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GOP Candidates Brace for Big Test; Palin vs. Bachmann on "Submission;" Second Straight Day of Stock Gains; Thousands of Postal Jobs May Go; Interview With DNC Chair Florida Representative Debbie Wasserman Schultz; Terrorists Behind Somali Famine; Controversy Over U.S. Drones in Pakistan

Aired August 12, 2011 - 17:00   ET


WOLF BLITZER, HOST: Thanks very much, Brooke.

Happening now, the Republican presidential candidates are heading into the biggest day yet of their battle for the nomination. We're following all the action in Iowa before tomorrow's straw poll. That's a key test of the field before the real voting begins.

Also, a second straight day of gains in stock prices. Wall Street breaks its wild zigzag pattern, at least for now. Stand by for the final tally of the losses during this volatile week.

And tens of thousands of postal workers could soon lose their jobs as America's mail system faces the equivalence of bankruptcy. This hour, how proposed cuts could affect all of us, including our own mail delivery.

I'm Wolf Blitzer. You're in THE SITUATION ROOM.

It all begins in Iowa. Right now, many of the Republican presidential candidates are in that state, a state that holds the lead-off contest in 2012. They're working the crowds at the state fair before tomorrow's pivotal Iowa Straw Poll. And they're taking direct aim at President Obama's handling of the debt crisis and the U.S. economy.

Listen to some of the Republican hopefuls, including Sarah Palin, who insists she still hasn't decided whether to run.


SARAH PALIN (R), FMR. ALASKA GOVERNOR: I think the question should be asked, is the president responsible for the downgrade?

And I would say yes, because from the top, that's -- leadership starts from the top.


RICK SANTORUM (R), PRESIDENTIAL CANDIDATE: Look what happened two weeks ago, when Barack Obama's back was against the wall.

What did he do to try to scare Americans to call their members of Congress?

He threatened Social Security recipients that their money wouldn't be there. He threatened Medicare recipients that their money wouldn't be there.

Why do you think he shoved Obamacare down the throats of the American public?

Because he wants his hooks in everybody.



REP. RON PAUL (R-TX), PRESIDENTIAL CANDIDATE: If you have a pile of debt in order to get growth again and if you're spending all your money on paying the interest, it won't work. You don't bail on bad debt.


BLITZER: Let us bring in our chief political correspondent, Candy Crowley.

She's over there at the Iowa State Fair in Des Moines -- give us a little flavor, Candy.

What are you seeing and hearing on this important day?

CANDY CROWLEY, CNN CHIEF POLITICAL CORRESPONDENT: Well, you know, exactly what you'd think at a state fair. I've got, you know, rides to the right of me, really bad for your heart food behind me and politics to the left of me. So it has everything that you can imagine, you know, livestock, people competing for ribbons. It goes on here in Iowa. I used to live in Iowa. And it is one of those things that everybody waits for, brings their children. It is packed here and will be for the next couple of weeks.

So, you know, the politics are, I have to tell you, kind of a sideshow. A lot of people are interested in the livestock showings. They're interested in, you know, taking the kids to the rides. But, nonetheless, they get to come here. And come they have, these 2012 Republican candidates -- and Debbie Wasserman Schultz, who, as you know, is head of the DNC, was also here getting some equal billing. And the folks that are on -- that are listening sit on hay bales and listen to what generally have been stock speeches. Some of them took a couple of questions. Nothing extraordinary happened. But it is -- it's what they do in August in pre-election years.

BLITZER: You know, Candy, last night two of the candidates, both from Minnesota, really went after each other. We're talking about Tim Pawlenty, Michelle Bachmann. They have a lot riding in tomorrow's straw poll.

I want to play this little clip from the Republican debate last night. (BEGIN VIDEO CLIP, COURTESY FOX NEWS)

TIM PAWLENTY (R), PRESIDENTIAL CANDIDATE: As to Congresswoman Bachmann's record, look, she's done wonderful things in her life, absolutely wonderful things. But it's an undisputable fact that in Congress, her record of accomplishment and results is nonexistent. That's not going to be good enough for our candidate for president of the United States. That's not going to be good enough for the president of the United States to serve in that capacity.



REP. MICHELLE BACHMANN (R-MN), PRESIDENTIAL CANDIDATE: Governor, when you were governor in Minnesota, you implemented cap and trade in our state. And you praised the unconstitutional individual mandate. And you called for requiring all people in our state to purchase health insurance that government would mandate. Third, you said the era of small government was over. That sounds a lot more like Barack Obama, if you ask me.


BLITZER: OK. That was just a little flavor. They went on and on. They really went after each other. Some are suggesting this is Pawlenty's sort of desperation right now. He's got to stay in this race and he's got to bring down Michelle Bachmann, if you will.

CROWLEY: Well, they, you might not be surprised, have set their sights somewhat lower, saying they have to do well here, they have to show movement here. Pawlenty has really struggled. Listen -- and -- and the interesting thing about this, is that he had some really good Democratic operatives here on the ground in Iowa. The folks you talk to say he's got the best organization on the ground. But, you know, the spark -- he hasn't caught the lightning in the bottle that Michelle Bachmann has.

So, you know, he has been going after her on, you know, he doesn't pass the charisma test with her. She brings in the passion. He's taking her on on her resume, saying, what have you done, and contrasting with his. And, of course, she's come right back and said, well, let's take a look at your resume and here's what you've done.

So he operated as governor for two terms in a -- a pretty Democratic state. And so there were some Democratic issues that he tended to agree with, although now he talks about, you know, what he was able to do as a Republican in a blue state.

So, hey, listen, there's a lot at stake for a lot of people in this way. The Ames Straw Poll doesn't elect people. They're not at all definitive about who's even going to win the Iowa caucus. We are talking about a very small number of Iowans that are even going to participate in this, much less, nationwide, people haven't even focused on 2012. But what it tends to do is dry up the money for the people who don't do well. And there is a long campaign ahead. And if you don't have any money, it is very hard to continue it.

Jon Huntsman also not catching fire. But he can write himself a check. He's a rich guy.

Tim Pawlenty is not. And he is pretty low in his campaign funds. He spent a lot -- about a million dollars -- sort of drumming up some interest in the straw poll and trying to bring his people in. So if he comes at the end of the straw poll and doesn't do well, it's going to be really difficult for him to raise money. Now, he says he's going to go on and we certainly take him at his word. But it will be very tough.

BLITZER: Candy is on the scene for us.

And we'll stay in touch with her all weekend.

Candy, thanks very much.

By the way, THE SITUATION ROOM, our Saturday edition, will be standing by for all of the Iowa Straw Poll results. We expect those results could come as ear -- in as early as 6:00 p.m., 6:30 p.m. Eastern tomorrow night. So make sure you tune in to CNN for that.

Please also be sure to tune in Sunday for CNN's "STATE OF THE UNION" from Ames, Iowa. Candy will be there. She'll have special interviews with the Republican presidential candidates, including Michelle Bachmann and Herman Cain, Sunday. 9:00 a.m. Eastern. Also, at noon Eastern, only here on CNN.

Sarah Palin says it's sexist to try to put her against Michelle Bachmann, because they're both women. But the two may have somewhat different views on their roles as wives who serve in politics.

The question, would they be submissive to their husbands if elected president?

Bachmann was asked about that during the Republican presidential debate last night.


BYRON YORK, "THE WASHINGTON EXAMINER": In 2006, when you were running for Congress, you described a moment in your life when your husband said you should study for a degree in tax law. You said you hated the idea. And then you explained, quote: "But the lord said be submissive. Wives, you are to be submissive to your husbands."

As president, would you be submissive to your husband?


BACHMANN: Thank you for that question, Byron.


BACHMANN: Marcus and I will be married for 33 years this September 10th. I am in love with him. I'm so proud of him. And both he and I, what submission means to us, if that's what your question is, it means respect. I respect my husband. He's a wonderful, Godly man and a great father. And he respects me as his wife. That's how we operate our marriage. We respect each other. We love each other.


BLITZER: All right. Today, Sarah Palin, also in Iowa, was asked about Michelle Bachmann's comments.

Listen to this.


UNIDENTIFIED MALE: Do you agree with the submission part?

PALIN: With her answer?

That -- that's her opinion, you know, is that -- to her, submission to her husband means respecting her husband and, you know, I -- I respect my husband, too. Submission --

UNIDENTIFIED MALE: If Todd said don't run, would you not run?

PALIN: I can't imagine my husband ever telling me what to do politically.


BLITZER: All right. Stand by for more on the Republican candidates and the president's strategy against them. I'll be speaking with Democratic Party chairwoman, Debbie Wassermann Shultz. The Congresswoman is in Iowa right now.

Now to a huge source of worry for so many voters -- the stock market. The Dow closed up 125 points an hour ago, the second straight day of gains. All three major indices were in positive territory at the closing bell. It's certainly a welcome break from the dramatic see-sawing trend over the past week.

But who knows what next week will bring?

Poppy Harlow of CNNMoney is joining us now with the final tally of the week -- Poppy, is there any consensus of why the market went up again today?

POPPY HARLOW, CNNMONEY.COM: No. Has there been -- all week, Wolf?

I mean this has been, according to one trader I just got off the phone with, the craziest week he has ever seen. This is a quote from a New York Stock Exchange trader who has been trading for -- get this -- 43 years.

It was a wild week, no question about it.

Let's just take a look back at the numbers since we saw the Dow fall so significantly a week ago Thursday. It was up, down, up, down, up, down since then.

Giving you just a sense of where we are overall in this big decline, we're still down over 600 points for the Dow Industrials.

And by the way, Wolf, we closed higher yesterday. We closed higher today.

You see those two green arrows at the end of your screen?

That is the first time we've had two positive closes for the stock market since July 6th and 7th. And if you want to look at where we are relatively speaking, we're now at about the same levels on the Dow that we were all the way back in April of 2010. So it has been a wild ride. And we are down overall when you look at -- at what we've seen in the up and down. We're still pretty far down.

I want you to take a listen to another trader that I spoke with at the New York Stock Exchange about just how he deals with this volatile, volatile market.

Take a listen.


KENNETH POLCARI, MANAGING DIRECTOR, ICAP EQUITIES: I walk into the crowd and I assess how the sellers are. If I sense you're nervous and I'm a buyer, I'm going to bid you down, because I'm going to test and see how nervous you are.

HARLOW: Right.

POLCARI: So when people say, jeez, the market's under pressure, where are all the buyers, the buyers are here.

HARLOW: Right.

POLCARI: They're just taking advantage of kind of the fear and the anxiety in the market.


HARLOW: Fear and anxiety in the market.

Wolf, I will tell you, everyone on Main Street is feeling this. We got the worst consumer confidence number this morning that we have gotten since 1980 -- 1980, when Carter was president. So it's been a long time since Americans have felt this unsure about what's happening to the economy and the stock market.

I will tell you, over the weekend, another trader told me, we used to be immune from bad news on the weekend. Now it seems like all we get is bad news on the weekend. I hope nothing bad happens this week. That's all -- this weekend. That's all I'm hoping.

So that -- that's the mood on Wall Street heading into Monday. If they don't get another downgrade, any bad news, they're going to take it heading into Monday's session -- Wolf.

BLITZER: Yes. And a lot of us are nervous, because last Friday after the markets closed --


BLITZER: -- we got that downgrade from the S&P, which caused a lot of nervousness all weekend.

Let's hope it stays quiet this weekend.

We can worry about the Iowa Straw Poll. That's enough.

All right, Poppy. Thanks very much for that.

The U.S. Postal Service says it's in desperate need of downsizing. The cost could cost thousands -- the cuts, I should say, could cost thousands of jobs and change mail service as we know it. Will Congress let it happen?

And a new ruling in the heated legal battle over health care reform signed into law by President Obama.

Lots of news happening today right here in THE SITUATION ROOM.


BLITZER: On top of everything else, there's another crisis unfolding right now here in Washington.

What if -- what if America's mail system simply went bust?

The U.S. Postal Service says it needs to make drastic changes to keep the agency afloat, including massive lay-offs.

Our Brian Todd has been looking into the problem for us and how it could affect all of our mail service -- Brian, what's going on?

BRIAN TODD, CNN CORRESPONDENT: Wolf, the Postal Service is hemorrhaging money and is pushing major cuts to its workforce. That's going to affect everyone from you and me to a gentleman who faithfully works his route every day.


TODD: (voice-over): For about three decades, Delvin Johnson has been hoofing it on his Northwest Washington beat.


How you doing, Miss. O'Neill (ph)?

TODD: As a seasoned postal carrier, he survived the anthrax scare and other perils of the job.

(on camera): So in 30 years, how many dog bites?

JOHNSON: Just one.

TODD: That one?

JOHNSON: Just one, yes.

TODD: Only one?

JOHNSON: After 28 years.

TODD: If you went 28 years without one --

JOHNSON: Without one and --

TODD: And you just got one a couple of years ago?

JOHNSON: Yes. Yes. But like I said, it comes with the job, though.

TODD: (voice-over): For Delvin and his colleagues, dog bites might be the least of their worries these days. The U.S. Postal Service says it will be insolvent next month and wants to lay off 120,000 people. It's trying to get Congress to allow it to waive protections against lay-offs for veteran workers and wants to provide its own benefit plans instead of federal plans.

(on camera): Are you worried that, given the Post Office's financial situation, that maybe it won't work out the way you want it to for your career?

JOHNSON: Well, that -- that has been, you know, my wife and I have talked about it. But, you know, we just have to make things, you know, make things work.

TODD: (voice-over): Postal unions are also upset with the potential cutbacks. The National Association of Letter Carriers calls this a pie in the sky proposal. The unions and the Postal Service itself say the service would be profitable if it wasn't forced by Congress to prefund retirement benefits for the next 75 years, for generations of postal workers who haven't even been born yet.

But there are other reasons for the bleeding. With more of us e- mailing and doing online bill paying, mail deliveries to our doorsteps have dropped precipitously over the past few years. I spoke with Pete Sepp of the National Taxpayers Union, a watchdog group, about the future.

(on camera): If they're allowed to make these cuts, what's it going to mean for you and me as far as stamp prices and service? PETE SEPP, NATIONAL TAXPAYERS UNION: If this plan goes through, consumers are likely to find fewer formal post offices, but more opportunities to do postal business at existing retail stores. They're likely to find somewhat stamp prices, but certainly not much higher ones that would be the case if the lay-offs didn't occur.

They're also likely to find service curtailments, perhaps no Saturday delivery.


TODD: But Pete Sepp says that's still better than a major taxpayer bailout that would come if the Postal Service didn't make these cutbacks.

Just how fat is the service?

Sepp says the U.S. Postal Service has more retail facilities than McDonald's, Starbucks, 7-Eleven and UPS combined -- Wolf.

BLITZER: Brian Todd, thank you.

Let's take a closer look right now at the problems weighing in on the U.S. Postal Service and how we all could be affected by these proposed cutbacks.

CNN's Tom Foreman is over at the data wall for us -- Tom.


We're looking at the cornerstones of what's happening here, because they really are big. Here's the map of the United States. The 3,700 post offices recommended to close. That's an awful lot out there. And here's why. We mentioned the pricing a minute ago in Brian's report there. Yes, our -- our letters are cheaper than most places right now, below Canada, Great Britain, Germany, for example. Our delivery frequency, if we got rid of Saturday deliveries, that would save $3 billion a year.

The workforce they're dealing with right now, well, there are a lot of people out there. More than 500,000 workers and 50 percent -- 50 percent of those post offices we showed a minute ago are losing money. Fifty percent of them.

But this is the big one. This is a big magilla (ph) they all talk about, those retirement health benefits. They have to pay in $5.5 billion per year to keep this thing solvent way into the future. It's already got $75 billion in it that's frozen that they cannot access in this difficult time.

All of this put together, Wolf, adds up into a very, very difficult profit/loss schedule. Look at this. This is where we are right now, already losing money. By 2020, if nothing else changes, they will have lost, accumulative, $238 billion.

So, Wolf, that's the reason they're talking about cutbacks right now and, you have to say for the economy, a very tough time, because some of the biggest losses have been in government and quasi- government jobs.

BLITZER: Yes. It looks like the handwriting is on the wall. But we'll see what they finally do.

Thanks, Tom.

Thanks very much.

New charges just filed against those three siblings nabbed in a brutal gun showdown with police. The details coming up.

Also, a disturbing new report suggesting American drone strikes in Pakistan have killed hundreds of civilians, many of them children. You're going to want to hear how the United States is responding to these allegations.


BLITZER: A federal appeals court deals a major blow to a key provision of President Obama's sweeping health care reform law.

Our Lisa Sylvester is monitoring that and some of the other top stories in THE SITUATION ROOM right now -- a big setback, potentially.


The U.S. Court of Appeals in Atlanta has ruled the individual mandate section, which requires almost all Americans to purchase health insurance by 2014 or face financial penalties, unconstitutional. The court argues that doing so was an improper exercise of federal authority. The ruling could likely prompt an election year showdown at the U.S. Supreme Court over this legislation.

And new charges filed against those three siblings nabbed after a dramatic high speed chase with police. Each was charged today with attempted murder and assault on a police officer in one Colorado county. Similar charges were filed yesterday in a separate county. The three are also accused of bank robbery in Georgia and attempted murder in Florida.

And a former Pennsylvania juvenile judge has been sentenced to 28 years in prison for accepting millions of dollars in bribes to incarcerate young people in detention centers owned by friends.



UNIDENTIFIED FEMALE: My kid's not here. He's dead because of him. He ruined my (EXPLETIVE LANGUAGE) life. I'd like him to go to hell and rot there forever.

UNIDENTIFIED MALE: Ma'am, come on. UNIDENTIFIED FEMALE: No. You know what he told everybody in court?


UNIDENTIFIED FEMALE: They need to be held accountable for their actions. You need to be --


SYLVESTER: This case made national headlines when the former judge, as you saw there, he was confronted by an outraged mother of a child he sentenced. He was also ordered to pay $1 million in restitution -- Wolf.


All right, thanks very much, Lisa. I know you've got more stories you're working on. You'll be back.

We heard Sarah Palin slam President Obama over the debt crisis, but is she willing to lay any of the blame on the Tea Party movement? Stand by for that.

We'll be right back.


BLITZER: I'm Wolf Blitzer.

Stories we're working on for our next hour.

Texas Governor Rick Perry gets ready to shake up the 2012 race with tomorrow's big announcement. Why even President Obama's campaign team is now taking some serious notice.

Also, as the economic crisis drags on, five things President Obama could do to reassure Americans that the buck really does stop with him.

And why an electronic tattoo could be the next big advance in medicine. We're not making this up.


Right now, all eyes on Iowa, where the Republican presidential contenders are gearing up for an early but critical test in the race for the White House.

Meanwhile, a number of key Democrats are also on hand to try and keep them from gaining all the new momentum.


BLITZER: And joining us now from Des Moines, Iowa, Debbie Wasserman Schultz. She is the chair of the Democratic National Committee, a congresswoman from South Florida. Congresswoman, thanks very much for coming in.


Thanks, Wolf.

BLITZER: Let's talk first about this 11th Circuit Court of Appeals decision saying that part of the President Obama and Democrats' health care reform law is unconstitutional, the part with mandates. This is obviously going to go to the Supreme Court.

But how much of a setback is this right now?

WASSERMAN SCHULTZ: Well, first of all, we're very confident that we're on firm ground with the -- with the Affordable Care Act, particularly because Congress has the ability to -- to regulate commerce. Clearly, there's nothing more that affects interstate commerce more than purchasing health insurance, and we know health insurance companies certainly do business across state lines.

So, the ground is firm there. And keep in mind that just a few weeks ago, the Sixth Circuit Court of Appeals out of Cincinnati had a different ruling, 2-1, to uphold the law. So, this is just, you know, another step in the path to what we know will be an ultimate Supreme Court decision. When we get there, we feel confident we're on very firm ground and that they will uphold it.

BLITZER: You won't be surprised to know that Reince Priebus, your counterpart at the Republican National Committee, put out a statement warmly welcoming this decision by the 11th Circuit Court of Appeals.

All right. Let's get to some politics right now. That's why you're there in Iowa.

Rick Perry, he's jumping into this race, as you well know. He does have a pretty impressive proven track record in creating lots of jobs in Texas.

How are you going to deal with that?

WASSERMAN SCHULTZ: Well, I mean, I know that that's what the current line in the media is, and he certainly is trying to leave people with that perception. But if you peel back the layers of that claim, that somehow Rick Perry has had success with job creation, that dog just doesn't hunt, as they say in the southern vernacular.

At the end of the day, this is someone who gets huge benefits from the decisions made by OPEC. There's a lot of money from the oil industry that impacts the economy and jobs in Texas. So, you know, for Rick Perry to claim that those jobs have something to do with his policy, really very -- you know, that's more hat than cattle. And at the end of the day, we've got to make sure that we have a candidate for president like Barack Obama who's going to focus on job creation with a proven track record, 17 straight months of private sector job growth, 2.4 million private sector jobs created. Here in Iowa, the first six months of this year, 2,200 private sector jobs created each month.

And with the Recovery Act, the reason that you've got about six percent unemployment here in Iowa, much lower than the national average, is that you've got 34,000 jobs that were created here alone from the Recovery Act. So, Iowa has benefited, America has benefited from Barack Obama's leadership, and Rick Perry or any other presidential candidate can't hold a candle to him.

BLITZER: Listen to Sarah Palin, in Iowa, where you are right now, told reporters today. Listen to this.


PALIN: If it weren't for the Tea Party, the discussion would never have gone where it went, so I appreciate the Tea Party's passion for getting our federal government to realize it needs to live within its means. The last group or entity to be blamed for the downgrade should be the Tea Party.

Is the president responsible for the downgrade? And I would say yes, because from the top, that -- leadership starts from the top.


BLITZER: She says the president should be blamed for the downgrade of America's creditworthiness from AAA to AA plus. I want you to have a chance to respond to Sarah Palin.

WASSERMAN SCHULTZ: Well, I know this is going to sound funny coming from the chair of the Democratic National Committee, but like Standard & Poor's analysis, I agree with them that the gridlock that was created by the Tea Party resulted in a Tea Party downgrade, and that the blame in S&P's analysis rests squarely with the Republican Party's refusal -- stubborn refusal -- to come to the table and compromise.

We need to come together as two sides in this country, work together to reduce the deficit, get a handle long term on getting our economy turned around even more so than President Obama has been able to accomplish. But at the end of the day, you know, we can't do it alone.

The American people want us to work together. And like I said, I know that sounds funny coming from the Democratic National Committee chairman, but I would love to hear Reince Priebus say something other than what he has been saying, which is nothing but divisive rhetoric. I'd love him and his colleagues in the Republican Party to commit to coming together, working with Democrats under President Obama's leadership, to get some balance into this long-term economic situation. BLITZER: Are you surprised, upset, worried about all the criticism that the president is getting, not from the Republicans, from the right, but from the left, from some of the liberal base of the Democratic Party? You saw that article, I'm sure, last Sunday in "The New York Times" by the Emory University professor, Drew Westin, entitled, "What Happened to Obama?" I'll read a line from it.

"When faced with the greatest economic crisis, the greatest levels of economic inequality, and the greatest levels of corporate influence on politics since the Depression, Barack Obama stared into the eyes of history and chose to avert his gaze. Instead of indicting the people whose recklessness wrecked the economy, he put them in charge of it."

Now, this comes from a professor who himself acknowledges he is a liberal and at one point was a great supporter of the president. But you're hearing more of this kind of criticism from the left.

How worried are you that that liberal base won't be energized?

WASSERMAN SCHULTZ: Well, you know, that analysis is simply not the case. I am proud of President Obama's record, proud of the courageous leadership that he has demonstrated in pushing forward historic health care reform, in taking on Wall Street and making sure that we made sure that banks are never again too big to fail, making sure that we establish some balance and fight hard for it, and continue to work hard to get this economy turned around.

I think whether you're a liberal, whether you're a conservative, or whether you're an Independent, there is something to be proud of in anything you look at in President Obama's leadership. And I've traveled the country, Wolf, heard from liberals across this country who are proud that President Obama has brought us to this point, dug us out of the ditch that the Republicans put us in, and now we need to work together to make even more prosperity happen for the American people.

BLITZER: All right. Debbie Wasserman Schultz, go ahead and enjoy some of these fried Twinkies behind you. Appreciate your joining us.


BLITZER: Thank you.

WASSERMAN SCHULTZ: I'm all about the fried Milky Ways. I'm on my way there now.

BLITZER: All right. Go ahead. Not too many.


BLITZER: A dangerous terror network is getting richer by the day, while it makes the deadly famine in Somalia worse.

And later, a tattoo that could help keep you alive. (COMMERCIAL BREAK)

BLITZER: All week we've bringing you extensive covering of the humanitarian catastrophe in Somalia, where hundreds of thousands of people, many of them children, are dying and the food supply is quickly running out. Now the wealthy terror network behind much of this devastating famine is prompting security concerns right here in the United States.

CNN Pentagon Correspondent Barbara Starr has details.


BARBARA STARR, CNN PENTAGON CORRESPONDENT: The once ragtag Somali terror group Al-Shabaab is now an economic powerhouse, raising millions of dollars a year from smuggling, illegal taxation, and extortion of the very Somalis starving in the famine.

PETER PHAM, ATLANTIC COUNCIL: We are dealing with a very sophisticated financial machine that's made to generate wealth both for individual leaders, as well as the militant movement itself.

STARR: A United Nations report estimates Al Shabaab generates between $70 million and $100 million a year controlling ports, roads and towns. It's a financial web that spreads from the poorest regions of southern Somalia to the richest neighborhoods of the Persian Gulf and back again.

One example, the U.N. estimates Al Shabaab makes $15 million a year exporting charcoal to the Gulf and then financing the import of sugar into southern Somalia to smuggle throughout the region at marked up prices.

PHAM: It's a major moneymaker that is bringing in millions of dollars each year to finance Shabaab's campaign of violence and terror.

STARR: It's all going to pay hundreds of new fighters and possibly plan attacks in cooperation with al Qaeda, intelligence officials say. And U.S.-bought weapons are showing up on the ground.

PHAM: U.S.-supplied weapons or weapons purchased through U.S. grants to African Union peacekeepers, or to the transitional federal government, have been used to purchase arms, which ultimately leak to Shabaab.

STARR: According to the U.N., weapons seized after a raid against Al Shabaab in February included components brought in by the U.S. firm DynCorp under a State Department with peacekeepers, then illegally resold to fighters. The company was not involved.

But for those who think Al Shabaab will stay buttoned up in Somalia, the chairman of the House Homeland Security Committee says think again.

REP. PETER KING (R-NY), HOMELAND SECURITY CHAIRMAN: That kind of thinking is a glaring example of what the 9/11 Commission called a failure of imagination.


STARR: Now, the current famine catastrophe, Wolf, has at least put a temporary crimp in Al Shabaab. So many people have fled southern Somalia and the capital of Mogadishu, they have less people they can extort from. But nobody is counting this very dangerous group down and out -- Wolf.

BLITZER: They shouldn't. All right, Barbara, thank you.

Another potential for rising tensions between the United States and Pakistan. The United States strongly disputing a new report that U.S. drones have killed more than 160 children in Pakistan.

CNN's Reza Sayah is in Islamabad.


REZA SAYAH, CNN INTERNATIONAL CORRESPONDENT: Wolf, the U.S. and Pakistan have been butting heads for years over the issue of these drone strikes, and this latest report is sure to fuel the debate about whether these drone strikes are an effective strategy in the fight against extremism.

The report, released by a U.K.-based group of British and Pakistani journalists. According to the report, ever since 2004, Washington has launched about 290 drone strikes on Pakistani soil that have killed more than 2,000 people. The report says among the victims, 380 civilians, including more than 160 children.

It's no surprise Washington is not happy with this report. This report doesn't bode well for what Washington is trying to do here in Pakistan, and that's to repair its damaged image. Washington wants to win some hearts and minds here in Pakistan.

No surprise that a U.S. official is telling CNN that this report is false and inaccurate. Washington has a different set of numbers when it comes to drone strikes. They say since 2001, they've killed more than 2,000 people with these attacks, but only 50 -- 50 of the victims have been civilians.

The glaring problem, of course, is neither CNN nor any other media outlet can verify these facts because access to the tribal region where these drone strikes take place is cut off. So, what you have is two sides, the opponents of drone strikes and the critics, who have very different versions.

Even so, Washington is pushing forth with the strategy of drone strikes. They've increased under the Obama administration. Washington maintains that they're still an effective strategy against militants -- Wolf.


BLITZER: All right, Reza. Thank you. Reza Sayah, reporting from Islamabad. A sensitive story.

Republican presidential contenders are firmly vowing they won't raise taxes. Could they be backing themselves though into a corner? That's coming up in our "Strategy Session."

And a widening rift between Verizon and thousands of its striking employees. Ahead, we'll tell you why the FBI is now being called in.


BLITZER: The Republican debate in Iowa was filled with disagreements, but there was at least one issue that all the candidates agreed on.


BRET BAIER, FOX NEWS: Say you had a deal, a real spending cuts deal, 10-1, as Byron said, spending cuts to tax increases.

Speaker, you are already shaking your head.

But who on this stage would walk away from that deal? Will you raise your hand if you feel so strongly about not raising taxes, you'd walk away on the 10-1 deal?



BLITZER: All right. Let's talk about that and more with Democratic strategist and CNN political contributor Donna Brazile, and Republican strategist Tony Blankley of Edelman PR. He used to serve as a press secretary to one of the guys who was on that podium yesterday, former House Speaker Newt Gingrich.

You know, I was a little surprised, 10-1. So let's say hypothetically there's $5 trillion in spending cuts over the next 10 years, and $500 billion, which is 10-1, in increased tax revenues. You eliminate some of the subsidies for ExxonMobil, for some of these hedge fund guys. GE didn't pay any federal income tax last year.

You remove some of that, the Republicans wouldn't take that deal?

TONY BLANKLEY, REPUBLICAN STRATEGIST: No. You have to understand, if it had been a ratio of 1,000-1, the headline the next morning would be "Candidate X is for Tax Increases." In presidential primary debates, in both parties, you don't violate the core convictions of your primary voters any more than in the last cycle the Democrats would be for keeping Gitmo open.

Whatever eventually becomes the policy in the wisdom of the elected candidate, you can't have that policy discussion. This is not a negotiating session. This is communicating fundamental principles to your primary voters. So I don't think it means anything. BLITZER: Because the Democrats are having a field day with this one. They're saying these Republicans, they are so committed to the no new taxes pledge to Grover Norquist and that organization, they're even willing to give up 10-1 in spending cuts versus tax increases.

DONNA BRAZILE, CNN POLITICAL CONTRIBUTOR: Wolf, I think Tony is absolutely right. What has happened now in the Republican primary is that they're all playing to their base.

They are trying to convince primary voters who are very, very conservative that they can basically outdo each other on these very conservative principle. But as you all know, 80 percent of the American people support a balanced approach which includes revenues, as well as spending cuts.

So I think, overall, what the Republicans are doing are backing themselves into a corner. If you look at the S&P results over the last couple of days, they basically point the finger at the political gridlock here in Washington, D.C., and the failure to look at the entire picture.

BLANKLEY: Look, on the other hand, the Democrats have believed ever since I have been a child that tax increases on the rich sell to the public. Reagan, Newt, lots of Republicans get elected regularly holding the line on raising taxes, because the public may be in favor of taxing the rich guy -- they always are -- but they have a sense that one party tends to raise taxes, the Ds, and one party tends not to, the Rs.

And they generally suspect -- if they're in a mood for keeping their taxes down, they vote for that party. So it's not been a loser in any particular election cycle. But whatever the final deal is, which will probably come after the 2012 election, if we get it, you are going to have a practical decision made at that point, but you don't negotiate it during --


BRAZILE: Well, the one thing that the public also understands is that we had a balanced budget under a Democratic president who made some very tough calls.

BLANKLEY: And a Republican Speaker of the House, Newt.

BRAZILE: Well, absolutely. But we had a balanced approach.

And when you have divided government, the public likes to see what I call a balanced approach, a sacrifice. And we shouldn't balance the budget on the backs of middle and working class Americans with 100 percent of the cuts coming from programs and services that aid people who simply can't afford it.

BLANKLEY: The budget was balanced in '97, '98, '99, when Newt was Speaker and Bill Clinton was president, and they did not raise taxes. Now, Clinton raised taxes in 93, and Herbert Walker Bush raised it in '90. But in the period when we balanced the budget, it was done just with the combination of an expanding economy and budget cuts.

BLITZER: Well, the Clinton people will argue that the increased taxes that Clinton passed in '93 helped pave the way for that balanced budget. Now, if you listen to Robert Rubin and all of them, they'll tell you that story.

You're smiling. I know you worked for Newt at the time.

Let me just play this one clip on a different part of the debate last night, because it focused a real fight between Ron Paul and Rick Santorum.


RICK SANTORUM (R), PRESIDENTIAL CANDIDATE: Iran is not Iceland, Ron. Iran is a country that has been at war with us since 1979.

REP. RON PAUL (R-TX), PRESIDENTIAL CANDIDATE: The senator is wrong on his history. We have been at war in Iran for a lot longer than '79.

SANTORUM: Anyone that suggests that Iran is not a threat to this country or is not a threat to stability in the Middle East is obviously not seeing the world very clearly.

PAUL: Iran does not have an Air Force that can come here. They can't even make enough gasoline for themselves. And here we are building this case --

Please, please.

They are building up this case just like we did in Iraq. Building up the war propaganda. There was no al Qaeda in Iraq. And they had nuclear weapons and we had to go in. I'm sure you supported that war as well.

It's time we quit this!


BLITZER: As I tweeted earlier in the day today, Tony, say what you will about Ron Paul, he is not afraid to go against the Republican consensus on the wars in Iraq, Afghanistan, relations with Iran, if you will. He is willing to take a clear isolationist stance.

BLANKLEY: Well, he does. And I think -- I mean, he has his theory of how the world works, and he never lets the facts in a particular situation get in the way of his theory.

Now, you can believe that we shouldn't needlessly get into wars, but Iran may be -- I mean, the whole world is worried about Iran. And the idea that Iran with nuclear weapons is no concern of the United States strikes me as beyond a reasonable view.

BLITZER: What did you think of that exchange, Donna? BRAZILE: I enjoyed it. And by the way, Wolf, it was really a good debate to watch. But the only way either one of these two guys is going to get to the Oval Office is on a guided tour.

But Ron Paul has really moved the Republican Party much more in a Libertarian fashion. Rick Santorum lost by 20 points. I don't think they're getting to the Oval Office.

BLITZER: Ron Paul could do very well in the straw poll tomorrow.

BRAZILE: Absolutely.

BLITZER: We'll see. He's got a great organization in Iowa. We'll see how he does.

BLANKLEY: He won't get the nomination.

BLITZER: That's another story, but we'll see how he does.

BRAZILE: Absolutely. I agree.

BLITZER: Guys, thanks very much.

Sarah Palin is in Iowa right now. She's crashing the party, some say. CNN's Don Lemon is over at the state fair. He actually got to speak with her. You're going to find out what she is up to, what she is saying.

And we'll take you to London, where police are being given new powers to crack down on rioters. Is it enough though to prevent more violence?


BLITZER: In Britain, more than 1,900 people have been arrested in this week's riots. Now police are trying to figure out how things got so out of hand so quickly.

CNN Senior International Correspondent Dan Rivers is in London.


DAN RIVERS, CNN SENIOR INTERNATIONAL CORRESPONDENT (voice-over): After the disorder of the past few days, now the postmortem. How did it come to this?

The prime minister was clear that the police were caught off guard.

DAVID CAMERON, BRITISH PRIME MINISTER: There were simply far too few police deployed onto our streets, and the tactics they were using weren't working. Police chiefs have been frank with me about why this happened. Initially, the police treated the situation too much as a public order issue, rather than essentially one of crime.

RIVERS: We saw in vivid detail by Tuesday the police were heeding calls for more robust action. This, the scene in Canning Town, east London, as officers pursued a zero tolerance of gangs.

Now the police will be given new powers to arrest masked men like this simply for what they're wearing on their faces.

CAMERON: We're going to give the police the discretion to require the removal of face coverings under any circumstances where there's reasonable suspicion that they are related to criminal activity.

RIVERS: For the first time, the police used these armored Jankel trucks to clear looters from the streets. The government is also considering adding curfews, rubber bullets and water cannon to the police tactics. But there was also this rebuke for senior officers who dismissed the idea of using the army to relieve pressure on the police.

CAMERON: It is the government's responsibility to make sure that every future contingency is looked at, including whether there are tasks that the army could undertake that might free up more police for the front line.

RIVERS: But police officers are resistant to that idea and are also concerned about government plans to cut the 137,000 officers in Britain by 16,000 by 2015.

HUGH ORDE, ASSOC. OF CHIEF POLICE OFFICERS: And what we are focusing on is making sure we are as efficient as we can be and minimizing the impact of those cuts on the front line. And what we're seeing at the moment is a recent report has shown we are achieving that. The front line is being protected, but other ancillary jobs we do sadly will have to stop. And there's some hard choices to be made, but make them we will.

RIVERS: Any reduction is a sensitive issue. In the past both, main parties competed to appear tough on crime. In light of scenes like this, these numbers are now politically explosive, and an issue that will dominate the debate about austerity and where the cut should fall for months to come.

Dan Rivers, CNN, London.