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CNN LATE EDITION WITH WOLF BLITZER

Interview With General Mark Hertling; Interview With Tzipi Livni

Aired August 3, 2008 - 11:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


WOLF BLITZER, HOST: This is LATE EDITION, the last word in Sunday talk.
(BEGIN VIDEO CLIP)

BLITZER (voice-over): John McCain and Barack Obama fight over issue number one.

SEN. JOHN MCCAIN, R-ARIZ.: Senator Obama and I have fundamental differences on economic policy.

SEN. BARACK OBAMA, D-ILL.: John McCain and the Republicans, they don't have any new ideas.

BLITZER: And race.

OBAMA: The only way they figure they're going to win this election is that they make you scared of me.

MCCAIN: His comments were clearly the race card.

BLITZER: We'll talk about both issues and more with top economic advisers and key supporters from both campaigns. With the Democratic and Republican conventions only three weeks away, vice presidential talk heats up. We'll hear from two potential running mates, Democratic Senator Claire McCaskill and former Bush budget director Rob Portman. And as always, we'll get insight and analysis on all of the week's news from three of the best political team on television.

PRESIDENT GEORGE W. BUSH: We're now in our third consecutive month with reduced violence levels holding steady.

BLITZER: Will conditions on the ground speed up the schedule for U.S. troop withdrawal? We'll ask one of the top commanders in Iraq.

LIVNI: Iran is a threat not only to Israel but this is a global threat.

BLITZER: Israel's foreign minister tells us how close she thinks Iran is to a nuclear weapon.

Plus, a conversation with the man in charge of trying to improve the U.S. image around the world. The first hour of LATE EDITION begins right now.

(END VIDEO CLIP)

BLITZER: It's 11:00 a.m. here in Washington, 8:00 a.m. in Los Angeles and 6:00 p.m. in Baghdad. Wherever you're watching from around the world, thanks very much for joining us for LATE EDITION.

With the U.S. presidential election only 94 days away, the ailing economy remains the number one issue with American voters. The government released figures this week that showed unemployment at its highest in more than four years. Gas prices are more than a dollar higher than they were just last summer. And a recent CNN poll shows that three out of four Americans feel that things are going badly right here in the United States, right now.

Senators John McCain and Barack Obama have both pledged to bring the country out of its downturn, but how will the candidates fix the economy? Let's discuss all of this and a lot more with two guests. Joining us, Obama economic adviser Laura Tyson. She served in the Clinton White House as a top economic adviser. She's joining us live now from Los Angeles. And with us here in Washington, the McCain economic adviser and spokeswoman Nancy Pfotenhauer. Ladies, thanks very much for coming up.

Laura Tyson, I'll start with you. There seems to be in the last couple of three days a significant change on the part of Senator Obama. He now says he's ready to compromise and potentially support offshore oil drilling off the coast of Florida, California, elsewhere if it's part of a comprehensive package in the U.S. Congress. Some are suggesting that this change, potential change, stems from recent public opinion polls showing, among other things, and I'll show you our CNN/Opinion Research Corporation poll, we asked the American people do you support offshore oil drilling -- 69 percent say they favor it and 30 percent say they oppose it. Is he simply responding to the will of the American public in indicating this significant shift?

TYSON: You know, there really isn't a significant shift. What's happened here is that a group -- a bipartisan group of senators has come together with a comprehensive paid-for plan on energy, and this plan includes some additional offshore oil drilling. What Senator Obama has said is he welcomes the plan. He welcomes working with the senators. He welcomes their energy summit in September.

He is skeptical about the value of additional offshore oil drilling, especially when we have 68 million acres already available to the oil companies that they are not using. On the other hand, this bill that they are proposing, this comprehensive bipartisan approach, contains many things that Senator Obama has been for and continues to be for, including rolling back tax breaks for the oil companies and using those revenues for alternative energy development, for more fuel-efficient automobile development, for helping our automakers retool, so this is a great opportunity for working together with a bipartisan group.

BLITZER: All right.

TYSON: In the congress. BLITZER: Well, let me ask Nancy Pfotenhauer. Senator McCain, who has always tried to work with Democrats when possible on these kinds of issues, is he ready to support that so-called group of ten, five Democrats, five Republicans, and join Senator Obama in reaching some sort of compromise, a comprehensive plan?

PFOTENHAUER: Well, I think it's rather amusing because Senator Obama has been dragged kicking and screaming into this situation, and the only reason he's where he is right now -- he claims he has not changed his position, by the way, on drilling. That's his words.

BLITZER: He says he's ready to support it, if it's part of this comprehensive package, and the question to you is Senator McCain ready to support this compromise?

PFOTENHAUER: Senator McCain is open to compromise packages, but the bottom line here and I think that the American people need to focus on is the fact that Senator Obama is only in this position now because it became patently obvious over the last weeks, particularly when Nancy Pelosi turned off the lights in the House of Representatives and Republican members refused to leave. She had an insurrection in her own party because Pelosi and Reid at Obama's behest were refusing to move forward on drilling. So he is now trying to get credit for being all of the above energy planner.

BLITZER: I just want to be precise. Senator McCain is open to this compromise and Senator Obama, Laura Tyson, he's open to this compromise as well. So we seem to be moving towards some common ground based on these ten senators, five Democrats, five Republicans, is that right, Laura Tyson?

TYSON: Well, I certainly can speak for Senator Obama that he has made it very clear he welcomes the opportunity to work on this agreement this, bipartisan agreement. I cannot speak for Senator McCain. I do know that in the bill, there are some important areas that Senator Obama has been for that Senator McCain has been aggressively opposed to and that is, for example, rolling back some of the tax breaks on the oil companies. I do want to say.

BLITZER: Let me -- hold on one second on that point. I'll let Nancy weigh in. Here's what he said on Thursday, Senator Obama on this issue of the big oil companies and taxes. "Perhaps the only thing more outrageous than Exxon Mobil making record profits while Americans are paying record prices at the pump is the fact that Senator McCain has proposed giving them an additional $1.2 billion tax break." He's referring --

PFOTENHAUER: He's referring to the corporate rate reduction.

BLITZER: Which Exxon Mobil would benefit from. PFOTENHAUER: Which Jason Furman, his top economic adviser supported up until he went to the campaign. We have the second worst corporate tax rate in the world. We're tied for last place with Japan. We have one tenth of 1 percent better. We've got a 35 percent rate. We're competing against countries like Ireland that have less than half that rate and let me just circle this back to energy policy and taxes. Senator Obama is advocating at this time a windfall profits tax. It is economic masochism. The last time it was tried in this country, it reduced domestic production and it increased prices for consumers at the pump. So it increases our reliance on foreign oil and it increases prices. It is absolutely terrible energy policy.

BLITZER: But with Exxon Mobil having a record profit of $15 billion over the last quarter, the last three months alone, does Exxon Mobil need another $1 billion tax break?

PFOTENHAUER: You don't do tax policy based on one company. You do tax policy based on what will spur economic growth and what will create jobs and that is precisely the plan that Senator McCain has put together which is why 21 out of 29 economists surveyed said it would be better for the economy and even the Tax Policy Center characterized the two plans, Senator McCain's as job-producing and economic growth producing and Senator Obama's as progressive, meaning he's reslicing the pie. He's not growing the pie, he's not creating jobs.

BLITZER: Senator McCain says this on this issue, Laura Tyson. And then I'll let you respond. He says, "Unlike Senator Obama, I do not believe that raising taxes is the answer to our economic problems. There is no surer way to force jobs overseas than to raise taxes on businesses." All right, go ahead and respond.

TYSON: OK. Well, I think there are several things. First of all, on the issue of the windfall profits tax, the Congressional Research Service as well as others have pointed out that a correctly designed windfall profits tax on the oil companies who are simply earning revenue, not because of better management, not because of drilling, not because of vision, not because of energy, of their own energy, but because the price of oil has gone up, that's a windfall and it can be taxed and it can be taxed properly. And as Congressional Research Service has concluded, taxed properly it would neither raise the price of oil nor would it increase imports.

Secondly on the corporate tax rates rate, since Nancy mentioned Jason Furman, there are many people who have argued that there should be a reduction in the corporate tax rate. You know what? They've also argued that there should be a very broad broadening of the base. Because corporate tax rates in the United States may be high, but most corporations in the United States are not paying anything near the rate. So if we're going to talk about corporate tax relief, we better talk about the whole thing.

Finally, I would say that the Tax Policy Center analysis of the tax plans said that the tax plan of Senator Obama would be two to three times as generous to the middle class. That the tax plan overall budget plan of Senator McCain would add $3.4 trillion to our deficit over the next 10 years.

PFOTENHAUER: Let me...

BLITZER: I'm going to let Nancy respond, but before you respond, here's the specific point that Senator Obama is making in criticizing Senator McCain's strategy on this issue. BLITZER: I'll play the clip and then can you respond.

(BEGIN VIDEO CLIP)

OBAMA: My opponent wants to keep giving tax breaks to companies that ship overseas. I want to end them and start giving incentives to companies that create jobs here in the United States of America. I don't think 463,000 lost jobs this year is economic progress.

(END VIDEO CLIP)

BLITZER: All right, go ahead.

PFOTENHAUER: The Tax Policy Center does not take into consideration spending side, therefore, any deficit production prediction that they make is inherently flawed, and I'm talking all letters flawed. If you will please let me respond, Laura, since I let you go.

OK, the other thing about tax policy, the Tax Policy Center acts as if massive increases in taxes do not affect investment. They act as if massive tax cuts do not affect investments. Well, guess what? Tax cuts spur investment and tax increases are depressive.

BLITZER: But the point that Senator Obama says is should these companies that ship jobs overseas continue to get tax breaks from the American public?

PFOTENHAUER: I don't even know what he is talking about, he's talking in such broad terms. I mean the bottom line is we right now penalize companies for locating in this country. The other thing that Laura mentioned when she was doing -- by the way, Tax Policy Center, it's a liberal think tank. It's the equivalent on the right would be the Heritage Foundation, so just keep that in mind. It's run by Clinton administration people. Jason Furman worked for them up until about a month ago so keep that in-minute when we cite them as if they are oracle because they are not.

BLITZER: Let me let Laura Tyson respond to that. Hold on one second, Laura. The specific argument is that American companies pay very high taxes compared to several other countries with whom the United States has to compete. And if the tax structure remains high, there will be an automatic incentive to ship their work overseas.

TYSON: Well, I think as we know that there are tax haven laws that encourage many American companies to set up their operations overseas. There are special provisions of our tax code which essentially say to people if you want to invest overseas, we'll allow you to take a tax break an all of your investment and by the way, you don't have to pay any tax on your corporate income as long us a keep it out of country. Those are incentives to move production abroad and keep your profits abroad. We can make a change in our tax code, but I want to get to the broader issue.

BLITZER: We don't have time to get to the broader issue because we're almost out of time. But make a final quick thought. TYSON: A final quick comment is that we need to understand that what Senator Obama is proposing bodily on taxes is rolling back some of the bush tax cuts for those make over $250,000 a year to levels you saw in the 1990s. I will only point out again the 1990s had the longest and strongest economic expansion in our history. The last eight years have not delivered for the American people and we have recognized.

BLITZER: Final quick thought from Nancy and then we're done.

PFOTENHAUER: I have a point here. This will be effectively a tax increase. The economy will respond to that. Now I don't care if you call yourself a Republican or a Democrat, but if you're an economist, you should acknowledge that increased taxes on investments you will get less of it. The other thing --

TYSON: I am an economist.

PFOTENHAUER: I know, I'm saying you know this. If you increase taxes on investment, you will get less of it. And your analysis completely ignores the health care -- the refundable tax credit, $2,500 per person and $5,000 per person family refundable that goes to every American. So when you talk about your analysis, you should at least acknowledge that in our plan.

BLITZER: Ladies, we've got to leave it there. A good discussion but you know what, we'll have plenty of time to continue this discussion down the road and Nancy Pfotenhauer and Laura Tyson, thanks to both of you coming in.

And just ahead, we'll search gears. We'll talk about what's happening in the war in Iraq. We'll get a progress report, the dramatic drop in violence there. What does it mean? Is it opening the door right now to a major drawdown of U.S. troops? And what is actually happening on the ground? We're standing by to speak live with one of the top U.S. military commanders. We'll go life to Tikrit when LATE EDITION continues.

(COMMERCIAL BREAK)

BLITZER: Coming up in our next hour, we'll speak with two key supporters of Barack Obama and John McCain. We'll talk about the race for the White House and the increasingly bitter tone of this campaign. Stand by for that.

But right now, 11 U.S. troops died in Iraq in July. That's the lowest number of deaths since the war began back in March of 2003. Here to talk about that, the dramatic drop in violence, what it means for the Iraqi military as well as for U.S. troops, where this war is heading is one of the top U.S. military commanders in Iraq, Major General Mark Hertling. His area of responsibility is the northern part of Iraq. He's joining us now live from Tikrit. General, thanks very much for coming in.

I know that as we speak, there's a battle under way in Diyala Province in your area of responsibility. It looks like at least some of the analysts are suggesting one of the final, potentially final battles between U.S. and Iraqi forces on the one hand and Al Qaida and its supporters on the other. Update our viewers on what is happening in Diyala, general, right now.

HERTLING: Well, thanks, Wolf, and it's good to be here with you today.

Well first of all, we have several operations going on in the northern provinces right now. The one in Diyala Province, again, a province about the size of the state of New Jersey, is going under the operational name, the Iraqi operational name of the Bushar Alkar (ph), which means omens of benevolence. Several more Iraqi forces have joined the fifth ranking Iraqi division in that area. It is not a harsh fight and in fact, the most important part of that fight is continuing to hold and build certain areas within Diyala Province. As you know, that's been a troubling area for the last few years. A lot of Al Qaida have gone into that area from the Baghdad belt as they have moved up north and from west in Anbar. That province is a very difficult province to gain control of. It's a little Iraq, but that operation is ongoing. It has been for about a week and a half now, and it will continue as we get more security forces into the area. That's just one fight we have going on.

BLITZER: What's the biggest threat that U.S. forces in your area have right now? Would it be from the Sunni supporters of Al Qaida or from the Shiite supporters of Muqtada al-Sadr and other anti-American elements?

HERTLING: Well, what I'll say, Wolf, is it is Al Qaida itself. What we're seeing is a gradual reduction in the Sunni support for Al Qaida, but they are still heavy in this area, and we are continuing to fight them. Even though that there have been -- there has been a reduction in violence in the northern provinces, there's still a lot more fight in Al Qaida and we've got to continue this organization, which is so evil and so nefarious.

BLITZER: What's the role, general...

(CROSSTALK)

What's the role, general -- excuse me for interrupting -- of Iran in all of this?

HERTLING: Well, we haven't seen any formal indicators of government forces, obviously, or support from Iran in our area, but we have seen some harvesting of weapons from the old Iran-Iraq War, along the border.

We have seen transit routes, and we're trying to block those now.

Again, Diyala has about a 200-kilometer border we are Iran, so it's very important to secure that border as well.

BLITZER: The secretary of defense, Robert Gates, made this statement this week. I'm going to play it for you, and then I'm going to follow up with a question. Listen to this. (BEGIN VIDEO CLIP)

SECRETARY OF DEFENSE ROBERT M. GATES: I think that the situation has improved dramatically, and I would -- I personally believe that there is a real possibility of some additional drawdowns, as we -- as we look forward.

(END VIDEO CLIP)

BLITZER: All right. In your area, General, of responsibility, assuming things start to improve even more so than they are right now, are you ready to say to the secretary of defense and your commanders, you know what, take a few more brigades out of my command; I don't need them?

HERTLING: Well, everything is based on the conditions, Wolf, as you know. I mean, that's the current mantra, condition-based operations. We will determine that as we see security reduced further.

But, again, this fight we're having right now is not over yet. There's still a lot of Al Qaida in our area. They have all come to the northern provinces from Baghdad and the west, and we continue to have to drive them and pursue them so that they quit fighting, give up or we kill or capture them. BLITZER: here's been a debate here in Washington, over the past few weeks, on what was really more important in turning things around in Iraq.

Was it the military surge, the increase in U.S. forces, 30,000, 40,000 additional troops that were deployed, or was it what was called the Sunni Awakening that started earlier, these Sunni Sheiks, especially in the Al Anbar province, and their supporters starting to see the light and going against Al Qaida and the huge amounts of funds that were provided to these sheiks and their supporters?

When General Petraeus was in Washington, he testified before Congress and he said, what, about $16 million a month, or close to $200 million a year are being provided to these so-called Sons of Iraq, these former Sunni insurgents who are now with the U.S.?

In your assessment, what is more important: the U.S. military presence or the money that's being given to these Sunni so-called Sons of Iraq?

HERTLING: Well, I'll have to put -- push back a little bit on your presumptions, Wolf. I think it's a couple of things.

It was the surge. That certainly helped in Baghdad and other regions.

There is an increasing capability of the Iraqi security forces. They have grown tremendously, even in the 11 months we've been here. The capability of the Iraqi security force has certainly contributed, both the army and the police.

The Sons of Iraq are part of the security elements in the northern provinces, and they have helped in some areas like Hawijah, Samarra, and some other places like that.

But the fourth thing is the Iraqi government and the provincial governments are starting to get their act together and providing jobs for people.

So there are good things going on across the board. And you also have to understand that the people of Iraq are just tired of the fighting, and it doesn't matter if you're Sunni, Kurd, Shia, Christian, Assyrians, you're just sick of this unbelievably bad organization called Al Qaida, which continues to do dastardly things throughout the northern areas and through the rest of the Iraq.

So the people have stood up to these organizations, as well.

So it's more than just the Sawr (ph) or Sons of Iraq movement, and it's more than just the surge. It's a combination of those other things that are all part of a requirement in counterinsurgency warfare.

BLITZER: Are the funds for the Sons of Iraq, the tens of thousands of Iraqi Sunnis who are now effectively on the payroll -- is that money still coming from U.S. taxpayers, or is it now coming from the Iraqi government?

HERTLING: It is still coming partly from U.S. taxpayers. We still pay those Sons of Iraq, to a degree, here in the North. But we're starting to transition those elements into other organizations, civil service corps to help rebuild roads, pipelines, projects, things like that.

They're gradually turning into other -- like, we used to have the CCC, prior to World War II, in the United States.

But we're also seeing microgrants and microloans take charge, and people actually getting normal work. The government is starting to work, a little bit more.

So the answer to your question, Wolf, is yes, we are still paying for the Sons of Iraq, but that's gradually being reduced and we have a goal of reducing that even further by October and November of this year.

BLITZER: General Mark Hertling, good luck to you. Good luck to all the men and women you command. I know you've got a tough assignment. We'll be talking to you down the road. Thanks very much for joining us.

HERTLING: Thank you, Wolf. It's good to talk to you again.

BLITZER: And up next on "Late Edition," the explosive issue of race rears its head in this presidential campaign. We'll talk about the potential impact on both Barack Obama and John McCain with two prominent supporters of the candidates. "Late Edition" continues right after this.

(COMMERCIAL BREAK) BLITZER: This past week John McCain's campaign directly accused Senator Barack Obama of playing the race card, an allegation the Obama campaign and the candidate himself strongly denies.

It's an issue that could have a potentially poisonous effect on the entire presidential campaign. Let's discuss what's going on.

Joining us from Cincinnati is the former Ohio secretary of state, Ken Blackwell. He's a strong supporter of John McCain.

And joining us from Dallas, the mayor -- former mayor, that is, of that city, Ron Kirk. He's strong supporter of Barack Obama.

And, Mayor, I'll start with you. And I'm going to play for you the sound bite of what Senator Obama said this week that resulted in this direct charge from the McCain campaign. Listen to this.

(BEGIN VIDEO CLIP)

OBAMA: John McCain and the Republicans -- they don't have any new ideas. That's why they're spending all their time talking about me. They're going to try to say that I'm a risky guy. They're going to try to say, well, you know, he's got a funny name, and he doesn't look like all the presidents on the dollar bills.

(END VIDEO CLIP)

BLITZER: All right. Rick Davis, the campaign manager for Senator McCain issued a statement Thursday, tough one, saying "Barack Obama has played the race card and he played it from the bottom of the deck. It's divisive, negative, shameful and wrong."

And then on Friday, Senator McCain also weighed in with this.

(BEGIN VIDEO CLIP)

MCCAIN: His comments were clearly -- were clearly the race card, because of what he said. Everybody can read his remarks. And in fact, his campaign retracted those remarks. So I think it's very clear, and I was very disappointed.

(END VIDEO CLIP)

BLITZER: All right. Go ahead, Mayor, and tell us what you think about this uproar. Because it's obviously a serious matter.

KIRK: Well, I don't know that it is that serious. I think it's probably more reflective of the fact that the McCain campaign has had a bad several weeks, in terms of the schizophrenic nature of their attacks on Senator -- Senator Obama, everything from the Paris Hilton ad and the foolishness of that and the fact that the economy is still the dominant issue in this campaign.

KIRK: And I think it's sadly reflective of the fact that Senator McCain and his supporters would rather talk about anything but the economy. BLITZER: But you can't blame -- mayor, you can't blame Senator McCain for reacting angrily because Senator Obama did accuse him directly of suggesting, that you know, he's saying I've got a funny name. He's saying I don't look like other presidents on dollar bills. Senator McCain has never suggested any of that, has he?

KIRK: I don't know that he has, and I think Senator Obama has already spoken to that. But given the tenure of the McCain camp's attacks on Senator Obama, I can understand Senator Obama saying that. But, again this, this campaign isn't going to be decided about race. This country is in a very bad economic cycle. We're trying to find our way out of this war that we never should have been into in the beginning, so that we can begin to think more clearly about how we want to turn the economy around, put Americans back to work and get us waned off our dependence on oil. And I think Wolf, you know, from previous conversations that Senator Obama wants to run as much as he can from a campaign that's focused only on race. And I think part of his appeal is that he's been trying to move people beyond that and get us talking about issues, about how can bring Americans together to solve these very difficult challenges ahead of us.

BLITZER: This follows, Ken Blackwell, an ad that the McCain campaign released making the comparison between Senator Obama and Britney Spears and Paris Hilton. I'm going to play a little clip of that ad.

(BEGIN VIDEO CLIP)

UNKNOWN: He's the biggest celebrity in the world, but is he ready to lead?

(END VIDEO CLIP)

BLITZER: All right. Images are very important, and there have been several comments in recent days. Our own Donna Brazile made the suggestion here in "THE SITUATION ROOM" the other day and Bob Herbert, the columnist for The New York Times wrote yesterday, he wrote this, referring to this ad. "Both of these ads were foul, poisonous and emanated from the upper reaches of the Republican Party," referring to that blond and that Harold Ford Jr. ad when he was running for senator in Tennessee. "What a surprise. Both were designed to exploit the hostility, anxiety and resentment of the many white Americans who are still freakishly hung up on the idea of black men rising above their station and becoming sexually involved with white women."

That's a very serious charge that's been leveled against the McCain campaign right now saying that what the McCain campaign did this week was similar to what Republicans did against Harold Ford Jr. in Tennessee when he was running for the Senate, and I want you to respond.

BLACKWELL: Well, that's ludicrous. John McCain has worked over time to keep race out of this campaign and to keep the focus on issues. He's invited Senator Obama to a series of town hall meetings that would focus on issues, issues of importance of our economy, like energy, and there are great contrasts on those issues. Look, the fact is that this is not the first time that the race card has been played by the Obama campaign. Bill Clinton even said hat the race card was played on him in South Carolina, and now the McCain campaign is saying, look, you introduced the whole notion of race. Why are you introducing the whole notion of race? Why don't you come to the town hall where we can talk about energy and talk about why you're against drilling, why you're against nuclear, why you want to tax away jobs, you know, on the oil companies of Texas and elsewhere?

BLITZER: I'm going to let the mayor respond to that, but I want to take a quick break because we have a lot more to talk about, the role of race in this presidential contest and what about affirmative action? It was on the agenda this week as well. The two candidates, they strongly disagree on this sensitive issue. How will it play out with voters? We're back with our guests when LATE EDITION continues.

(COMMERCIAL BREAK)

BLITZER: Welcome back to LATE EDITION. We're talking about race and politics with two guests, the former Ohio Secretary of State Ken Blackwell who supports Senator McCain and the former mayor of Dallas, Ron Kirk, he supports Senator Obama.

Do you agree, Mr. Mayor, with Bob Herbert, Donna Brazile, that this ad, this Britney Spears and Paris Hilton ad was similar in nature to the blonde woman ad that was used against Harold Ford Jr.?

KIRK: I think it was a more subtle attack in the same direction, but the people that are behind those kinds of ads know exactly the type of emotions that they are going to bring out of people. But the broader point, and, Ken, I want to say to you that those of us who believe in Senator Obama can't wait until he has an opportunity to debate Senator McCain about the economy, about their differences and approaches on how we make America strong, not only at home but also abroad, because part of our ability to rebuild our economy and invest in education and get this country headed in the right direction is going to be to make sure that we get out of that war in a responsible way and direct some of those resources at home. But there's no question that the people that put those ads out, Wolf, know exactly what they are doing.

BLITZER: All right.

KIRK: And ironically it's some of the same things they did against Senator McCain back in South Carolina.

BLITZER: Let me let Ken Blackwell respond.

BLACKWELL: Well, you know, look. That commercial was about what do Americans want? A celebrity or a leader? And it basically was saying -- making a charge that -- Ron and I have heard made against political candidates quite often. Are they all hat and no cattle? Can Senator Obama move beyond celebrity and talk about winning the war in Iraq?

Two, talk about creating job-producing energy strategy like saying making us energy exporter as opposed -- as a country as opposed to an energy importer, using use the great resources that we have, whether it's solar, nuclear, oil, gas and wind power?

BLITZER: All right. Let's move on and talk about another issue that came up this week, affirmative action. And we heard a nuance, mayor, on who should qualify for affirmative action which he still strongly supports. Senator McCain opposes it, but let me play this little clip for you and get your reaction. Here's Senator Obama.

(BEGIN VIDEO CLIP)

OBAMA: We have to think about affirmative action and craft it in such a way where some of our children who are advantaged aren't getting more favorable treatment than a poor white kid who has struggled more.

OBAMA: That has to be taken into account.

(END VIDEO CLIP)

BLITZER: What do you think about that, Mr. Mayor, that it shouldn't only be based on a minority status but also on class? In other words, if the children of affluent, very prominent African- Americans, they don't necessarily need to get the benefits of affirmative action, but a poor little white kid from Appalachia, he or she may need to get those benefits?

KIRK: Well, I think it's a fairly intelligent response to the reality, that the issue of class and the growing income gap in this country is making the reach of higher education farther and farther out of reach of many Americans, and it's based more on income and class.

But I think Senator Obama, as most Democrats, still understand the fundamental premise and believe in the fundamental premise, that America is going to be a better country, a better place when everybody gets to play, and that's why he's always going to defend affirmative action, but he recognizes that we have to be more creative and make sure that we reach out to all Americans that need help and that have been denied access, whether it's to get education, or good schools, or good jobs, and is willing to think creatively about that. And I applaud him for that.

BLITZER: Ken Blackwell, hold on one second, Ken.

BLACKWELL: Wolf, on that...

BLITZER: I'm going to let you respond, but Senator McCain said only the other day that he supports a resolution referendum in his home state of Arizona that would effectively remove affirmative action once and for all in that state. How do you feel about that?

BLACKWELL: Well, no, I think that initiative is to remove the sort of affirmative action program that Barack Obama says needs to be fixed. It is race-based and it is quota-based. And so if you're against quotas, if you're against race-based affirmative action and you want a more broader definition of affirmative action, like Senator Obama is suggesting we need, then you would logistically and logically oppose the Arizona initiative.

Look, Senator McCain is for expanding parental choice. Too many of our kids are locked on reservations of public school systems that are not working. Senator McCain is for creating, you know, an energy strategy that would drop the price of gas, make us more energy independent, because he knows that poor people and disproportionately African-Americans are impacted by high gas prices. So he has an affirmative action program.

BLITZER: Gentlemen, unfortunately, we have to leave it right there. I know both of you have a lot more to say.

BLACKWELL: That's my man Ron.

BLITZER: We'll leave it for another day. Appreciate it. Ken Blackwell, very much. Ron Kirk, a good discussion here on "Late Edition."

Could the U.S. economy be close to a recovery, or is it going to be a lot more doom and gloom? The former Clinton Treasury Secretary Robert Rubin shares his views. Stand by for that right here on "Late Edition."

(COMMERCIAL BREAK)

BLITZER: Welcome back to "Late Edition." I'm Wolf Blitzer reporting from Washington.

The former Clinton Treasury Secretary Robert Rubin has been praised for his role in shaping a strong U.S. economy during the 1990s. Now he's an adviser to Barack Obama, and he shared his outlook for the current economy with me earlier in the week in "The Situation Room."

(BEGIN VIDEO CLIP)

BLITZER: In terms of the big picture, a lot of us remember your handling of the economy back then in the '90s. Where are we? The U.S. economy right now, some have suggested we're maybe only in the third inning of a nine-inning game in terms of the deterioration, the distress some would call it a recession already? Where do you think we are in big picture terms?

FORMER TREASURY SECRETARY ROBERT RUBIN: Wolf, I've been around markets and economic issues for a long, long time. I think this is probably the most uncertain and complex environment with respect to the outlook in my adult lifetime. And just to put it in very short terms, I think when you consider all the factors, all these competing considerations, there are negatives as well as positives, and also some positives.

I think there is some chance that we could have a recovery in the relatively near future, but I put the lowest probability on that. I think the most probable scenario is that we continue sort of like we are now to somewhat worse. And there is some chance, there is some chance, that things could be very seriously worse.

(END VIDEO CLIP)

BLITZER: All right. Robert Rubin speaking with me earlier in "The Situation Room."

And just ahead, the battle for hearts and minds in the Arab world. Is the United States winning that effort? A top U.S. diplomat standing by live to weigh in when "Late Edition" continues.

(COMMERCIAL BREAK)

BLITZER: There is little doubt right now that the image of the United States has taken a serious hit around the world in recent years. But are there inroads in the effort to try to win the hearts and minds of people around the world, especially in the Middle East?

BLITZER: Let's discuss with the man in charge of this mission, Jim Glassman is the U.S. undersecretary of state for public diplomacy. Ambassador, thanks very much for coming in.

GLASSMAN: Great to be here.

BLITZER: You've got a tough assignment, as we know. Karen Hughes used to do what you're doing. She had a tough assignment. The Pew Research Center poll that came out earlier in the year said that the favorable opinion in the United States in friendly countries in the Muslim world like Pakistan, only 19 percent. Jordan, only 19 percent. Egypt, only 22 percent. Not very high given U.S. support for those countries over the years.

GLASSMAN: It's true. But things are looking up.

BLITZER: What do you base that on?

GLASSMAN: Well, I base it on the latest Pew Research Poll in June where they looked at 21 countries in '07 and '08 and our ratings increased in 16 of them. But also, this is a very complicated issue. And to reduce it down to a few numbers, I don't think really does anybody --

BLITZER: All right, so let's talk about some of the problems that have impacted negatively on the U.S. image, especially, in the Muslim and Arab world. Senator McCain said this on June 20th and I'll get your reaction, because he's very worried about this. Listen to what he said.

(BEGIN VIDEO CLIP)

MCCAIN: It happens that I also regard the prison at Guantanamo as a liability in the cause against violent radical extremism. And as president of the United States, I would close it.

(END VIDEO CLIP)

BLITZER: How much does an issue like that, the prison at Guantanamo Bay affect the negative U.S. image in the Muslim world?

GLASSMAN: There's no doubt that Guantanamo has hurt our image. The president, though, two years ago said he would close Guantanamo. Of the 750 people that have gone through Guantanamo, 500 of them have been released. The big problem right now, we care about what happens to the 260 or so people who are there now who we would like to release. The question is, what will happen when they get back to their home countries? Will they be properly treated there? So we're working on this question. There's no doubt that that's important. But I think when we talk about the popularity of the United States, let's put it in the right perspective. Our objective in foreign policy is to reduce the threat to the United States and the promote freedom. It is not to win some kind of "American Idol" contest.

BLITZER: Because you've written extensively about the so-called war of ideas that is unfolding right now in this battle, if you will, for the hearts and minds of these young, largely men in the Muslim and Arab world, who potentially represent a significant threat. Is that what you're talking about?

GLASSMAN: Exactly, Wolf. And no matter what people feel about particular policies that the United States has, what we found is that in the Middle East, and in Europe, we've had tremendous cooperation from governments and from individuals in doing in the war of ideas. Really, there are two things we're doing. One is pushing back against the ideology of the terrorists and the second is diverting young people from taking a path that leads to violence extremism.

BLITZER: Because if they're unemployed, they have nothing to do, a lot of idle time. That sort of creates an opening. But let me read to you what Thomas Friedman, the New York Times columnist wrote on this issue back on June 11th. "It would not be an exaggeration to say that the Democrats' nomination of Barack Obama as their candidate for president has done more to improve America's image abroad, an image dented by the Iraq war, President Bush's invocation of a post-9/11 'crusade,' Abu Ghraib, Guantanamo Bay, and the xenophobic opposition to Dubai Ports World managing U.S. harbors -- than the entire Bush public diplomacy effort for seven years."

GLASSMAN: Well, there's no doubt that there's a lot of excitement in the world about the election that's coming up, and it's not just Barack Obama. And that's very important to people. You know, first African-American. Also, we almost had a woman nominated. We've got John McCain, who is a true war hero, spent five and a half years in a prison in Vietnam.

So the world is very excited about the American election. We're doing a lot, actually, to bring people to the United States to have them observe this election. But it's a lot more than that. It is the success that we've had in Al Anbar. It is the fact that al Qaeda has shown itself to be a bunch of wanton, violent extremists. The world is turning against al Qaeda and that kind of extremism. You talk about polls about the United States.

What's important to us, in fact, is the fact that support for suicide bombing, for example, in Jordan, in Morocco, throughout the Middle East that be dropping. Support for Osama bin Laden has been dropping. Support for al Qaeda has been dropping. Now, we're not out of the woods. Terrorism is a serious, serious problem, was we've done a lot of things in public diplomacy that has ameliorated the situation.

BLITZER: Here's what Robert Gates, the defense secretary said on July 15th. "The solution is not to be found in some slick PR campaign or by trying to out-propagandize al Qaeda, but through the steady accumulation of actions and results that built trust and credibility over a time."

GLASSMAN: He is absolutely right and I think the American people should understand that, for example, this year, we are bringing 50,000 exchange people to the United States. Students, experts in many --

BLITZER: Who pays for that?

GLASSMAN: The American taxpayers pay for it and it's a terrific investment. For example, in Iran, we are now -- we've brought 200 people on exchanges to the United States --

BLITZER: Iranians?

GLASSMAN: Iranians, from Iran. We just had the Iranian basketball team here playing in Utah. And it was a fantastic thing. The Iranian basketball team are throwing roses --

BLITZER: So do you think this is going to lead to an improvement in U.S./Iranian relationship?

GLASSMAN: U.S./Iranian relations, as far as individuals, as far as Iranians and Americans are quite good and we would like to improve them. The problem we have is with the regime.

BLITZER: Let me ask you to explain something that you wrote on July 15th. And because it sort of raises some questions in my mind. "Whether Osama bin Laden himself is killed or captured, I think is not of great consequence. It would have some importance in the war of ideas, but I think if he were killed or if his number two Ayman al- Zawahiri were killed, the ideology would certainly continue to survive."

Because most Americans, they say, it's very important to catch these two guys, to bring them to justice, or to kill them.

GLASSMAN: I think it is important to bring them to justice or to kill them. What I'm saying is that this is a powerful ideology. We're coming up on the 10th anniversary of the bombings by al Qaeda at our embassies in of Dar es Salaam and Nairobi. Al Qaeda is killing Muslims. Al Qaeda has longevity, they have perseverance, they're tough, their ideology is the base of what they're doing. And we need to fight back against that ideology, and that's what we're trying to do right now in the war of ideas.

BLITZER: Good luck. Jim Glassman, the undersecretary of state for public diplomacy. Thanks for coming in. GLASSMAN: Thank you, Wolf.

BLITZER: Still ahead on LATE EDITION, Democratic Senator Claire McCaskill and former Bush budget director Rob Portman. They're standing by live with their take on this increasingly tense race between Barack Obama and John McCain. LATE EDITION continues at the top of the hour.

(COMMERCIAL BREAK)

BLITZER: This is "Late Edition", the last word in Sunday talk.

(BEGIN VIDEOTAPE)

MCCAIN: His ideas are not always as impressive as his rhetoric.

OBAMA: They're very good at negative campaigns. They're not so good at governing.

BLITZER: Obama versus McCain: We'll assess the candidates and key issues in an increasingly contentious campaign, with Obama supporter Senator Claire McCaskill and McCain supporter, former Bush budget director, Rob Portman.

LIVNI: Wolf, my habit is not to negotiate with interviewers, in Israel or elsewhere.

BLITZER: Israel's foreign minister answers tough questions on Iran, a possible Middle East peace agreement, and the next prime minister of Israel.

Plus, insight and analysis on this week's highs and lows on the campaign trail from three of the best political team on television.

"Late Edition's" second hour begins right now.

ANNOUNCER: Live from CNN in Washington, this is "Late Edition" with Wolf Blitzer.

(END VIDEOTAPE)

BLITZER: And welcome back to the second hour of "Late Edition."

Barack Obama and John McCain tried to focus their attention this week on the economy and energy, but their messages were overshadowed by the issue of race, in what appears to be an increasingly negative contest between the two candidates.

Joining us now to discuss this and more, from St. Louis, the Missouri Democratic Senator, Claire McCaskill. She's a very strong supporter of Barack Obama, and has been mentioned as a possible vice presidential pick.

And joining us from Cincinnati, the former Bush budget director and former Ohio congressman, Rob Portman. He's a strong supporter of John McCain. He, too, has been mentioned as a possible vice presidential pick.

I want to thank you both of you for coming in. Thanks very much.

MCCASKILL: Sure.

PORTMAN: Thank you.

BLITZER: Senator McCaskill, this is only a few days ago, very strong words from Senator Obama, in his opposition to offshore oil drilling. This is what he said.

(BEGIN VIDEO CLIP)

OBAMA: If we started drilling today, the first drop of oil wouldn't come for another seven years. And even then, it wouldn't have a lot of impact on prices.

(BEGIN VIDEO CLIP)

BLITZER: All right, very strong words, but in the past two or three days, all of a sudden, we're hearing from Senator Obama, you know what, he might be ready to support offshore oil drilling if it were part of a compromise package that 10 senators now are putting forward, five Democrats, five Republicans, that includes a whole lot of other stuff, but it seems like a significant shift on the part of Senator Obama.

MCCASKILL: Well, there's not a significant shift, Wolf. What is happening here is the Republican Party, as usual, is taking their marching orders from big oil.

They've refused to extend tax credits for wind and solar this week. They've refused to take action against excess speculation. They've refused to do anything except what big oil wants.

And what Barack has said is, listen, domestic production is part of this. He was pointing out that we can never drill our way out of this problem. Long term, the only way to get us out from underneath foreign oil is to turn to alternatives, which the Republicans are not interested in unless we're dealing with big oil.

BLITZER: But Senator McCaskill, is he ready to go ahead and, as part of this compromise, say, you know what, you can go ahead and start drilling off the coast of Florida and California and elsewhere?

MCCASKILL: I think he's going to look very carefully at what that language says. I think he wants to make sure that we do a "use it or lose it."

They have 68 million acres under lease, right now, that they haven't touched, including some we just gave them a few years ago.

So what he says is "use it or lose it" to the oil companies. He's also telling the oil companies, unlike John McCain, take a little bit of that $12 billion of profit you had last quarter and give it back to the American people. By the way, John McCain says to ExxonMobil, I'm going to give you another $1.2 billion in a tax break. It's ridiculous.

BLITZER: All right. Is Senator McCain, Rob Portman, ready to go ahead and work with these senators, in the Senate, along the lines of what Senator Obama is now saying he's willing to compromise -- Senator McCain willing to compromise on additional tax increases, if you will, for ExxonMobil and other oil companies, in order to work out a deal?

PORTMAN: Wolf, I don't think the compromise includes the windfall profits tax that Senator McCaskill just talked about. Why? Because it doesn't make any sense.

We've tried it before. It's not going to lower the price. It's not going to increase the supply. It will just raise prices for American consumers.

So, if you're concerned about the price of gas at the pump, you shouldn't be for that.

I think it's very interesting that Senator McCaskill talks about the fact that Senator Obama may or may not have shifted. I don't know if he's shifted his position or not, but the truth is he voted for the 2005 energy bill that has the very tax breaks for oil companies he now says that he opposes.

John McCain actually voted against it, for that reason.

So this notion that somehow Senator McCain is not willing to be tough on big oil -- look at the 2005 bill that provided the very tax breaks that Barack Obama...

BLITZER: All right. Senator McCaskill, do you want to respond to that?

MCCASKILL: Oh, absolutely. You know, this is -- John McCain was against offshore drilling. He gave a speech on June 16, flipping his position. And in June alone, he collected $1.1 million from oil executives. They were cheering him in Texas. It's the same old song.

(CROSSTALK)

BLITZER: But what about the charge, Senator McCaskill, that Senator Obama actually voted with the oil companies and Senator McCain opposed that legislation?

MCCASKILL: In that legislation, there were important alternative fuel measures. What Barack Obama is focused on, like a laser, is getting out from underneath oil. And he wanted to make sure that we were supporting alternative fuels, which was in that energy bill.

We have got to get to cellulosic fuel, hybrids, wind, solar -- and repeatedly the Republicans keep saying no. If it isn't for big oil, they're not interested.

PORTMAN: Wolf? BLITZER: Go ahead, Mr. Portman.

PORTMAN: Well, you know, it's just interesting. This is an issue where John McCain says we've got to do it all; we've got to do it now; we've got to cut our dependence on foreign oil.

So he's for everything. He's for increasing alternative fuels. He's been a leader on that. He's for more conservation, both of which Senator Obama talks a lot about.

But what he's also for is increasing production here in this country and using nuclear power and using coal. We have got about 200 years of it in the ground. It's extremely important. This is a break not just from Senator Obama but, frankly, from some of the Bush administration policies.

It's very important. It's aggressive. It's the right thing to do for the American consumer.

BLITZER: And a lot of the American public, Senator McCaskill, seems to agree on this offshore oil drilling proposal. You correctly point out that Senator McCain changed his mind about it in June. Now it looks like Senator Obama is ready to change his mind, as part of a comprehensive compromise in the Senate.

In our latest CNN Opinion Research Corporation poll, we asked, "Do you support or oppose offshore oil drilling?" Sixty-nine percent favor it; 30 percent oppose it.

Is it just politics that's turning Senator Obama, potentially, around?

MCCASKILL: Well, I think what's going on here is that Barack Obama is not afraid of working in a bipartisan way to find a real solution. If you look at his economic stimulus plan that he has just proposed, you see examples of that.

But what really is happening here, Wolf, the American people are hurting. The middle class is hurting. Working families are hurting. Now, you can stay with the economic policies that Congressman Portman was a big part of under this administration.

He was part of this budget process under the Bush administration and the economic policies. They have driven us into a ditch, with spending, with an economic policy that was all about helping the very rich, that the middle class didn't get part of. He is focused to try to help the middle class.

BLITZER: All right. Congressman Portman, I want you to respond to that, but before you do, the other serious allegation that Senator McCaskill and Senator Obama, among others, have said is, you know what, ExxonMobil -- they have these record billions of dollars in oil profits, but if Senator McCain had his way, he would give them more tax incentives, even additional tax breaks, more than $1 billion, as part of an entire corporate tax rate reduction, which ExxonMobil, among other companies, would benefit from. You want to respond to that?

PORTMAN: Wolf, thank you very much for clarifying that issue. Because that's exactly what Senator McCain is saying and it's the right thing to do.

First of all, he's against the windfall profits tax, says it won't work; it won't lower prices; it won't increase supply.

What he is for is for saying to American companies, if you stay here, have your headquarters here and create jobs in America, we will treat you like other countries around the world do.

We have the second highest corporate tax rate in the world, now, among developed countries. And what's happening is we're losing corporate headquarters; we're losing employees. Senator McCaskill's seen that in her own state recently.

So Senator McCain is saying that, for U.S. companies, if they want to stay here, we're going to reward them.

And the fact that that would apply to every company in America, including oil companies, is what Senator McCaskill was referring to earlier. It's misleading. It's not targeted to the oil companies at all. It's something to try to help American workers.

BLITZER: Senator McCaskill, go ahead.

MCCASKILL: I think that Senator Obama also has talked about changing the tax code -- a little bit different, though. He's going to say, we're not going to continue to reward companies that shift jobs overseas; we're going to close up some of these tax havens and some of these tax code provisions that allow people to actually benefit from shipping jobs overseas, and we're going to reward them for staying here.

But I've got to tell you the truth. We've had 7 1/2 years of rewarding the people at the top, and it hasn't worked for the American people.

For the first time, Wolf, American families are making less today, in real money, than they were seven years ago. We are going backwards under these policies. We need a change from these economic policies. And if people believe that, this choice is very clear.

BLITZER: Let's talk a little...

PORTMAN: Wolf...

BLITZER: Go ahead -- very quickly, go ahead, Mr. Portman.

PORTMAN: Just for a second, because what Senator McCaskill was talking about is accurate.

PORTMAN: Senator Obama, though, wants to increase taxes on companies that do business overseas. This is going to hurt employment right here in this country, including her state, including my state and Ohio, where I am right now. It's the wrong way to go. It's going to hurt the very families that Senator McCaskill was talking about because it's going to raise their taxes and it's going to result in fewer jobs in this country. So what Senator McCain has said instead, let's give these companies a break who are willing to stay here in America and let's provide tax relief across the board to small businesses. That's going to help get the economy up and help everyone.

MCCASKILL: I want to make sure there's nothing in Barack's plan that would ever raise taxes on anyone who makes less than $250,000, period.

PORTMAN: That's not accurate. Because you're talking about raising taxes on capital gains, 100 million Americans take advantage of that.

MCCASKILL: Not for people who have less than

PORTMAN: Raising taxes on dividends, raising taxes on small businesses, and 95 percent of small businesses pay their taxes as individuals and all those rates go up.

MCCASKILL: No.

PORTMAN: This will increase taxes on the economy at a time when it's very soft. It's a very dangerous thing to do.

MCCASKILL: None of those taxes, whether it's capital gains, any kind will apply to anyone who makes less than $250,000.

BLITZER: Rob Portman, you may have heard the former Clinton Treasury secretary, Robert Rubin, he was in "THE SITUATION ROOM" earlier in the week and he made the point that what Senator Obama wants to do is simply go back to the tax structure that existed during the '90s, during the Clinton administration and when people were making a lot of money and rich people were doing rather well. What's wrong with going back to the tax structure that existed in the '90s?

PORTMAN: It's interesting. I was in the House, as you know, in the 1990s working with senator -- then President Clinton on the Balanced Budget Act and what happened was we reduced the capital gains rate. And in fact, Secretary Rubin was very much a part of that. That encouraged economic growth, that along with spending restraint, which is the other thing that Barack Obama is not proposing. In fact, he's got $1 trillion in new spending over the next 10 years, is going to lead us to both fiscal sanity in terms of our balanced budget, but also in terms of helping the economy.

So that's a little bit revisionist in terms of what happened in the 1990s. We did reduce taxes. It did help. We got higher revenues than anybody expected. It helped us get to a balanced budget sooner than expected. And that's what we've got to do going forward. That's what John McCain is talking about. Keep taxes low, don't raise them, but also provide targeted tax relief that helps the economy, helps jobs, helps workers and get spending under control, which is something that Senator McCain of course has been a leader on over the years. BLITZER: Let me ask both of you and I'll ask Senator McCaskill first. Everybody's wondering when there's going to be a vice presidential naming process, if you will. Your name has often been mentioned, Senator McCaskill. Have they asked you, the Obama campaign for personal documents as part of a vetting process?

MCCASKILL: They have not. And I'm always honored to be mentioned. I'm proud to be campaigning for this incredibly bright man who is going the change course in this country, but I think that all the speculation is going to come to an end soon, because at least we're going to get choices before too long.

BLITZER: When do you think the Obama campaign, Senator Obama will make his decision?

MCCASKILL: I don't honestly know. I talked to Barack about it this weekend. You know what he did? He just smiled.

BLITZER: What about on the other side, Rob Portman? Have you been vetted, have you been asked for personal documents?

PORTMAN: No, I haven't, and I'm supporting Senator McCaskill on the Democrats' side after her feisty performance today. I think she'd be great for Senator Obama. But, no, I think the whole VP thing is a little bit overrated. It's important, but maybe the media is giving it a little bit more importance than it deserves.

The key is who's at the top of the ticket. And I really think John McCain is the right person at the right time. We've got huge challenges in terms of our economy. You talked about this earlier with some guests, certainly in terms of our national security. We need someone with his steady leadership skills and his experience and his record of working across the aisle and getting things done. I think that's what's best for our country right now.

BLITZER: You both represented these two campaigns rather well today. Thanks to both of you for coming in, Claire McCaskill and Rob Portman. Good discussion.

Just ahead, a nuclear Iran, is Israel preparing for a military strike. We'll ask the country's foreign minister in an exclusive interview. LATE EDITION continues after this. (COMMERCIAL BREAK)

BLITZER: Iran is insisting that its nuclear program is being used for peaceful purposes, but Israel is warning the time for engaging Iran over the issue may be running out. I spoke with the Israeli foreign minister Tzipi Livni about her country's tensions with Iran, the Israeli/Palestinian peace process and her own effort to succeed Ehud Olmert as Israeli's next prime minister.

(BEGIN VIDEOTAPE)

BLITZER: Foreign Minister, thanks very much for joining us. Welcome back to LATE EDITION, good to have you back in the United States. LIVNI: Thank you.

BLITZER: Let's talk about Iran, right now.

I know Israel is deeply concerned about Iran's nuclear program. The Ayatollah Ali Khamenei, he said on Wednesday, he said "the Iranian nation, by depending on its useful experience and advantages of 30 years of resistance, does not pay any attention to such talk and will continue with its path." They're showing absolutely no indication they're going to stop enriching uranium. So the question to Israel, at what point do you give up on sanctions and diplomacy and begin thinking about military action?

LIVNI: It is clear that Iran doesn't pay attention to talks. And this is a clear message to the international community to continue to with real and effective sanctions. And clearly, Iran is a threat, not only to Israel, but this is a global threat. And the international community should act accordingly.

BLITZER: Well, at what point though, assuming you continue with sanctions, how much time do you have? Yesterday, I spoke with your defense minister, Ehud Barak. And he thought that there was a window of 15 months to 36 months until the Iranians crossed what he called, the line of no return. Do you accept that window?

LIVNI: I think the time is of the essence even more. While we are talking, Iran continues. And any kind of hesitation coming from the international community is being perceived by the Iranians as weakness. And these kinds of messages that talks doesn't measure -- don't measure, needs to change the attitude of the international community. Intensive and sanctions can be effective. And the wrong messages that need to be taken not only by Iran, but also by its neighbors.

Iran is a threat to its neighbors, as well. And the international community is being watched not only by Iran, but also by Iran's neighbors. And when the international community shows hesitation, this is being perceived as weakness. And we live in a neighborhood in which whether you beat the bully or join in. And I don't want to the Iranian neighbors, which are part of the camps of moderates, to join Iran.

So what we are doing today is of the essence and we shouldn't wait to what we call, point of no return.

BLITZER: So, you're saying that you don't even give them 15 months, necessarily. You think it's a more urgent matter?

LIVNI: Yes.

BLITZER: How much time do you think Israel and for that matter, the United States, has?

LIVNI: It's not -- this is something -- we need to understand that we need to act today in terms of sanctions. Sanctions can be effective as long as the Iranians and the entire world understands that all the options that are on the table. LIVNI: This is what we need to do today. We cannot postpone it. We cannot wait for the Iranians to decide whether they are willing to talk with the international community. And the message coming from Iranians is clear. Sanctions are needed today.

BLITZER: Recently, the chairman of the U.S. Joint Chiefs of Staff, Admiral Michael Mullen, on July 2nd, he said this. He said, "this is a very unstable part of the world and I don't need it to be more unstable. Opening up a third front right now would be extremely stressful on us." He was referring to the first front in Iran -- excuse me, in Iraq. Second front in Afghanistan. To open a third front in Iran right now, he said, would be extremely stressful on the U.S.

And I'm going to read another quote to you from the director general of the International Atomic Energy Agency, Dr. Mohamed ElBaradei. He says, "in my opinion, a military strike will be the worst. It will turn the Middle East to a ball of fire."

How worried are you that an Israeli military strike for example, could turn the entire region into what Dr. ElBaradei calls, a ball of fire?

LIVNI: The choice in the Middle East is choice between bad options. This region is the region that creates some threats like the Iranian threats to the entire world.

Now, let's talk about the situation when the world is not doing what needs to be done. I'm not feeling and the world cannot afford a nuclear Iran (inaudible) and weapons of mass destruction everywhere in this region, in the hands not only of states, but also of terrorist organization. The world doesn't want to see what is now part of the camps of moderates become part of the camp of extremists. This is something that nobody can afford.

So, only by waiting, it doesn't create a better situation, but worse. And sanctions are effective only when the Iranians know that there are other options. But, let's focus on the sanctions today.

BLITZER: There's a lot of political uncertainty in Israel right now. With potentially elections coming up, a new prime minister. Do you realistically believe that President Bush's deadline for the end of this year, for an Israeli-Palestinian agreement is still realistic at all?

LIVNI: In Annapolis, and I support, supported and still support deeply, the Annapolis Process, we decided and promised to make all the efforts to reach the peace treaty until the end of the year.

We are making all the effort to do so. But, what is more important is now the understanding between Israelis and the Palestinians that we are on the right track. It needs to be understood that these Annapolis Process launched these negotiations after seven years of intafadah of violence in the region between Israelis. Violence of Palestinians against Israelis. And now we have these peace talks which according to my Palestinian colleagues, are the most serious and advanced peace talks in many years now. So, we need to keep this track. We need to continue in negotiating and it's not the timeline is less important. What is more important is the content and the fact that we continue to do so in order to reach a peace treaty.

BLITZER: Would you be willing to give up the Golan Heights to reach a peace treaty with Syria?

LIVNI: Syria now, this is now not even the beginning of direct peace talks between Israel and Syria. But, this is indirect talks in order to find out whether this is possible.

And it's important for the Syrians to understand that peace in the region doesn't mean only embassies or getting territory from Israel. But, it means that they need to change their destructive hold in the region.

(CROSSTALK)

BLITZER: Excuse me for interrupting. But, if they were willing to do that, to reach out and to make full peace with Israel along the lines of Egypt and Jordan, would you be willing to give up the Golan Heights?

LIVNI: Wolf, my habit is not to negotiate with interviewers in Israel, or elsewhere.

The idea of peace means of course, territorial concessions. But, it is more important to understand that peace means that Syria should stop now their transfer of weapons from Syria, to Lebanon, to Hezbollah. The support of Syria of terrorist organization including headquarters of Hamas in Syria. Their connections with Iran doesn't help.

So, since this is a point in which we need to find out whether Syria is serious in terms of peace, the most important thing right now, is put all of this on the table, not only by Israel, but the entire international community and ask Syria whether they want peace negotiation just to get legitimacy from the international community. Or, are they serious enough and in order to show that they're serious enough, they need to stop what they are doing right now, you know, in supporting all these terrorist activities in the region.

BLITZER: We're almost out of time, but a couple of quick, political questions for you. Ehud Olmert, the Prime Minister's giving up his position as leader of your party, the Kadima Party, in September. I assume you want to be the leader of Kadima and you want to be the next prime minister of Israel. Is that right?

LIVNI: Yes. Yes, I am.

BLITZER: Will you be able to do that without a new election? Or, do you think there will have to be early elections in the next few months?

LIVNI: Kadima now is choosing its next leader. As you know, my intentions are to be the next leader of Kadima and then, the next Israeli Prime Minister.

I believe that there's a place for a government that represents unity in Israel. I believe that we have a common ground that most of the political parties in Israel can share in a government, in a coalition. And this can create some method of unity, internally and externally, as well.

But, this depends also, not only on my desire, intentions. But also, on the other part of Israel's political willingness to do so. But, anyway, I believe in Kadima and Kadima is going to win the elections, as well.

BLITZER: Even if Ehud Barak, the Labor Party leader, runs? Because he told me that he wants to be Israel's next prime minister. And as you know, the opposition leader, Benjamin Netanyahu, the leader of Likud, he wants to run and he thinks he's going to be the next prime minister. It could be a lively political period in Israel.

LIVNI: May the best one win for the future of Israel.

BLITZER: We'll be watching closely. The Foreign Minister of Israel, maybe the next prime minister of Israel. Tzipi Livni, thanks very much for joining us.

LIVNI: Thank you. Thank you.

(END VIDEOTAPE)

BLITZER: And still ahead, did this week's dust up over race hurt John McCain or Barack Obama or both of them? Insight and analysis from three of the best political team on television. Stay with LATE EDITION, we'll be right back.

(COMMERCIAL BREAK)

BLITZER: Our political roundtable discussion coming up, let's take a quick look on what's on the cover of this week's major news magazines here in the United States. Time magazine calls the economy job number one for the next president. Newsweek looks at the end of the South. How Obama versus McCain is unsettling the old confederacy. And U.S. News and World Report with a double issue last week. It looks at the frontiers of science.

Don't forget coming up right after LATE EDITION at the top of the hour at 1:00 p.m. Eastern, "FAREED ZAKARIA GPS." He'll take a comprehensive look at international affairs with world leaders, policy experts, and journalists. This week Fareed silts down with former U.S. ambassador to the U.N., Richard Holbrooke.

(BEGIN VIDEO CLIP)

RICHARD HOLBROOKE, FORMER U.S. AMBASSADOR TO U.N.: Israel faces a real existential threat from Iran. Not only directly from Iran, but from the fact that tens of thousands of rockets are in the hands of Hezbollah and Lebanon, some of them with long range now that can reach into the Sinai and Demona. And this is in intolerable situation long term for Israel.

(END VIDEO CLIP)

BLITZER: Stay tuned for "FAREED ZAKARIA GPS." It's coming up at the top of the hour right after LATE EDITION only here on CNN.

Up next, when candidates attack. Three of the best political team on television will tell us who has the edge as the tone of the campaign gets nasty. Much more LATE EDITION right after this.

(COMMERCIAL BREAK)

BLITZER: A lot of ground to cover in the presidential race, so let's get right to it right now with CNN senior political analyst, Bill Schneider. He's joining us from Los Angeles. And here in Washington, our senior correspondent, Joe Johns and our senior political analyst Gloria Borger.

Gloria, what a story this week, the whole race card issue. It started after Barack Obama said this --

(BEGIN VIDEO CLIP) OBAMA: John McCain and the Republicans, they don't have any new ideas. That's why they're spending all their time talking about me. They're going to try to say that I'm a risky guy. They're going to try to say, well, you know, he's got a funny name, and he doesn't look like all the presidents on the dollar bills.

(END VIDEO CLIP)

BLITZER: All right and the next day, Rick Davis, the campaign manager for Senator McCain wasted no time. He pounced. He said, "Barack Obama has played the race card and he played it from the bottom of the deck. It's divisive, negative, shameful, and wrong." And it became a big issue.

BORGER: Yeah, it became a big issue. I think that's what the McCain campaign intended. They say that McCain was personally offended, because, of course, he would never play the race card.

But I think this is a way for the campaign to inoculate itself in case race does come up as an issue. They can always say, Barack Obama, you raised it first. They do not want to make the same mistake they believe Hillary Clinton made in the primaries when race was race raised and they didn't fight back on it. They're saying, we're going to, this was our mark.

BLITZER: And we heard from David Plouffe, the campaign manager for Obama reacting. He said, "This is not the John McCain voters thought they would be seeing in this presidential campaign. He's not just embracing the Rove playbook that people are really tired of, he's taking to it a further extreme."

JOHNS: You know, there's a lot of danger in this for Barack Obama. It cuts both way, but most of the negatives go to him. It's all about his response. He has to have sort of a light touch on this, because if he's not -- the voters who are really watching this of course are those Independent voters, those swing voters. It comes off looking surly, it comes off looking angry, if he comes off looking angry, then that could be to the benefit of other candidates.

It sort of happened in Tennessee with Harold Ford, another telegenic African-American candidate who found himself in the position of taking in these racial charges and responding in a slightly angry way. The voters didn't like that and it turned out to be a big problem for him. He lost.

BORGER: It's also risky for John McCain to be doing this. Because the voters could have a sense, gee, you're just kind of grumpy here. Why don't you tell us about what you can do for us as president of the country instead of just taking on Obama?

BLITZER: And it's very fascinating this way, because the race, Bill Schneider, is very close, not only in the so-called national polls, in our own national polls, but also in these key battleground states like Florida, for example, or Ohio right now where it's a statistical dead heat according to that Quinnipiac University poll that just came out. The undecideds right now, what do we know about them, who are they?

SCHNEIDER: Well, they're people who don't pay a lot of attention to politics and they don't make up their minds until they have to make up their minds. They don't have to make up their minds for several months. Barack Obama is going to try to reach them by advertising during the Olympics. That is very expensive. But he figures, you know, a lot of people aren't paying attention to politics are paying attention to sports, so he might be able to reach them.

Let me tell you something. I'm here in California. The latest field poll in California shows Obama leading McCain here by 24 points. Now, our poll of polls has Obama leading McCain nationwide by just three points. What does that mean? If you do the math, California's one eighth of the country. It needs that Obama's national lead is entirely due to the big lead he has here in California. Without California, the race is a dead heat in the rest of the country.

BLITZER: That's an amazing poll. And it indicates, Gloria, the immediate reaction, we're not going to see a lot of Senator McCain in California.

BORGER: No, I think it would probably be a waste of his campaign finances to be in California. I think the fight, though, may be in the west. It could be states like Colorado, Nevada, New Mexico. Those could be the new battleground states for Obama and McCain because both of them think they've got some real good chances.

BLITZER: Why is he's further ahead, right now, Joe? Given the Republicans, the right mood, the right track, wrong track poll numbers that we're getting. In fact, the economy is so bad right now. People blame the Republican incumbent in the White House and McCain obviously is the Republican. Shouldn't Senator Obama be way ahead in a lot of these polls right now?

JOHNS: People aren't sure. It's a question of demographics. But when they look at Barack Obama, there are a lot of people who haven't focused fully on this campaign yet. Just starting now to really look at these people and they don't know him. He hasn't been on the stage as long as John McCain. He still has to sort of explain who he is, talk about his biography, which he has been doing quite a while and try to sell himself to those voters in those areas where people have a sort of natural reluctance. You're talking about states like West Virginia and a variety of other states where he's just going to have a problem and he has to go perhaps and camp out in some of these places.

BORGER: I think he needs to reintroduce himself to the American people again. There are polls that show that people questioned whether they share Barack Obama's values or whether they can identify with his background. If four out of 10 people have questions about that, you know, that's pretty serious for him and so he's got to work to define himself.

BORGER: What McCain is doing is trying to define him for him and say, he's risky; he's inexperienced; and he's different, and you're not comfortable with it.

(CROSSTALK)

BLITZER: Go ahead, Bill.

SCHNEIDER: And there's something very odd about this race. It's turning into a referendum on Barack Obama.

It's not supposed to be a referendum on Barack Obama. It's supposed to be a referendum on the status quo, how things are going in the country. Do people want to keep things going the way they are or do they want change?

Overwhelmingly, Americans say they want change. The number of people who say things are going well has not been this low since 1980, almost 30 years ago, when Jimmy Carter was president.

But McCain has so far succeeded in keeping the spotlight on Barack Obama and forcing the election to be about him. Barack Obama has to change that. I think the Democratic Convention is going to refocus attention on George Bush.

JOHNS: There's also this issue of the e-mails and, sort of, that -- the dark side of the Internet that claims that Barack Obama's a Muslim. There are a lot of people out there who still believe that, even though they've been given so much evidence to the contrary.

That's something else he's having a bit of a difficult time dealing with. Questions about his patriotism -- they keep coming back, and all, in part, I think, because people see Barack Obama as a different kind of candidate than the type of candidate who has run for president before.

BORGER: And if you're the McCain campaign, you would rather make this a referendum on Barack Obama than make it a referendum on George W. Bush.

BLITZER: If you make it a referendum on Bush...

BORGER: You're gone.

(LAUGHTER)

BLITZER: All right, guys. Stand by. We have much more to talk about. We'll be back with our political panel.

Also, on one of the Sunday morning talk shows, the House speaker, Nancy Pelosi, was grilled about what Congress didn't do to address voters' pains at the gas pump. We're going to tell you what she had to say in our very popular "In Case You Missed It" segment. Stay with us.

(COMMERCIAL BREAK)

BLITZER: We'll get back to our political panel in a moment, but in case you missed it, let's check some of the highlights from the other Sunday morning talk shows here in the United States.

On ABC, the House speaker, Nancy Pelosi, was asked why she didn't allow a vote to expand offshore oil drilling before Congress went on its August recess.

(BEGIN VIDEO CLIP)

REP. NANCY PELOSI, D-CALIF.: We have presented our options that will really have -- make a difference at the pump.

Free our oil, Mr. President. We're sitting on 700 million gallons -- barrels of oil. That would have an immediate effect in 10 days.

But to single-shoot on something that won't work, and mislead the American people as to thinking it's going to reduce the price at the pump, I'm just not going to be a party to it.

(END VIDEO CLIP)

BLITZER: On CBS, the McCain economic adviser, Carly Fiorina, explained why the Republican candidate suggested he would be open to negotiating a change in the payroll taxes to bolster Social Security, even though he's pledging not to raise taxes overall.

(BEGIN VIDEO CLIP)

CARLY FIORINA, MCCAIN ECONOMIC ADVISER: Senator McCain, with his vast experience in bipartisan discussions, understands that you don't begin a negotiation with an ultimatum.

On the other hand, his record is crystal clear. Barack Obama has proposed solving our Social Security problem with an increase in payroll taxes. John McCain has been very explicit in saying he does not support an increase in payroll taxes.

(END VIDEO CLIP) BLITZER: On Fox, the McCain supporter, Senator Lindsey Graham, and the Obama supporter, former senator Tom Daschle, sparred over the McCain campaign's accusation that Barack Obama played the race card.

(BEGIN VIDEO CLIP) SEN. LINDSEY GRAHAM, R-S.C.: And there's no doubt in my mind that what Senator Obama is trying to suggest is that he's a victim of something. And when he mentioned Bush and McCain have no real answers, if you really believe that you're running against a guy with no answers to America's challenges, why won't you debate him?

TOM DASCHLE, FORMER U.S. SENATOR: He has never said that he believes that John McCain is a racist. He's never said anything that he was using race in this effort.

You can't quote him. When the McCain campaign couldn't get any traction on the issues, they go after him personally. They go after him as a person who really doesn't fit the political mold.

(END VIDEO CLIP)

BLITZER: On NBC, McCain supporter Senator Joe Lieberman and Obama supporter Senator John Kerry talked about the campaign's negative turn.

(BEGIN VIDEO CLIP)

SEN. JOHN KERRY, D-MASS.: This is a complete contradiction in John McCain -- John McCain, who said he wants a campaign of ideas, not insults; John McCain, who said the American people want a campaign that's respectful.

SEN. JOSEPH I. LIEBERMAN, I-CONN.: The McCain campaign is, to use Barack Obama's words, raising the question, is he a risky guy? But it has nothing to do with his name or his skin color. It has to do with his lack of experience and bad judgment, his unreadiness to be president.

When you use the expressions that Senator Obama did, three times this week, you're making a personal insult to John McCain.

(END VIDEO CLIP)

BLITZER: Highlights from the other Sunday morning talk shows, here on "Late Edition," the last word in Sunday talk.

Up next, is this the week Barack Obama and John McCain name their vice presidential picks?

And Bill Clinton is now speaking out. We'll get our political panel's take when "Late Edition" continues.

(COMMERCIAL BREAK)

BLITZER: We're back. We're talking politics with CNN's Gloria Borger, Bill Schneider and Joe Johns. Guys, let's talk a little bit about Bill Clinton. We haven't heard from him lately, but now in an interview that was published today in "The Washington Post", he's in Africa, he's working on his various projects there. He says this. He says, "This is my life now and I was eager to get back to it and I couldn't be happier."

On politics, he was asked a bunch of questions. He said, "Next year you and I and everybody else will be freer and have more space to say what we believe to be the truth about the primaries."

A little intriguing comment, Gloria, from the former president.

BORGER: He's not bitter.

BLITZER: He says in the interview, he's only spoken to Barack Obama once since Hillary Clinton effectively conceded.

BORGER: Right. And Anne Kornblut who did that interview for "The Washington Post" made the point that he was very quiet when asked about Barack Obama. And I think that tells you everything. It's very clear that Hillary Clinton is doing everything she's been asked to do, Wolf. She's going to go out campaigning in the month of August in three or four battleground states. She's going to have a big speech at the convention. Bill Clinton doesn't know when his speech is going to be at the convention. It's clear that there's still a lot of tension left.

BLITZER: It was intriguing in that article, if you read it, and I'm sure you did, Joe. He said, you know what, I don't know what my role is going to be at the convention. He still himself is in the dark.

JOHNS: Certainly. And there's always a possibility of hard feelings out there, even the McCain campaign is sort of pointing at the Clintons as people who really got it rough from the Obama campaign.

BLITZER: They're reaching out. They're trying to get some of those Hillary Clinton supporters. They would like to get 15 or 20 percent of those supporters of Hillary Clinton. If they did that, this race could result in a McCain victory. JOHNS: It certainly could. Look, the Clintons are upset, certainly, about things like South Carolina, where whatever the president said about Barack Obama was interpreted as having some type of a racial subtext to it.

So these are wounds that are going to have to be mended no matter how much Hillary Clinton gets out on the campaign trail, no matter who donates to whom. They're going to have to sort of fix that going on. Because Bill Clinton still as the article I think points out, I think he's the most successful Democratic politician of his generation. He's still a big figure.

BLITZER: He's still very popular. Bill, we referred earlier to those Quinnipiac University polls in some of the battleground states. In Ohio, for example, 46/44, effectively within the margin of error, Obama slight lead. Same numbers in Florida right now, which raises this question, and David Gergen made this point the other day here on CNN, our political analyst. He said, if it's this close in those states, the two states which determined the Florida in 2000 and 2004, the outcome that the Democrats lost, could it convince Senator Obama to reconsider and maybe pull his nose and reach out to Hillary Clinton after all if he thinks that's what he needs no win the election?

SCHNEIDER: He may be tempted to do that, because she represents an important wing of the Democratic Party. Then the Democratic Convention would really be a lovefest. They'd be locking arms and singing kumbaya.

But remember one other thing. Hillary Clinton and her husband would both be on the ticket in one fashion or another and Barack Obama says he wants to look to the future, he wants to change Washington, he wants something dramatically new and different. And with the Clintons on the ticket, he'd be undercutting his own message.

One important thing about Bill Clinton here. Bill Clinton has dominated the Democratic Party for 16 years since 1992. It's been the Clinton party, even though Gore and Kerry were the nominees, they didn't get elected. So Bill Clinton is facing a very difficult time here. The party could be taken away from him. The party could become an Obama party, which is really not just a campaign, but a movement. If Obama wins the presidency, it won't be a Clinton party anymore. It will be something very different.

BLITZER: If he thinks, though, you know what, that his election is really in trouble right now, Senator Obama, is it realistic, is it at all possible might reconsider and forget about a safe choice let's say like Evan Bayh, the Democratic senator from Indiana or somebody else and take that bold step?

BORGER: You know, Wolf, I would never say never. I think if the campaign thought that it was in really deep trouble, it might turn to Hillary Clinton. But if you look at this interview with Bill Clinton, it's not at all clear that he would be a willing participant in this, quite honestly. And maybe Hillary Clinton, if Barack Obama could lose, maybe she would rather not be on the ticket and run again herself. We just don't know. I mean, I still think it's highly unlikely. You talk to the people in the campaign, they don't think they're in that much trouble. They could be kidding themselves. But these polls in the battleground states should give them some pause.

BLITZER: What do you think, Joe?

JOHNS: I sort of feel the same way. When you look at the chemistry of that mix, and as Bill said, the concern about President Clinton being sort of the other vice president, that's a huge stretch for Barack Obama. On the other hand, you know, people look at Barack Obama and say, look, do you want to be president of the United States or not? Do you want your picture up here with all these presidents, or do you want to be the first African-American who was merely nominated?

BLITZER: Or do you want to be John Kerry or Al Gore.

JOHNS: Exactly. BLITZER: And so if that's the choice and if his internal polls and his focus groups say, you know what, you really need Hillary Clinton right now, that possibility is out there.

BORGER: It's about winning.

JOHNS: Simple math.

BLITZER: Well, pet's see what happens. All right guys, we've got to leave it right there. Thanks to all of you for coming in.

And this reminder, if you would like a recap of today's program, you can get highlights on our LATE EDITION podcast. Simply go to CNN.com/podcast. LATE EDITION continues right after this.

(COMMERCIAL BREAK)

BLITZER: That's your LATE EDITION for this Sunday, August 3rd. Please be sure to join us against next Sunday and every Sunday at 11:00 a.m. Eastern for the last word in Sunday talk. Remember, I'm also in "THE SITUATION ROOM" Monday through Friday from 4:00 to 7:00 p.m. Eastern. Until tomorrow, thanks very much for watching. I'm Wolf Blitzer in Washington. "FAREED ZAKARIA GPS" starts right now.

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