updated 9/11/2008 1:44:44 PM ET 2008-09-11T17:44:44

Guest: Jennifer Granholm, Lawrence O’Donnell, Michelle Laxalt, Michael

Smerconish, John Harwood, Larry Persily, Steve Hildebrand

DAVID GREGORY, HOST:  Tonight, lipstick madness.  The campaign enters muddy turbulent waters with a new controversy sparked by this...

(BEGIN VIDEOTAPE)

SEN. BARACK OBAMA (D), PRESIDENTIAL CANDIDATE:  I’m talking about John

McCain’s economic policies.  I said this is more of the same.  You can put lipstick on a pig, but it’s still a pig. 

GREGORY (voice-over):  The McCain campaign is now accusing Obama of gender insensitivity.  But Obama stood by his words today in battleground Virginia. 

OBAMA:  I mean, this whole thing about lipstick, nobody actually believes that these folks are offended.  I mean, think about it.  These are the Republicans who spent a whole bunch of time getting all huffy about, why are you being all politically incorrect? 

GREGORY:  The question tonight, how does Obama fight back and keep this race Obama versus McCain, not Obama versus Palin? 

And meet me in St. Louis.  Senator Joe Biden predicts Governor Sarah Palin will try to make it personal during the vice presidential debate at Washington University in St. Louis next month.  We’ll talk to the Democratic governor of Michigan, Jennifer Granholm, who will prep Biden for his big showdown. 

Also, the states of the race.  Obama’s battleground guru Steve Hildebrand joins us with an inside look into Obama’s new strategy state by state. 

Plus, reading their lips.  Who is telling the truth on taxes?  CNBC’s Erin Burnett  cuts through the talk on the trail. 

Later, a moderator from Sarah Palin’s 2006 gubernatorial debate, Larry Persily.  He says he’s separated the facts from fiction on Palin, McCain’s newest weapon. 

All this and more in the RACE FOR THE WHITE HOUSE.

(END VIDEOTAPE)

GREGORY:  Fifty-five days to go in the race for the White House. 

Welcome to the program.  I’m David Gregory. 

We start with the headlines.  Mine tonight, “The Palin Phenomenon.”

Barack Obama has been campaigning for exactly 19 months.  Governor Sarah Palin has been on the trail for less than three weeks.  And since her surprise debut, Palin has shaken up this race, knocking Obama off message and locking him in a battle over what was originally his message of change. 

(BEGIN VIDEO CLIP)

GOV. SARAH PALIN (R-AK), VICE PRESIDENTIAL CANDIDATE:  In politics,

there are some candidates who use change to promote their careers.  And then there are others like John McCain who use their careers to promote change. 

(END VIDEO CLIP)

GREGORY:  And she’s changing the battleground map, sending Missouri, a tossup, into the lean McCain column.  Plus, she’s forcing Obama to pull resources out of states like Georgia that the Obama campaign was hoping to make competitive this year. 

The question tonight, is her stock only going up from here or will the novelty wear off?  It’s an important question with the race now in a dead heat.  The Palin factor has been especially helpful to the McCain/Palin ticket with women, gaining 10 points in the past month, according to the latest NBC News/”Wall Street Journal” poll. 

Michigan Governor, Democrat, Jennifer Granholm will be prepping Senator Biden for his crucial debate with Governor Palin, and she joins me one-on-one now from East Lansing. 

Governor Granholm, welcome to the program.  Thanks for being here. 

GOV. JENNIFER GRANOLM (D), MICHIGAN:  You bet.  Thanks for having me

on. 

GREGORY:  The straight-ahead question is, has Governor Palin single-handedly evened out this race? 

GRANHOLM:  I don’t think so.  I don’t think people know her or who she is.  I think that what people care about—and I just speak to, David, as the governor of Michigan, which is the state with the most challenged economy in the nation. 

Honestly, since George Bush became president, for us, we will have lost 400,000 manufacturing jobs in our state because we haven’t had somebody in the White House who has stood up for manufacturers, who has stood up for fair trade.  Those are the things that people care about in Michigan—am I going to have somebody in the White House who cares about me on Main Street? 

They don’t know Sarah Palin yet.  You can always project your hopes on to somebody that you don’t know yet.  But the bottom line is that she and McCain are the same as George Bush in terms of their policies.  And it’s the policies that people care about. 

GREGORY:  Well, the public may not know her a great deal, but it’s going to be your job to get to know her very well if you’re going to be preparing Senator Biden for the debate.  As you work to get in character, as it were, what do you find that’s most potent about Governor Palin? 

GRANHOLM:  Potent in terms of a vulnerability?  I would say that she is...

GREGORY:  No, no, no.  The question is, what do you think is her strength that you’re going to be sparring with Senator Biden?  You have got to be analyzing her strengths and weaknesses. 

GRANHOLM:  Yes, I mean, that is right.  We are going to analyze strengths and weaknesses, but from my perspective, I was probably chosen to be able to do this because I am the only other woman governor who has got kids at home and can relate to what real people are feeling and experiencing.  And I think that’s one of the reasons why Governor Palin has been attractive, because she is a real person and she appears to have real person’s issues. 

But I can tell you, David, that real people care about jobs in Michigan.  They care about health care.  And those are the issues that I think everyday citizens are going to want to know—what are you going to do for me, for my pocketbook, for my family? 

GREGORY:  Right.  Well, it’s interesting you bring up Michigan, where things stand.  Let’s look at where the race stands now in your state.

The latest poll from “The Detroit News” has it as a dead heat, Obama, 43 percent, McCain at 41 percent, certainly well within the margin of error.  You talk about joblessness in Michigan, 8.5 percent, almost 2.5 percent higher than the national average. 

You talked about the blame being with George Bush.  You’ve been in office for six years.  The state is effectively controlled by Democrats both in the state house and in Congress as well when you think of the Senate leadership. 

Do you think it’s going to make it difficult for Senator Obama to prevail there given your poor political standing? 

GRANHOLM:  The Michigan economy has been tied for one hundred years to the automotive industry.  When gas is $4 a gallon, and when globalization hits us like a ton of bricks without having somebody in the White House who is negotiating fair trade agreements, people in Michigan have seen their manufacturing jobs go on a slow boat to China, on the Internet to India, on a fast track to Mexico. 

We know that when the auto industry is challenged, we’re challenged.  And this is why having a president with a manufacturing policy, who will stand up for manufacturers, is important for a state like Michigan.  And having a president who will help us to diversify our auto industry, making sure that we can build the cars that you can plug in, the plug-in electric vehicles, making sure we have got the biofuels, having that $150 billion that Senator Obama wants to put into renewable and alternative energy, that’s a game-changer for a state like Michigan. 

You can create jobs in a whole new sector.  But when you’ve got somebody in the White House who is not standing up for us on trade, who is allowing these jobs to go to trading partners who aren’t held to the same standards, for us that means job losses.  And this is why for Michigan, change is so important. 

GREGORY:  But clearly, the Obama campaign is worried about Michigan, a state that Senator Kerry carried in 2004. 

GRANHOLM:  True.

GREGORY:  One of Senator Obama’s foreign policy advisers, Susan Rice, was in Michigan just yesterday and had this to say about the importance of winning your state: “Whoever wins Michigan is probably going to win this election.  If we don’t win Michigan, it is going to be hard to put together 270 electoral votes.”

As you know, Governor, Senator Obama has not spent very much time in Michigan.  He didn’t campaign there during the primaries.  You have a 37 percent approval rating, according to the latest poll.  The economy is in trouble, which I understand could cut both ways. 

But what are the biggest challenges do you think for Obama now?  What does he have to do to keep Michigan in the column of the Democrats? 

GRANHOLM:  I think he and Senator Biden have to be here.  People have to see him, hear him, feel him, understand that he understands where Michigan is coming from. 

We have been—we are the poster child for this global shift in manufacturing jobs.  So they need to be here, Senator Obama and Senator Biden.  They need to feel our pain and understand how this is—not one state can affect policy, one state alone can’t affect globalization.  But what we can do is have a partner in the White House that will have policy that will help everyday citizens here at home. 

GREGORY:  As you know, there’s also political problems in the mayor’s office in Detroit.  A group called Freedom’s Defense Fund is running this ad in Macomb County, Michigan, linking Obama to indicted former Detroit mayor Kwame Kilpatrick. 

Let’s watch this. 

(BEGIN VIDEO CLIP)

OBAMA:  I want to, first of all, acknowledge your great mayor, Kwame Kilpatrick.  And he is a leader not just here in Detroit, not just Michigan, but all across the country.  People look to him. 

We know that he is going to be doing astounding things for many years to come.  And I’m grateful to call him a friend and a colleague.  I’m looking forward to a lengthy collaboration. 

(END VIDEO CLIP)

GREGORY:  Governor, the question...

GRANHOLM:  That is incredible to me.  Yes, this...

GREGORY:  Let me just—hold on.  Let me just ask my question, which is, the ethics problems in the mayor’s office in Detroit, has it created a racially divisive atmosphere that could hurt Senator Obama in the Detroit suburbs, which you know well, including Macomb County?  This, of course, the historic home of those blue collar Reagan Democrats. 

GRANHOLM:  This is exactly what they want to do.  It’s to create a divisive atmosphere. 

The mayor is no longer the mayor.  That clip was taken a year and a half ago, before any of this came up.  And the fact that it is being run in a predominantly White suburb tells you that there is an explicit effort to try to divide people by race.

It is a cynical and wrong attack.  It’s the same kind of diversion that they’re trying to create with this “lipstick on a pig” thing, or with the—you know, the other attacks that they’re making.

In Michigan, in Macomb County, people care about jobs.  They want to know, are you going to be a champion for us?

GREGORY:  Right.

GRANHOLM:  And because McCain and Palin are not talking about that, because they’ve got eight years of the Bush administration that they want to be able to run from, but they don’t have new policies themselves to be able to stand up for Michigan people, they create all these diversions.  And that’s another one of them.

GREGORY:  But as you know, Senator McCain won the primary in 2000, came close in 2008, just in this cycle.  He’s going to be formidable. 

GRANHOLM:  Yes, there’s no doubt.  This is going to be a tough race in Michigan.  And I believe strongly that the candidate who comes here and talks about what they’re going to do for everyday citizens on foreclosure, what are they going to do to help real people, those are—that’s the candidate that is going to win Michigan. 

But it’s not going to be a victory that is easy.  It is going to be a hard-fought victory.  And that’s why these candidates, especially Senator Obama, Senator Biden, have got to be here. 

GREGORY:  Governor Granholm, thank you very much for your views. 

GRANHOLM:  You bet. 

GREGORY:  Coming next, more on this lipstick issue.  It takes center stage on the campaign trail. 

And has Obama been knocked off his game more generally?  Why one columnist says the Democratic nominee needs to start slamming some phones - - when THE RACE returns. 

(COMMERCIAL BREAK)

GREGORY:  We are back now on RACE FOR THE WHITE HOUSE, going inside

the war room with our dream team panel: Michelle Laxalt, Republican strategist; Lawrence O’Donnell, MSNBC political analyst; and Michael Smerconish, Philadelphia radio talk show host and a columnist for both “The Philadelphia Inquirer” and “The Philadelphia Daily News.”

Thomas Friedman of “The New York Times” wrote this morning that Obama has gone from cool to cold and may have lost the gut connection that he once had with voters.  And he wrote this: “Somebody needs to tell Obama that if he wants the chance to calmly answer the phone at 3:00 a.m. in the White House, he is going to need to start slamming down some phones at 3:00 p.m. along the campaign trail.  I like much of what he has to say, especially about energy, but I don’t think people are feeling it in their guts, and I am a big believer that voters don’t listen through their ears.  They listen through their stomachs.”. 

Lawrence O’Donnell, I think he’s on to something here.  What people are feeling right now on the campaign trail is Sarah Palin.  Are they feeling Barack Obama? 

LAWRENCE O’DONNELL, MSNBC POLITICAL ANALSYT:  Well, you know, once you

get into acting criticism of political candidates, you’re in a hopeless territory.  They all do their best.  You’re stuck—really, you’re stuck with the performer that showed up to campaign in the first place. 

Sarah Palin has a great touch with the teleprompter, a great touch with speeches.  She seems quick-witted. 

Barack Obama is an inspirational big speechmaker.  He has a different style when he is in the high school gymnasium taking questions. 

It’s very, very difficult to change their styles.  If Tom Friedman’s contribution to the Obama campaign is, could you please change your campaigning style?  I’m afraid that’s a couple years too late. 

GREGORY:  Michelle, is this a big real issue?  Even Obama advisers will admit that one of their struggles is that they say Obama is more cerebral than he is emotional, and there is a time for some real emotion on the campaign trail. 

MICHELLE LAXALT, REPUBLICAN STRATEGIST:  I agree with much of what Mr. Friedman had to write.  The most important thing for Senator Obama to do now is to be himself. 

And when I look at the footage which has been beaten and beaten and beaten to death about this ridiculous “lipstick” crack from last night, he delivered it in a town hall meeting which is not his comfort zone.  And he appeared to be very physically exhausted last night. 

So, my first advice to his campaign is, get your candidate some rest.  He is not fresh.  His vice presidential opponent on the other side has only been on the trail for a few days and has yet to give an interview with a national media person.  That will happen tomorrow for the very first time. 

So he needs to get some rest. 

GREGORY:  Right. 

But you know, here’s my question, Smerc, because I struggle with this myself.  A lot of people say, well, does Obama really connect to voters?  I guess it’s the question, is he connecting to the right voters that he needs -- Independent, undecided voters?  Well, how can you raise the connection question when you see the kind of crowds that he draws, the kind of enthusiasm he inspires?  How do you reconcile those two observations? 

MICHAEL SMERCONISH, RADIO TALK SHOW HOST:  He certainly has been

connecting.  But I agree with Michelle that all of a sudden, the air is being let out of those tires. 

This morning, I had an interesting experience in that I was on the radio, and “The Today Show” was playing in the background, but the sound was muted.  So all that I could witness was the body language from both Senator Obama and then McCain and Palin out on the stump together.  And what a dramatic difference it was. 

But here’s my explanation.  I don’t know that he’s physically tired.  I don’t think the Obama campaign has yet determined how to deal with Sarah Palin.  And rather than the one-liners, I think they ought to deal with her substantively based on her record in Alaska. 

GREGORY:  Moving on...

LAXALT:  I think that’s an important point. 

GREGORY:  Since adding Sarah Palin to this ticket, McCain has been driving the narrative and the talking points of the day.  Our own political blog, the best in the business, “First Read,” MSNBC’s “First Read,” notes this spells bad news for Obama, and this is the point they make...

“Any day the campaign is not about Bush, not about the economy, not about the fundamentals of this environment that make this an election favoring the Democrats is a good day for the McCain campaign.”

Lawrence, there has been criticism from Republicans of Obama saying, what is he doing attacking Sarah Palin?  Do you think they found their voice on this yet? 

O’DONNELL:  No, I don’t think they have.  And I think Obama made a big strategic mistake by giving us additional footage about this lipstick on a pig thing, as he did today.  Saying more about it was a big mistake. 

If we were stuck with what Obama said originally, and nothing else, I don’t think there is a viewer out there who would hold that against Obama.  He’s extended the story a little bit. 

It’s also—I think when we look back on it, this will be the day.  On the eve of the anniversary of September 11th, the most serious day in our most recent history, this will be the day when the American news media sunk to its absolute lowest point in its obsessive attention to this thing, which again, Obama should not have helped us with that additional video. 

GREGORY:  Do you think there is a larger point here about what he should be focused on, what both candidates should be focused on?  And that is the economy. 

And Lawrence, I ask you to reach back and think about the ‘92 campaign and contrast candidate Bill Clinton to candidate Barack Obama in terms of energy and ownership of the economy as an issue. 

O’DONNELL:  Oh, absolutely, they should.  Now, one of the struggles here is it becomes a tax argument very quickly.  And the Democrats are always gun shy when they are on the tax increase side in a campaign against another camp, the Republican, who is just talking tax cuts, tax cuts all day. 

So I think that—I don’t think, David, they’ve figured out what their best angle is on their tax argument, which is mostly a defensive argument so far.  And I think that is why they’re having trouble stepping in a full-throated way into the economy. 

GREGORY:  Right.

And the question for you, Michelle, is, has McCain done any better in owning the economic argument when his fundamental economic pitch and his own acceptance speech at the convention was only about tax cuts? 

LAXALT:  Absolutely not.  It’s stunning to me to hear Mr. O’Donnell speak about candidate Obama being on the defensive when it comes to the economy. 

If he is running against a party that has held party—held power in the White House for two consecutive terms where we have a mortgage crisis, we have soldiers in Iraq, an unending war, we have mortgage industry being bailed out by the American taxpayers, we have kooks all over the world who are sizing us up for a hit, it is stunning to me that he would be in a defensive mode. 

He has to get back on his own game and Senator McCain doesn’t need to do anything at this point because they have achieved the unbelievable, and that is, they have inoculated the American public from anything negative that will come out as a result of any research being conducted in Alaska on Governor Palin’s record as governor.  Those are relevant issues to speak to.  The American public have only known her for an hour more than John McCain did. 

GREGORY:  Got to take a break here. 

Coming next, the Bush administration steps up the hunt for Osama bin Laden.  Could it yield an October surprise?  It is on THE RACE’s radar tonight, and we’ll tell you about it right after this. 

(COMMERCIAL BREAK)

GREGORY:  We are back now with a look at what else is on THE RACE’s radar today. 

Stepping up the hunt for Osama bin Laden, “The Washington Post” reports today the U.S. is ramping up the use of unmanned predator drones in the mountains along the Pakistan/Afghanistan border where bin Laden is believed to be hiding.  The U.S. has already launched 11 predator strikes in the region this year, compared to just three last year. 

The Post reports that efforts up to now have been lagging.  The CIA disbanded its special unit dedicated to tracking bin Laden because they believed him to be more of a symbolic figure.  Security officials now say that assessment was wrong, that bin Laden is still al Qaeda’s strategic mastermind, even if he is staying out of sight. 

Lawrence, the capture or attempt to capture bin Laden is a lot bigger than politics.  It doesn’t mean that it wouldn’t be front and center in politics, especially if it became some kind of October surprise. 

O’DONNELL:  Well, I don’t know why it has to be an October surprise, David.  We had the chairman of the Joint Chiefs testify in the House today that, after—here we’ve been in Afghanistan for seven years, and he said he does not think we are winning. 

And here we have news the threat assessment of Osama bin Laden’s role was wrong, and neither one of those elements are part of the presidential campaign today.  Neither candidate is dealing with those issues that have erupted today, and no one in the press is trying to force either one of these candidates to say, what do you think about the chairman of the Joint Chiefs saying we’re not winning in Afghanistan? 

I mean, the inability to link what’s happening in the real world to our presidential campaign, I don’t think we’ve ever seen a gap that big before. 

GREGORY:  All right.  We’ve got to take another break here.  A short segment.  We’re going to come back. 

McCain says Obama will raise your taxes.  Obama says he will cut them. 

So who’s telling the truth?

CNBC’s Erin Burnett and John Harwood are going to break it down next, what you need to know about key economic policy, when THE RACE returns. 

(COMMERCIAL BREAK)

GREGORY:  Hard times; the economy is the number one issue on voters’ minds.  But which candidate will really help thicken the wallets of the middle class?  Plus, Governor Palin’s leadership style; I’m going to go in depth with a veteran Alaska journalist who covered her, worked for her, is now criticizing. 

Welcome back to RACE FOR THE WHITE HOUSE.  I’m David Gregory.  Time for the back half.  Our focus, the economy, rising gas prices, climbing food costs, the mortgage crisis.  It has all added up to a major topic this political talk this season.  Our latest NBC News/”Wall Street Journal” polls shows that when voters were asked about the most important issue affecting their vote, look at the number, the economy topped the list, that and domestic issues; 41 percent of Americans focus on that issue.  Here we are, the eve of the 7th anniversary of 9/11. 

This shows you where the focus is in this campaign.  What does it mean for those candidates?  Joining us now, John Harwood, cNBC’s chief Washington correspondent and political writer for the “New York Times,” and Erin Burnett, host of “Street Signs” and co-host of “Squawk on The Street,” both on cNBC.  Welcome to both of you.

(CROSS TALK)

GREGORY:  So the candidates know the economy is on the minds of voters.  The McCain campaign put out an ad saying that voters will see tax hike if Senator Obama is elected.  Here’s the attack and Obama’s response.  Watch. 

(BEGIN VIDEO CLIP)

UNIDENTIFIED FEMALE:  Life in the spotlight must be grand.  For the rest of us, times are tough.  Obama voted to raise taxes on people making just 42,000 dollars.  He promises more taxes on small business, seniors, your life savings, your family.  Painful taxes, hard choices for your budget, not ready to lead.  That’s the real Obama. 

OBAMA:  He leaves 100 million people without a dime of tax relief.  And he has the nerve to run around showing ads saying I’m going to raise taxes.  Let me tell you something.  My plan cuts taxes for 95 percent of America’s families.  You will get a tax cut under the Obama administration. 

(END VIDEO CLIP)

GREGORY:  John, in just a second, I want to ask you what the truth is behind these ads and their positions.  Erin Burnett, first to you.  The polling, 41 percent put the domestic issues and the economy at the top of the issues.  What is driving that concern? 

ERIN BURNETT, CNBC ANCHOR:  It’s amazing, David, when people are concerned about their pocket books, that means they’re going to vote on taxes and money.  It is always that way.  Remember, it’s the economy, stupid, back from the Clinton years.  And that’s what we’re seeing again.  People are worried about their own financial situation.  That’s why you’re seeing that poll. 

You can see the jobs numbers, David.  They’re not as bad as in some recessions, but they’re not great.  And incomes haven’t gone anywhere in the past seven years, while the cost for health care, for food, for energy, for education, all of those have gone up.  What that adds up to is economic discontent.  That’s rally the bottom line. 

GREGORY:  I’m going to posit something here, and you tell me if this is fair or not.  On the one hand, you have individuals who are going through the difficulties of high gas prices, paying for college tuition, losing jobs, maybe having their home value plummet, and maybe they’re over-leveraged because they borrowed off the home equity on their home.  On another level, we have all this news out of the financial services industry, and a real sense of malaise.  Frankly, even at the highest levels of the economy, not everybody understands how bad it going to get. 

BURNETT:  I think that’s a really great point.  In a sense, it is a perfect storm.  There is a lot of fear, because there is so much uncertainty.  You can certainly see it on Wall Street every single day.  David, we talk to these CEOs of all the big banks, and to a T, all of them would say they don’t really know whether things are going to will get worse or going to get better.  All they have is hope.  And if that’s the best they can say, how do you think the regular person on the street feels when they’re hearing about bank failures every Friday night? 

GREGORY:  John Harwood, lets talk taxes now.  We just played those two ads.  The rap against Obama is that he is going to raise taxes.  The response from Senator Obama.  What is the truth here? 

JOHN HARWOOD, “THE NEW YORK TIMES”:  Well, David, if the McCain campaign says Barack Obama is going to raise taxes on some people, they’re telling the truth and they’re exactly right.  If they say that Barack Obama is going to raise taxes on everybody, that dog won’t hunt.  And let me just say that is correct particular cliche was not directed at John McCain, Sarah Palin or Erin Burnett. 

BURNETT:  You have to be careful these days. 

HARWOOD:  Exactly.  Look, actually, Barack Obama is putting a significant amount of cash on the table for those blue collar voters.  It is a fair question to say, how will he pay for it?  But certainly, compared to John McCain, he is offering a lot more in direct economic benefits for those swing voters in Ohio, Michigan, Pennsylvania. 

GREGORY:  So, John, take me through the bullet points then on Obama and then Erin will do the same on McCain. 

HARWOOD:  The biggest one, David, is the Making Work Pay Tax Credit, 500 per worker, 1,000 for a two-worker couple.  This is, in essence, an off-set against your pay roll tax, which everybody pays.  So that’s one substantial benefit.  Secondly, we’re talking about eliminating income taxes for senior citizens who make less than 50,000 dollars a year.  Seniors are a big target constituency.  Obama hasn’t been doing all that well there. 

The way he’d pay for it, among other things, is to raise taxes on those over 250,000 dollars.  That is the people who benefited under President Bush’s tax cuts, as other people have.  And he would also raise taxes on capital gains and dividends.  So investments and the affluent are how he would pay for those tax cuts.  But a lot of people would get them. 

GREGORY:  Erin, take us through John McCain’s tax pitch. 

BURNETT:  All right, here, we broke this down to three as well, David, just to make it—these are the things, it seem to me, to be the most important out of John McCain’s proposal.  The alternative minimum tax, something that many Americans abhor.  He says he would repeal it.  The key thing in John McCain’s tax plan, though, I believe, is his corporate tax cut.  He wants to cut that from 35 to 25 percent.  He says, look, if corporations pay less in tax, they’re going to use some of that tax savings to hire people and perhaps pay them more.  That’s the argument from the McCain camp. 

Last but not least, keeping the dividend and capital gain taxes at 15 percent.  We know Obama has indicated he would raise that to 20 percent or more.  So that’s the real difference.  The way I see it, you think about it this way, give 100 billion dollars to Barack Obama and John McCain.  Barack Obama might spend that on increasing health care coverage.  John McCain would probably spend that on cutting corporate taxes.  It is really what you think is the better way to stimulate the economy.  Two very different ways of looking at it. 

GREGORY:  We talk about federal bail outs of Fannie Mae and Freddie

Mac.  We’ve see in it the banking sector as well.  As you just alluded to,

in the financial services industry, there is not a real sense of where the

bottom is, in terms of all these credit losses, how much liquidity in the

market was paid out in the sub prime loan market.  The chickens have not

yet come host to roost completely on all of this.  What does that mean to -

-

HARWOOD:  Who are you talking about with those chickens, David? 

GREGORY:  I know. 

BURNETT:  I know.  You got stop with the animal references. 

GREGORY:  No more, no more.  Erin, where does it end? 

BURNETT:  Look, the latest that we’re hearing now, David, is that we can start to see the beginning of a recovery/stabilization by the end of next year.  You’re thinking, what does stabilization mean?  Well, stabilization likely means home prices stop falling dramatically.  The rate of declines in home prices in this country is starting to slow down.  so prices are still falling, but not by as much as they were before.  You can call that a little bit of an improvement.  Until we start seeing home prices stop dropping, most executives, most members of the Federal Reserve would say, you are not going to see this economy recover. 

For most people, their home is their most significant asset.  It is the crux of the problem. 

GREGORY:  All right.  When we talked about the tax plans, the economics overall, it is a question of how they’re all going to play with the voters.  John, your former colleague at the “Wall Street Journal,” in his column, Gerry Seib argued that Senator McCain’s plan may not be catchy enough to hold voters’ attention.  This is how he put it, “John McCain has a problem.  His pitch to the middle class—my policies will produce a better economy, which in turn will produce lasting jobs, which in turn will help you, is a lot harder to sell than the pitch of Senator Obama.  The Obama message to the middle class is simply I’ll give you a tax cut and a health plan.” 

Is that more effective?

HARWOOD:  Look, if Barack Obama can succeed in getting voters to focus narrowly on their own economic circumstances and what either candidate will do for them, yes, Gerry’s exactly right.  Barack Obama will sell that plan.  But it is not entirely clear you can do that for a couple reason.  One, there is a credibility issue.  People have to be satisfied that Barack Obama could deliver the benefits that he’s promising to deliver. 

And secondly, there is a broader issue about who they’re comfortable with voting for president.  In our poll, the NBC/”Wall Street Journal” we showed a plurality of voters saying Barack Obama is the riskier choice for president.  That’s not only about national security.  People have to get comfortable with him as the steward of the economy. 

If they see John McCain as somehow safer, even if the economy is bad, that’s going to be good for John McCain.  Barack Obama still has the chance because the desire for change is so strong.  If he can communicate that message more effectively to drive the election on that issue. 

BURNETT:  David, I think a really fascinating point, from what John was talking about, the reality of this is that both these candidates are going to cut taxes for the vast majority of Americans.  It is really who is  going to get the big tax cut.  For John McCain, it goes higher up the income scale.  For Barack Obama, it goes lower down the income scale.  It is interesting how easily it can be to make this about tax.  Where, in many ways, while they have a different focus, the bottom line is similar.  It’s going to be tax cuts. 

It’s the other differences on their tax plans, perhaps, or their economic plans that are much more significant, and really aren’t getting a lot of coverage across Main Street, America. 

HARWOOD:  David, one other thing we got to keep in mind is that culture still plays a big role in this electric.  That’s one of the things that’s come into sharper relief since Sarah Palin has been selected.  As much as Barack Obama might like to make this election about the economy, he has to vie with the values issues, the cultural issues at the same time. 

BURNETT:  That’s a great point. 

GREGORY:  If the cultural issues are predominant, we could see another 50/50 election like we did in 2000. 

HARWOOD:  Bingo. 

GREGORY:  Thanks to both of you very much, Erin Burnett and John Harwood, really appreciate you being here. 

Coming up next, a look inside Governor Palin’s state house.  What is it like to work along side her?  What kind of leader is she, a decision maker?  How does she make decisions?  I’ll talk to a veteran Alaska journalist for the governor and now is sharply criticizing her when we return. 

(COMMERCIAL BREAK)

GREGORY:  Back on RACE FOR THE WHITE HOUSE.  What makes Sarah Palin so

appealing?  My next guest questioned Palin in the 2006 Alaska gubernatorial debate, left his job as a journalist to work for her in the governor’s office in 2007.  When he joined her, Palin praised him, saying, quote, “Larry has excellent qualifications, knowledge of the issues, experience in the public and private sectors, and analytic and advocacy skills.  I am pleased that he joined our team.” 

Joining me now, Larry Persily, former editorial page editor at “The Anchorage Daily News” and former associate director at the Alaska Governor’s Office.  Larry, thank you for being here. 

As I mentioned, you questioned then not governor, Sarah Palin in the 2006 gubernatorial debate.  We actually have a clip of you asking a question of what came to be known as the bridge to nowhere.  Watch. 

(BEGIN VIDEO CLIP)

LARRY PERSILY, FMR ADVISER TO GOV. PALIN:  Governor Murkowski is pushing this to be signed by December 1st.  Ms. Palin, you would take over 72 hours later.  Would you try to cancel that contract? 

PALIN:  You know, I wouldn’t.  I am not going to stand in the way of progress that our Congressional delegation, in the position of strength that they have right now, they’re making those efforts for the state of Alaska to build up our infrastructure. 

(END VIDEO CLIP)

GREGORY:  The question, as this has been debated now over the past couple days.  Is this something more than her changing her mind? 

PERSILY:  No, I think it is pretty simple.  Sarah Palin, when she ran for governor in 2006, supported both bridges to nowhere.  People need to remember that there is a bridge in Ketchikan, which she did cancel.  There’s also a billion-dollar bridge in Anchorage which she has not yet canceled.  She supported both in the 2006 campaign.  She has since change her mind and canceled Ketchikan projects.  But the state got to keep all the money. 

GREGORY:  Right, they got to keep the money.  Why did she change her mind?  Was it because the project got to be hot. 

PERSILY:  For a couple reasons.  I think after she got into office, she realized it was maybe more expensive than maybe she had believed, and as her staff briefed her and said this is really something we can’t afford to build, even with the federal money.  Also, she saw a political opportunity.  The Bridges to nowhere, as they were called, had become an embarrassment for Alaskans.  She saw a chance in 2007, after the Minneapolis Bridge collapsed, to score some political points nationwide and said Alaska is not going to do this bridge. 

GREGORY:  You’ve seen her up close.  A lot of Americans have yet to be able to do that besides the television screen.  What is she like? 

PERSILY:  She’s dynamic.  She’s engaging.  She talks in a language that people relate to.  They understand, she is not a politician in the traditional sense of talking down to the public with long, involved explanations about public policy.  She keeps it simple and she uses terms people understand.  She has a lot of energy.  She is an effective force. 

GREGORY:  Is she a gut player? 

PERSILY:  She has good political instinct.  When she gets on that stage, she knows what is going to sell and she knows to stick to the message. 

GREGORY:  What about how she make a decision? 

PERSILY:  I would say disengaged, in terms of state government is a lot more complex than I think she believed it is when she took over as governor.  So she makes decisions, I think, with shorter briefings, rather than long involved briefings books.  She makes them based on her gut, on her instinct, on a sense of politics rather than studying reams of material and coming out with an in depth comprehensive public policy decision. 

GREGORY:  You’ve also recently been rather critical of Governor Palin, your former boss.  A few comments you’ve made about her in the last couple of weeks include this, quote, “that she underestimated exponentially how much more complex state government is than the city of Wasilla.”  You were quoted as saying she was never deeply engaged.  And this, that “she’s not qualified.  She doesn’t have the judgment to be next in line to the president of the United States.” 

First off, why are you more critical of her now, having the position where you worked for her?  Do you have an ax to grind against her?   

PERSILY:  No, I left on good terms when I worked for her.  No one really asked me my opinion.  The world changed when she got nominated for vice president.  In my mind, when you’re looking at a vice president, they’re waiting to see if something happens to the president and they need to step in.  It is one thing to be governor of Alaska, which has billions of dollars in budget surplus because of high oil revenues.  It’s just not that tough of a job right now.  To be possible stand-in for the president of the United States, it’s a little hard to sit here and be quiet. 

GREGORY:  Is there anything in her record as a public official that would be disqualifying for office? 

PERSILY:  I don’t think disqualifying, I guess, in terms crimes, high misdemeanors or something, no.  But in term of the judgment, the experience, knowing the breadth of the issues that you’re going to have to deal with as possibly president of the United States, or at least vice president; I don’t think this is the job for her. 

GREGORY:  Thank you very much for being here.  Thank you for your views.  We appreciate it very much. 

Coming next, team Obama has set up to dramatically redraw the electoral map, setting up offices in Montana, Georgia and even Alaska.  Are they going back to basics when it comes to battle ground states?  Is Governor Palin changing their plans?  I’ll look at Obama’s electoral strategy with his top state by state guy, when he joins me here when THE RACE returns right after this.

(COMMERCIAL BREAK)

GREGORY:  Back now on RACE FOR THE WHITE HOUSE.  Both team headed to

battle ground Virginia today.  An estimated 23,000 people came out for McCain/Palin rally in Fairfax, Virginia.  That’s Northern Virginia, an area that’s been trending Democratic of late.  While Obama took questions from voters in Norfolk, Virginia, a traditional conservative stronghold.  Poaching on each others’ territory.  Virginia is obviously one of Obama’s top targets in this election cycle. 

But recent reports in the “Wall Street Journal” and the “Los Angeles Times” suggest the Obama campaign may be scaling back their electoral ambitions and putting more focus on traditional swing states like Ohio, where Senator Obama has been traveling a lot lately.  Joining me now, Obama’s deputy campaign manager, Steve Hildebrand, one of the biggest minds in this campaign.  Steve—

STEVE HILDEBRAND, OBAMA DEPUTY CAMPAIGN MANAGER:  I don’t know about

that.

GREGORY:  Good to have you here.  Is it true?  Have you had to trim a little bit and focus on a smaller group of states? 

HILDEBRAND:  No, not in the least.  We cut back in Alaska.  But that’s not going to be a surprise to anybody.  A lot of people were surprised we were there to start with.  We’re keeping our seven offices open.  We’re keeping staff there.  We’re not running ads right now in Georgia.  But John McCain hasn’t ran one ad there.  We spent three million dollars on television ads in that state. 

GREGORY:  Has Governor Palin changed the dynamic of the race in a way that affects what you do, state to state? 

HILDEBRAND:  Not in the least. 

GREGORY:  You don’t think she has some impact in rural parts of Ohio or Missouri? 

HILDEBRAND:  She is going to have an impact.  But we’re not going to change the kind of voters we’re going after, the kind of people.  Look, this race is still about change.  This race is still about whether or not John McCain can actually convince the American people that he is anything different than George Bush, and the same policies, 90 percent voting record with George Bush; that’s what he needs to explain to the American people.  Is he going to be different on the economy?  Is he going to be different on taxes?  Is he going to be different on subsidies for oil companies, tax breaks for oil companies or not? 

If he is not, this is not about Sarah Palin. 

GREGORY:  Let talk about the battle grounds here.  These are the latest maps from our political unit here at NBC News.  Right now, Obama has the slight lead over McCain in our tabulations, with 220 electoral votes favored for Obama, 200 favored for McCain.  NBC News has identified nine states as too close to call.  And let’s put them up there.  These are the toss up states, Colorado, Florida, Michigan, Nevada, New Mexico, New Hampshire, Ohio, Virginia, and Wisconsin.  That’s a total, Steve, of 110 electoral votes. 

What is interesting is that if you look at how those toss-up states voted back in 2004, they trended for Bush, Colorado, Florida, Nevada, New Mexico, Ohio, Virginia, 79 electoral votes.  Michigan, New Hampshire, Wisconsin, Kerry got 31.  So what I want to do is go through these states.  And very quickly, give me your sense of what is the issue there and how it looks for you.  Colorado is a state you’re looking at very closely. 

HILDEBRAND:  David, this is not going to be all that hard.  A lot of these states are going to decide the same thing.  It is going to be about high gas prices, mortgage crisis, taxes, whether or not we’re going to continue this war in Iraq or bring our soldiers home.  Those issues are critical to people in Colorado.  And I think if Barack Obama does the job that he needs to do in convincing the people that he is more capable of changing those issues than John McCain, we’re going to win Colorado. 

GREGORY:  You focused on—we talked to Governor Granholm this hour.  A tough circumstance there where she is not very popular.  You do have high unemployment there.  It is a state where McCain has obviously performed well.  And there could be some cultural issues as well that Barack Obama faces.  Are Michigan and New Hampshire two states you have to worry about John McCain picking off from the blue column? 

HILDEBRAND:  We’re going to worry about each of these states.  In Governor Granholm’s defense, she won reelection by a sizable margin with millions and millions dollars worth of negative ads against her.  She is fighting to try to get a better life for people in Michigan, and she’ll be a good partner with Barack Obama on that. 

GREGORY:  In New Hampshire, the independent vote, McCain’s history there—

HILDEBRAND:  We’ve never been behind in New Hampshire in this general election cycle.  It is tight.  It is close.  But it is also a state that has trended Democratic over the last couple years.  And, you know, of all the states in the country, New Hampshire wants change more than anybody.  That’s not John McCain. 

GREGORY:  The “Wall Street Journal” reported today something about where the reach actually is, and that despite the campaign’s rhetoric about broadening that map, post-convention, Obama is actually spending a lot of time in some traditional states.  Ohio, Pennsylvania, just two of them where he is spending a great deal of time. 

HILDEBRAND:  He is in New Mexico, Colorado, Nevada, Indiana.  He is all over the place, Florida, as is Senator Biden.  So there is no shrinkage of the map.  If anything, it is John McCain who—his resources are stretched.  And he is having great difficulty, frankly, keeping up with us.  We shouldn’t be ahead in Indiana.  We shouldn’t be ahead in Georgia, in some of these states. 

And he’s nowhere to be found.  No offices, no staff, no advertising. 

GREGORY:  Steve Hildebrand, thanks very much for being here from the Obama campaign.  We look forward to one of your counterparts at the McCain campaign, Mike DuHaime, who we’ve talked to, who will be on the program to talk about the state by state analysis as well coming soon.  We hope to have you back.  Steve, thanks very much. 

That does it for the program tonight, for RACE FOR THE WHITE HOUSE. 

I’m David Gregory.  Thanks to a great panel.  Thank you for watching. 

We’ll be back here tomorrow night, same time, 6:00 p.m. Eastern time on

MSNBC.  Watch “COUNTDOWN” with Keith Olbermann tonight at 8:00 Eastern

time.  And stay with MSNBC, “THE RACHEL MADDOW SHOW,” right here on MSNBC,

immediately follows “COUNTDOWN.”  And coming up right now is “HARDBALL.”

Content and programming copyright 2008 NBC.  ALL RIGHTS  RESERVED.  Transcription Copyright 2008 ASC LLC  ALL RIGHTS  RESERVED. No license is granted to the user of this material other than for research. User may not reproduce or redistribute the material except for user’s personal or internal use and, in such case, only one copy may be printed, nor shall user use any material for commercial purposes or in any fashion that may infringe upon NBC and ASC LLC’s copyright or other proprietary rights or interests in the material. This is not a legal transcript for purposes of litigation.

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