CHRIS WALLACE, HOST: On this Labor Day weekend, the slow recovery and rising unemployment are not just big economic news but also the central issue in the midterm elections.
We'll talk with Democratic Party chair Tim Kaine in a few minutes, but first, Republican senator John McCain, who joins us from his home state of Arizona.
Senator, President Obama is set to announce a new economic plan this week that will reportedly center on tax cuts for business to boost hiring and investment. It sounds like something straight out of the Republican play book. What's your reaction?
SEN. JOHN MCCAIN, R-ARIZ.: Well, my reaction is that we always like to see deathbed conversions, but the fact is if we'd had done this kind of thing nearly a couple years ago we'd be in a lot better shape.
Look, they're just flailing around. Every place I go in my state where people are hurting very badly, one of the major things that small business and large business people tell me is they want some kind of certainty.
I run into CPAs that say I can't tell my client exactly what they should do with their money or with their future, because nobody knows when the next regulation is going to come down, what are the taxes going to be, what's the -- you know, we tell them small businesses -- there's a $600 -- every transaction over $600 now has to be reported to the IRS, thanks to "Obamacare."
So there -- it isn't going to resolve this incredible uncertainty out there that large and small businesses have about their financial future. And so I hope that they'll do a payroll tax cut.
But the first thing -- the first thing we need to do is extend the tax cuts that are in existence so people have that certainty.
WALLACE: Well, let me ask can you about that, because the Democrats are talking -- and this is all reportedly at this point -- about framing it this way: Let's end the tax cuts for the wealthy and use that $35 billion instead to have targeted tax cuts for small business that does most of the hiring and for lower-income employees. Would you support that?
MCCAIN: Well, let's get in the old class warfare again. Let's get the rich. The -- just extend the tax cuts. Then let's talk about the payroll tax holiday, which -- for small businesses, which is something we have fought for for a long period of time, and pay for it out of the unused stimulus funds, or cut other spending.
The American people want us to stop spending. And so let's just give them some certainty. Let's extend the tax -- the existing tax cuts. And then let's give some more tax breaks to small businesses and large. And then maybe the American people will have some confidence.
They have lost confidence in this administration's ability and this president's ability to get this economy going again.
WALLACE: Do you think if this president announces the kind of economic plan he's talking about this week it's going to have any impact at all that will help Democrats in November?
MCCAIN: I'm doubtful, but the point is that the Obama Keynesian on steroids has not worked. The economic policies have failed. And we can argue about jobs created, jobs saved, but the fact is when they passed the stimulus package they said unemployment would be a maximum of 8 percent. It's now 9.6 percent. Enough said.
We've got to start doing the right things, frankly, that some of our European friends like the conservative government in England is doing.
WALLACE: The polls and the pundits seem to agree this is going to be a very good year for Republicans. A couple of questions. First of all, do you think that the GOP will regain control of the Senate?
And secondly, what kind of party will it be next year? Are you comfortable with some of the tea party ideas that would dramatically shrink the size and the scope of the federal government?
MCCAIN: I think we'll do very well. I think that's obvious. The question is how well do we do. And I think then that we get down to, I believe, that Republicans have to come up with a contract for, with, of -- whatever you want to call it -- America.
And I think a balanced budget amendment to the Constitution has to be part of it, elimination of earmarking and pork-barrel spending, repeal and replace "Obamacare." We have to have a short list of promises we'll make the American people and keep it.
But I really think that the -- that this election could be a seismic election. But we've got to give Americans a reason to be for us rather than be just against the Democrats and the president.
The tea partiers are a great addition. The tea partiers have invigorated a base that has been dormant for a long period of time. We're going to have a broad array of different views in our Republican conference, and I think it might be more interesting than any I've been in in a long time.
WALLACE: I just want to get back to this idea of the contract. The House Republicans are talking about -- I guess they're going to call it a commitment to America. But Senate Republicans haven't been talking about that.
Are you saying Senate Republicans should come forward with their own affirmative agenda between now and the election?
MCCAIN: I think Senate and House Republicans should come forward with an agenda before the election. Yes.
MCCAIN: You know, as much as -- as happy as we are about the outcome of the elections, when you look at the approval ratings of Republicans, they're just as bad as Democrats'. We've got to give them a reason to vote for us.
WALLACE: Let's talk about a few specifics that have come out from some members of the House Republican Caucus, like Paul Ryan, with his road map and some of the tea partiers.
Do you support the idea of allowing those under 55 -- not talking about people near retirement now -- allowing people under 55 to put up to a third of their payroll taxes in private accounts?
MCCAIN: Frankly, I haven't examined that particular issue and in that detail, but everybody knows -- all Americans know that we're going to have to fix Social Security and Medicare.
And I notice that the Democrats are focusing in. They've rolled out that tired old golden oldie that Republicans are going to destroy Social Security and -- which, by the way, after "Obamacare," they cut Medicare by half a trillion dollars and also are doing away with Medicare Advantage.
But -- so we don't talk about Republicans going to cut Medicare. Look, we need to sit down and we need to do as Ronald Reagan and Tip O'NEILL did and come up with a solution. We all know we need to do that, but I can't specific -- endorse a specific proposal.
WALLACE: I guess now's as good a time to ask the "has John McCain sold his soul to win re-election" question that you faced in the tough battle that you had in the -- in the Republican Senate primary in Arizona?
Let's look at the record, sir. You changed your position on "don't ask, don't tell." You went from sponsoring...
MCCAIN: Could I -- could I...
WALLACE: Well, let me just...
MCCAIN: Could I take this?
WALLACE: Let me go through the litany...
WALLACE: ... and then you can respond.
WALLACE: "Don't ask, don't tell." You went from sponsoring legislation to cap greenhouse gases to calling it "cap and tax." And you went from sponsoring comprehensive immigration reform to saying build the dang fence.
Question: You don't see any change, any trimming, of your position?
MCCAIN: No. On "don't ask, don't tell" I was always the same. I said we needed a complete review of the impact on morale and battle effectiveness of "don't ask, don't tell" before we repeal it. That's my position now. Now they're trying to ram through a repeal without a -- any kind of really realistic survey done.
On climate change I said, "Look, nuclear power has to be part of it." Now, thanks to Harry Reid and the radical environmental movement that closed Yucca Mountain, there's no recycling, so nuclear power is basically not viable.
On immigration, look, as anybody doesn't -- hasn't seen what's going on south of our border, they have been oblivious to the terrible, terrible struggle that's going on down there -- 28,000 Mexican citizens being killed, the murders taking place just south of our border, the invasions and the insecurity in the southern part of our state.
Of course we've got to get our border secured. And anybody who doesn't think so, come to Arizona and visit the southern part of my state. I'd love for the president to come and visit the border. Unfortunately, he hasn't seen -- had time to do so.
WALLACE: Let me follow up on this question of immigration...
WALLACE: ... though, because I want to put up some new numbers.
WALLACE: The Pew Hispanic Center had a new study out just recently. The annual flow of illegals into the U.S. is two-thirds smaller than it was five years ago. And the total number of illegals in the U.S. is down 8 percent from three years ago.
So the question is, Senator, whether it's the economy, whether it's increased enforcement, hasn't the Obama administration done something right?
MCCAIN: Oh, I think there's been something done right. But the fact is that we haven't got a secure border. We need more fence. We need more surveillance capability. And we need more -- actually, we need the Guard down there.
The violence level -- there were 72 people murdered just recently. Fourteen of them were women. The incredible violence down there is spilling over onto our side of the border if we don't get our border secured. And any -- again, anybody who has missed that, they ought to just check into what's been going on.
And the people who live in the southern part of my state do not have a secure environment. To wit, there are signs that the government put up that say, "Warning. You are in a drug smuggling area and a human smuggling area."
Look, this is -- the police chief of Nogales, Arizona has been told that his police officers will be murdered if they interfere with the drug cartels. And that funnel is coming up through the State of Arizona.
Yes, there have been some improvements. We have a long, long way to go. And for the federal government to sue the State of Arizona because the federal government hasn't carried out its responsibility and the State of Arizona is trying to get its border secured is really remarkable.
WALLACE: Senator, we have less than two minutes left and I want to get to...
WALLACE: .. one final area with you.
WALLACE: You've been very critical of the president for insisting that U.S. troops will begin to leave Afghanistan -- begin to leave in July of 2011, saying that it undercuts the surge.
But in his speech, the president did emphasize that the pace of the withdrawal will be based on conditions on the ground. And just this last couple of days, we've had Defense Secretary Gates say that he sees two to three more years of American combat operations there. Does that reassure you at all?
MCCAIN: No, it does not. You cannot tell the enemy you're going to leave and expect the enemy to not -- and expect to succeed. I mean, that's just a fundamental of warfare.
No military person advised the president to set 2011. He did it for political reasons, to take care of his left base. And no matter what the secretary of defense or anybody else says, the president again reiterated last Tuesday night that we would be leaving. And that is sending the wrong signals. And people in the region, both friends and enemies, are accommodating to that situation. The president needs to say we will be leaving on conditions-based only. And then we will be able to succeed. We will not without the president's saying that, because it's for pure political reasons why he said it. And that is playing with American lives in a way that I think is absolutely unacceptable.
WALLACE: Senator John McCain, we're going to have to leave it there. We want to thank you so much for spending part of your holiday weekend with us and answering our questions. All the best, sir.
MCCAIN: Thank you.