MR. STEPHANOPOULOS: Hello, again. The new Republican team came roaring out of St. Paul this week, and for the Democrats' reaction we were back on the trail with Barack Obama.
SEN. OBAMA: (From tape.) Good to be in the Midwest. Good to be just a few miles from my home state.
MR. STEPHANOPOULOS: All fired up at the Wabash County fairgrounds in Indiana on Saturday, Obama mocked the idea that John McCain means change.
SEN. OBAMA: (From tape.) Except for economic policies and tax policies and energy policies and healthcare policies and education policies and Karl Rove style of politics - except for all that, we're really going to bring change to Washington. (Laughs.) What are these guys talking about?
MR. STEPHANOPOULOS: After the speech, we talked about issue number one: the economy.
Yesterday, that unemployment report came out and here's what John McCain said. He said, my tax cuts will create jobs; his tax increases will eliminate them.
SEN. OBAMA: Yes. You know, John McCain has been peddling this story about me increasing taxes, when every independent analyst has said my tax cuts provide three times the amount of tax relief to middle class families than do John McCain's. What he wants to do is essentially to not only continue the Bush tax cuts to the very wealthiest Americans, but he wants to double down with $200 billion in additional tax cuts to corporate America, including companies like Exxon Mobile.
And what I've said is let's provide tax cuts to 95 percent of the American people, because I have a different economic theory than George Bush's and John McCain's. I believe that the economy is going to grow from the bottom up, and if we give some relief to middle class families, they're going to do better.
MR. STEPHANOPOULOS: Actually, the Tax Policy (Center ?) says it's 81 percent of the American people, it's 95 percent families with children, but they also say you'll raise revenue by $600 billion over the next 10 years. He cuts revenue by $600 billion over the next 10 years. If we are either in a recession or approaching one, is it wise to raise revenues in any way?
SEN. OBAMA: Well, I think that it is wise if you've got $500 billion deficit. I think it makes sense for us to make sure that we're paying for what we're purchasing. If we're continuing to spend $10 billion a month in Iraq, we can't keep on borrowing that on a credit card from the Chinese. So John McCain likes to talk about fiscal responsibility, but there is no doubt that his proposal blow a hole through the budget.
And what I've said is, realistically, we're not going to be able to eliminate that budget deficit, but what we can do is stabilize it, stop digging a hole, give a tax break to middle class families, give them some relief, and that will start growing the economy again.
MR. STEPHANOPOULOS: So even if we're in a recession next January, you come into office, you'll still go through with your tax increases?
SEN. OBAMA: No, no, no, no, no. What I've said, George, is that even if we're still in a recession, I'm going to go through with my tax cuts. That's my priority.
MR. STEPHANOPOULOS: But not the increases?
SEN. OBAMA: I think we've got to take a look and see where the economy is. The economy is weak right now. The news with Freddie Mac and Fannie Mae, I think, along with the unemployment numbers indicates that we're fragile. I want to accelerate those tax cuts through a second stimulus package, get more money into the pockets of ordinary Americans, see if we can stabilize the housing market, and then we're going to have to reevaluate at the beginning of the year to see what kind of hole we're in.
MR. STEPHANOPOULOS: I just got back from the Republican Convention. And it's clear that the choice of Governor Palin electrified that convention. You said that your number one criteria for a vice presidential pick was someone who was capable of being president.
SEN. OBAMA: Right.
MR. STEPHANOPOULOS: Did John McCain meet that threshold test?
SEN. OBAMA: Well, you know, I'll let you ask John McCain when he's on ABC.
MR. STEPHANOPOULOS: But I want to know what you think.
SEN. OBAMA: Or Governor Palin if she ends up accepting an invitation to your show. Here's what I'll say. I think she's a skilled politician. She wouldn't be governor of Alaska if she wasn't a skilled politician. And I think her performance at the convention showed what a skilled politician she is.
MR. STEPHANOPOULOS: But what does it say about John McCain that he picked her? Your -
SEN. OBAMA: Here's what I'll say - is that it tells me that he chose somebody who may be even more aligned with George Bush or Dick Cheney or the politics we've seen over the last eight years than John McCain himself is. Supposedly, he was thinking about accepting - taking Joe Lieberman, decided not to because the Right Wing of the Republican Party would have had a riot.
The most important thing from my perspective is what are the policies that John McCain and his vice president intend to pursue? And what I didn't hear from Governor Palin, what I didn't hear from John McCain, what I didn't hear at all from during this convention is how are they going to put people back to work, how are they going to deal with healthcare, how are they going to make college more affordable, how are they going to keep people in their homes.
MR. STEPHANOPOULOS: Senator McCain said that she actually has more national security experience than you. Here's what he told Charlie Gibson.
SEN. JOHN MCCAIN (R-AZ): (From tape.) Alaska's right next to Russia. She understands that. She's the commander of the Alaska National Guard. He has no experience on these issues. She has been in charge and she has had national security as one of her primary responsibilities.
SEN. OBAMA: Well, you know, I actually knew that Russia was next to Alaska as well. (Laughs.
) I saw it on a map.
MR. STEPHANOPOULOS: It's not a qualification?
SEN. OBAMA: I don't think it is.
MR. STEPHANOPOULOS: But how about the National Guard executive experience?
SEN. OBAMA: I know that John McCain was offended or at least his campaign was when she was asked, or one of his representatives was asked, what decisions did she make while she was heading up the National Guard? And they didn't have a response. But look, it's going to be your job -
MR. STEPHANOPOULOS: No. But he's saying she has more national security experience than you do.
SEN. OBAMA: I understand. And I think that as somebody who served on the Senator Foreign Relations Committee and passed legislation on critical issues like nuclear proliferation, as somebody who's been working on these issues for a long time, and somebody who selected Joe Biden as vice president, who's the chairman of the Senator Foreign Relations Committee, I'm going to be happy to have a substantive debate with John McCain about foreign policy. This whole résumé contest that's been going back and forth is not what the American people are looking for.
MR. STEPHANOPOULOS: It's pretty clear they didn't think too much of your early career as a community organizer. Governor Palin, Rudy Giuliani.
MAYOR RUDY GIULIANI: (From tape.) He worked as a community organizer. He immersed himself in Chicago machine politics.
MR. STEPHANOPOULOS: What were you thinking when you heard the boos, the laughter?
SEN. OBAMA: It's a real puzzling thing. I mean, understanding what I did as a community organizer. When I got out of college as a young person, 24, 25-years-old, I moved to Chicago and worked with churches who were dealing with steel plants that had closed in their neighborhoods to set up job training programs for the unemployed, and after-school programs for youth, and to try to deal with asbestos in homes of poor people - community service work, which John McCain has been talking about putting country first and extolling the virtues of national service. That's what I did between the ages of 24 and 27 before I went to law school. I would think that's what we want all our young people to do. I would think that that's an area where Democrats and Republicans would agree. So it's curious to me that they would mock that when I at least think that's exactly what young people should be doing.
MR. STEPHANOPOULOS: You're smiling about it, but some of your supporters were listening, and they heard subtle racial code.
SEN. OBAMA: I didn't hear that. I just think that there is a - for folks who suddenly have tried to grab the change banner, they've got a very traditional view of what service means. It means running for office and being a politician, I guess, or serving in the military. Those are the two options that I think they've talked about. I think there are a whole lot of people, young people in particular, who are teaching in underserved schools or working in a hospital in need, volunteering for their community, that think that's part of the change that we need, that's part of the energy that we've been able to mobilize in this campaign.
MR. STEPHANOPOULOS: One of our viewers wrote in - you talk about service - and asked - Brenda Gottfried Bryant (sp), Marietta, Georgia. Did you ever consider joining the armed forces to protect and serve our country? If not, why?
SEN. OBAMA: You know, I actually did.
MR. STEPHANOPOULOS: When?
SEN. OBAMA: I had to sign up for Selective Service when I graduated from high school. And I was growing up in Hawaii, and I had friends whose parents were in the military. There are a lot of Army military bases there. And I actually always thought of the military as an ennobling and honorable option. But keep in mind, I graduated in 1979. The Vietnam War had come to an end. We weren't engaged in an active military conflict at that point. And so it's not an option that I ever decided to pursue.
But one of the things that I want to make sure of is that for those young men and women who decided to pursue a military career, that they are treated with the honor and dignity they deserve during service and when they get home. And this is actually an area where John McCain and I have had some disagreements in terms of funding veteran services and disability payments and dealing with posttraumatic stress disorder - things that I've prioritize as part of the reason why I asked to join the Veterans' Affairs Committee when I first went to the Senate.
MR. STEPHANOPOULOS: You had a lot of fun with the idea of John McCain as a change agent out there today.
SEN. OBAMA: (From tape.) John McCain brags, 95 percent of the time I have voted with George Bush.
MR. STEPHANOPOULOS: But you voted with the Democrats in Congress 2005, 97 percent of the time; 2006, 96 percent of the time; 2007, 97 percent of the time.
SEN. OBAMA: Right.
MR. STEPHANOPOULOS: So that -
SEN. OBAMA: I think you're conflating two arguments. One argument is bipartisanship. One argument has to do with change. I don't think you can dispute that I haven't voted with George Bush 90 percent of the time. So if you're going to ask how is more likely to change George Bush -
MR. STEPHANOPOULOS: Who is the more likely to break with their party?
SEN. OBAMA: Well, no. That wasn't the question, right? That's not the point. The point is if you believe that George Bush has run this economy into the ground and mismanaged our foreign policy, who's more likely to change those policies? And I don't think there's any dispute that that would be me. Now, if it has to do with who has broken with their party, the first couple of years that I was in the Senate, the Republicans controlled the agenda, which meant that most of those votes are votes against efforts by the Republicans on issues that I feel very strongly about. So I have no problem defending a record of saying, no, we shouldn't cut benefits to vulnerable populations. No, I don't think that we should suspend Habeas Corpus, critical issues.
MR. STEPHANOPOULOS: But that's not breaking with your party.
SEN. OBAMA: Well, I tell you what. You can get testimony from Republicans during my Illinois Senate days, and my U.S. Senate days who say, this is somebody who we work with, who listens to us and who brings a different tone to politics. And for John McCain to say that he wanted to reduce the rancor in Washington, as I said in there, it sounds to me like he didn't listen to the first two days of his convention.
MR. STEPHANOPOULOS: That's part of the campaign, though, isn't it?
SEN. OBAMA: Well, I tell you what, how you campaign I think foreshadows how you're going to govern.
MR. STEPHANOPOULOS: How about looking forward? Bobby Barfield (sp) of Palm City, Florida, wanted to know - he wants you to name three changes you would make as president that would be unpopular with the Democrats in Congress.
SEN. OBAMA: Number one: I think that on education, we do have to improve accountability. And I've not only supported charter schools, which the teachers' unions have opposed, but I've also said -
MR. STEPHANOPOULOS: The public funding of charter schools.
SEN. OBAMA: But I've also said that we should look at pay-for- performance in terms of how teachers are rewarded and getting rid of teachers. That's not something that's popular in my party, but that's something that I think is important.
I've said that we need to increase the size of our military, which, politically, if it got to the floor probably would pass but there are, are you know, a whole bunch of folks on the left who think that that is a waste of money. I think it's important for us to do.
And on healthcare, I think that it is important for us to figure out how to reduce litigation costs. Now, I don't -
MR. STEPHANOPOULOS: So tort reform.
SEN. OBAMA: Well, I think that finding ways - and I was working with Hillary Clinton on this before the campaign started - finding ways where we can have doctors in communication with patients who've been injured in a way that doesn't automatically send it to court, but instead figures out how can we reduce errors and improve quality. I think that's an area to go into.
MR. STEPHANOPOULOS: And you'd push that even if Nancy Pelosi and Harry Reid say no.
SEN. OBAMA: Well, absolutely. But I think I can ultimately make the case to them that that's the right thing for the overall values and goals that we want to pursue. And one of the things I'm going to insist on doing when I get to the White House is that we're going to do an audit of every bit of government spending. And I will have some big arguments with some Democrats about the need to eliminate programs that don't work, that have just gone and on and on because of inertia.
MR. STEPHANOPOULOS: Can you name three?
SEN. OBAMA: I can name more than three, and I don't want to start putting a target on my back.
MR. STEPHANOPOULOS: I'll take one.
SEN. OBAMA: Well, I tell you what, the way that we are currently, I think, funding Medicare is something that has to be completely reexamined because often by paying fee for service, a lot of times what we're doing is we're not measuring are these services that are actually needed? Are they actually improving quality? There may be ways that we can rationalize that system in a way that improves care and save tax payers.
MR. STEPHANOPOULOS: You've brought up Iraq before. Let me ask you about that. One of the phrases we heard from Governor Palin and others at the convention, Republican Convention, was that in Iraq, victory is in sight. Do you believe that?
SEN. OBAMA: They have yet to define victory, or it's a very slippery definition.
MR. STEPHANOPOULOS: What's your definition?
SEN. OBAMA: My view is, number one, that it was a poorly conceived mission, so to talk about victory, I think -
MR. STEPHANOPOULOS: So there will never be a victory?
SEN. OBAMA: Well, look, I think George Bush with the help of John McCain and Donald Rumsfeld and Dick Cheney made a big strategy blunder. There are enormous costs to that blunder. It's the equivalent to them driving the car off the ditch. I think it's possible for us to get the car back on the road -
MR. STEPHANOPOULOS: But that's not going to be victory.
SEN. OBAMA: Well, that doesn't signify that we are better off than had we not gone. So I do think there have been enormous reductions in violence because of the extraordinary service of our troops. And there is no doubt that the improvements in terms of violence has to do with the surge and the Sunni Awakening, the Shi'a militia standing down, and we have to take advantage of that opportunity. The strange question is why John McCain insists on continuing to snatch defeat from the jaws of victory when -
MR. STEPHANOPOULOS: How so?
SEN. OBAMA: Well, Prime Minister Maliki has said that we are ready to take control and responsibility for what's happening in Iraq. And John McCain seems resistant even at a time when George Bush is prepared to say that we need to have some sort of timeframe or timetable.
MR. STEPHANOPOULOS: But given all you just said, how do you escape the logic? You said we've succeeded with the surge beyond our wildest dreams. How do you escape the logic that that means that John McCain was right about the surge?
SEN. OBAMA: Look, it's interesting to me why people are so focused on what's happened in the last year and half and not on the previous five.
MR. STEPHANOPOULOS: Granted that you think you made the right decision -
SEN. OBAMA: No. No. I don't think -
MR. STEPHANOPOULOS: - about the surge.
SEN. OBAMA: No. No. No. But they're connected, George, and here's why. My whole premise has always been that it was a distraction for us to go into Iraq. Once we were there, we had to make the best of a bad situation.
MR. STEPHANOPOULOS: And didn't the surge do that?
SEN. OBAMA: And what I have said is that at the time that we made the decision to go in with the surge, that it did not address the underlying problem, which is the willingness of the Iraqis to overcome their political differences and reconcile, and to provide -
MR. STEPHANOPOULOS: But the State Department says that 15 out of 18 political benchmarks have been met.
SEN. OBAMA: - and to provide the kind of strategy that would allow us to move forward. That wasn't part of the package in the surge. So if the question is, has the surge done much better than we expected in combination with these other factors in reducing violence, the answer is. And I've said this repeatedly.
If the question is, what was the judgment to be made at the time the surge was put forward by the Bush administration, my choice, and John McCain's choice was are we going to continue to give an open- ended, blank check to George Bush without any strategy for political reconciliation, or are we going to try to pressure this administration to come up with a more coherent, cohesive plan for how we are going to wind this war down.
MR. STEPHANOPOULOS: You took some heat at the convention for the answer you gave to Rick Warren out at Saddleback about abortion.
RICK WARREN: (From tape.) At what point does a baby get human rights in your view?
SEN. OBAMA: (From tape.) Answering that question with specificity is above my pay grade.
MR. STEPHANOPOULOS: Was that phrase too flip?
SEN. OBAMA: Probably, yes. What I intended to say is that as a Christian, I have a lot of humility about understanding when does the soul enter into -
MR. STEPHANOPOULOS: Goes back to - (unintelligible).
SEN. OBAMA: It does. It's a pretty tough question. And so all I meant to communicate was that I don't presume to be able to answer these kinds of theological questions. What I do know is that abortion is a moral issue, that it's one that families struggle with all the time, and that in wrestling with those issues, I don't think that the government criminalizing the choices that families make is the best answer for reducing abortions.
I think the better answer, and this was reflected in the Democratic platform, is to figure out how do we make sure that young mothers or women who have a pregnancy that's unexpected or difficult have the kind of support they need to make a whole range of choices, including adoption and keeping the child.
MR. STEPHANOPOULOS: You mentioned your Christian faith. Yesterday, you took after the Republicans for suggesting you have Muslim connections. Just a few minutes ago, Rick Davis, John McCain's campaign manager, said they've never done that. This is a false and cynical attempt to play victim.
SEN. OBAMA: You know what, these guys love to throw a rock and hide their hands.
MR. STEPHANOPOULOS: But the McCain campaign has never suggested you have Muslim connections.
SEN. OBAMA: No. No. No. But I don't think that when you look at what is being promulgated on Fox News, let's say, and Republican commentators who are closely allied to these folks -
MR. STEPHANOPOULOS: But John McCain said that's wrong.
SEN. OBAMA: Listen, you and I both know that the minute that Governor Palin was forced to talk about her daughter, I immediately said that's off limits. And -
MR. STEPHANOPOULOS: And John McCain said the same thing about questioning your faith.
SEN. OBAMA: And what was the first thing the McCain campaign went out and did? They said, look, these liberal blogs that support Obama are out there attacking Governor Palin. Let's not play games. What I was suggesting - you're absolutely right that John McCain has not talked about my Muslim faith, and you're absolutely right that that has not come -
MR. STEPHANOPOULOS: Your Christian faith.
SEN. OBAMA: My Christian faith - well, what I'm saying is -
MR. STEPHANOPOULOS: Connections, right.
SEN. OBAMA: - that he hasn't suggested that I'm a Muslim, and I think that his campaign upper echelons haven't either. What I think is fair to say is that coming out of the Republican camp, there have been efforts to suggest that perhaps I'm not what who I say I am when it comes to my faith, something which I find deeply offensive, and that has been going on for a pretty long time.
MR. STEPHANOPOULOS: Sixty days to go, just about.
SEN. OBAMA: Yes.
MR. STEPHANOPOULOS: What's the single most important thing you need to do?
SEN. OBAMA: I have to make the choice clear to the American people about what is at stake in this election. The American people know we're in a bad place. They understand that the country is off- track. They know the economy is not working for them. And what they have to, I think, be persuaded of is that there is a real difference between the parties, because they've grown cynical. They look at Washington, and they say, a plague on both their houses. And what I've got to say is, you know what, there is a real difference here.
John McCain, who is a good man and has a compelling biography, has embraced and adopted the George Bush economic platform. And I've got a very different economic theory, which says that if we are working to help the middle class have lower taxes, get healthcare, send their kids to college, invest in infrastructure, and invest in green technology, that in fact the economy is going to grow more.
So if I can make that choice clear, then I think the American people who are awfully smart, they're going to be able to make their assessment. They're going to say, you know what, if we choose John McCain, for all his good qualities, we're going to get the same kind of government. And if we choose Barack Obama, we're going to get a different one. And if they liked what they've had over the last eight years, then they'll go with McCain, and if they don't like it, hopefully they'll go with me.
MR. STEPHANOPOULOS: I have just one more question from Linda Lilly (sp), Union City, Pennsylvania. Will you go one-on-one with Sarah Palin? (Laughs.)
SEN. OBAMA: Well, you know what?
MR. STEPHANOPOULOS: Come on, Barry O'Bomber, Sarah Barracuda?
SEN. OBAMA: You know, I would play her a game of horse. She looks like she's got some game. She played in high school. I know she's a sharpshooter, and then I know that - I probably wouldn't do some target practice with her. I think she'd be a better shot for me. But on the basketball court, I think I'd stand up pretty well.
MR. STEPHANOPOULOS: We would break all Neilson records.
SEN. OBAMA: I'm sure that's true. There's no doubt.
MR. STEPHANOPOULOS: Thanks a lot, Senator.
SEN. OBAMA: I appreciate it. Thank you.