason Riley and Kim Strassel. And Wall Street Journal

senior economics writer, Steve Moore, also joins the panel.

So, Steve, this is really an interesting story that I don't think gets enough attention --

STEVE MOORE, SENIOR ECONOMICS WRITER: I agree.

GIGOT: -- the reforms taking place across the country in a lot of states.

Who are the stars you're looking at?

MOORE: I entirely agree with your premise, Paul. If you look at the -- you talked about the demise of the Republicans on the national levels, we're not seeing that on the state level. There are 30 Republican governors today in America. The Republicans actually picked up a governorship in North Carolina. So that south now is almost entirely Republican, whereas just 25 years ago, it was pretty entirely Democratic. And it's not just the south. States like --

(CROSSTALK)

GIGOT: Right. Steve, but what are they doing --

(CROSSTALK)

GIGOT: What are they doing with that power? That's the interesting thing.

MOORE: Right. So, they have the power and they are actually using it.

You've got states like Kansas and Florida that have been cutting taxes very aggressively to promote jobs. You've got a lot of these states in the mountain states that are Republican, where they're very aggressively promoting pro-energy drilling policies to get at the national resources.

And of course, the big story that you mentioned, Paul, is what's happening with Right-to-Work. It wasn't just Michigan. Sometimes we forget that earlier Indiana became a right-to-work state, too. So, two Midwestern states that have traditionally been pretty heavily unionized moved to right-to-work. And I wouldn't be surprised if next year we see a couple more states fall.

RILEY: Interesting contrast in Maryland and Virginia, neighboring states.

You have, in Virginia, a Republican governor cutting taxes, cutting spending. In Maryland, you have a liberal Democratic governor who's raised taxes, all kinds of taxes, income taxes, gas taxes, sales taxes, you name it. As a result, Virginia has a job growth rate that is three times that of Maryland. Virginia has a lower unemployment rate. So you see that contrast.

And, Paul, I think, in this election, it actually worked to the president's benefit in some of the swing states, like Ohio and Virginia. And you had the voters in the states experiencing above-average economic growth thanks to the policies of Republican governors.

GIGOT: Kim, then you see the alternatives. There are --

(LAUGHTER)

And let me mention one state, where Democrat Gina Raimondo, the state treasurer, pushed through a terrific pension reform, probably the best in the country. But if you look at other states where the Democratic coalition is dominant, Illinois, for example, New York State and California, you see a very different policy mix. Which direction are they going?

STRASSEL: Their policy mixes to mirror what's happening in Washington, which is, do not address any of your structural spending problems. In fact, continue to add spending and ask your taxpayers in particular the wealthier taxpayers to contribute more to that. So it's a tax-and-spend policy. One of the problems that the states have, obviously, this is not helping their economic growth. And you're beginning to see a huge contrast on the ground between the economic situations of states that are reforming and those that are not.

(CROSSTALK)

GIGOT: Give us a couple of examples, Kim. Where is growth occurring and where you're seeing it? The jobless rate, for example, in Illinois, the last time I checked, was 8.8 percent.

STRASSEL: Yes.

GIGOT: And meanwhile, Wisconsin 6.9 percent. Very interesting contrast.

STRASSEL: Look at Indiana, where it's also low, and --

GIGOT: Something like 8 percent.

STRASSEL: Yes. North Dakota, which, by the way, Steve mentioned, you know, the fracking boom going up there. And I think it's below 5 percent.

It's astonishing.

GIGOT: It's three percent.

(LAUGHTER)

STRASSEL: Yes.

GIGOT: So, what about -- Steve, where do you think this is going? I mean, we've got, you know, the states are supposed to be laboratories are democracy and we're going to see the next two, three, four years --

MOORE: No doubt about it.

GIGOT: -- what laboratories work and what laboratories don't.

MOORE: Yes. No question about it. I think this is the big story in America, Paul, is that, just as I was talking about the red states getting redder, the blue states like California and New York, my home state of Illinois, got bluer. Republicans are kind of endangered species in those states. And so now you have a very sharp contrast, an almost economic balkanization that's going on in America where states like California pass this massive tax increase. They have cap-and-trade.

GIGOT: Right.

MOORE: And so I think more so than any other time in our lifetime, Paul, you're going to see a divergent path taken by states like California that are very liberal, and states in the south and some of these mountain states that are going to promote tax cuts, reductions in pension costs, and I think it will be a real experiment to see which of these models work.

GIGOT: So, Steve, are you predicting that California is not going to get down from its current jobless rate, or is going to see an outflow of capital really?

MOORE: Oh, yes. There's no doubt about it.

GIGOT: Because that state, remember, it's tremendous. It still has tremendous resources and agriculture and high-tech, obviously, in the Hollywood area. So, are you overdoing some of the pessimism here about California?

MOORE: No. No, I think it's hard to see any optimistic forecast for California. Everywhere I go, and as you know, I go all over the country, I can't tell you how many time I run into businessmen who say, I used to be in California and now I'm in Texas or now I'm in Virginia or Florida or Nevada. I think that state is in real trouble. And it has big implications for the national academy, Paul, because if California isn't growing, it's hard for the nation to grow.

GIGOT: Yes, I agree with that. I think it's a real setback, if California keeps growing show.

Kim?

STRASSEL: Well, you mentioned Maryland, and we're talking about an outflow. The Democratic governor there, Martin O'Malley, is a mini-me Barack Obama. He went down this road. He instituted a millionaire's tax, and guess what? All the millionaires left Maryland.

(LAUGHTER)

So we know this is what happened.

GIGOT: He's a maxi-me Barack Obama.

STRASSEL: Yes. I should say that. That's right.

GIGOT: And we wants to come and go to the national level. I think he has his eye on 2016.

OK, when we come back, from energy to education to technology, our panel's pick for the good news stories of the year.

(COMMERCIAL BREAK)

GIGOT: Well, just when you thought there wasn't all that much to cheer about in 2012, our panel is here with good news from the year.

Wall Street Journal editorial board member, Mary Anastasia O'Grady, starts us off.

So what's your big news of the year?

MARY ANASTASIA O'GRADY, EDITORIAL BOARD MEMBER: It's a high-energy story, Paul and --

GIGOT: Just like you, Mary, high energy.

(LAUGHTER)

O'GRADY: Basically, we have -- through technology, the United States has discovered that it has a huge amount of both shale oil and shale gas and can get it out of the ground, as I say, thanks to technology. And you know, that's not just a U.S. story. It's kind of a North American story.

GIGOT: Right.

O'GRADY: There's a ton of oil in Canada. There's lots of the same geological formations in Mexico. And so, you know, there's a lot of energy that can come up. And, for example, the CEO of Fluor, the large construction company, says there's at least $30 billion of potential projects just around the U.S. Gulf of Mexico.

GIGOT: People are talking now and, even saying, by 2020, which isn't that far away, we could be self-sufficient in terms of providing most of the oil, gas we get domestically.

What are the implications of this for the larger energy? Not just for the energy economy, but for things like manufacturing and consumer prices?

O'GRADY: Well, certainly, you know, obviously, residential heating, things like that would be more affordable --

GIGOT: Cheaper.

O'GRADY: -- and make us more competitive in manufacturing.

But there's another angle that's also very interesting and that has to do with exports. We could actually become the leading producer of energy for the emerging markets. Energy demand in this country is going down, but in the rest of the world, it's going up. So this would be an enormous source of jobs and also tax revenues.

GIGOT: And the big threat to this is politics --

(LAUGHTER)

If somehow regulators get in there and say, for whatever reason, that we're going to stop the shale gas revolution, and there are a lot of opponents of this. The Sierra Club, a lot of environmentalists want to kill this. There's still a moratorium on hydraulic fracking in the state of New York, though, right across the state, in Pennsylvania, it's booming.

O'GRADY: Well, there's -- just as one example, in California, there's something called the Monterey Shale. It has more reserves than the Bakkan in North Dakota and the Texas reserves put together, but there's questions about whether the California environmentalists will allow us to go after that oil.

GIGOT: I think the answer to that is no.

(LAUGHTER)

Jason, keep the good news coming.

(LAUGHTER)

RILEY: There was a lot of good news on the education front, the education reform front. I should specify, Paul, we had a ballot initiative passed in Washington State, one of the 10 states with no charter schools at all.

This would allow the creation of them. Also, down in Georgia, a ballot initiative that would expand the current number of charter schools in that state. And in Louisiana, you had a state-wide voucher program expanded, signed into law by Governor Bobby Jindal. So a lot of good news on getting people without access to good public schools better access to good public schools.

GIGOT: Why this momentum now for school choice, whether charters or

vouchers? What's behind it right now?

RILEY: I think it's the track record of the system, the status quo.

(CROSSTALK)

RILEY: And the more we talk about the reality of options out there for people -- Paul, in Georgia, one in three high school freshmen does not graduate in four years. I mean, it's incredible. In Louisiana, something like 36 percent of schools were ranked "D" or "F" by the state. It's just hard to understand.

GIGOT: Which might grade on a curve.

(LAUGHTER)

RILEY: It's hard to defend those kinds of results. And that's why I think the momentum is really with reformers.

GIGOT: So liberals mugged by reality.

(LAUGHTER)

GIGOT: Not just liberals, but parents, too. You even have seen -- and this is interesting to me, Jason. You've even seen Hollywood change.

RILEY: Yes.

GIGOT: Where, culturally, they tend to be opposed to this kind of thing, but they've turned and said, maybe parents -- they have the parent trigger movie this year. So maybe they are seeing a change in direction that is a tipping point in this debate.

RILEY: I hope so.

GIGOT: Dan, can you match those two?

HENNINGER: I think I can, at least with one example. In the world of technology, here's a pure good news story. There's a company named Myomo, who this year came up with a robotic arm which attaches to the arms of people who have had strokes and they're paralyzed. It allows the brain to transmit nerve signals to the muscles in the arms and the robot picks it up, the robotic arm, and allows those arms to move. This is the most extraordinary thing. But we're able to do that sort of thing.

Another example is 3-D printers, which I think I can explain. You take liquid plastic, you design something, like say, a plastic pen. You pour the liquid plastic in and the 3-D printer outputs an object. This could revolutionize manufacturing. It's just beginning to come out in productivity right now. But these are the sorts of ideas that are based on the kind of knowledge that you produce in the United States. And as we know, knowledge, since the industrial revolution, is what's driven economies forward. And it's still possible in the United States.

GIGOT: You know, Dan, we had visits this year from a lot of CEO's. But I was struck by Paul Otellini, of Intel, and Jeff Bezos, of Amazon. And what they described is a world in which Moore's Law, which says that computer power is going to double -- I forget -- it's every couple of years, is going to continue and roll through our economy, so you're going to have this digital revolution, producing things like artificial intelligence, voice recognition, things that will transform the way we live our lives.

No matter -- even if the economy keeps growing at one percent or two percent, one big question is, is that growth and innovation going to happen here in the United States, or more of it overseas in places like China?

HENNINGER: Yes, well, take this robotic device I just -- this is a medical device. And under the Obama-care law, medical devices will be subject to a tax because they have to pay for Obama-care.

GIGOT: Yes.

HENNINGER: This is the sort of thing that if we keep doing, will suppress the growth of technology in this country. And then again, there's the issue of immigration policies. A lot of this technology, driven by engineers who come from Asia. Silicon Valley, in great part, has been the result of immigration into the United States. So if we don't stand in the front of these things, we can grow.

GIGOT: OK, Dan, thank you.

Coming up in our second half hour, a look ahead to 2013. Is the economy poised for a comeback or will slow growth and high unemployment continue to drag us down?

And get ready for ObamaCare. What you need know as some key provisions kick in.

(COMMERCIAL BREAK)

GIGOT: Welcome back to this special edition of the "Journal Editorial Report." I'm Paul Gigot.

Well, if you haven't checked your 401(k) lately, you may be pleasantly surprised. 2012, it turns out, was a pretty good year for the markets, despite continued high unemployment and slow economic growth. So what can we expect in 2013?

We're back with Dan Henninger, Mary Anastasia O'Grady and Steve Moore.

So, Mary explain us seeming contradiction between slow growth and bull markets.

O'GRADY: Well, first of all, with respect to the markets, I would say that if you look at a chart of, for example, the S&P 500, if you go back to say, 2000 - April of 2011 until October of 2012. You're basically flat. There's been a lot of churning up and down, but the S&P 500 index was not any higher. Now, in the last couple of months we have seen a little bit of a pickup there and certainly, from the end of -- from the beginning of this year you saw a run in the market, but you don't have a great return if you're a long-term investor.

GIGOT: Right, so, OK, but if you -- if growth is still slow, OK, why are -- and some people are still investing in companies and the corporate balance sheets earnings have been pretty good, you know, they've cleaned out a lot of the debt from the crisis. Could we be poised here for faster growth going forward?

O'GRADY: Well, I think one of the things that explains why the corporate sector is doing well is because they basically have access to money at zero interest rates. That's not true for the broader population and it's not true for a lot of small businesses. It's just true for, you know, large corporations who can borrow very cheap money. You have high unemployment, which means that employers can ring more productivity out of their workers.

GIGOT: Right.

O'GRADY: Because, you know, workers need jobs. So, I think if you take all of those factors into account, you know, you're not looking at an environment that is as bullish for the broad American public as it might seem, looking at the stock market.

GIGOT: Dan, one of the, kind of a side follow, Ed Hyman of ISI Group points out that there have been 312 stimulative easings of one policy stimulus and Central Bank easings over the last 16 months around the world. That's extraordinary. 312. So one's answer to this question may be that there's just an awful lot of money sloshing around from Central Banks around the world who are just saying, look, we've got to drive this economy and they're opening the spigots.

HENNINGER: They are opening the spigots, but the question is, what is happening to that capital. Is it being deployed for productive uses? And I think in the case of the United States what we've seen, what has been written about is that many companies have spent hundreds of billions of dollars buying back their own stock. They've been borrowing this money cheaply and using it to buy back their own stock, rather than investing it in productive capital projects. And there's a cool of thought that says most of the growth in the stock market has been because companies have been net buyers of stock, whereas retail investors or even the mutual funds have been net sellers of stock. So we're not in a very productive economy right now.

GIGOT: Well, we have seen investment in energy, there is no question about that across the country, so what about our favorite bull, Steve Moore here, is you -- what is -- what do you think? Is 2013 going to turn the corner in a better direction like Ben Bernanke, the Fed chairman and others are saying?

MOORE: I never like to bet against the American economy and, you know, there are just so many (inaudible). And Paul, we haven't had a real recovery in four years. You know, we really haven't. And so ...

GIGOT: Right.

MOORE: You just get the feeling that the economy is ready to pop, but the countervailing argument, though, Paul, is everything Washington is doing is holding back this extension. And that's the frustration I think investors and businesses feel. So, on the positive side, you've got the energy -- I entirely agree with your previous conversation that energy and technology are just drivers of high powered growth, but the countervailing force I think follows those higher tax rates that are coming in 2013 and some of these regulations and ObamaCare are holding back businesses willingness to expand and hire more workers.

GIGOT: Well, it's just not the regulatory wave on health care ...

MOORE: Of course.

GIGOT: ... there's going to be a huge regulatory wave to finish out the Dodd Frank financial reform, you will be seeing a huge pent up regulatory wave hit on energy. All kinds of rules hitting utilities and energy companies. So who wins? Washington or the private economy?

(laughter)

O'GRADY: Well, I think, actually if you look at a couple of indicators,

it's not good for at least the first half of 2013. One is business

investment. Business investment is now weaker than it was in 2008.

GIGOT: Right.

O'GRADY: And on top, so you have lots of companies sitting on their hands.

You also have small business confidence taking a huge hit in November,

which is very worrying. And personal per capita, personal income.

GIGOT: Still very -- it's still down ...

O'GRADY: It's weak.

GIGOT: ... from even at the start of this recovery. Steve, you wanted to get in there?

MOORE: Yeah, let me be the bull here for a minute. You know, we talk all the time about the energy story and it's not just the energy sector that is affected by that, you know, we've had a mini renaissance in manufacturing in this country, in transportation because of the fact that energy prices have been falling and it makes American manufacturers much more competitive at the margin. I think as we -- I think 2013 is going to see continued declines in energy prices. That's like a tax cut for the American consumer, Paul.

HENNINGER: But, Paul, the thing we haven't mentioned here is unemployment.

We've had high unemployment for four years ...

GIGOT: Right.

HENNINGER: ... which means a lot of people out of jobs. We would need a tremendously bullish economy and I'm saying like four percent ...

GIGOT: That's true.

HENNINGER: ... to produce enough jobs, it would take a decade to get back to where we were before this recession.

GIGOT: Right, sure, no question about it.

HENNINGER: So, we just need to do whatever we can to allow economic growth in this country.

O'GRADY: But declining energy prices are not necessarily good for energy production. Because at some point, energy producers are going to say the price is too low and to mitigate that problem, they have to be able to export. The Obama administration still hasn't decided if they should be able to export.

GIGOT: Export of natural gas and that's right, that's a key policy move ahead.

Still ahead, the new world disorder as the Arab Spring continues to deteriorate and Iran's nuclear program continues to progress. Look at the foreign policy challenges facing the United States in 2013.

(COMMERCIAL BREAK)

GIGOT: From Iran's nuclear ambitions to China's nationalist impulses, the new year, no doubt, will bring its own share of foreign policy challenges.

Here with a look at which are likely to be the biggest, Wall Street Journal foreign affairs columnist Bret Stephens and editorial board member Matt Kaminski

So, Bret, the world is safer now than it was a year ago?

BRET STEPHENS, FOREIGN AFFAIRS COLUMNIST: Well, think about it. We're that much closer to a nuclear confrontation or crisis with Iran where the regime will either cross the nuclear threshold or somebody - Israel or maybe the United States is going to stop that regime. You have the Chinese making trouble for Japan over these little islands, the Senkaku Islands, making trouble for their neighbors in the Philippines over this and that shore, making trouble for the Vietnamese being very assertive in their -- what they conceive to be their territorial waters, other people think that they are international waters. It's the scarier place, various disorder in the world.

GIGOT: And it's picking up. What about the Middle East? There was so much promise, man, about the Arab Spring a year ago, but a lot less promising now.

MATTHEW KAMINSKI, EDITORIAL BOARD MEMBER: Sure, you have the problems in Egypt with the very difficult transition, you know, Libya, we obviously know what happened there at Benghazi in a country that's very unstable.

Even Tunisia is not doing that well. But I think, you know, when you have crisis and chaos, there is an opportunity for American leadership. And what you would need is the president who would have the kind of grand strategy for what do I want to see happen in the world in the next four years and how am I going to get there.

GIGOT: The strategy, though, seems to be without quite advertising it, America withdrawal and retreat in the world. I mean we are going to cut

The -- gash the defense budget and people understand it. We're pulling out of Afghanistan, we are already out of Iraq and we've abdicated doing anything in Syria, so, but the message around the world, isn't it, is that the U.S. is going to be much -- going to lead a lot less than it has.

KAMINSKI: I didn't say we had the right strategy, I think we could have the right strategy and it's an opportunity.

STEPHENS: Well, look, you know, look, there is an analogy here. In the 1920s it became clear that the victorious powers, the United States, France, Britain weren't prepared to enforce the global order that they had

imposed at the Versailles Settlement. And it became obvious to countries

like Germany and the new Soviet Union that they could violate that order with impunity. And so, beginning around 1922 you had two decades leading to the Second World War of this sort of double process, so called revisionist regimes that wanted to revise the structure of global power and the status quo powers who weren't prepared to enforce it. Today there is one status quo power and under this administration, as Matt said, it's not ...

GIGOT: Well, is Iran the test case for whether or not these countries are going, Europe and the United States, in particular, are going to enforce this world order? Is that the ...

STEPHENS: Look, you've had three presidents, President Clinton, Bush and Obama have said explicitly that a nuclear Iran is unacceptable. So, if the Iranians are allowed to walk across that threshold with no opposition, that is going to demonstrate to other would-be aggressive regimes that there is just - there is no cop on the street, and that's what's happening.

GIGOT: Is this the year for the showdown on Iran?

STEPHENS: Look, simply as a matter of industrial mechanics, how much uranium you need to enrich to get to a bomb, this is the year.

GIGOT: We've been saying that for a while, though, and somehow there's a computer virus or something that happens that keeps kicking it down. You are saying, this is ...

STEPHENS: But it's not -- it's not an ever receding horizon and the International Atomic Energy Agency takes inventories of Iran's nuclear stock piles, just how much - how much they have and how deeply it's buried. Look, you saw Benjamin Netanyahu at the U.N. in September ...

GIGOT: Right.

STEPHENS: ... draw literally a red line. Both American intelligence and Israeli intelligence have basically come to a consensus view that late in the spring of 2013 you're going to have that threshold moment.

GIGOT: You know, Matt, you've been the optimist among our group on the Arab Spring and I think you've made a very strong case for it, particularly after the dictatorships for so many decades ...

KAMINSKI: Right.

GIGOT: ... in that part of the world. Give us some reason to think that this could turn out better than it looks to be turning out now.

KAMINSKI: Well, it's not over and I think what you are seeing that

(inaudible) on the struggle in Egypt on the ground over the constitution, over power, it is not over. I think the worst thing is, you know, to write them off because they're somehow genetically ill-disposed to democracy.

There's a vibrant process inside, but there's also decades of authoritarian political tradition in these countries that have to be worked through and tossed over. And this is a very hard. It was hard in Europe, in Eastern Europe, it was certainly hard in South African and Latin America, but I think there's some hope that dynamism of this places can still carry them through.

STEPHENS: Sure, in 50 years, it's going to work out great.

(LAUGHTER)

KAMINSKI: And there is no (ph) alternative, by the way.

HENNINGER: If there's a theme to what we're saying here, is that the United States has to play an active leadership role rather than a passive leadership role. If the United States is passive and Barack Obama to a certain extent, represents Democratic ideas that it should be more passive, this is the kind of world that results. I think places like Egypt and even Syria were looking to the United States to at least have a presence in this transitions, but we have not and we're seeing the results.

GIGOT: Where do you think, other than -- where are the potential flash points in this coming year?

STEPHENS: Look, there are many. One of them is, we don't talk about Europe enough. The crisis in Europe hasn't turned the corner, it's going to get dramatically worse, and the scenes that you've started to see in Portugal, Spain, Italy. There is deepening political dysfunction in the European Union. That's one place to look. That's going to encourage

Russia to make moves of its own. You mentioned South Africa. South

Africa is not going in a good direction, it was supposed to be the most optimistic spot on the African continent. So I don't really see many bright spots, maybe New Zealand, but someone told me, even the New Zealand is kind of heading south ...

GIGOT: All right, still ahead, counting down to ObamaCare. Big changes could be coming in 2013 for you and your family. Thanks to the president's

health care overhaul. We'll tell you what to expect when we come back.

(COMMERCIAL BREAK)

GIGOT: Well, get ready, America, for the arrival of ObamaCare, some key provisions of the president's mammoth health care overhaul kick in come January and Wall Street Journal editorial board member Joe Rago was here to tell you what to expect. Or as we call the bill, Joe, the Joe Rago Lifetime Employment Act, fated as you are to cover it. So, what can we expect this year?

JOSEPH RAGO, EDITORIAL BOARD MEMBER: Well, look, this -- the bill ramps up starting in October, 2013. So you're going to have three big changes, I

think. One is pouring out, of the Obama administration is going to be all

the regulations creating this law in practice, this is sort of a process of ad hoc improvisation. You're also going to see more resistance in the states, 26 states have said they won't participate.

GIGOT: They won't participate and set up these health care exchanges, which will be as insurance market.

RAGO: Right. Sort of a regulatory body where the subsidies will come out.

So I think - I think you are going to see a lot of dislocation in the states and then the third change is going to be just convulsion in the health care market as providers and insurers try to adapt to all of this churn that's going on.

GIGOT: Well, and one of those things in the insurance market is going to be consolidation. You're already seeing it where big insurers are getting bigger and doctors and individuals and practices are joining much larger practices because everybody realizes when you get hit with new regulation, you get hit with new costs and the bigger you are, the better you're able to weather something like that.

RAGO: Right. It's a total flight to safety, it's a way to manage risk and this, the major changes among the providers, it's almost ...

GIGOT: Doctors and hospitals.

RAGO: Doctors and hospitals, it's almost impossible to practice today as a physician unless you're affiliated with a hospital in some way. And what that tends to do is drive up costs. You know, you get local monopolies that can -- that can command their own prices, so, that's going to be contributing to a very, very strong trend in terms of premium increases for consumers.

GIGOT: The -- we're also seeing though, the taxes are hitting right away to pay for this, even before the benefits kick in for individuals who next year, 2014, you're seeing this big medical device tax that Dan talked about. You are also going to see the big investment tax, the Medicare surcharge on individuals and is there a-- and companies are going to start to now have to calculate what all of this is going to cost them. Are we going to see reductions in the costs of health care from this?

RAGO: No, we're going to see exactly the opposite. You know, insurers, they're getting taxed as well, these are all going to just pass through to consumers. So, if you saw about two weeks ago the CEO of AETNA came out and said ...

GIGOT: Big insurer.

RAGO: Big insurer, expect a premium rate shock, some consumers, 30, 50, even 100 percent in some markets, so there's really going to be a big jump in cost.

GIGOT: Kim, what about the politics of this. The resistance by the Republicans to this bill has really defined politics of the last three years, have been a big part of defining politics. Are they going to give up the ghost here and now accommodate themselves to this as a fait accompli?

KIMBERLEY STRASSEL, THE WALL STREET JOURNAL: No, I don't think you're going to see that. And it comes down to look at what you just mentioned, the fact that there are 26 states, many of them run by Republican governors who are not going to take part in these exchanges. And look, I think there are a lot of Republicans who realize that this next year is going to be really big and the logistical challenges that the Obama administration is going to face in setting this up, almost guarantees that there's going to be convulsion and all kinds of problems and I think Republicans see that this is going to be maybe an opportunity for them to point out to Americans some of the things that they had been warning of. Unfortunately the Americans are going to have to experience it firsthand. That they --

(CROSSTALK)

HENNINGER: Well, not only are they going to witness it firsthand. I think what you're seeing here is Franklin Roosevelt created the regulatory or administrative state in the United States. These big social programs with these gone forward for four or five decades. Barack Obama is really the heir to the Roosevelt legacy. And honestly, Paul, if you'd listen to what we're talking about here, I think we could -- we are beginning to see the implosion of the administrative state, simply collapsing under its own sheer unsupportable weight. It will be very ugly and I think it's going to begin with ObamaCare.

GIGOT: And Joe, the implementation, you've been writing about this, the implementation so far of this law is not going well.

RAGO: No, it isn't. It's just -- essentially a catastrophe. I mean ...

GIGOT: Even Democratic governors who support the law are find -- are really frustrated with what's coming out of Washington.

RAGO: That's absolutely right. I mean, essentially, they're just very bloody minded, they want to dictate everything out of Washington and it's frustrating, even people who support the law because it's so chaotic and ad hoc.

GIGOT: Can the administration ask for delay, perhaps, and kick this down the road a year or two?

RAGO: Look, the first year of implementation when people actually see this on the ground is really going to be important. I wouldn't be surprised if they asked for it. I would be surprised if Republican -- if House Republicans gave it to them.

GIGOT: Why?

RAGO: Because what you are seeing, they are saying, this is the pottery barn row, right? You broke it, you own it. And they are saying, if you can't get it up and running, it's your problem.

GIGOT: Then maybe it ought to be repealed, totally, and we can find over this again in 2014 and '16. OK. We have to take one more break. When we come back, our hits and misses of the year.

(COMMERCIAL BREAK)

GIGOT: Time now for hits and misses of the year. Bret, first to you.

STEPHENS: I think an absolute hit to NASA and the people at the Jet Propulsion Laboratory in Pasadena, California for this amazing feat of putting the Curiosity rover -- big rover, the size of an SUV pinpoint on the surface of Mars to look for signs of planets geologic past, possibly life. It shows that the can do spirit, the true spirit of curiosity is alive in America like nowhere else. And I hope it carries us forward beyond just -- beyond the planet.

GIGOT: All right, Matt.

KAMINSKI: My person of the year is also arguably the most powerful person in the world. But she does not give very many charismatic speeches, and is not very fancy. She is Angela Merkel who is the chancellor of Germany. I think she has done more than anyone in the last year to try and save us from an economic calamity in Europe. It is not a perfect solution, but somehow she has nudged some of these European countries in the south toward reform. She's agreed on some bailouts to keep it going. So, if the euro survives and if we all survive it will be thanks to her.

GIGOT: And she wins re-election?

KAMINSKI: Absolutely.

GIGOT: Joe.

RAGO: Paul, my hit of the year is the people of New York and New Jersey and their conduct during Hurricane Sandy. Think about it. Half of the Manhattan without power, half of the New Jersey without power, no subways, no gas, scenes that looked like they out of the Dresden fire bombing. Yet, civilization didn't fall away. There was no disorder, there was no crime, there was no violence, people did the best that they could and said things will look better in the morning. I think it's a testament to resilience and grace under pressure.

GIGOT: All right. My miss, and it's a big one, goes to Chief Justice John Roberts for his ruling that the Affordable Care Act is constitutional. He agreed with the four conservatives that the law violated the commerce clause of the Constitution, which was the main claim of the 26 states that sued. But then he turned around and found it constitutional under the government's taxing power even though the plain language of the law says it wasn't a tax. Justice Roberts was clearly looking for any rational to uphold the law.

I think because he was looking not to get criticized -- have the court criticized for being too political. He probably believes he was protecting the reputation of the court, but in the process he made the court look more political and he hurt his own reputation and I think ultimately the court's, too.

And remember if you have your own hit or miss, please send it to us at jer@foxnews.com and be sure to follow us on Twitter @jeronfnc.

That's it for this week's show. Thanks to my panel and to all of you for watching. I'm Paul Gigot. Happy New Year. We hope to see you right here next week.

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