LEHRER: Good evening from the Magness Arena at the University of Denver in Denver, Colorado. I'm Jim Lehrer of the PBS NewsHour, and I welcome you to the first of the 2012 presidential debates between President Barack Obama, the Democratic nominee, and former Massachusetts Governor Mitt Romney, the Republican nominee.

This debate and the next three - two presidential, one vice- presidential - are sponsored by the Commission on Presidential Debates.

Tonight's 90 minutes will be about domestic issues, and will follow a format designed by the commission. There will be six roughly 15-minute segments, with two-minute answers for the first question, then open discussion for the remainder of each segment.

Thousands of people offered suggestions on segment subjects of questions via the Internet and other means, but I made the final selections, and for the record, they were not submitted for approval to the commission or the candidates.

The segments, as I announced in advance, will be three on the economy and one each on health care, the role of government, and governing, with an emphasis throughout on differences, specifics and choices. Both candidates will also have two-minute closing statements.

The audience here in the hall has promised to remain silent. No cheers, applause, boos, hisses - among other noisy distracting things - so we may all concentrate on what the candidates have to say. There is a noise exception right now, though, as we welcome President Obama and Governor Romney. 

Gentlemen, welcome to you both.

Let's start the economy, segment one. And let's begin with jobs. What are the major differences between the two of you about how you would go about creating new jobs? You have two minutes - each of you have two minutes to start. The coin toss has determined, Mr. President, you go first.

OBAMA2012: Well, thank you very much, Jim, for this opportunity. I want to thank Governor Romney and the University of Denver for your hospitality.

There are a lot of points that I want to make tonight, but the most important one is that 20 years ago I became the luckiest man on earth because Michelle Obama agreed to marry me. And so I just want to wish, Sweetie, you happy anniversary and let you know that a year from now, we will not be celebrating it in front of 40 million people.

You know, four years ago we went through the worst financial crisis since the Great Depression. Millions of jobs were lost. The auto industry was on the brink of collapse. The financial system had frozen up. And because of the resilience and the determination of the American people, we've begun to fight our way back.

Over the last 30 months, we've seen 5 million jobs in the private sector created. The auto industry has come roaring back and housing has begun to rise. But we all know that we've still got a lot of work to do. And so the question here tonight is not where we've been but where we're going. Governor Romney has a perspective that says if we cut taxes, skewed towards the wealthy, and roll back regulations that we'll be better off.

I've got a different view. I think we've got to invest in education and training. I think it's important for us to develop new sources of energy here in America, that we change our tax code to make sure that we're helping small businesses and companies that are investing here in the United States, that we take some of the money that we're saving as we wind down two wars to rebuild America and that we reduce our deficit in a balanced way that allows us to make these critical investments.

Now, it ultimately is going to be up to the voters, to you, which path we should take. Are we going to double down on the top-down economic policies that helped to get us into this mess, or do we embrace a new economic patriotism that says, America does best when the middle class does best? And I'm looking forward to having that debate.

LEHRER: Governor Romney, two minutes.

ROMNEY: Thank you, Jim. It's an honor to be here with you, and I appreciate the chance to be with the president. I am pleased to be at the University of Denver, appreciate their welcome and also the presidential commission on these debates.

And congratulations to you, Mr. President, on your anniversary. I'm sure this was the most romantic place you could imagine here - here with me, so I congratulations.

This is obviously a very tender topic. I've had the occasion over the last couple of years of meeting people across the country. I was in Dayton, Ohio, and a woman grabbed my arm, and she said, I've been out of work since May. Can you help me?

Ann yesterday was a rally in Denver, and a woman came up to her with a baby in her arms and said, Ann, my husband has had four jobs in three years, part-time jobs. He's lost his most recent job, and we've now just lost our home. Can you help us?

And the answer is yes, we can help, but it's going to take a different path, not the one we've been on, not the one the president describes as a top-down, cut taxes for the rich. That's not what I'm going to do.

My plan has five basic parts. One, get us energy independent, North American energy independent. That creates about four million jobs. Number two, open up more trade, particularly in Latin America; crack down on China if and when they cheat. Number three, make sure our people have the skills they need to succeed and the best schools in the world. We're far away from that now. Number four, get us to a balanced budget. Number five, champion small business.

It's small business that creates the jobs in America. And over the last four years small-business people have decided that America may not be the place to open a new business, because new business startups are down to a 30-year low. I know what it takes to get small business growing again, to hire people.

Now, I'm concerned that the path that we're on has just been unsuccessful. The president has a view very similar to the view he had when he ran four years ago, that a bigger government, spending more, taxing more, regulating more - if you will, trickle-down government would work. That's not the right answer for America. I'll restore the vitality that gets America working again.

Thank you.

LEHRER: Mr. President, please respond directly to what the governor just said about trickle-down - his trickle-down approach. He's - as he said yours is.

OBAMA2012: Well, let me talk specifically about what I think we need to do.

First, we've got to improve our education system. And we've made enormous progress drawing on ideas both from Democrats and Republicans that are already starting to show gains in some of the toughest to deal with schools. We've got a program called Race to the Top that has prompted reforms in 46 states around the country, raising standards, improving how we train teachers. So now I want to hire another hundred thousand new math and science teachers and create 2 million more slots in our community colleges so that people can get trained for the jobs that are out there right now. And I want to make sure that we keep tuition low for our young people.

When it comes to our tax code, Governor Romney and I both agree that our corporate tax rate is too high. So I want to lower it, particularly for manufacturing, taking it down to 25 percent. But I also want to close those loopholes that are giving incentives for companies that are shipping jobs overseas. I want to provide tax breaks for companies that are investing here in the United States.

On energy, Governor Romney and I, we both agree that we've got to boost American energy production.

And oil and natural gas production are higher than they've been in years. But I also believe that we've got to look at the energy source of the future, like wind and solar and biofuels, and make those investments.

So, all of this is possible. Now, in order for us to do it, we do have to close our deficit, and one of the things I'm sure we'll be discussing tonight is, how do we deal with our tax code, and how do we make sure that we are reducing spending in a responsible way, but also how do we have enough revenue to make those investments? And this is where there's a difference because Governor Romney's central economic plan calls for a $5 trillion tax cut, on top of the extension of the Bush tax cuts, so that's another $2 trillion, and $2 trillion in additional military spending that the military hasn't asked for. That's $8 trillion. How we pay for that, reduce the deficit and make the investments that we need to make without dumping those costs on the middle-class Americans I think is one of the central questions of this campaign.

LEHRER: Both of you have spoken about a lot of different things, and we're going to try to get through them in as specific a way as we possibly can.

But first, Governor Romney, do you have a question that you'd like to ask the president directly about something he just said?

ROMNEY: Well, sure. I'd like to clear up the record and go through it piece by piece. First of all, I don't have a $5 trillion tax cut. I don't have a tax cut of a scale that you're talking about. My view is that we ought to provide tax relief to people in the middle class. But I'm not going to reduce the share of taxes paid by high- income people. High-income people are doing just fine in this economy. They'll do fine whether you're president or I am.

The people who are having the hard time right now are middle- income Americans. Under the president's policies, middle-income Americans have been buried. They're - they're just being crushed. Middle-income Americans have seen their income come down by $4,300. This is a - this is a tax in and of itself. I'll call it the economy tax. It's been crushing. The same time, gasoline prices have doubled under the president, electric rates are up, food prices are up, health care costs have gone up by $2,500 a family.

Middle-income families are being crushed. And so the question is how to get them going again, and I've described it. It's energy and trade, the right kind of training programs, balancing our budget and helping small business. Those are the - the cornerstones of my plan.

But the president mentioned a couple of other ideas, and I'll just note: first, education. I agree, education is key, particularly the future of our economy. But our training programs right now, we got 47 of them housed in the federal government, reporting to eight different agencies. Overhead is overwhelming. We got to get those dollars back to the states and go to the workers so they can create their own pathways to getting the training they need for jobs that will really help them.

The second area: taxation. We agree; we ought to bring the tax rates down, and I do, both for corporations and for individuals. But in order for us not to lose revenue, have the government run out of money, I also lower deductions and credits and exemptions so that we keep taking in the same money when you also account for growth.

The third area: energy. Energy is critical, and the president pointed out correctly that production of oil and gas in the U.S. is up. But not due to his policies. In spite of his policies. Mr. President, all of the increase in natural gas and oil has happened on private land, not on government land. On government land, your administration has cut the number of permits and license in half. If I'm president, I'll double them. And also get the - the oil from offshore and Alaska. And I'll bring that pipeline in from Canada.

And by the way, I like coal. I'm going to make sure we continue to burn clean coal. People in the coal industry feel like it's getting crushed by your policies. I want to get America and North America energy independent, so we can create those jobs.

And finally, with regards to that tax cut, look, I'm not looking to cut massive taxes and to reduce the - the revenues going to the government. My - my number one principle is there'll be no tax cut that adds to the deficit.

I want to underline that - no tax cut that adds to the deficit. But I do want to reduce the burden being paid by middle-income Americans. And I - and to do that that also means that I cannot reduce the burden paid by high-income Americans. So any - any language to the contrary is simply not accurate.

LEHRER: Mr. President.

OBAMA2012: Well, I think - let's talk about taxes because I think it's instructive. Now, four years ago when I stood on this stage I said that I would cut taxes for middle-class families. And that's exactly what I did. We cut taxes for middle-class families by about $3,600. And the reason is because I believe we do best when the middle class is doing well.

And by giving them those tax cuts, they had a little more money in their pocket and so maybe they can buy a new car. They are certainly in a better position to weather the extraordinary recession that we went through. They can buy a computer for their kid who's going off to college, which means they're spending more money, businesses have more customers, businesses make more profits and then hire more workers.

Now, Governor Romney's proposal that he has been promoting for 18 months calls for a $5 trillion tax cut on top of $2 trillion of additional spending for our military. And he is saying that he is going to pay for it by closing loopholes and deductions. The problem is that he's been asked a - over a hundred times how you would close those deductions and loopholes and he hasn't been able to identify them.

But I'm going to make an important point here, Jim.

LEHRER: All right.

OBAMA2012: When you add up all the loopholes and deductions that upper income individuals can - are currently taking advantage of - if you take those all away - you don't come close to paying for $5 trillion in tax cuts and $2 trillion in additional military spending. And that's why independent studies looking at this said the only way to meet Governor Romney's pledge of not reducing the deficit - or - or - or not adding to the deficit, is by burdening middle-class families.

The average middle-class family with children would pay about $2,000 more. Now, that's not my analysis; that's the analysis of economists who have looked at this. And - and that kind of top - top-down economics, where folks at the top are doing well so the average person making 3 million bucks is getting a $250,000 tax break while middle- class families are burdened further, that's not what I believe is a recipe for economic growth.

LEHRER: All right. What is the difference?

ROMNEY: Well -

LEHRER: Let's just stay on taxes for -

ROMNEY: But I - but I - right, right.

LEHRER: OK. Yeah, just - let's just stay on taxes for a moment.

ROMNEY: Yeah. Well, but - but -

LEHRER: What is the difference?

ROMNEY: - virtually every - virtually everything he just said about my tax plan is inaccurate.

LEHRER: All right, go -

ROMNEY: So - so if - if the tax plan he described were a tax plan I was asked to support, I'd say absolutely not. I'm not looking for a $5 trillion tax cut. What I've said is I won't put in place a tax cut that adds to the deficit. That's part one. So there's no economist can say Mitt Romney's tax plan adds 5 trillion (dollars) if I say I will not add to the deficit with my tax plan.

Number two, I will not reduce the share paid by high-income individuals. I - I know that you and your running mate keep saying that, and I know it's a popular things to say with a lot of people, but it's just not the case. Look, I got five boys. I'm used to people saying something that's not always true, but just keep on repeating it and ultimately hoping I'll believe it - but that - that is not the case, all right? I will not reduce the taxes paid by high-income Americans.

And number three, I will not, under any circumstances, raise taxes on middle-income families. I will lower taxes on middle-income families. Now, you cite a study. There are six other studies that looked at the study you describe and say it's completely wrong. I saw a study that came out today that said you're going to raise taxes by 3(,000 dollars) to $4,000 on - on middle-income families. There are all these studies out there.

But let's get to the bottom line. That is, I want to bring down rates. I want to bring down the rates down, at the same time lower deductions and exemptions and credits and so forth so we keep getting the revenue we need.

And you think, well, then why lower the rates? And the reason is because small business pays that individual rate. Fifty-four percent of America's workers work in businesses that are taxed not at the corporate tax rate but at the individual tax rate. And if we lower that rate, they will be able to hire more people.

For me, this is about jobs.

LEHRER: All right. That's where we started.

ROMNEY: This is about getting jobs for the American people.

LEHRER: Yeah.

Do you challenge what the governor just said about his own plan?

OBAMA2012: Well, for 18 months he's been running on this tax plan. And now, five weeks before the election, he's saying that his big, bold idea is "never mind." And the fact is that if you are lowering the rates the way you describe, Governor, then it is not possible to come up with enough deductions and loopholes that only affect high-income individuals to avoid either raising the deficit or burdening the middle class. It's - it's math. It's arithmetic.

Now, Governor Romney and I do share a deep interest in encouraging small-business growth. So at the same time that my tax plan has already lowered taxes for 98 percent of families, I also lowered taxes for small businesses 18 times. And what I want to do is continue the tax rates - the tax cuts that we put into place for small businesses and families.

But I have said that for incomes over $250,000 a year that we should go back to the rates that we had when Bill Clinton was president, when we created 23 million new jobs, went from deficit to surplus and created a whole lot of millionaires to boot.

And the reason this is important is because by doing that, we can not only reduce the deficit, we can not only encourage job growth through small businesses, but we're also able to make the investments that are necessary in education or in energy.

And we do have a difference, though, when it comes to definitions of small business. Now, under - under my plan, 97 percent of small businesses would not see their income taxes go up. Governor Romney says, well, those top 3 percent, they're the job creators. They'd be burdened.

But under Governor Romney's definition, there are a whole bunch of millionaires and billionaires who are small businesses. Donald Trump is a small business. And I know Donald Trump doesn't like to think of himself as small anything, but - but that's how you define small businesses if you're getting business income. And that kind of approach, I believe, will not grow our economy because the only way to pay for it without either burdening the middle class or blowing up our deficit is to make drastic cuts in things like education, making sure that we are continuing to invest in basic science and research, all the things that are helping America grow. And I think that would be a mistake.

LEHRER: All right.

ROMNEY: Jim, let me just come back on that - on that point.

LEHRER: Just for the - just for the record -

ROMNEY: These small businesses we're talking about -

LEHRER: Excuse me. Just so everybody understands -

ROMNEY: Yeah.

LEHRER: - we're way over our first 15 minutes.

ROMNEY: It's fun, isn't it?

LEHRER: It's OK. It's great.

OBAMA2012: That's OK.

LEHRER: No problem. No, you don't have - you don't have a problem, I don't have a problem, because we're still on the economy, but we're going to come back to taxes and we're going to move on to the deficit and a lot of other things, too.

OK, but go ahead, sir.

ROMNEY: You bet.

Well, President, you're - Mr. President, you're absolutely right, which is that with regards to 97 percent of the businesses are not - not taxed at the 35 percent tax rate, they're taxed at a lower rate. But those businesses that are in the last 3 percent of businesses happen to employ half - half - of all of the people who work in small business. Those are the businesses that employ one quarter of all the workers in America. And your plan is take their tax rate from 35 percent to 40 percent.

Now, I talked to a guy who has a very small business. He's in the electronics business in - in St. Louis. He has four employees.

He said he and his son calculated how much they pay in taxes. Federal income tax, federal payroll tax, state income tax, state sales tax, state property tax, gasoline tax - it added up to well over 50 percent of what they earned.

And your plan is to take the tax rate on successful small businesses from 35 percent to 40 percent. The National Federation of Independent Businesses has said that will cost 700,000 jobs. I don't want to cost jobs. My priority is jobs. And so what I do is I bring down the tax rates, lower deductions and exemptions - the same idea behind Bowles-Simpson, by the way. Get the rates down, lower deductions and exemptions to create more jobs, because there's nothing better for getting us to a balanced budget than having more people working, earning more money, paying - more taxes. That's by far the most effective and efficient way to get this budget balanced.

OBAMA2012: Jim, I - you may want to move on to another topic, but I would just say this to the American people. If you believe that we can cut taxes by $5 trillion and add $2 trillion in additional spending that the military is not asking for - $7 trillion, just to give you a sense, over 10 years that's more than our entire defense budget - and you think that by closing loopholes and deductions for the well-to-do, somehow you will not end up picking up the tab, then Governor Romney's plan may work for you.

But I think math, common sense and our history shows us that's not a recipe for job growth.

Look, we've tried this - we've tried both approaches. The approach that Governor Romney's talking about is the same sales pitch that was made in 2001 and 2003. And we ended up with the slowest job growth in 50 years. We ended up moving from surplus to deficits. And it all culminated in the worst financial crisis since the Great Depression.

Bill Clinton tried the approach that I'm talking about. We created 23 million new jobs. We went from deficit to surplus, and businesses did very well.

So in some ways, we've got some data on which approach is more likely to create jobs and opportunity for Americans, and I believe that the economy works best when middle-class families are getting tax breaks so that they've got some money in their pockets and those of us who have done extraordinarily well because of this magnificent country that we live in, that we can afford to do a little bit more to make sure we're not blowing up the deficit.

ROMNEY: Jim, the president began this segment, so I think I get the last word, so I'm going to take it. All right? (Chuckles.)

LEHRER: Well, you're going to get the first word in the next segment.

ROMNEY: Well, but - but he gets the first word of that segment. I get the last word of that segment, I hope. Let me just make this comment.

OBAMA2012: He can - you can have it. He can -

ROMNEY: First of all -

LEHRER: That's not how it works.

ROMNEY: Let me - let me repeat - let me repeat what I said. I'm not in favor of a $5 trillion tax cut. That's not my plan. My plan is not to put in place any tax cut that will add to the deficit. That's point one. So you may keep referring to it as a $5 trillion tax cut, but that's not my plan.

OBAMA2012: OK.

ROMNEY: Number two, let's look at history. My plan is not like anything that's been tried before. My plan is to bring down rates but also bring down deductions and exemptions and credits at the same time so the revenue stays in, but that we bring down rates to get more people working. My priority is putting people back to work in America. They're suffering in this country. And we talk about evidence - look at the evidence of the last four years. It's absolutely extraordinary. We've got 23 million people out of work or stop looking for work in this country.

LEHRER: All right.

ROMNEY: It's just - it's - we've got - we got - when the president took office, 32 million people on food stamps; 47 million on food stamps today. Economic growth this year slower than last year, and last year slower than the year before. Going forward with the status quo is not going to cut it for the American people who are struggling today.

LEHRER: All right. Let's talk - we're still on the economy. This is, theoretically now, a second segment still on the economy, and specifically on what do about the federal deficit, the federal debt. And the question - you each have two minutes on this - and, Governor Romney you go first because the president went first on segment one. And the question is this: What are the differences between the two of you as to how you would go about tackling the deficit problem in this country?

ROMNEY: Well, good. I'm glad you raised that. And it's a - it's a critical issue. I think it's not just an economic issue. I think it's a moral issue. I think it's, frankly, not moral for my generation to keep spending massively more than we take in, knowing those burdens are going to be passed on to the next generation. And they're going to be paying the interest and the principle all their lives. And the amount of debt we're adding, at a trillion a year, is simply not moral.

So how do we deal with it? Well, mathematically there are - there are three ways that you can cut a deficit. One, of course, is to raise taxes. Number two is to cut spending. And number three is to grow the economy because if more people work in a growing economy they're paying taxes and you can get the job done that way.

The presidents would - president would prefer raising taxes. I understand. The problem with raising taxes is that it slows down the rate of growth and you could never quite get the job done. I want to lower spending and encourage economic growth at the same time.

What things would I cut from spending? Well, first of all, I will eliminate all programs by this test - if they don't pass it: Is the program so critical it's worth borrowing money from China to pay for it? And if not, I'll get rid of it. "Obamacare" is on my list. I apologize, Mr. President. I use that term with all respect.

OBAMA2012: I like it.

ROMNEY: Good. OK, good. So I'll get rid of that. I'm sorry, Jim. I'm going to stop the subsidy to PBS. I'm going to stop other things. I like PBS. I love Big Bird. I actually like you too. But I'm not going to - I'm not going to keep on spending money on things to borrow money from China to pay for it. That's number one.

Number two, I'll take programs that are currently good programs but I think could be run more efficiently at the state level and send them to state.

Number three, I'll make government more efficient, and to cut back the number of employees, combine some agencies and departments. My cutbacks will be done through attrition, by the way.

This is the approach we have to take to get America to a balanced budget. The president said he'd cut the deficit in half. Unfortunately, he doubled it. Trillion-dollar deficits for the last four years. The president's put it in place as much public debt - almost as much debt held by by the public as all prior presidents combined.

LEHRER: Mr. President. two minutes.

OBAMA2012: When I walked in the Oval Office, I had more than a trillion dollar deficit greeting me, and we know where it came from. Two wars that were paid for on a credit card. Two tax cuts that were not paid for, and a whole bunch of programs that were not paid for. And then a massive economic crisis.

And despite that, what we've said is, yes, we had to take some initial emergency measures to make sure we didn't slip into a Great Depression. But what we've also said is, let's make sure that we are cutting out those things that are not helping us grow.

So, 77 government programs - everything from aircrafts that the Air Force had ordered but weren't working very well. Eighteen government - 18 government programs for education that were well intentioned but weren't helping kids learn. We went after medical fraud in Medicare and Medicaid very aggressively - more aggressively than ever before, and have saved tens of billions of dollars. Fifty billion dollars of waste taken out of the system.

And I worked with Democrats and Republicans to cut a trillion dollars out of our discretionary domestic budget. That's the largest cut in the discretionary domestic budget since Dwight Eisenhower.

Now, we all know that we've got to do more. And so I've put forward a specific $4 trillion deficit-reduction plan.

It's on a website. You can look at all the numbers, what cuts we make and what revenue we raise.

And the way we do it is $2.50 for every cut, we ask for a dollar of additional revenue, paid for, as I indicated earlier, by asking those of us who have done very well in this country to contribute a little bit more to reduce the deficit.

And Governor Romney earlier mentioned the Bowles-Simpson commission. Well, that's how the commission - bipartisan commission that talked about how we should move forward suggested we have to do it - in a balanced way with some revenue and some spending cuts. And this is a major difference that Governor Romney and I have.

Let - let me just finish this point because you're looking for contrast. You know, when Governor Romney stood on a stage with other Republican candidates for the nomination, and he was asked, would you take $10 of spending cuts for just $1 of revenue, and he said no. Now, if you take such an unbalanced approach, then that means you are going to be gutting our investments in schools and education. It means that - Governor Romney talked about Medicaid and how we could send it back to the states, but effectively this means a 30 percent cut in the primary program we help for seniors who are in nursing homes, for kids who are with disabilities -

LEHRER: Mr. President, I'm sorry -

OBAMA2012: And that is not a right strategy for us to move forward.

LEHRER: Way over the two minutes.

OBAMA2012: Sorry.

LEHRER: Governor, what about Simpson-Bowles. Will you support Simpson-Bowles?

ROMNEY: Simpson-Bowles, the president should have grabbed that.

LEHRER: No, I mean do you support Simpson-Bowles?

ROMNEY: I have my own plan. It's not the same as Simpson- Bowles. But in my view, the president should have grabbed it. If you wanted to make some adjustments to it, take it, go to Congress, fight for it.

OBAMA2012: That's what we've done, made some adjustments to it; and we're putting it forward before Congress right now, a $4 trillion plan, a balanced

ROMNEY: But you've been - but you've been president four years. You've been president four years. You said you'd cut the deficit in half. It's now four years later. We still have trillion- dollar deficits.

The CBO says we'll have a trillion-dollar deficit each of the next four years. If you're re-elected, we'll get to a trillion-dollar debt. You have said before you'd cut the deficit in half. And this four - I love this idea of 4 trillion (dollars) in cuts. You've found $4 trillion of ways to reduce or to get closer to a balanced budget, except we still show trillion dollar deficits every year. That doesn't get the job done.

Let me come back and say, why is that I don't want to raise taxes? Why don't I want to raise taxes on people? And actually, you said it back in 2010. You said, look, I'm going to extend the tax policies that we have. Now, I'm not going to raise taxes on anyone because when the economy's growing slow like this, when we're in recession you shouldn't raise taxes on anyone.

Well, the economy is still growing slow. As a matter of fact, it's growing much more slowly now than when you made that statement. And so if you believe the same thing, you just don't want to raise taxes on people. And the reality is it's not just wealthy people - you mentioned Donald Trump - it's not just Donald Trump you're taxing; it's all those businesses that employ one-quarter of the workers in America. These small businesses that are taxed as individuals. You raise taxes and you kill jobs. That's why the National Federation of Independent Businesses said your plan will kill 700,000 jobs. I don't want to kill jobs in this environment.

Let me make one more point. And that's - and that -

LEHRER: Let's let him answer the taxes thing for a moment, OK?

ROMNEY: OK.

LEHRER: Mr. President.

OBAMA2012: Well, we've had this discussion before.

LEHRER: No, about the idea that in order to reduce the deficit there has to be revenue in addition to cuts.

OBAMA2012: There has to be revenue in addition to cuts. Now, Governor Romney has ruled out revenue. He's - he's ruled out revenue.

LEHRER: That's true, right?

ROMNEY: Absolutely.

OBAMA2012: OK, so -

LEHRER: Completely?

ROMNEY: I - look, the revenue I get is by more people working, getting higher pay, paying more taxes. That's how we get growth and how we balance the budget. But the idea of taxing people more, putting more people out of work - you'll never get there. You never balance the budget by raising taxes.

Spain - Spain spends 42 percent of their total economy on government. We're now spending 42 percent of our economy on government.

I don't want to go down the path to Spain. I want to go down the path of growth that puts Americans to work, with more money coming in because they're working.

LEHRER: Yeah.

But Mr. President, you're saying in order to get it - the job done, it's got to be balanced. You've got to have -

OBAMA2012: If we're serious, we've got to take a balanced, responsible approach. And by the way, this is not just when it comes to individual taxes.

Let's talk about corporate taxes. Now, I've identified areas where we can, right away, make a change that I believe would actually help the economy. The - the oil industry gets $4 billion a year in corporate welfare. Basically, they get deductions that those small businesses that Governor Romney refers to, they don't get. Now, does anybody think that ExxonMobil needs some extra money when they're making money every time you go to the pump? Why wouldn't we want to eliminate that?

Why wouldn't we eliminate tax breaks for corporate jets? My attitude is if you got a corporate jet, you can probably afford to pay full freight, not get a special break for it.

When it comes to corporate taxes, Governor Romney has said he wants to, in a revenue-neutral way, close loopholes, deductions - he hasn't identified which ones they are - but thereby bring down the corporate rate. Well, I want to do the same thing, but I've actually identified how we can do that.

And part of the way to do it is to not give tax breaks to companies that are shipping jobs overseas. Right now you can actually take a deduction for moving a plant overseas. I think most Americans would say that doesn't make sense. And all that raises revenue.

And so if we take a balanced approach, what that then allows us to do is also to help young people, the way we already have during my administration, make sure that they can afford to go to college. It means that the teacher that I met in Las Vegas, wonderful young lady, who describes to me - she's got 42 kids in her class.

The first two weeks, she's got them - some of them sitting on the floor until finally they get reassigned. They're using textbooks that are 10 years old. That is not a recipe for growth; that's not how America was built.

And so budgets reflect choices. Ultimately we're going to have to make some decisions. And if we're asking for no revenue, then that means that we've got to get rid of a whole bunch of stuff, and the magnitude of the tax cuts that you're talking about, Governor, would end up resulting in severe hardship for people, but more importantly, would not help us grow.

As I indicated before, when you talk about shifting Medicaid to states, we're talking about potentially a - a 30 - a 30 percent cut in Medicaid over time. Now, you know, that may not seem like a big deal when it just is - you know, numbers on a sheet of paper, but if we're talking about a family who's got an autistic kid and is depending on that Medicaid, that's a big problem. And governors are creative. There's no doubt about it. But they're not creative enough to make up for 30 percent of revenue on something like Medicaid. What ends up happening is some people end up not getting help.

ROMNEY: Jim, let's - we - we've gone on a lot of topics there, and - so I've got to take - it's going to take a minute to go from Medicaid to schools to -

LEHRER: Come back to Medicaid, here, yeah, yeah, right.

ROMNEY: - oil to tax breaks and companies overseas. So let's go through them one by one. First of all, the Department of Energy has said the tax break for oil companies is $2.8 billion a year. And it's actually an accounting treatment, as you know, that's been in place for a hundred years. Now -

OBAMA2012: It's time to end it.

ROMNEY: And - and in one year, you provided $90 billion in breaks to the green energy world. Now, I like green energy as well, but that's about 50 years' worth of what oil and gas receives, and you say Exxon and Mobil - actually, this $2.8 billion goes largely to small companies, to drilling operators and so forth.

But you know, if we get that tax rate from 35 percent down to 25 percent, why, that $2.8 billion is on the table. Of course it's on the table. That's probably not going to survive, you get that rate down to 25 percent.

But - but don't forget, you put $90 billion - like 50 years worth of breaks - into solar and wind, to - to Solyndra and Fisker and Tesla and Ener1. I mean, I - I had a friend who said, you don't just pick the winners and losers; you pick the losers. All right? So - so this is not - this is not the kind of policy you want to have if you want to get America energy-secure.

The second topic, which is you said you get a deduction for getting a plant overseas. Look, I've been in business for 25 years. I have no idea what you're talking about. I maybe need to get a new accountant.

LEHRER: Let's -

ROMNEY: But the - the idea that you get a break for shipping jobs overseas is simply not the case.

LEHRER: Let's have -

ROMNEY: What we do have right now is a setting -

LEHRER: Excuse me.

ROMNEY: - where I'd like to bring money from overseas back to this country.

And finally, Medicaid to states, I'm not quite sure where that came in, except this, which is, I would like to take the Medicaid dollars that go to states and say to a state, you're going to get what you got last year plus inflation - inflation - plus 1 percent. And then you're going to manage your care for your poor in the way you think best.

And I remember as a governor, when this idea was floated by Tommy Thompson, the governors, Republican and Democrats, said, please let us do that. We can care for our own poor in so much better and more effective a way than having the federal government tell us how to care for our poor.

So let states - one of the magnificent things about this country is the whole idea that states are the laboratories of democracy. Don't have the federal government tell everybody what kind of training programs they have to have and what kind of Medicaid they have to have. Let states do this.

And by the way, if a states get - gets in trouble, why, we could step in and see if we could find a way to help them. But -

LEHRER: Let's go.

ROMNEY: But - but the right - the right approach is one which relies on the brilliance -

LEHRER: Two seconds.

ROMNEY: - of our people and states, not the federal government.

LEHRER: Two seconds and we're going on, still on the economy on another - but another part of it.

OBAMA2012: OK.

LEHRER: All right? All right, this is this is segment three, the economy, entitlements.

First answer goes to you. It's two minutes. Mr. President, do you see a major difference between the two of you on Social Security?

OBAMA2012: You know, I suspect that on Social Security, we've got a somewhat similar position. Social Security is structurally sound. It's going to have to be tweaked the way it was by Ronald Reagan and Speaker - Democratic Speaker Tip O'Neill. But it is - the basic structure is sound. But - but I want to talk about the values behind Social Security and Medicare and then talk about Medicare, because that's the big driver -

LEHRER: Sure - it - you bet.

OBAMA2012: - of our deficits right now.

You know, my grandmother, some of you know, helped to raise me. My grandparents did. My grandfather died awhile back. My grandmother died three days before I was elected president. And she was fiercely independent. She worked her way up, only had a high school education, started as a secretary, ended up being the vice president of a local bank. And she ended up living alone by choice. And the reason she could be independent was because of Social Security and Medicare. She had worked all her life, put in this money and understood that there was a basic guarantee, a floor under which she could not go.

And that's the perspective I bring when I think about what's called entitlements. You know, the name itself implies some sense of dependency on the part of these folks. These are folks who've worked hard, like my grandmother. And there are millions of people out there who are counting on this.

So my approach is to say, how do we strengthen the system over the long term? And in Medicare, what we did was we said, we are going to have to bring down the costs if we're going to deal with our long- term deficits, but to do that, let's look where some of the money is going. Seven hundred and sixteen billion dollars we were able to save from the Medicare program by no longer overpaying insurance companies, by making sure that we weren't overpaying providers.

And using that money, we were actually able to lower prescription drug costs for seniors by an average of $600, and we were also able to make a - make a significant dent in providing them the kind of preventive care that will ultimately save money through the - throughout the system.

So the way for us to deal with Medicare in particular is to lower health care costs. But when it comes to Social Security, as I said, you don't need a major structural change in order to make sure that Social Security is there for the future.

LEHRER: We'll follow up on this.

First, Governor Romney, you have two minutes on Social Security and entitlements.

ROMNEY: Well, Jim, our seniors depend on these programs. And I know any time we talk about entitlements, people become concerned that something's going to happen that's going to change their life for the worst, and the answer is, neither the president nor I are proposing any changes for any current retirees or near retirees, either to Social Security or Medicare. So if you're 60 or around 60 or older, you don't need to listen any further.

But for younger people, we need to talk about what changes are going to be occurring.

Oh, I just thought about one, and that is in fact I was wrong when I said the president isn't proposing any changes for current retirees. In fact, he is on Medicare. On Social Security, he's not.

But on Medicare, for current retirees he's cutting $716 billion from the program. Now, he says by not overpaying hospitals and providers, actually just going to them and saying we're going to reduce the rates you get paid across the board, everybody's going to get a lower rate. That's not just going after places where there's abuse, that's saying we're cutting the rates. Some 15 percent of hospitals and nursing homes say they won't take anymore Medicare patients under that scenario.

We also have 50 percent of doctors who say they won't take more Medicare patients. This - we have 4 million people on Medicare Advantage that will lose Medicare Advantage because of those $716 billion in cuts. I can't understand how you can cut Medicare $716 billion for current recipients of Medicare.

Now, you point out, well, we're putting some back; we're going to give a better prescription program. That's one - that's $1 for every 15 (dollars) you've cut. They're smart enough to know that's not a good trade.

I want to take that $716 billion you've cut and put it back into Medicare. By the way, we can include a prescription program if we need to improve it, but the idea of cutting $716 billion from Medicare to be able to balance the additional cost of "Obamacare" is, in my opinion, a mistake. And with regards to young people coming along, I've got proposals to make sure Medicare and Social Security are there for them without any question.

LEHRER: Mr. President.

OBAMA2012: First of all, I think it's important for Governor Romney to present this plan that he says will only affect folks in the future. And the essence of the plan is that he would turn Medicare into a voucher program. It's called premium support, but it's understood to be a voucher program. His running mate -

LEHRER: And you - and you don't support that?

OBAMA2012: I don't. And - and let me explain why.

ROMNEY: Again, that's for future people -

OBAMA2012: I understand.

ROMNEY: - right, not for current retirees.

OBAMA2012: For - for - so if you're - if you - you're 54 or 55, you might want to listen, because this - this will affect you. The idea, which was originally presented by Congressman Ryan, your running mate, is that we would give a voucher to seniors, and they could go out in the private marketplace and buy their own health insurance. The problem is that because the voucher wouldn't necessarily keep up with health care inflation, it was estimated that this would cost the average senior about $6,000 a year.

Now, in fairness, what Governor Romney has now said is he'll maintain traditional Medicare alongside it. But there's still a problem, because what happens is those insurance companies are pretty clever at figuring out who are the younger and healthier seniors.

They recruit them leaving the older, sicker seniors in Medicare. And every health care economist who looks at it says over time what'll happen is the traditional Medicare system will collapse. And then what you've got is folks like my grandmother at the mercy of the private insurance system, precisely at the time when they are most in need of decent health care.

So I don't think vouchers are the right way to go. And this is not my own - only my opinion. AARP thinks that the - the savings that we obtained from Medicare bolster the system, lengthen the Medicare trust fund by 8 years. Benefits were not affected at all and ironically if you repeal "Obamacare" - and I have become fond of this term, "Obamacare" - if you repeal it, what happens is those seniors right away are going to be paying $600 more in prescription care. They're now going to have to be paying copays for basic check-ups that can keep them healthier.

And the primary beneficiary of that repeal are insurance companies that are estimated to gain billions of dollars back when they aren't making seniors any healthier. And I - I don't think that's right approach when it comes to making sure that Medicare is stronger over the long term.

LEHRER: We'll talk about - specifically about health care in a moment, but what is - do you support the voucher system, Governor?

ROMNEY: What I support is no change for current retirees and near-retirees to Medicare and the president supports taking $716 billion out of that program.

LEHRER: What about the vouchers?

ROMNEY: So that's - that's number one.

LEHRER: OK. All right.

ROMNEY: Number two is for people coming along that are young. What I'd do to make sure that we can keep Medicare in place for them is to allow them either to choose the current Medicare program or a private plan - their choice. They get to - and they'll have at least two plans that will be entirely at no cost to them. So they don't have to pay additional money, no additional $6,000. That's not going to happen.

They'll have at least two plans.

And by the way, if the government can be as efficient as the private sector and offer premiums that are as low as the private sector, people will be happy to get traditional Medicare, or they'll be able to get a private plan. I know my own view is I'd rather have a private plan. I - I'd just as soon not have the government telling me what kind of health care I get. I'd rather be able to have an insurance company. If I don't like them, I can get rid of them and find a different insurance company. But people will make their own choice.

The other thing we have to do to save Medicare, we have to have the benefits high for those that are low-income, but for higher-income people, we're going to have to lower some of the benefits. We have to make sure this program is there for the long term. That's the plan that I've put forward.

And by the way, the idea came not even from Paul Ryan or - or Senator Wyden, who's a co-author of the bill with - with Paul Ryan in the Senate, but also it came from Bill Clinton's - Bill Clinton's chief of staff. This is an idea that's been around a long time, which is saying, hey, let's see if we can't get competition into the Medicare world so that people can get the choice of different plans at lower cost, better quality. I believe in competition.

OBAMA2012: Jim, if I - if I can just respond very quickly, first of all, every study has shown that Medicare has lower administrative cost than private insurance does, which is why seniors are generally pretty happy with it. And private insurers have to make a profit. Nothing wrong with that; that's what they do. And so you've got higher administrative costs, plus profit on top of that, and if you are going to save any money through what Governor Romney's proposing, what has to happen is is that the money has to come from somewhere.

And when you move to a voucher system, you are putting seniors at the mercy of those insurance companies. And over time, if traditional Medicare has decayed or fallen apart, then they're stuck. And this is the reason why AARP has said that your plan would weaken Medicare substantially, and that's why they were supportive of the approach that we took.

One last point I want to make. We do have to lower the cost of health care. Not just in Medicare and -

LEHRER: We'll talk about that in a minute.

OBAMA2012: - but - but overall.

LEHRER: Go. OK.

OBAMA2012: And so -

ROMNEY: That's - that's a big topic. Could we - could we stay on Medicare?

OBAMA2012: Is that a - is that a separate topic? I'm sorry.

LEHRER: Yeah, we're going to - yeah. I want to get to it, but all I want to do is very quickly -

ROMNEY: Let's get back to Medicare.

LEHRER: - before we leave the economy -

ROMNEY: Let's get back to Medicare.

LEHRER: No, no, no, no -

ROMNEY: The president said that the government can provide the service at lower -

LEHRER: No.

ROMNEY: - cost and without a profit.

LEHRER: All right.

ROMNEY: If that's the case, then it will always be the best product that people can purchase. But my experience -

LEHRER: Wait a minute, Governor.

ROMNEY: My experience is the private sector typically is able to provide a better product at a lower cost.

LEHRER: Can we - can the two of you agree that the voters have a choice, a clear choice between the two of you -

ROMNEY: Absolutely.

OBAMA2012: Yes.

LEHRER: - on Medicare?

ROMNEY: Absolutely.

LEHRER: All right. So, to finish quickly, briefly, on the economy, what is your view about the level of federal regulation of the economy right now? Is there too much, and in your case, Mr. President, is there - should there be more? Beginning with you - this is not a new two-minute segment - to start, and we'll go for a few minutes and then we're going to go to health care. OK?

ROMNEY: Regulation is essential. You can't have a free market work if you don't have regulation. As a business person, I had to have - I needed to know the regulations. I needed them there. You couldn't have people opening up banks in their - in their garage and making loans. I mean, you have to have regulations so that you can have an economy work. Every free economy has good regulation.

At the same time, regulation can become excessive.

LEHRER: Is it excessive now, do you think?

ROMNEY: In some places, yes, in other places, no.

LEHRER: Like where?

ROMNEY: It can become out of date. And what's happened in - with some of the legislation that's been passed during the president's term, you've seen regulation become excessive and it's hurt the - it's hurt the economy. Let me give you an example. Dodd- Frank was passed, and it includes within it a number of provisions that I think have some unintended consequences that are harmful to the economy. One is it designates a number of banks as too big to fail, and they're effectively guaranteed by the federal government.

This is the biggest kiss that's been given to - to New York banks I've ever seen. This is an enormous boon for them. There's been - 122 community and small banks have closed since Dodd-Frank. So there's one example.

Here's another. In Dodd-Frank, it says that -

LEHRER: You want to repeal Dodd-Frank?

ROMNEY: Well, I would repeal it and replace it. You - we're not going to get rid of all regulation. You have to have regulation. And there's some parts of Dodd-Frank that make all the sense in the world. You need transparency, you need to have leverage limits for institutes -

LEHRER: Well, here's a specific - let's - excuse me -

ROMNEY: Let me mention the other one. Let's talk the -

LEHRER: No, no, let's do - right now, let's not. Let's let him respond.

ROMNEY: OK.

LEHRER: Let's let him respond to this specific on Dodd-Frank and what the governor just said.

OBAMA2012: Well, I think this is a great example. The reason we have been in such a enormous economic crisis was prompted by reckless behavior across the board. Now, it wasn't just on Wall Street. You had - loan officers were - they were giving loans and mortgages that really shouldn't have been given, because they're - the folks didn't qualify. You had people who were borrowing money to buy a house that they couldn't afford. You had credit agencies that were stamping these as A-1 (ph) great investments when they weren't. But you also had banks making money hand-over-fist, churning out products that the bankers themselves didn't even understand in order to make big profits, but knowing that it made the entire system vulnerable.

So what did we do? We stepped in and had the toughest reforms on Wall Street since the 1930s. We said you've got - banks, you've got to raise your capital requirements. You can't engage in some of this risky behavior that is putting Main Street at risk. We're going to make sure that you've got to have a living will, so - so we can know how you're going to wind things down if you make a bad bet so we don't have other taxpayer bailouts.

In the meantime, by the way, we also made sure that all the help that we provided those banks was paid back, every single dime, with interest.

Now, Governor Romney has said he wants to repeal Dodd-Frank, and, you know, I appreciate, and it appears we've got some agreement that a marketplace to work has to have some regulation, but in the past, Governor Romney has said he just wants to repeal Dodd-Frank, roll it back. And so the question is does anybody out there think that the big problem we had is that there was too much oversight and regulation of Wall Street? Because if you do, then Governor Romney is your candidate. But that's not what I believe.

ROMNEY: Sorry, Jim. That - that's just not - that's just not the facts. Look, we have to have regulation of Wall Street.

OBAMA2012: Yeah.

ROMNEY: That - that's why I'd have regulation. But I wouldn't designate five banks as too big to fail and give them a blank check. That's one of the unintended consequences of Dodd-Frank. It wasn't thought through properly. We need to get rid of that provision, because it's killing regional and small banks. They're getting hurt.

Let me mention another regulation of Dodd-Frank. You say we were giving mortgages to people who weren't qualified. That's exactly right. It's one of the reasons for the great financial calamity we had. And so Dodd-Frank correctly says we need to -

LEHRER: All right.

ROMNEY: - have qualified mortgages, and if you give a mortgage that's not qualified, there are big penalties. Except they didn't ever go on to define what a qualified mortgage was.

LEHRER: All right.

ROMNEY: It's been two years. We don't know what a qualified mortgage is yet. So banks are reluctant to make loans, mortgages. Try and get a mortgage these days. It's hurt the housing market -

LEHRER: All right -

ROMNEY: - because Dodd-Frank didn't anticipate putting in place the kinds of regulations you have to have. It's not that Dodd- Frank always was wrong with too much regulation. Sometimes they didn't come out with a clear regulation.

LEHRER: OK.

ROMNEY: I will make sure we don't hurt the functioning of our - of our marketplace and our businesses, because I want to bring back housing and get good jobs.

LEHRER: All right, I think we have another clear difference between the two of you. Now let's move to health care, where I know there is a clear difference - and that has to do with the Affordable Care Act, "Obamacare."

And it's a two-minute new segment, and it's - that means two minutes each. And you go first, Governor Romney. You wanted repeal. You want the Affordable Care Act repealed. Why?

ROMNEY: I sure do. Well, in part, it comes, again, from my experience. I was in New Hampshire. A woman came to me, and she said, look, I can't afford insurance for myself or my son. I met a couple in Appleton, Wisconsin, and they said, we're thinking of dropping our insurance; we can't afford it. And the number of small businesses I've gone to that are saying they're dropping insurance because they can't afford it - the cost of health care is just prohibitive. And - and we've got to deal with cost.

And unfortunately, when - when you look at "Obamacare," the Congressional Budget Office has said it will cost $2,500 a year more than traditional insurance. So it's adding to cost. And as a matter of fact, when the president ran for office, he said that by this year he would have brought down the cost of insurance for each family by $2,500 a family. Instead, it's gone up by that amount. So it's expensive. Expensive things hurt families. So that's one reason I don't want it.

Second reason, it cuts $716 billion from Medicare to pay for it. I want to put that money back in Medicare for our seniors.

Number three, it puts in place an unelected board that's going to tell people, ultimately, what kind of treatments they can have. I don't like that idea.

Fourth, there was a survey done of small businesses across the country. It said, what's been the effect of "Obamacare" on your hiring plans? And three-quarters of them said, it makes us less likely to hire people. I just don't know how the president could have come into office, facing 23 million people out of work, rising unemployment, an economic crisis at the - at the kitchen table and spent his energy and passion for two years fighting for "Obamacare" instead of fighting for jobs for the American people.

It has killed jobs. And the best course for health care is to do what we did in my state, craft a plan at the state level that fits the needs of the state. And then let's focus on getting the costs down for people rather than raising it with the $2,500 additional premium.

LEHRER: Mr. President, the argument against repeal.

OBAMA2012: Well, four years ago when I was running for office I was traveling around and having those same conversations that Governor Romney talks about. And it wasn't just that small businesses were seeing costs skyrocket and they couldn't get affordable coverage even if they wanted to provide it to their employees; it wasn't just that this was the biggest driver of our federal deficit, our overall health care costs. But it was families who were worried about going bankrupt if they got sick - millions of families, all across the country.

If they had a pre-existing condition they might not be able to get coverage at all. If they did have coverage, insurance companies might impose an arbitrary limit. And so as a consequence, they're paying their premiums, somebody gets really sick, lo and behold they don't have enough money to pay the bills because the insurance companies say that they've hit the limit. So we did work on this alongside working on jobs, because this is part of making sure that middle-class families are secure in this country.

And let me tell you exactly what "Obamacare" did. Number one, if you've got health insurance it doesn't mean a government take over. You keep your own insurance. You keep your own doctor. But it does say insurance companies can't jerk you around. They can't impose arbitrary lifetime limits. They have to let you keep your kid on their insurance - your insurance plan till you're 26 years old. And it also says that they're - you're going to have to get rebates if insurance companies are spending more on administrative costs and profits than they are on actual care.

Number two, if you don't have health insurance, we're essentially setting up a group plan that allows you to benefit from group rates that are typically 18 percent lower than if you're out there trying to get insurance on the individual market.

Now, the last point I'd make before -

LEHRER: Two minutes -

OBAMA2012: - before -

LEHRER: Two minutes is up, sir.

OBAMA2012: No, I - I think I've - I had five seconds before you interrupted me - was - that the irony is that we've seen this model work really well in Massachusetts, because Governor Romney did a good thing, working with Democrats in the state to set up what is essentially the identical model. And as a consequence, people are covered there. It hasn't destroyed jobs. And as a consequence, we now have a system in which we have the opportunity to start bringing down cost, as opposed to just -

LEHRER: Your five -

OBAMA2012: - leaving millions of people out in the cold.

LEHRER: Your five seconds went away a long time ago.

OBAMA2012: That -

LEHRER: All right, Governor. Governor, tell the - tell the president directly why you think what he just said is wrong about "Obamacare."

ROMNEY: Well, I did with my first statement.

OBAMA2012: You did.

ROMNEY: But I'll go on.

OBAMA2012: Please elaborate.

ROMNEY: I'll elaborate.

Exactly right.

First of all, I like the way we did it in Massachusetts. I like the fact that in my state, we had Republicans and Democrats come together and work together. What you did instead was to push through a plan without a single Republican vote. As a matter of fact, when Massachusetts did something quite extraordinary, elected a Republican senator to stop "Obamacare," you pushed it through anyway. So entirely on a partisan basis, instead of bringing America together and having a discussion on this important topic, you pushed through something that you and Nancy Pelosi and Harry Reid thought was the best answer and drove it through.

What we did, in a legislature 87 percent Democrat, we worked together. Two hundred legislators in my legislature - only two voted against the plan by the time we were finished.

What were some differences?

We didn't raise taxes. You've raised them by a trillion dollars under "Obamacare." We didn't cut Medicare. Of course, we don't have Medicare, but we didn't cut Medicare by $716 billion. We didn't put in place a board that can tell people ultimately what treatments they're going to receive.

We didn't - we didn't also do something that I think a number of people across this country recognize, which is put - put people in a position where they're going to lose the insurance they had and they wanted. Right now, the CBO says up to 20 million people will lose their insurance as "Obamacare" goes into effect next year. And likewise, a study by McKinsey & Company of American businesses said 30 percent of them are anticipating dropping people from coverage. So for those reasons, for the tax, for Medicare, for this board and for people losing their insurance, this is why the American people don't want - don't want "Obamacare." It's why Republicans said, do not do this.

And the Republicans had a - had a plan. They put a plan out. They put out a plan, a bipartisan plan. It was swept aside. I think something this big, this important has to be done in a bipartisan basis. And we have to have a president who can reach across the aisle and fashion important legislation with the input from both parties.

OBAMA2012: Governor Romney said this has to be done on a bipartisan basis. This was a bipartisan idea. In fact, it was a Republican idea.

And Governor Romney, at the beginning of this debate, wrote and said, what we did in Massachusetts could be a model for the nation. And I agree that the Democratic legislators in Massachusetts might have given some advice to Republicans in Congress about how to cooperate, but the fact of the matter is, we used the same advisers, and they say it's the same plan.

It - when Governor Romney talks about this board, for example - unelected board that we've created - what this is, is a group of health care experts, doctors, et cetera, to figure out how can we reduce the cost of care in the system overall, because the - there are two ways of dealing with our health care crisis.

One is to simply leave a whole bunch of people uninsured and let them fend for themselves, to let businesses figure out how long they can continue to pay premiums until finally they just give up and their workers are no longer getting insured, and that's been the trend line. Or, alternatively, we can figure out how do we make the cost of care more effective. And there are ways of doing it.

So at - at Cleveland Clinic, one of the best health care systems in the world, they actually provide great care cheaper than average. And the reason they do is because they do some smart things. They - they say, if a patient's coming in, let's get all the doctors together at once, do one test instead of having the patient run around with 10 tests. Let's make sure that we're providing preventive care so we're catching the onset of something like diabetes. Let's - let's pay providers on the basis of performance as opposed to on the basis of how many procedures they've - they've engaged in. Now, so what this board does is basically identifies best practices and says, let's use the purchasing power of Medicare and Medicaid to help to institutionalize all these good things that we do.

And the fact of the matter is that when "Obamacare" is fully implemented, we're going to be in a position to show that costs are going down. And over the last two years, health care premiums have gone up, it's true, but they've gone up slower than any time in the last 50 years. So we're already beginning to see progress. In the meantime, folks out there with insurance, you're already getting a rebate.

Let me make one last point. Governor Romney says we should replace it. I'm just going to repeal it, but we can replace it with something. But the problem is he hasn't described what exactly we'd replace it with other than saying we're going to leave it to the states.

But the fact of the matter is that some of the prescriptions that he's offered, like letting you buy insurance across state lines, there's no indication that that somehow is going to help somebody who's got a pre-existing condition be able to finally buy insurance. In fact, it's estimated that by repealing "Obamacare," you're looking at 50 million people losing health insurance at a time when it's vitally important.

LEHRER: Let's let the governor explain what you would do if "Obamacare" is repealed. How would you replace it? What do you have in mind?

ROMNEY: Let - well, actually - actually it's - it's - it's a lengthy description, but number one, pre-existing conditions are covered under my plan. Number two, young people are able to stay on their family plan. That's already offered in the private marketplace; you don't have - have the government mandate that for that to occur.

But let's come back to something the president - I agree on, which is the - the key task we have in health care is to get the costs down so it's more affordable for families, and - and then he has as a model for doing that a board of people at the government, an unelected board, appointed board, who are going to decide what kind of treatment you ought to have.

OBAMA2012: No, it isn't.

ROMNEY: In my opinion, the government is not effective in - in bringing down the cost of almost anything. As a matter of fact, free people and free enterprises trying to find ways to do things better are able to be more effective in bringing down the costs than the government will ever be. Your example of the Cleveland clinic is my case in point, along with several others I could describe. This is the private market. These are small - these are enterprises competing with each other, learning how to do better and better jobs.

I used to consult to businesses - excuse me, to hospitals and to health care providers. I was astonished at the creativity and innovation that exists in the American people. In order to bring the cost of health care down, we don't need to have a - an - a board of 15 people telling us what kinds of treatments we should have. We instead need to put insurance plans, providers, hospitals, doctors on targets such that they have an incentive, as you say, performance pay, for doing an excellent job, for keeping costs down, and that's happening.

Intermountain Health Care does it superbly well.

OBAMA2012: They do.

ROMNEY: Mayo Clinic is doing it superbly well, Cleveland Clinic, others. But the right answer is not to have the federal government take over health care and start mandating to the providers across America, telling a patient and a doctor what kind of treatment they can have. That's the wrong way to go. The private market and individual responsibility always work best.

OBAMA2012: Let me just point out, first of all, this board that we're talking about can't make decisions about what treatments are given. That's explicitly prohibited in the law.

But let's go back to what Governor Romney indicated, that under his plan he would be able to cover people with pre-existing conditions. Well, actually, Governor, that isn't what your plan does. What your plan does is to duplicate what's already the law, which says if you are out of health insurance for three months then you can end up getting continuous coverage and an insurance company can't deny you if you've - if it's been under 90 days.

But that's already the law. And that doesn't help the millions of people out there with pre-existing conditions. There's a reason why Governor Romney set up the plan that he did in Massachusetts. It wasn't a government takeover of health care. It was the largest expansion of private insurance. But what it does say is that insurers, you've got to take everybody. Now, that also means that you've got more customers.

But when Governor Romney says that he'll replace it with something but can't detail how it will be in fact replaced, and the reason he set up the system he did in Massachusetts is because there isn't a better way of dealing with the pre-existing conditions problem, it - it just reminds me of - you know, he says that he's going to close deductions and loopholes for his tax plan.

That's how it's going to be paid for. But we don't know the details. He says that he's going to replace Dodd-Frank, Wall Street reform. But we don't know exactly which ones. He won't tell us. He now says he's going to replace "Obamacare" and assure that all the good things that are in it are going to be in there and you don't have to worry.

And at some point, I think the American people have to ask themselves, is the reason that Governor Romney is keeping all these plans to replace secret because they're too good? Is - is it because that somehow middle-class families are going to benefit too much from them? No, the - the reason is because when we reform Wall Street, when we tackle the problem of pre-existing conditions, then, you know, these are tough problems, and we've got to make choices. And the choices we've made have been ones that ultimately are benefiting middle-class families all across the country.

LEHRER: All right, we're going to move to a -

ROMNEY: No, I - I have to respond to that -

LEHRER: No, but -

ROMNEY: - which is - which is my experience as a governor is if I come in and - and lay down a piece of legislation and say it's my way or the highway, I don't get a lot done. What I do is the same way that Tip O'Neill and Ronald Reagan worked together some years ago. When Ronald Reagan ran for office, he laid out the principles that he was going to foster. He said he was going to lower tax rates. He said he was going to broaden the base. You've said the same thing: You're going to simplify the tax code, broaden the base. Those are my principles.

I want to bring down the tax burden on middle-income families. And I'm going to work together with Congress to say, OK, what are the various ways we could bring down deductions, for instance? One way, for instance, would be to have a single number. Make up a number - 25,000 (dollars), $50,000. Anybody can have deductions up to that amount. And then that number disappears for high-income people. That's one way one could do it. One could follow Bowles-Simpson as a model and take deduction by deduction and make differences that way.

There are alternatives to accomplish the objective I have, which is to bring down rates, broaden the base, simplify the code and create incentives for growth.

And with regards to health care, you had remarkable details with regards to my pre-existing condition plan. You obviously studied up on - on my plan. In fact, I do have a plan that deals with people with pre-existing conditions. That's part of my health care plan. And what we did in Massachusetts is a model for the nation, state by state. And I said that at that time. The federal government taking over health care for the entire nation and whisking aside the 10th Amendment, which gives states the rights for these kinds of things, is not the course for America to have a stronger, more vibrant economy.

LEHRER: That is a terrific segue to our next segment, and is the role of government. And let's see, role of government and it is - you are first on this, Mr. President. The question is this. Do you believe - both of you - but you have the first two minutes on this, Mr. President - do you believe there's a fundamental difference between the two of you as to how you view the mission of the federal government?

OBAMA2012: Well, I definitely think there are differences.

LEHRER: And - yeah.

OBAMA2012: The first role of the federal government is to keep the American people safe. That's its most basic function. And as commander in chief, that is something that I've worked on and thought about every single day that I've been in the Oval Office.

But I also believe that government has the capacity - the federal government has the capacity to help open up opportunity and create ladders of opportunity and to create frameworks where the American people can succeed. Look, the genius of America is the free enterprise system, and freedom, and the fact that people can go out there and start a business, work on an idea, make their own decisions.

But as Abraham Lincoln understood, there are also some things we do better together.

So in the middle of the Civil War, Abraham Lincoln said, let's help to finance the Transcontinental Railroad. Let's start the National Academy of Sciences. Let's start land grant colleges, because we want to give these gateways of opportunity for all Americans, because if all Americans are getting opportunity, we're all going to be better off. That doesn't restrict people's freedom; that enhances it.

And so what I've tried to do as president is to apply those same principles. And when it comes to education, what I've said is we've got to reform schools that are not working. We use something called Race to the Top. Wasn't a top-down approach, Governor. What we've said is to states, we'll give you more money if you initiate reforms. And as a consequence, you had 46 states around the country who have made a real difference.

But what I've also said is let's hire another hundred thousand math and science teachers to make sure we maintain our technological lead and our people are skilled and able to succeed. And hard-pressed states right now can't all do that. In fact, we've seen layoffs of hundreds of thousands of teachers over the last several years, and Governor Romney doesn't think we need more teachers. I do, because I think that that is the kind of investment where the federal government can help. It can't do it all, but it can make a difference, and as a consequence, we'll have a better-trained workforce, and that will create jobs, because companies want to locate in places where we've got a skilled workforce.

LEHRER: Two minutes, Governor, on the role of government, your view.

ROMNEY: Well, first, I love great schools. Massachusetts, our schools are ranked number one of all 50 states. And the key to great schools: great teachers. So I reject the idea that I don't believe in great teachers or more teachers. Every school district, every state should make that decision on their own.

The role of government - look behind us: the Constitution and the Declaration of Independence.

The role of government is to promote and protect the principles of those documents. First, life and liberty. We have a responsibility to protect the lives and liberties of our people, and that means the military, second to none. I do not believe in cutting our military. I believe in maintaining the strength of America's military.

Second, in that line that says, we are endowed by our Creator with our rights - I believe we must maintain our commitment to religious tolerance and freedom in this country. That statement also says that we are endowed by our Creator with the right to pursue happiness as we choose. I interpret that as, one, making sure that those people who are less fortunate and can't care for themselves are cared by - by one another.

We're a nation that believes we're all children of the same God. And we care for those that have difficulties - those that are elderly and have problems and challenges, those that disabled, we care for them. And we look for discovery and innovation, all these thing desired out of the American heart to provide the pursuit of happiness for our citizens.

But we also believe in maintaining for individuals the right to pursue their dreams, and not to have the government substitute itself for the rights of free individuals. And what we're seeing right now is, in my view, a - a trickle-down government approach which has government thinking it can do a better job than free people pursuing their dreams. And it's not working.

And the proof of that is 23 million people out of work. The proof of that is one out of six people in poverty. The proof of that is we've gone from 32 million on food stamps to 47 million on food stamps. The proof of that is that 50 percent of college graduates this year can't find work.

ROMNEY: We know that the path we're taking is not working. It's time for a new path.

LEHRER: All right, let's go through some specifics in terms of what - how each of you views the role of government. How do - education. Does the federal government have a responsibility to improve the quality of public education in America?

ROMNEY: Well, the primary responsibility for education is - is of course at the state and local level. But the federal government also can play a very important role. And I - and I agree with Secretary Arne Duncan. He's - there's some ideas he's put forward on Race to the Top - not all of them but some of them I agree with, and congratulate him for pursuing that. The federal government can get local and - and state schools to do a better job.

My own view, by the way, is I've added to that. I happen to believe - I want the kids that are getting federal dollars from IDEA or - or Title I - these are disabled kids or - or poor kids or - or lower-income kids, rather. I want them to be able to go to the school of their choice. So all federal funds, instead of going to the - to the state or to the school district, I'd have go - if you will, follow the child and let the parent and the child decide where to send their - their - their student.

LEHRER: How do you see the federal government's responsibility to - as I say, to improve the quality of public education in this country?

OBAMA2012: Well, as I've indicated, I think that it has a significant role to play. Through our Race to the Top program, we've worked with Republican and Democratic governors to initiate major reforms, and they're having an impact right now.

LEHRER: Do you think you have a difference with your views and those of Governor Romney on - about education and the federal government?

OBAMA2012: You know, this is where budgets matter because budgets reflect choices. So when Governor Romney indicates that he wants to cut taxes and potentially benefit folks like me and him, and to pay for it, we're having to initiate significant cuts in federal support for education, that makes a difference.

You know, his running mate, Congressman Ryan, put forward a budget that reflects many of the principles that Governor Romney's talked about. And it wasn't very detailed. This seems to be a trend. But - but what it did do is to - if you extrapolated how much money we're talking about, you'd look at cutting the education budget by up to 20 percent.

When it comes to community colleges, we are seeing great work done out there all over the country because we have the opportunity to train people for jobs that exist right now. And one of the things I suspect Governor Romney and I probably agree on is getting businesses to work with community colleges so that they're setting up their training programs -

LEHRER: Do you agree, Governor?

OBAMA2012: Let - let - let me just finish the point.

ROMNEY: Oh, yeah. Oh, yeah.

OBAMA2012: I suspect it'll be a small agreement.

ROMNEY: It's going over well in my state, by the way, yeah.

OBAMA2012: The - where their partnering so that - they're designing training programs, and people who are going through them know that there's a job waiting for them if they complete them. That makes a big difference. But that requires some federal support.

Let me just say one final example. When it comes to making college affordable - whether it's two-year or four-year - one of the things that I did as president was we were sending $60 billion to banks and lenders as middle men for the student loan program, even though the loans were guaranteed. So there was no risk for the banks or the lenders but they were taking billions out of the system.

And we said, why not cut out the middle man? And as a consequence, what we've been able to do is to provide millions more students assistance, lower or keep low interest rates on student loans. And this is an example of where our priorities make a difference. Governor Romney, I genuinely believe, cares about education. But when he tells a student that, you know, you should borrow money from your parents to go to college, you know, that indicates the degree to which, you know, there may not be as much of a focus on the fact that folks like myself, folks like Michelle, kids probably who attend University of Denver just don't have that option.

And for us to be able to make sure that they've got that opportunity and they can walk through that door, that is vitally important - not just to those kids. It's how we're going to grow this economy over the long term.

LEHRER: We're running out of time.

ROMNEY: Jim, Jim -

LEHRER: I'm certainly going give you a chance to respond to that. Yes, sir, Governor.

ROMNEY: Mr. - Mr. President, you're entitled, as the president, to your own airplane and to your own house, but not to your own facts - all right? I'm - I'm not going to cut education funding. I don't have any plan to cut education funding and grants that go to people going to college. I'm planning on continuing to grow, so I'm not planning on making changes there.

But you make a very good point, which is that the - the place you put your money makes a pretty clear indication of where your heart is. You put $90 billion into - into green jobs. And - and I - look, I'm all in favor of green energy. Ninety billion (dollars) - that - that would have - that would have hired 2 million teachers. Ninety billion dollars. And these businesses - many of them have gone out of business. I think about half of them, of the ones have been invested in, they've gone out of business. A number of them happened to be owned by - by people who were contributors to your campaigns.

Look, the right course for - for America's government - we were talking about the role of government - is not to become the economic player picking winners and losers, telling people what kind of health treatment they can receive, taking over the health care system that - that has existed in this country for - for a long, long time and has produced the best health records in the world. The right answer for government is to say, how do we make the private sector become more efficient and more effective?

How do we get schools to be more competitive? Let's grade them. I propose we grade our schools so parents know which schools are succeeding and failing, so they can take their child to a - to a school that's being more successful. I don't - I don't want to cut our commitment to education; I wanted to make it more effective and efficient.

And by the way, I've had that experience. I don't just talk about it. I've been there. Massachusetts schools are ranked number one in the nation. This is not because I didn't have commitment to education. It's because I care about education for all of our kids.

LEHRER: All right, gentlemen, look -

OBAMA2012: Jim, I

LEHRER: Excuse me, one sec - excuse, me sir. We've got - we've got - barely have three minutes left. I'm not going to grade the two of you and say you've - your answers have been too long or I've done a poor job -

OBAMA2012: You've done a great job, Jim.

LEHRER: Oh, well, no. But the fact is, government - the role of government and governing, we've lost a, in other words, so we only have three minutes left in the - in the debate before we go to your closing statements. And so I want to ask finally here - and remember, we've got three minutes total time here.

And the question is this: Many of the legislative functions of the federal government right now are in a state of paralysis as a result of partisan gridlock. If elected in your case, if re-elected in your case, what would you do about that?

Governor?

ROMNEY: Jim, I had the great experience - it didn't seem like it at the time - of being elected in a state where my legislature was 87 percent Democrat, and that meant I figured out from day one I had to get along and I had to work across the aisle to get anything done. We drove our schools to be number one in the nation. We cut taxes 19 times.

LEHRER: Well, what would you do as president?

ROMNEY: We - as president, I will sit down on day one - actually the day after I get elected, I'll sit down with leaders - the Democratic leaders as well as Republican leaders and - as we did in my state. We met every Monday for a couple hours, talked about the issues and the challenges in the - in the - in our state, in that case. We have to work on a collaborative basis - not because we're going to compromise our principle, but because there's common ground.

And the challenges America faces right now - look, the reason I'm in this race is there are people that are really hurting today in this country, and we face - this deficit could crush the future generations. What's happening in the Middle East? There are developments around the world that are of real concern. And Republicans and Democrats both love America, but we need to have leadership - leadership in Washington that will actually bring people together and get the job done and could not care less if it's a Republican or a Democrat. I've done it before. I'll do it again.

LEHRER: Mr. President.

OBAMA2012: Well, first of all, I think Governor Romney's going to have a busy first day, because he's also going to repeal "Obamacare," which will not be very popular among Democrats as you're sitting down with them.

But look, my philosophy has been I will take ideas from anybody, Democrat or Republican, as long as they're advancing the cause of making middle-class families stronger and giving ladders of opportunity into the middle class. That's how we cut taxes for middle-class families and small businesses. That's how we cut a trillion dollars of spending that wasn't advancing that cause. That's how we signed three trade deals into law that are helping us to double our exports and sell more American products around the world. That's how we repealed "don't ask, don't tell." That's how we ended the war in Iraq, as I promised, and that's how we're going to wind down the war in Afghanistan. That's how we went after al-Qaida and bin Laden.

So we've - we've seen progress even under Republican control of the House or Representatives. But ultimately, part of being principled, part of being a leader is, A, being able to describe exactly what it is that you intend to do, not just saying, I'll sit down, but you have to have a plan.

Number two, what's important is occasionally you've got to say now to - to - to folks both in your own party and in the other party. And you know, yes, have we had some fights between me and the Republicans when they fought back against us, reining in the excesses of Wall Street? Absolutely, because that was a fight that needed to be had. When - when we were fighting about whether or not we were going to make sure that Americans had more security with their health insurance and they said no, yes, that was a fight that we needed to have. And so part of leadership and governing is both saying what it is that you are for, but also being willing to say no to some things.

And I've got to tell you, Governor Romney, when it comes to his own party during the course of this campaign, has not displayed that willingness to say no to some of the more extreme parts of his party.

LEHRER: That brings us to closing statements. There was a coin toss. Governor Romney, you won the toss, and you elected to go last.

So you have a closing two minutes, Mr. President.

OBAMA2012: Well, Jim, I want to thank you and I want to thank Governor Romney, because I think this was a terrific debate and I very much appreciate it.

And I want to thank the University of Denver.

You know, four years ago we were going through a major crisis, and yet my faith and confidence in the American future is undiminished. And the reason is because of its people. Because of the woman I met in North Carolina who decided at 55 to go back to school because she wanted to inspire her daughter, and now has a new job from that new training that she's gotten. Because of the company in Minnesota who was willing to give up salaries and perks for their executives to make sure that they didn't lay off workers during a recession. The auto workers that you meet in Toledo or Detroit take such pride in building the best cars in the world - not just because of a paycheck, but because it gives them that sense of pride, that they're helping to build America.

And so the question now is, how do we build on those strengths? And everything that I've tried to do and everything that I'm now proposing for the next four years in terms of improving our education system, or developing American energy, or making sure that we're closing loopholes for companies that are shipping jobs overseas and focusing on small businesses and companies that are creating jobs here in the United States, or - or closing our deficit in a responsible, balanced way that allows us to invest in our future - all those things are designed to make sure that the American people, their genius, their grit, their determination is - is channeled, and - and - and they have an opportunity to succeed.

And everybody's getting a fair shot and everybody's getting a fair share. Everybody's doing a fair share and everybody's playing by the same rules.

You know, four years ago I said that I'm not a perfect man and I wouldn't be a perfect president. And that's probably a promise that Governor Romney thinks I've kept. But I also promised that I'd fight every single day on behalf of the American people and the middle class and all those who are striving to get in the middle class.

I've kept that promise and if you'll vote for me, then I promise I'll fight just as hard in a second term.

LEHRER: Governor Romney, your two-minute closing.

ROMNEY: Thank you, Jim and Mr. President. And thank you for tuning in this evening. This is a - this is an important election. And I'm concerned about America. I'm concerned about the direction America has been taking over the last four years. I know this is bigger than election about the two of us as individuals. It's bigger than our respective parties. It's an election about the course of America - what kind of America do you want to have for yourself and for your children.

And there really are two very different paths that we began speaking about this evening. And over the course of this month we're going to have two more presidential debates and vice presidential debate. We'll talk about those two paths. But they lead in very different directions. And it's not just looking to our words that you have to take in evidence of where they go; you can look at the record.

There's no question in my mind that if the president were to be re-elected you'll continue to see a middle-class squeeze with incomes going down and prices going up. I'll get incomes up again. You'll see chronic unemployment. We've had 43 straight months with unemployment above 8 percent. If I'm president, I will create - help create 12 million new jobs in this country with rising incomes.

If the president's re-elected, "Obamacare" will be fully installed. In my view, that's going to mean a whole different way of life for people who counted on the insurance plan they had in the past. Many will lose it. You're going to see health premiums go up by some $2,500 per - per family. If I'm elected, we won't have "Obamacare." We'll put in place the kind of principles that I put in place in my own state and allow each state to craft their own programs to get people insured. And we'll focus on getting the cost of health care down.

If the president were to be re-elected, you're going to see a $716 billion cut to Medicare. You'll have 4 million people who will lose Medicare advantage. You'll have hospitals and providers that'll no longer accept Medicare patients.

I'll restore that $716 billion to Medicare.

And finally, military. If the president's re-elected, you'll see dramatic cuts to our military. The secretary of defense has said these would be even devastating. I will not cut our commitment to our military. I will keep America strong and get America's middle class working again.

Thank you, Jim.

LEHRER: Thank you, Governor.

Thank you, Mr. President.

The next debate will be the vice presidential event on Thursday, October 11th at Center College in Danville, Kentucky. For now, from the University of Denver, I'm Jim Lehrer. Thank you, and good night. 
LEHRER: Gentlemen, at this very moment tonight, where do you stand on the financial recovery plan?

First response to you, Senator Obama. You have two minutes.

OBAMA2008: Well, thank you very much, Jim, and thanks to the commission and the University of Mississippi, "Ole Miss," for hosting us tonight. I can't think of a more important time for us to talk about the future of the country.

You know, we are at a defining moment in our history. Our nation is involved in two wars, and we are going through the worst financial crisis since the Great Depression.

And although we've heard a lot about Wall Street, those of you on Main Street I think have been struggling for a while, and you recognize that this could have an impact on all sectors of the economy.

And you're wondering, how's it going to affect me? How's it going to affect my job? How's it going to affect my house? How's it going to affect my retirement savings or my ability to send my children to college? 

So we have to move swiftly, and we have to move wisely. And I've put forward a series of proposals that make sure that we protect taxpayers as we engage in this important rescue effort.

No. 1, we've got to make sure that we've got oversight over this whole process; $700 billion, potentially, is a lot of money.

No. 2, we've got to make sure that taxpayers, when they are putting their money at risk, have the possibility of getting that money back and gains, if the market -- and when the market returns.

No. 3, we've got to make sure that none of that money is going to pad CEO bank accounts or to promote golden parachutes.

And, No. 4, we've got to make sure that we're helping homeowners, because the root problem here has to do with the foreclosures that are taking place all across the country. 

Now, we also have to recognize that this is a final verdict on eight years of failed economic policies promoted by George Bush, supported by Senator McCain, a theory that basically says that we can shred regulations and consumer protections and give more and more to the most, and somehow prosperity will trickle down.

It hasn't worked. And I think that the fundamentals of the economy have to be measured by whether or not the middle class is getting a fair shake. That's why I'm running for president, and that's what I hope we're going to be talking about tonight.

LEHRER: Senator McCain, two minutes.

MCCAIN: Well, thank you, Jim. And thanks to everybody.

And I do have a sad note tonight. Senator Kennedy is in the hospital. He's a dear and beloved friend to all of us. Our thoughts and prayers go out to the lion of the Senate.

I also want to thank the University of Mississippi for hosting us tonight.

And, Jim, I -- I've been not feeling too great about a lot of things lately. So have a lot of Americans who are facing challenges. But I'm feeling a little better tonight, and I'll tell you why.

Because as we're here tonight in this debate, we are seeing, for the first time in a long time, Republicans and Democrats together, sitting down, trying to work out a solution to this fiscal crisis that we're in.

And have no doubt about the magnitude of this crisis. And we're not talking about failure of institutions on Wall Street. We're talking about failures on Main Street, and people who will lose their jobs, and their credits, and their homes, if we don't fix the greatest fiscal crisis, probably in -- certainly in our time, and I've been around a little while.

But the point is -- the point is, we have finally seen Republicans and Democrats sitting down and negotiating together and coming up with a package.

This package has transparency in it. It has to have accountability and oversight. It has to have options for loans to failing businesses, rather than the government taking over those loans. We have to -- it has to have a package with a number of other essential elements to it.

And, yes, I went back to Washington, and I met with my Republicans in the House of Representatives. And they weren't part of the negotiations, and I understand that. And it was the House Republicans that decided that they would be part of the solution to this problem.

But I want to emphasize one point to all Americans tonight. This isn't the beginning of the end of this crisis. This is the end of the beginning, if we come out with a package that will keep these institutions stable.

And we've got a lot of work to do. And we've got to create jobs. And one of the areas, of course, is to eliminate our dependence on foreign oil.

LEHRER: All right, let's go back to my question. How do you all stand on the recovery plan? And talk to each other about it. We've got five minutes. We can negotiate a deal right here.

But, I mean, are you -- do you favor this plan, Senator Obama, and you, Senator McCain? Do you -- are you in favor of this plan?

OBAMA2008: We haven't seen the language yet. And I do think that there's constructive work being done out there. So, for the viewers who are watching, I am optimistic about the capacity of us to come together with a plan.

The question, I think, that we have to ask ourselves is, how did we get into this situation in the first place?

Two years ago, I warned that, because of the subprime lending mess, because of the lax regulation, that we were potentially going to have a problem and tried to stop some of the abuses in mortgages that were taking place at the time.

Last year, I wrote to the secretary of the Treasury to make sure that he understood the magnitude of this problem and to call on him to bring all the stakeholders together to try to deal with it.

So -- so the question, I think, that we've got to ask ourselves is, yes, we've got to solve this problem short term. And we are going to have to intervene; there's no doubt about that.

But we're also going to have to look at, how is it that we shredded so many regulations? We did not set up a 21st-century regulatory framework to deal with these problems. And that in part has to do with an economic philosophy that says that regulation is always bad.

LEHRER: Are you going to vote for the plan, Senator McCain?

MCCAIN: I -- I hope so. And I...

LEHRER: As a United States senator...

MCCAIN: Sure.

LEHRER: ... you're going to vote for the plan?

MCCAIN: Sure. But -- but let me -- let me point out, I also warned about Fannie Mae and Freddie Mac and warned about corporate greed and excess, and CEO pay, and all that. A lot of us saw this train wreck coming.

But there's also the issue of responsibility. You've mentioned President Dwight David Eisenhower. President Eisenhower, on the night before the Normandy invasion, went into his room, and he wrote out two letters.

One of them was a letter congratulating the great members of the military and allies that had conducted and succeeded in the greatest invasion in history, still to this day, and forever.

And he wrote out another letter, and that was a letter of resignation from the United States Army for the failure of the landings at Normandy.

Somehow we've lost that accountability. I've been heavily criticized because I called for the resignation of the chairman of the Securities and Exchange Commission. We've got to start also holding people accountable, and we've got to reward people who succeed.

But somehow in Washington today -- and I'm afraid on Wall Street -- greed is rewarded, excess is rewarded, and corruption -- or certainly failure to carry out our responsibility is rewarded.

As president of the United States, people are going to be held accountable in my administration. And I promise you that that will happen.

LEHRER: Do you have something directly to say, Senator Obama, to Senator McCain about what he just said?

OBAMA2008: Well, I think Senator McCain's absolutely right that we need more responsibility, but we need it not just when there's a crisis. I mean, we've had years in which the reigning economic ideology has been what's good for Wall Street, but not what's good for Main Street.

And there are folks out there who've been struggling before this crisis took place. And that's why it's so important, as we solve this short-term problem, that we look at some of the underlying issues that have led to wages and incomes for ordinary Americans to go down, the -- a health care system that is broken, energy policies that are not working, because, you know, 10 days ago, John said that the fundamentals of the economy are sound.

LEHRER: Say it directly to him.

OBAMA2008: I do not think that they are.

LEHRER: Say it directly to him.

OBAMA2008: Well, the -- John, 10 days ago, you said that the fundamentals of the economy are sound. And...

MCCAIN: Are you afraid I couldn't hear him?

LEHRER: I'm just determined to get you all to talk to each other. I'm going to try.

OBAMA2008: The -- and I just fundamentally disagree. And unless we are holding ourselves accountable day in, day out, not just when there's a crisis for folks who have power and influence and can hire lobbyists, but for the nurse, the teacher, the police officer, who, frankly, at the end of each month, they've got a little financial crisis going on.

They're having to take out extra debt just to make their mortgage payments. We haven't been paying attention to them. And if you look at our tax policies, it's a classic example.

LEHRER: So, Senator McCain, do you agree with what Senator Obama just said? And, if you don't, tell him what you disagree with.

MCCAIN: No, I -- look, we've got to fix the system. We've got fundamental problems in the system. And Main Street is paying a penalty for the excesses and greed in Washington, D.C., and on Wall Street.

So there's no doubt that we have a long way to go. And, obviously, stricter interpretation and consolidation of the various regulatory agencies that weren't doing their job, that has brought on this crisis.

But I have a fundamental belief in the goodness and strength of the American worker. And the American worker is the most productive, the most innovative. America is still the greatest producer, exporter and importer.

But we've got to get through these times, but I have a fundamental belief in the United States of America. And I still believe, under the right leadership, our best days are ahead of us.

LEHRER: All right, let's go to the next lead question, which is essentially following up on this same subject.

And you get two minutes to begin with, Senator McCain. And using your word "fundamental," are there fundamental differences between your approach and Senator Obama's approach to what you would do as president to lead this country out of the financial crisis?

MCCAIN: Well, the first thing we have to do is get spending under control in Washington. It's completely out of control. It's gone -- we have now presided over the largest increase in the size of government since the Great Society.

We Republicans came to power to change government, and government changed us. And the -- the worst symptom on this disease is what my friend, Tom Coburn, calls earmarking as a gateway drug, because it's a gateway. It's a gateway to out-of-control spending and corruption.

And we have former members of Congress now residing in federal prison because of the evils of this earmarking and pork-barrel spending.

You know, we spent $3 million to study the DNA of bears in Montana. I don't know if that was a criminal issue or a paternal issue, but the fact is that it was $3 million of our taxpayers' money. And it has got to be brought under control.

As president of the United States, I want to assure you, I've got a pen. This one's kind of old. I've got a pen, and I'm going to veto every single spending bill that comes across my desk. I will make them famous. You will know their names.

Now, Senator Obama, you wanted to know one of the differences. a million dollars for every day that he's been in the United States Senate.

I suggest that people go up on the Web site of Citizens Against Government Waste, and they will look at those projects.

That kind of thing is not the way to rein in runaway spending in Washington, D.C. That's one of the fundamental differences that Senator Obama and I have.

LEHRER: Senator Obama, two minutes.

OBAMA2008: Well, Senator McCain is absolutely right that the earmarks process has been abused, which is why I suspended any requests for my home state, whether it was for senior centers or what have you, until we cleaned it up.

And he's also right that oftentimes lobbyists and special interests are the ones that are introducing these kinds of requests, although that wasn't the case with me.

But let's be clear: Earmarks account for $18 billion in last year's budget. Senator McCain is proposing -- and this is a fundamental difference between us -- $300 billion in tax cuts to some of the wealthiest corporations and individuals in the country, $300 billion.

Now, $18 billion is important; $300 billion is really important.

And in his tax plan, you would have CEOs of Fortune 500 companies getting an average of $700,000 in reduced taxes, while leaving 100 million Americans out.

So my attitude is, we've got to grow the economy from the bottom up. What I've called for is a tax cut for 95 percent of working families, 95 percent.

And that means that the ordinary American out there who's collecting a paycheck every day, they've got a little extra money to be able to buy a computer for their kid, to fill up on this gas that is killing them.

And over time, that, I think, is going to be a better recipe for economic growth than the -- the policies of President Bush that John McCain wants to -- wants to follow.

LEHRER: Senator McCain?

MCCAIN: Well, again, I don't mean to go back and forth, but he...

LEHRER: No, that's fine.

MCCAIN: Senator Obama suspended those requests for pork-barrel projects after he was running for president of the United States. He didn't happen to see that light during the first three years as a member of the United States Senate, $932 million in requests.

Maybe to Senator Obama it's not a lot of money. But the point is that -- you see, I hear this all the time. "It's only $18 billion." Do you know that it's tripled in the last five years? Do you know that it's gone completely out of control to the point where it corrupts people? It corrupts people.

That's why we have, as I said, people under federal indictment and charges. It's a system that's got to be cleaned up.

I have fought against it my career. I have fought against it. I was called the sheriff, by the -- one of the senior members of the Appropriations Committee. I didn't win Miss Congeniality in the United States Senate.

Now, Senator Obama didn't mention that, along with his tax cuts, he is also proposing some $800 billion in new spending on new programs.

Now, that's a fundamental difference between myself and Senator Obama. I want to cut spending. I want to keep taxes low. The worst thing we could do in this economic climate is to raise people's taxes.

OBAMA2008: I -- I don't know where John is getting his figures. Let's just be clear.

What I do is I close corporate loopholes, stop providing tax cuts to corporations that are shipping jobs overseas so that we're giving tax breaks to companies that are investing here in the United States. I make sure that we have a health care system that allows for everyone to have basic coverage.

I think those are pretty important priorities. And I pay for every dime of it.

But let's go back to the original point. John, nobody is denying that $18 billion is important. And, absolutely, we need earmark reform. And when I'm president, I will go line by line to make sure that we are not spending money unwisely.

But the fact is that eliminating earmarks alone is not a recipe for how we're going to get the middle class back on track.

OBAMA2008: And when you look at your tax policies that are directed primarily at those who are doing well, and you are neglecting people who are really struggling right now, I think that is a continuation of the last eight years, and we can't afford another four.

LEHRER: Respond directly to him about that, to Senator Obama about that, about the -- he's made it twice now, about your tax -- your policies about tax cuts.

MCCAIN: Well -- well, let me give you an example of what Senator Obama finds objectionable, the business tax.

Right now, the United States of American business pays the second-highest business taxes in the world, 35 percent. Ireland pays 11 percent.

Now, if you're a business person, and you can locate any place in the world, then, obviously, if you go to the country where it's 11 percent tax versus 35 percent, you're going to be able to create jobs, increase your business, make more investment, et cetera.

I want to cut that business tax. I want to cut it so that businesses will remain in -- in the United States of America and create jobs.

But, again, I want to return. It's a lot more than $18 billion in pork-barrel spending. I can tell you, it's rife. It's throughout.

The United States Senate will take up a continuing resolution tomorrow or the next day, sometime next week, with 2,000 -- 2,000 -- look at them, my friends. Look at them. You'll be appalled.

And Senator Obama is a recent convert, after requesting $932 million worth of pork-barrel spending projects.

So the point is, I want people to have tax cuts. I want every family to have a $5,000 refundable tax credit so they can go out and purchase their own health care. I want to double the dividend from $3,500 to $7,000 for every dependent child in America.

I know that the worst thing we could possibly do is to raise taxes on anybody, and a lot of people might be interested in Senator Obama's definition of "rich."

LEHRER: Senator Obama, you have a question for Senator McCain on that?

OBAMA2008: Well, let me just make a couple of points.

LEHRER: All right.

OBAMA2008: My definition -- here's what I can tell the American people: 95 percent of you will get a tax cut. And if you make less than $250,000, less than a quarter-million dollars a year, then you will not see one dime's worth of tax increase.

Now, John mentioned the fact that business taxes on paper are high in this country, and he's absolutely right. Here's the problem: There are so many loopholes that have been written into the tax code, oftentimes with support of Senator McCain, that we actually see our businesses pay effectively one of the lowest tax rates in the world.

And what that means, then, is that there are people out there who are working every day, who are not getting a tax cut, and you want to give them more.

It's not like you want to close the loopholes. You just want to add an additional tax cut over the loopholes. And that's a problem.

Just one last point I want to make, since Senator McCain talked about providing a $5,000 health credit. Now, what he doesn't tell you is that he intends to, for the first time in history, tax health benefits.

So you may end up getting a $5,000 tax credit. Here's the only problem: Your employer now has to pay taxes on the health care that you're getting from your employer. And if you end up losing your health care from your employer, you've got to go out on the open market and try to buy it.

It is not a good deal for the American people. But it's an example of this notion that the market can always solve everything and that the less regulation we have, the better off we're going to be.

MCCAIN: Well, you know, let me just...

LEHRER: We've got to go to another lead question.

MCCAIN: I know we have to, but this is a classic example of walking the walk and talking the talk.

We had an energy bill before the United States Senate. It was festooned with Christmas tree ornaments. It had all kinds of breaks for the oil companies, I mean, billions of dollars worth. I voted against it; Senator Obama voted for it.

OBAMA2008: John, you want to give oil companies another $4 billion.

MCCAIN: You've got to look at our record. You've got to look at our records. That's the important thing.

Who fought against wasteful and earmark spending? Who has been the person who has tried to keep spending under control?

Who's the person who has believed that the best thing for America is -- is to have a tax system that is fundamentally fair? And I've fought to simplify it, and I have proposals to simplify it.

Let's give every American a choice: two tax brackets, generous dividends, and, two -- and let Americans choose whether they want the -- the existing tax code or they want a new tax code.

And so, again, look at the record, particularly the energy bill. But, again, Senator Obama has shifted on a number of occasions. He has voted in the United States Senate to increase taxes on people who make as low as $42,000 a year.

OBAMA2008: That's not true, John. That's not true.

MCCAIN: And that's just a fact. Again, you can look it up.

OBAMA2008: Look, it's just not true. And if we want to talk about oil company profits, under your tax plan, John -- this is undeniable -- oil companies would get an additional $4 billion in tax breaks.

Now, look, we all would love to lower taxes on everybody. But here's the problem: If we are giving them to oil companies, then that means that there are those who are not going to be getting them. And...

MCCAIN: With all due respect, you already gave them to the oil companies.

OBAMA2008: No, but, John, the fact of the matter is, is that I was opposed to those tax breaks, tried to strip them out. We've got an emergency bill on the Senate floor right now that contains some good stuff, some stuff you want, including drilling off-shore, but you're opposed to it because it would strip away those tax breaks that have gone to oil companies.

LEHRER: All right. All right, speaking of things that both of you want, another lead question, and it has to do with the rescue -- the financial rescue thing that we started -- started asking about.

And what -- and the first answer is to you, Senator Obama. As president, as a result of whatever financial rescue plan comes about and the billion, $700 billion, whatever it is it's going to cost, what are you going to have to give up, in terms of the priorities that you would bring as president of the United States, as a result of having to pay for the financial rescue plan?

OBAMA2008: Well, there are a range of things that are probably going to have to be delayed. We don't yet know what our tax revenues are going to be. The economy is slowing down, so it's hard to anticipate right now what the budget is going to look like next year.

But there's no doubt that we're not going to be able to do everything that I think needs to be done. There are some things that I think have to be done.

We have to have energy independence, so I've put forward a plan to make sure that, in 10 years' time, we have freed ourselves from dependence on Middle Eastern oil by increasing production at home, but most importantly by starting to invest in alternative energy, solar, wind, biodiesel, making sure that we're developing the fuel-efficient cars of the future right here in the United States, in Ohio and Michigan, instead of Japan and South Korea.

We have to fix our health care system, which is putting an enormous burden on families. Just -- a report just came out that the average deductible went up 30 percent on American families.

They are getting crushed, and many of them are going bankrupt as a consequence of health care. I'm meeting folks all over the country. We have to do that now, because it will actually make our businesses and our families better off.

The third thing we have to do is we've got to make sure that we're competing in education. We've got to invest in science and technology. China had a space launch and a space walk. We've got to make sure that our children are keeping pace in math and in science.

And one of the things I think we have to do is make sure that college is affordable for every young person in America.

And I also think that we're going to have to rebuild our infrastructure, which is falling behind, our roads, our bridges, but also broadband lines that reach into rural communities.

Also, making sure that we have a new electricity grid to get the alternative energy to population centers that are using them.

So there are some -- some things that we've got to do structurally to make sure that we can compete in this global economy. We can't shortchange those things. We've got to eliminate programs that don't work, and we've got to make sure that the programs that we do have are more efficient and cost less.

LEHRER: Are you -- what priorities would you adjust, as president, Senator McCain, because of the -- because of the financial bailout cost?

MCCAIN: Look, we, no matter what, we've got to cut spending. We have -- as I said, we've let government get completely out of control.

Senator Obama has the most liberal voting record in the United States Senate. It's hard to reach across the aisle from that far to the left.

The point -- the point is -- the point is, we need to examine every agency of government.

First of all, by the way, I'd eliminate ethanol subsidies. I oppose ethanol subsidies.

I think that we have to return -- particularly in defense spending, which is the largest part of our appropriations -- we have to do away with cost-plus contracts. We now have defense systems that the costs are completely out of control.

We tried to build a little ship called the Littoral Combat Ship that was supposed to cost $140 million, ended up costing $400 million, and we still haven't done it.

So we need to have fixed-cost contracts. We need very badly to understand that defense spending is very important and vital, particularly in the new challenges we face in the world, but we have to get a lot of the cost overruns under control.

I know how to do that.

MCCAIN: I saved the taxpayers $6.8 billion by fighting a contract that was negotiated between Boeing and DOD that was completely wrong. And we fixed it and we killed it and the people ended up in federal prison so I know how to do this because I've been involved these issues for many, many years. But I think that we have to examine every agency of government and find out those that are doing their job and keep them and find out those that aren't and eliminate them and we'll have to scrub every agency of government.

LEHRER: But if I hear the two of you correctly neither one of you is suggesting any major changes in what you want to do as president as a result of the financial bailout? Is that what you're saying?

OBAMA2008: No. As I said before, Jim, there are going to be things that end up having to be ...

LEHRER: Like what?

OBAMA2008: ... deferred and delayed. Well, look, I want to make sure that we are investing in energy in order to free ourselves from the dependence on foreign oil. That is a big project. That is a multi-year project.

LEHRER: Not willing to give that up?

OBAMA2008: Not willing to give up the need to do it but there may be individual components that we can't do. But John is right we have to make cuts. We right now give $15 billion every year as subsidies to private insurers under the Medicare system. Doesn't work any better through the private insurers. They just skim off $15 billion. That was a give away and part of the reason is because lobbyists are able to shape how Medicare works.

They did it on the Medicaid prescription drug bill and we have to change the culture. Tom -- or John mentioned me being wildly liberal. Mostly that's just me opposing George Bush's wrong headed policies since I've been in Congress but I think it is that it is also important to recognize I work with Tom Coburn, the most conservative, one of the most conservative Republicans who John already mentioned to set up what we call a Google for government saying we'll list every dollar of federal spending to make sure that the taxpayer can take a look and see who, in fact, is promoting some of these spending projects that John's been railing about.

LEHRER: What I'm trying to get at this is this. Excuse me if I may, senator. Trying to get at that you all -- one of you is going to be the president of the United States come January. At the -- in the middle of a huge financial crisis that is yet to be resolved. And what I'm trying to get at is how this is going to affect you not in very specific -- small ways but in major ways and the approach to take as to the presidency.

MCCAIN: How about a spending freeze on everything but defense, veteran affairs and entitlement programs.

LEHRER: Spending freeze?

MCCAIN: I think we ought to seriously consider with the exceptions the caring of veterans national defense and several other vital issues.

LEHRER: Would you go for that?

OBAMA2008: The problem with a spending freeze is you're using a hatchet where you need a scalpel. There are some programs that are very important that are under funded. I went to increase early childhood education and the notion that we should freeze that when there may be, for example, this Medicare subsidy doesn't make sense.

Let me tell you another place to look for some savings. We are currently spending $10 billion a month in Iraq when they have a $79 billion surplus. It seems to me that if we're going to be strong at home as well as strong abroad, that we have to look at bringing that war to a close.

MCCAIN: Look, we are sending $700 billion a year overseas to countries that don't like us very much. Some of that money ends up in the hands of terrorist organizations. We have to have wind, tide, solar, natural gas, flex fuel cars and all that but we also have to have offshore drilling and we also have to have nuclear power.

Senator Obama opposes both storing and reprocessing of spent nuclear fuel. You can't get there from here and the fact is that we can create 700,000 jobs by building constructing 45 new nuclear power plants by the year 2030. Nuclear power is not only important as far as eliminating our dependence on foreign oil but it's also responsibility as far as climate change is concerned and the issue I have been involved in for many, many years and I'm proud of the work of the work that I've done there along with President Clinton.

LEHRER: Before we go to another lead question. Let me figure out a way to ask the same question in a slightly different way here. Are you -- are you willing to acknowledge both of you that this financial crisis is going to affect the way you rule the country as president of the United States beyond the kinds of things that you have already -- I mean, is it a major move? Is it going to have a major affect?

OBAMA2008: There's no doubt it will affect our budgets. There is no doubt about it. Not only -- Even if we get all $700 billion back, let's assume the markets recover, we' holding assets long enough that eventually taxpayers get it back and that happened during the Great Depression when Roosevelt purchased a whole bunch of homes, over time, home values went back up and in fact government made a profit. If we're lucky and do it right, that could potentially happen but in the short term there's an outlay and we may not see that money for a while.

And because of the economy's slowing down, I think we can also expect less tax revenue so there's no doubt that as president I'm go doing have to make some tough decision.

The only point I want to make is this, that in order to make the tough decisions we have to know what our values are and who we're fighting for and our priorities and if we are spending $300 billion on tax cuts for people who don't need them and weren't even asking for them, and we are leaving out health care which is crushing on people all across the country, then I think we have made a bad decision and I want to make sure we're not shortchanging our long term priorities.

MCCAIN: Well, I want to make sure we're not handing the health care system over to the federal government which is basically what would ultimately happen with Senator Obama's health care plan. I want the families to make decisions between themselves and their doctors. Not the federal government. Look. We have to obviously cut spending. I have fought to cut spending. Senator Obama has $800 billion in new spending programs. I would suggest he start by canceling some of those new spending program that he has.

We can't I think adjust spending around to take care of the very much needed programs, including taking care of our veterans but I also want to say again a healthy economy with low taxes would not raising anyone's taxes is probably the best recipe for eventually having our economy recover.

And spending restraint has got to be a vital part of that. And the reason, one of the major reasons why we're in the difficulties we are in today is because spending got out of control. We owe China $500 billion. And spending, I know, can be brought under control because I have fought against excessive spending my entire career. And I got plans to reduce and eliminate unnecessary and wasteful spending and if there's anybody here who thinks there aren't agencies of government where spending can be cut and their budgets slashed they have not spent a lot of time in Washington.

OBAMA2008: I just want to make this point, Jim. John, it's been your president who you said you agreed with 90 percent of the time who presided over this increase in spending. This orgy of spending and enormous deficits you voted for almost all of his budgets. So to stand here and after eight years and say that you're going to lead on controlling spending and, you know, balancing our tax cuts so that they help middle class families when over the last eight years that hasn't happened I think just is, you know, kind of hard to swallow.

LEHRER: Quick response to Senator Obama.

MCCAIN: It's well-known that I have not been elected Miss Congeniality in the United States Senate nor with the administration. I have opposed the president on spending, on climate change, on torture of prisoner, on - on Guantanamo Bay. On a -- on the way that the Iraq War was conducted. I have a long record and the American people know me very well and that is independent and a maverick of the Senate and I'm happy to say that I've got a partner that's a good maverick along with me now.

LEHRER: All right. Let's go another subject. Lead question, two minutes to you, senator McCain. Much has been said about the lessons of Vietnam. What do you see as the lessons of Iraq?

MCCAIN: I think the lessons of Iraq are very clear that you cannot have a failed strategy that will then cause you to nearly lose a conflict. Our initial military success, we went in to Baghdad and everybody celebrated. And then the war was very badly mishandled. I went to Iraq in 2003 and came back and said, we've got to change this strategy. This strategy requires additional troops, it requires a fundamental change in strategy and I fought for it. And finally, we came up with a great general and a strategy that has succeeded.

This strategy has succeeded. And we are winning in Iraq. And we will come home with victory and with honor. And that withdrawal is the result of every counterinsurgency that succeeds.

MCCAIN: And I want to tell you that now that we will succeed and our troops will come home, and not in defeat, that we will see a stable ally in the region and a fledgling democracy.

The consequences of defeat would have been increased Iranian influence. It would have been increase in sectarian violence. It would have been a wider war, which the United States of America might have had to come back.

So there was a lot at stake there. And thanks to this great general, David Petraeus, and the troops who serve under him, they have succeeded. And we are winning in Iraq, and we will come home. And we will come home as we have when we have won other wars and not in defeat.

LEHRER: Two minutes, how you see the lessons of Iraq, Senator Obama?

OBAMA2008: Well, this is an area where Senator McCain and I have a fundamental difference because I think the first question is whether we should have gone into the war in the first place.

Now six years ago, I stood up and opposed this war at a time when it was politically risky to do so because I said that not only did we not know how much it was going to cost, what our exit strategy might be, how it would affect our relationships around the world, and whether our intelligence was sound, but also because we hadn't finished the job in Afghanistan.

We hadn't caught bin Laden. We hadn't put al Qaeda to rest, and as a consequence, I thought that it was going to be a distraction. Now Senator McCain and President Bush had a very different judgment.

And I wish I had been wrong for the sake of the country and they had been right, but that's not the case. We've spent over $600 billion so far, soon to be $1 trillion. We have lost over 4,000 lives. We have seen 30,000 wounded, and most importantly, from a strategic national security perspective, al Qaeda is resurgent, stronger now than at any time since 2001.

We took our eye off the ball. And not to mention that we are still spending $10 billion a month, when they have a $79 billion surplus, at a time when we are in great distress here at home, and we just talked about the fact that our budget is way overstretched and we are borrowing money from overseas to try to finance just some of the basic functions of our government.

So I think the lesson to be drawn is that we should never hesitate to use military force, and I will not, as president, in order to keep the American people safe. But we have to use our military wisely. And we did not use our military wisely in Iraq.

LEHRER: Do you agree with that, the lesson of Iraq?

MCCAIN: The next president of the United States is not going to have to address the issue as to whether we went into Iraq or not. The next president of the United States is going to have to decide how we leave, when we leave, and what we leave behind. That's the decision of the next president of the United States.

Senator Obama said the surge could not work, said it would increase sectarian violence, said it was doomed to failure. Recently on a television program, he said it exceed our wildest expectations.

But yet, after conceding that, he still says that he would oppose the surge if he had to decide that again today. Incredibly, incredibly Senator Obama didn't go to Iraq for 900 days and never

LEHRER: Well, let's go at some of these things...

MCCAIN: Senator Obama is the chairperson of a committee that oversights NATO that's in Afghanistan. To this day, he has never had a hearing.

LEHRER: What about that point?

MCCAIN: I mean, it's remarkable.

LEHRER: All right. What about that point?

OBAMA2008: Which point? He raised a whole bunch of them.

LEHRER: I know, OK, let's go to the latter point and we'll back up. The point about your not having been...

OBAMA2008: Look, I'm very proud of my vice presidential selection, Joe Biden, who is the chairman of the Senate Foreign Relations Committee, and as he explains, and as John well knows, the issues of Afghanistan, the issues of Iraq, critical issues like that, don't go through my subcommittee because they're done as a committee as a whole.

But that's Senate inside baseball. But let's get back to the core issue here. Senator McCain is absolutely right that the violence has been reduced as a consequence of the extraordinary sacrifice of our troops and our military families.

They have done a brilliant job, and General Petraeus has done a brilliant job. But understand, that was a tactic designed to contain the damage of the previous four years of mismanagement of this war.

And so John likes -- John, you like to pretend like the war started in 2007. You talk about the surge. The war started in 2003, and at the time when the war started, you said it was going to be quick and easy. You said we knew where the weapons of mass destruction were. You were wrong.

You said that we were going to be greeted as liberators. You were wrong. You said that there was no history of violence between Shiite and Sunni. And you were wrong. And so my question is...

LEHRER: Senator Obama...

OBAMA2008: ... of judgment, of whether or not -- of whether or not -- if the question is who is best-equipped as the next president to make good decisions about how we use our military, how we make sure that we are prepared and ready for the next conflict, then I think we can take a look at our judgment.

LEHRER: I have got a lot on the plate here...

MCCAIN: I'm afraid Senator Obama doesn't understand the difference between a tactic and a strategy. But the important -- I'd like to tell you, two Fourths of July ago I was in Baghdad. General Petraeus invited Senator Lindsey Graham and me to attend a ceremony where 688 brave young Americans, whose enlistment had expired, were reenlisting to stay and fight for Iraqi freedom and American freedom.

I was honored to be there. I was honored to speak to those troops. And you know, afterwards, we spent a lot of time with them. And you know what they said to us? They said, let us win. They said, let us win. We don't want our kids coming back here.

And this strategy, and this general, they are winning. Senator Obama refuses to acknowledge that we are winning in Iraq.

OBAMA2008: That's not true.

MCCAIN: They just passed an electoral...

OBAMA2008: That's not true.

MCCAIN: An election law just in the last few days. There is social, economic progress, and a strategy, a strategy of going into an area, clearing and holding, and the people of the country then become allied with you. They inform on the bad guys. And peace comes to the country, and prosperity.

That's what's happening in Iraq, and it wasn't a tactic.

LEHRER: Let me see...

OBAMA2008: Jim, Jim, this is a big...

MCCAIN: It was a stratagem. And that same strategy will be employed in Afghanistan by this great general. And Senator Obama, who after promising not to vote to cut off funds for the troops, did the incredible thing of voting to cut off the funds for the troops in Iraq and Afghanistan.

OBAMA2008: Jim, there are a whole bunch of things we have got to answer. First of all, let's talk about this troop funding issue because John always brings this up. Senator McCain cut -- Senator McCain opposed funding for troops in legislation that had a timetable, because he didn't believe in a timetable.

I opposed funding a mission that had no timetable, and was open- ended, giving a blank check to George Bush. We had a difference on the timetable. We didn't have a difference on whether or not we were going to be funding troops.

We had a legitimate difference, and I absolutely understand the difference between tactics and strategy. And the strategic question that the president has to ask is not whether or not we are employing a particular approach in the country once we have made the decision to be there.

The question is, was this wise? We have seen Afghanistan worsen, deteriorate. We need more troops there. We need more resources there. Senator McCain, in the rush to go into Iraq, said, you know what? We've been successful in Afghanistan. There is nobody who can pose a threat to us there.

This is a time when bin Laden was still out, and now they've reconstituted themselves. Secretary of Defense Robert Gates himself acknowledges the war on terrorism started in Afghanistan and it needs to end there.

But we can't do it if we are not willing to give Iraq back its country. Now, what I've said is we should end this war responsibly. We should do it in phases. But in 16 months we should be able to reduce our combat troops, put -- provide some relief to military families and our troops and bolster our efforts in Afghanistan so that we can capture and kill bin Laden and crush al Qaeda.

And right now, the commanders in Afghanistan, as well as Admiral Mullen, have acknowledged that we don't have enough troops to deal with Afghanistan because we still have more troops in Iraq than we did before the surge.

MCCAIN: Admiral Mullen suggests that Senator Obama's plan is dangerous for America.

OBAMA2008: That's not the case.

MCCAIN: That's what ...

OBAMA2008: What he said was a precipitous...

MCCAIN: That's what Admiral Mullen said.

OBAMA2008: ... withdrawal would be dangerous. He did not say that. That's not true.

MCCAIN: And also General Petraeus said the same thing. Osama bin Laden and General Petraeus have one thing in common that I know of, they both said that Iraq is the central battleground.

Now General Petraeus has praised the successes, but he said those successes are fragile and if we set a specific date for withdrawal -- and by the way, Senator Obama's original plan, they would have been out last spring before the surge ever had a chance to succeed.

And I'm -- I'm -- understand why Senator Obama was surprised and said that the surge succeeded beyond his wildest expectations.

MCCAIN: It didn't exceed beyond mine, because I know that that's a strategy that has worked and can succeed. But if we snatch defeat from the jaws of victory and adopt Senator Obama's plan, then we will have a wider war and it will make things more complicated throughout the region, including in Afghanistan.

LEHRER: Afghanistan, lead -- a new -- a new lead question. Now, having resolved Iraq, we'll move to Afghanistan.

And it goes to you, Senator Obama, and it's a -- it picks up on a point that's already been made. Do you think more troops -- more U.S. troops should be sent to Afghanistan, how many, and when?

OBAMA2008: Yes, I think we need more troops. I've been saying that for over a year now.

And I think that we have to do it as quickly as possible, because it's been acknowledged by the commanders on the ground the situation is getting worse, not better.

We had the highest fatalities among U.S. troops this past year than at any time since 2002. And we are seeing a major offensive taking place -- al Qaeda and Taliban crossing the border and attacking our troops in a brazen fashion. They are feeling emboldened.

And we cannot separate Afghanistan from Iraq, because what our commanders have said is we don't have the troops right now to deal with Afghanistan.

So I would send two to three additional brigades to Afghanistan. Now, keep in mind that we have four times the number of troops in Iraq, where nobody had anything to do with 9/11 before we went in, where, in fact, there was no al Qaeda before we went in, but we have four times more troops there than we do in Afghanistan.

And that is a strategic mistake, because every intelligence agency will acknowledge that al Qaeda is the greatest threat against the United States and that Secretary of Defense Gates acknowledged the central front -- that the place where we have to deal with these folks is going to be in Afghanistan and in Pakistan.

So here's what we have to do comprehensively, though. It's not just more troops.

We have to press the Afghan government to make certain that they are actually working for their people. And I've said this to President Karzai.

No. 2, we've got to deal with a growing poppy trade that has exploded over the last several years.

No. 3, we've got to deal with Pakistan, because al Qaeda and the Taliban have safe havens in Pakistan, across the border in the northwest regions, and although, you know, under George Bush, with the support of Senator McCain, we've been giving them $10 billion over the last seven years, they have not done what needs to be done to get rid of those safe havens.

And until we do, Americans here at home are not going to be safe.

LEHRER: Afghanistan, Senator McCain?

MCCAIN: First of all, I won't repeat the mistake that I regret enormously, and that is, after we were able to help the Afghan freedom fighters and drive the Russians out of Afghanistan, we basically washed our hands of the region.

And the result over time was the Taliban, al Qaeda, and a lot of the difficulties we are facing today. So we can't ignore those lessons of history.

Now, on this issue of aiding Pakistan, if you're going to aim a gun at somebody, George Shultz, our great secretary of state, told me once, you'd better be prepared to pull the trigger.

I'm not prepared at this time to cut off aid to Pakistan. So I'm not prepared to threaten it, as Senator Obama apparently wants to do, as he has said that he would announce military strikes into Pakistan.

We've got to get the support of the people of -- of Pakistan. He said that he would launch military strikes into Pakistan.

Now, you don't do that. You don't say that out loud. If you have to do things, you have to do things, and you work with the Pakistani government.

Now, the new president of Pakistan, Kardari, has got his hands full. And this area on the border has not been governed since the days of Alexander the Great.

I've been to Waziristan. I can see how tough that terrain is. It's ruled by a handful of tribes.

And, yes, Senator Obama calls for more troops, but what he doesn't understand, it's got to be a new strategy, the same strategy that he condemned in Iraq. It's going to have to be employed in Afghanistan.

And we're going to have to help the Pakistanis go into these areas and obtain the allegiance of the people. And it's going to be tough. They've intermarried with al Qaeda and the Taliban. And it's going to be tough. But we have to get the cooperation of the people in those areas.

And the Pakistanis are going to have to understand that that bombing in the Marriott Hotel in Islamabad was a signal from the terrorists that they don't want that government to cooperate with us in combating the Taliban and jihadist elements.

So we've got a lot of work to do in Afghanistan. But I'm confident, now that General Petraeus is in the new position of command, that we will employ a strategy which not only means additional troops -- and, by the way, there have been 20,000 additional troops, from 32,000 to 53,000, and there needs to be more.

So it's not just the addition of troops that matters. It's a strategy that will succeed. And Pakistan is a very important element in this. And I know how to work with him. And I guarantee you I would not publicly state that I'm going to attack them.

OBAMA2008: Nobody talked about attacking Pakistan. Here's what I said.

And if John wants to disagree with this, he can let me know, that, if the United States has al Qaeda, bin Laden, top-level lieutenants in our sights, and Pakistan is unable or unwilling to act, then we should take them out.

Now, I think that's the right strategy; I think that's the right policy.

And, John, I -- you're absolutely right that presidents have to be prudent in what they say. But, you know, coming from you, who, you know, in the past has threatened extinction for North Korea and, you know, sung songs about bombing Iran, I don't know, you know, how credible that is. I think this is the right strategy.

Now, Senator McCain is also right that it's difficult. This is not an easy situation. You've got cross-border attacks against U.S. troops.

And we've got a choice. We could allow our troops to just be on the defensive and absorb those blows again and again and again, if Pakistan is unwilling to cooperate, or we have to start making some decisions.

And the problem, John, with the strategy that's been pursued was that, for 10 years, we coddled Musharraf, we alienated the Pakistani population, because we were anti-democratic. We had a 20th-century mindset that basically said, "Well, you know, he may be a dictator, but he's our dictator."

And as a consequence, we lost legitimacy in Pakistan. We spent $10 billion. And in the meantime, they weren't going after al Qaeda, and they are more powerful now than at any time since we began the war in Afghanistan.

That's going to change when I'm president of the United States.

MCCAIN: I -- I don't think that Senator Obama understands that there was a failed state in Pakistan when Musharraf came to power. Everybody who was around then, and had been there, and knew about it knew that it was a failed state.

But let me tell you, you know, this business about bombing Iran and all that, let me tell you my record.

Back in 1983, when I was a brand-new United States congressman, the one -- the person I admired the most and still admire the most, Ronald Reagan, wanted to send Marines into Lebanon.

And I saw that, and I saw the situation, and I stood up, and I voted against that, because I was afraid that they couldn't make peace in a place where 300 or 400 or several hundred Marines would make a difference. Tragically, I was right: Nearly 300 Marines lost their lives in the bombing of the barracks.

And then we had Somalia -- then we had the first Gulf War. I supported -- I supported that.

I supported us going into Bosnia, when a number of my own party and colleagues was against that operation in Bosnia. That was the right thing to do, to stop genocide and to preserve what was necessary inside of Europe.

I supported what we did in Kosovo. I supported it because ethnic cleansing and genocide was taking place there.

And I have a record -- and Somalia, I opposed that we should turn -- turn the force in Somalia from a peacekeeping force into a peacemaking force, which they were not capable of.

So I have a record. I have a record of being involved in these national security issues, which involve the highest responsibility and the toughest decisions that any president can make, and that is to send our young men and women into harm's way.

And I'll tell you, I had a town hall meeting in Wolfeboro, New Hampshire, and a woman stood up and she said, "Senator McCain, I want you to do me the honor of wearing a bracelet with my son's name on it."

He was 22 years old and he was killed in combat outside of Baghdad, Matthew Stanley, before Christmas last year. This was last August, a year ago. And I said, "I will -- I will wear his bracelet with honor."

And this was August, a year ago. And then she said, "But, Senator McCain, I want you to do everything -- promise me one thing, that you'll do everything in your power to make sure that my son's death was not in vain."

That means that that mission succeeds, just like those young people who re-enlisted in Baghdad, just like the mother I met at the airport the other day whose son was killed. And they all say to me that we don't want defeat.

MCCAIN: A war that I was in, where we had an Army, that it wasn't through any fault of their own, but they were defeated. And I know how hard it is for that -- for an Army and a military to recover from that. And it did and we will win this one and we won't come home in defeat and dishonor and probably have to go back if we fail.

OBAMA2008: Jim, let me just make a point. I've got a bracelet, too, from Sergeant - from the mother of Sergeant Ryan David Jopeck, sure another mother is not going through what I'm going through.

No U.S. soldier ever dies in vain because they're carrying out the missions of their commander in chief. And we honor all the service that they've provided. Our troops have performed brilliantly. The question is for the next president, are we making good judgments about how to keep America safe precisely because sending our military into battle is such an enormous step.

And the point that I originally made is that we took our eye off Afghanistan, we took our eye off the folks who perpetrated 9/11, they are still sending out videotapes and Senator McCain, nobody is talking about defeat in Iraq, but I have to say we are having enormous problems in Afghanistan because of that decision.

And it is not true you have consistently been concerned about what happened in Afghanistan. At one point, while you were focused on Iraq, you said well, we can "muddle through" Afghanistan. You don't muddle through the central front on terror and you don't muddle through going after bin Laden. You don't muddle through stamping out the Taliban.

I think that is something we have to take seriously. And when I'm president, I will.

LEHRER: New ...

MCCAIN: You might think that with that kind of concern that Senator Obama would have gone to Afghanistan, particularly given his responsibilities as a subcommittee chairman. By the way, when I'm subcommittee chairman, we take up the issues under my subcommittee. But the important thing is -- the important thing is I visited Afghanistan and I traveled to Waziristan and I traveled to these places and I know what our security requirements are. I know what our needs are. So the point is that we will prevail in Afghanistan, but we need the new strategy and we need it to succeed.

But the important thing is, if we suffer defeat in Iraq, which General Petraeus predicts we will, if we adopted Senator Obama's set date for withdrawal, then that will have a calamitous effect in Afghanistan and American national security interests in the region. Senator Obama doesn't seem to understand there is a connected between the two.

LEHRER: I have some good news and bad news for the two of you. You all are even on time, which is remarkable, considering we've been going at it ...

OBAMA2008: A testimony to you, Jim.

LEHRER: I don't know about that. But the bad news is all my little five minute things have run over, so, anyhow, we'll adjust as we get there. But the amount of time is even.

New lead question. And it goes two minutes to you, Senator McCain, what is your reading on the threat to Iran right now to the security of the United States?

MCCAIN: My reading of the threat from Iran is that if Iran acquires nuclear weapons, it is an existential threat to the State of Israel and to other countries in the region because the other countries in the region will feel compelling requirement to acquire nuclear weapons as well.

Now we cannot a second Holocaust. Let's just make that very clear. What I have proposed for a long time, and I've had conversation with foreign leaders about forming a league of democracies, let's be clear and let's have some straight talk. The Russians are preventing significant action in the United Nations Security Council.

I have proposed a league of democracies, a group of people - a group of countries that share common interests, common values, common ideals, they also control a lot of the world's economic power. We could impose significant meaningful, painful sanctions on the Iranians that I think could have a beneficial effect.

The Iranians have a lousy government, so therefore their economy is lousy, even though they have significant oil revenues. So I am convinced that together, we can, with the French, with the British, with the Germans and other countries, democracies around the world, we can affect Iranian behavior.

But have no doubt, but have no doubt that the Iranians continue on the path to the acquisition of a nuclear weapon as we speak tonight. And it is a threat not only in this region but around the world.

What I'd also like to point out the Iranians are putting the most lethal IEDs into Iraq which are killing young Americans, there are special groups in Iran coming into Iraq and are being trained in Iran. There is the Republican Guard in Iran, which Senator Kyl had an amendment in order to declare them a sponsor of terror. Senator Obama said that would be provocative.

So this is a serious threat. This is a serious threat to security in the world, and I believe we can act and we can act with our friends and allies and reduce that threat as quickly as possible, but have no doubt about the ultimate result of them acquiring nuclear weapons.

LEHRER: Two minutes on Iran, Senator Obama.

OBAMA2008: Well, let me just correct something very quickly. I believe the Republican Guard of Iran is a terrorist organization. I've consistently said so. What Senator McCain refers to is a measure in the Senate that would try to broaden the mandate inside of Iraq. To deal with Iran.

And ironically, the single thing that has strengthened Iran over the last several years has been the war in Iraq. Iraq was Iran's mortal enemy. That was cleared away. And what we've seen over the last several years is Iran's influence grow. They have funded Hezbollah, they have funded Hamas, they have gone from zero centrifuges to 4,000 centrifuges to develop a nuclear weapon.

So obviously, our policy over the last eight years has not worked. Senator McCain is absolutely right, we cannot tolerate a nuclear Iran. It would be a game changer. Not only would it threaten Israel, a country that is our stalwart ally, but it would also create an environment in which you could set off an arms race in this Middle East.

Now here's what we need to do. We do need tougher sanctions. I do not agree with Senator McCain that we're going to be able to execute the kind of sanctions we need without some cooperation with some countries like Russia and China that are, I think Senator McCain would agree, not democracies, but have extensive trade with Iran but potentially have an interest in making sure Iran doesn't have a nuclear weapon.

But we are also going to have to, I believe, engage in tough direct diplomacy with Iran and this is a major difference I have with Senator McCain, this notion by not talking to people we are punishing them has not worked. It has not worked in Iran, it has not worked in North Korea. In each instance, our efforts of isolation have actually accelerated their efforts to get nuclear weapons. That will change when I'm president of the United States.

LEHRER: Senator, what about talking?

MCCAIN: Senator Obama twice said in debates he would sit down with Ahmadinejad, Chavez and Raul Castro without precondition. Without precondition. Here is Ahmadinenene, Ahmadinejad, who is, Ahmadinejad, who is now in New York, talking about the extermination of the State of Israel, of wiping Israel off the map, and we're going to sit down, without precondition, across the table, to legitimize and give a propaganda platform to a person that is espousing the extermination of the state of Israel, and therefore then giving them more credence in the world arena and therefore saying, they've probably been doing the right thing, because you will sit down across the table from them and that will legitimize their illegal behavior.

The point is that throughout history, whether it be Ronald Reagan, who wouldn't sit down with Brezhnev, Andropov or Chernenko until Gorbachev was ready with glasnost and perestroika.

Or whether it be Nixon's trip to China, which was preceded by Henry Kissinger, many times before he went. Look, I'll sit down with anybody, but there's got to be pre-conditions. Those pre-conditions would apply that we wouldn't legitimize with a face to face meeting, a person like Ahmadinejad. Now, Senator Obama said, without preconditions.

OBAMA2008: So let's talk about this. First of all, Ahmadinejad is not the most powerful person in Iran. So he may not be the right person to talk to. But I reserve the right, as president of the United States to meet with anybody at a time and place of my choosing if I think it's going to keep America safe.

And I'm glad that Senator McCain brought up the history, the bipartisan history of us engaging in direct diplomacy.

Senator McCain mentioned Henry Kissinger, who's one of his advisers, who, along with five recent secretaries of state, just said that we should meet with Iran -- guess what -- without precondition. This is one of your own advisers.

Now, understand what this means "without preconditions." It doesn't mean that you invite them over for tea one day. What it means is that we don't do what we've been doing, which is to say, "Until you agree to do exactly what we say, we won't have direct contacts with you."

There's a difference between preconditions and preparation. Of course we've got to do preparations, starting with low-level diplomatic talks, and it may not work, because Iran is a rogue regime.

But I will point out that I was called naive when I suggested that we need to look at exploring contacts with Iran. And you know what? President Bush recently sent a senior ambassador, Bill Burns, to participate in talks with the Europeans around the issue of nuclear weapons.

Again, it may not work, but if it doesn't work, then we have strengthened our ability to form alliances to impose the tough sanctions that Senator McCain just mentioned.

And when we haven't done it, as in North Korea -- let me just take one more example -- in North Korea, we cut off talks. They're a member of the axis of evil. We can't deal with them.

And you know what happened? They went -- they quadrupled their nuclear capacity. They tested a nuke. They tested missiles. They pulled out of the nonproliferation agreement. And they sent nuclear secrets, potentially, to countries like Syria.

When we re-engaged -- because, again, the Bush administration reversed course on this -- then we have at least made some progress, although right now, because of the problems in North Korea, we are seeing it on shaky ground.

And -- and I just -- so I just have to make this general point that the Bush administration, some of Senator McCain's own advisers all think this is important, and Senator McCain appears resistant.

He even said the other day that he would not meet potentially with the prime minister of Spain, because he -- you know, he wasn't sure whether they were aligned with us. I mean, Spain? Spain is a NATO ally.

MCCAIN: Of course.

OBAMA2008: If we can't meet with our friends, I don't know how we're going to lead the world in terms of dealing with critical issues like terrorism.

MCCAIN: I'm not going to set the White House visitors schedule before I'm president of the United States. I don't even have a seal yet.

Look, Dr. Kissinger did not say that he would approve of face-to- face meetings between the president of the United States and the president -- and Ahmadinejad. He did not say that.

OBAMA2008: Of course not.

MCCAIN: He said that there could be secretary-level and lower level meetings. I've always encouraged them. The Iranians have met with Ambassador Crocker in Baghdad.

What Senator Obama doesn't seem to understand that if without precondition you sit down across the table from someone who has called Israel a "stinking corpse," and wants to destroy that country and wipe it off the map, you legitimize those comments.

This is dangerous. It isn't just naive; it's dangerous. And so we just have a fundamental difference of opinion.

As far as North Korea is concerned, our secretary of state, Madeleine Albright, went to North Korea. By the way, North Korea, most repressive and brutal regime probably on Earth. The average South Korean is three inches taller than the average North Korean, a huge gulag.

We don't know what the status of the dear leader's health is today, but we know this, that the North Koreans have broken every agreement that they've entered into.

And we ought to go back to a little bit of Ronald Reagan's "trust, but verify," and certainly not sit down across the table from -- without precondition, as Senator Obama said he did twice, I mean, it's just dangerous.

OBAMA2008: Look, I mean, Senator McCain keeps on using this example that suddenly the president would just meet with somebody without doing any preparation, without having low-level talks. Nobody's been talking about that, and Senator McCain knows it. This is a mischaracterization of my position.

When we talk about preconditions -- and Henry Kissinger did say we should have contacts without preconditions -- the idea is that we do not expect to solve every problem before we initiate talks.

And, you know, the Bush administration has come to recognize that it hasn't worked, this notion that we are simply silent when it comes to our enemies. And the notion that we would sit with Ahmadinejad and not say anything while he's spewing his nonsense and his vile comments is ridiculous. Nobody is even talking about that.

MCCAIN: So let me get this right. We sit down with Ahmadinejad, and he says, "We're going to wipe Israel off the face of the Earth," and we say, "No, you're not"? Oh, please.

OBAMA2008: No, let me tell...

MCCAIN: By the way, my friend, Dr. Kissinger, who's been my friend for 35 years, would be interested to hear this conversation and Senator Obama's depiction of his -- of his positions on the issue. I've known him for 35 years.

OBAMA2008: We will take a look.

MCCAIN: And I guarantee you he would not -- he would not say that presidential top level.

OBAMA2008: Nobody's talking about that.

MCCAIN: Of course he encourages and other people encourage contacts, and negotiations, and all other things. We do that all the time.

LEHRER: We're going to go to a new...

MCCAIN: And Senator Obama is parsing words when he says precondition means preparation.

OBAMA2008: I am not parsing words.

MCCAIN: He's parsing words, my friends.

OBAMA2008: I'm using the same words that your advisers use.

Please, go ahead.

LEHRER: New lead question.

Russia, goes to you, two minutes, Senator Obama. How do you see the relationship with Russia? Do you see them as a competitor? Do you see them as an enemy? Do you see them as a potential partner?

OBAMA2008: Well, I think that, given what's happened over the last several weeks and months, our entire Russian approach has to be evaluated, because a resurgent and very aggressive Russia is a threat to the peace and stability of the region.

Their actions in Georgia were unacceptable. They were unwarranted. And at this point, it is absolutely critical for the next president to make clear that we have to follow through on our six-party -- or the six-point cease-fire. They have to remove themselves from South Ossetia and Abkhazia.

It is absolutely important that we have a unified alliance and that we explain to the Russians that you cannot be a 21st-century superpower, or power, and act like a 20th-century dictatorship.

And we also have to affirm all the fledgling democracies in that region, you know, the Estonians, the Lithuanians, the Latvians, the Poles, the Czechs, that we are, in fact, going to be supportive and in solidarity with them in their efforts. They are members of NATO.

And to countries like Georgia and the Ukraine, I think we have to insist that they are free to join NATO if they meet the requirements, and they should have a membership action plan immediately to start bringing them in.

Now, we also can't return to a Cold War posture with respect to Russia. It's important that we recognize there are going to be some areas of common interest. One is nuclear proliferation.

They have not only 15,000 nuclear warheads, but they've got enough to make another 40,000, and some of those loose nukes could fall into the hands of al Qaeda.

This is an area where I've led on in the Senate, working with a Republican ranking member of the Senate Foreign Relations Committee, Dick Lugar, to deal with the proliferation of loose nuclear weapons. That's an area where we're going to have to work with Russia.

But we have to have a president who is clear that you don't deal with Russia based on staring into his eyes and seeing his soul. You deal with Russia based on, what are your -- what are the national security interests of the United States of America?

And we have to recognize that the way they've been behaving lately demands a sharp response from the international community and our allies.

LEHRER: Two minutes on Russia, Senator McCain.

MCCAIN: Well, I was interested in Senator Obama's reaction to the Russian aggression against Georgia. His first statement was, "Both sides ought to show restraint."

Again, a little bit of naivete there. He doesn't understand that Russia committed serious aggression against Georgia. And Russia has now become a nation fueled by petro-dollars that is basically a KGB apparatchik-run government.

I looked into Mr. Putin's eyes, and I saw three letters, a "K," a "G," and a "B." And their aggression in Georgia is not acceptable behavior.

I don't believe we're going to go back to the Cold War. I am sure that that will not happen. But I do believe that we need to bolster our friends and allies. And that wasn't just about a problem between Georgia and Russia. It had everything to do with energy.

There's a pipeline that runs from the Caspian through Georgia through Turkey. And, of course, we know that the Russians control other sources of energy into Europe, which they have used from time to time.

It's not accidental that the presidents of Latvia, Estonia, Lithuania, Poland, and Ukraine flew to Georgia, flew to Tbilisi, where I have spent significant amount of time with a great young president, Misha Saakashvili.

MCCAIN: And they showed solidarity with them, but, also, they are very concerned about the Russian threats to regain their status of the old Russian to regain their status of the old Russian empire.

Now, I think the Russians ought to understand that we will support -- we, the United States -- will support the inclusion of Georgia and Ukraine in the natural process, inclusion into NATO.

We also ought to make it very clear that the Russians are in violation of their cease-fire agreement. They have stationed additional troops in Abkhazia and South Ossetia.

By the way, I went there once, and we went inside and drove in, and there was a huge poster. And this is -- this is Georgian territory. And there was a huge poster of Vladimir Putin, and it said, "Vladimir Putin, our president."

It was very clear, the Russian intentions towards Georgia. They were just waiting to seize the opportunity.

So, this is a very difficult situation. We want to work with the Russians. But we also have every right to expect the Russians to behave in a fashion and keeping with a -- with a -- with a country who respects international boundaries and the norms of international behavior.

And watch Ukraine. This whole thing has got a lot to do with Ukraine, Crimea, the base of the Russian fleet in Sevastopol. And the breakdown of the political process in Ukraine between Tymoshenko and Yushchenko is a very serious problem.

So watch Ukraine, and let's make sure that we -- that the Ukrainians understand that we are their friend and ally.

LEHRER: You see any -- do you have a major difference with what he just said?

OBAMA2008: No, actually, I think Senator McCain and I agree for the most part on these issues. Obviously, I disagree with this notion that somehow we did not forcefully object to Russians going into Georgia.

I immediately said that this was illegal and objectionable. And, absolutely, I wanted a cessation of the violence, because it put an enormous strain on Georgia, and that's why I was the first to say that we have to rebuild the Georgian economy and called for a billion dollars that has now gone in to help them rebuild.

Because part of Russia's intentions here was to weaken the economy to the point where President Saakashvili was so weakened that he might be replaced by somebody that Putin favored more.

Two points I think are important to think about when it comes to Russia.

No. 1 is we have to have foresight and anticipate some of these problems. So back in April, I warned the administration that you had Russian peacekeepers in Georgian territory. That made no sense whatsoever.

And what we needed to do was replace them with international peacekeepers and a special envoy to resolve the crisis before it boiled over.

That wasn't done. But had it been done, it's possible we could have avoided the issue.

The second point I want to make is -- is the issue of energy. Russia is in part resurgent and Putin is feeling powerful because of petro-dollars, as Senator McCain mentioned.

That means that we, as one of the biggest consumers of oil -- 25 percent of the world's oil -- have to have an energy strategy not just to deal with Russia, but to deal with many of the rogue states we've talked about, Iran, Venezuela.

And that means, yes, increasing domestic production and off-shore drilling, but we only have 3 percent of the world's oil supplies and we use 25 percent of the world's oil. So we can't simply drill our way out of the problem.

What we're going to have to do is to approach it through alternative energy, like solar, and wind, and biodiesel, and, yes, nuclear energy, clean-coal technology. And, you know, I've got a plan for us to make a significant investment over the next 10 years to do that.

And I have to say, Senator McCain and I, I think agree on the importance of energy, but Senator McCain mentioned earlier the importance of looking at a record.

Over 26 years, Senator McCain voted 23 times against alternative energy, like solar, and wind, and biodiesel.

And so we -- we -- we've got to walk the walk and not just talk the talk when it comes to energy independence, because this is probably going to be just as vital for our economy and the pain that people are feeling at the pump -- and, you know, winter's coming and home heating oil -- as it is our national security and the issue of climate change that's so important.

LEHRER: We've got time for one more lead question segment. We're way out of...

LEHRER: Quick response and then...

MCCAIN: No one from Arizona is against solar. And Senator Obama says he's for nuclear, but he's against reprocessing and he's against storing. So...

OBAMA2008: That's just not true, John. John, I'm sorry, but that's not true.

MCCAIN: ... it's hard to get there from here. And off-shore drilling is also something that is very important and it is a bridge.

And we know that, if we drill off-shore and exploit a lot of these reserves, it will help, at temporarily, relieve our energy requirements. And it will have, I think, an important effect on the price of a barrel of oil.

OBAMA2008: I just have to respond very quickly, just to correct -- just to correct the record.

MCCAIN: So I want to say that, with the Nunn-Lugar thing...

LEHRER: Excuse me, Senator.

OBAMA2008: John?

MCCAIN: ... I supported Nunn-Lugar back in the early 1990s when a lot of my colleagues didn't. That was the key legislation at the time and put us on the road to eliminating this issue of nuclear waste and the nuclear fuel that has to be taken care of.

OBAMA2008: I -- I just have to correct the record here. I have never said that I object to nuclear waste. What I've said is that we have to store it safely.

And, Senator McCain, he says -- he talks about Arizona.

LEHRER: All right.

OBAMA2008: I've got to make this point, Jim.

LEHRER: OK.

OBAMA2008: He objects...

MCCAIN: I have voted for alternate fuel all of my time...

OBAMA2008: He -- he -- he objects...

LEHRER: One at a time, please.

OBAMA2008: He objected...

LEHRER: One at a time.

MCCAIN: No one can be opposed to alternate energy.

OBAMA2008: All right, fair enough. Let's move on. You've got one more energy -- you've got one more question.

LEHRER: This is the last -- last lead question. You have two minutes each. And the question is this, beginning with you, Senator McCain.

What do you think the likelihood is that there would be another 9/11-type attack on the continental United States?

MCCAIN: I think it's much less than it was the day after 9/11. I think it -- that we have a safer nation, but we are a long way from safe.

And I want to tell you that one of the things I'm most proud of, among others, because I have worked across the aisle. I have a long record on that, on a long series of reforms.

But after 9/11, Senator Joe Lieberman and I decided that we needed a commission, and that was a commission to investigate 9/11, and find out what happened, and fix it.

And we were -- we were opposed by the administration, another area where I differed with this administration. And we were stymied until the families of 9/11 came, and they descended on Washington, and we got that legislation passed.

And there were a series of recommendations, as I recall, more than 40. And I'm happy to say that we've gotten written into law most of those reforms recommended by that commission. I'm proud of that work, again, bipartisan, reaching across the aisle, working together, Democrat and Republican alike.

So we have a long way to go in our intelligence services. We have to do a better job in human intelligence. And we've got to -- to make sure that we have people who are trained interrogators so that we don't ever torture a prisoner ever again.

We have to make sure that our technological and intelligence capabilities are better. We have to work more closely with our allies. I know our allies, and I can work much more closely with them.

But I can tell you that I think America is safer today than it was on 9/11. But that doesn't mean that we don't have a long way to go.

And I'd like to remind you, also, as a result of those recommendations, we've probably had the largest reorganization of government since we established the Defense Department. And I think that those men and women in those agencies are doing a great job.

But we still have a long way to go before we can declare America safe, and that means doing a better job along our borders, as well.

LEHRER: Two minutes, Senator Obama.

OBAMA2008: Well, first of all, I think that we are safer in some ways. Obviously, we've poured billions of dollars into airport security. We have done some work in terms of securing potential targets, but we still have a long way to go.

We've got to make sure that we're hardening our chemical sites. We haven't done enough in terms of transit; we haven't done enough in terms of ports.

And the biggest threat that we face right now is not a nuclear missile coming over the skies. It's in a suitcase.

This is why the issue of nuclear proliferation is so important. It is the -- the biggest threat to the United States is a terrorist getting their hands on nuclear weapons.

And we -- we are spending billions of dollars on missile defense. And I actually believe that we need missile defense, because of Iran and North Korea and the potential for them to obtain or to launch nuclear weapons, but I also believe that, when we are only spending a few hundred million dollars on nuclear proliferation, then we're making a mistake.

The other thing that we have to focus on, though, is al Qaeda. They are now operating in 60 countries. We can't simply be focused on Iraq. We have to go to the root cause, and that is in Afghanistan and Pakistan. That's going to be critical. We are going to need more cooperation with our allies.

And one last point I want to make. It is important for us to understand that the way we are perceived in the world is going to make a difference, in terms of our capacity to get cooperation and root out terrorism.

And one of the things that I intend to do as president is to restore America's standing in the world. We are less respected now than we were eight years ago or even four years ago.

OBAMA2008: And this is the greatest country on Earth. But because of some of the mistakes that have been made -- and I give Senator McCain great credit on the torture issue, for having identified that as something that undermines our long-term security -- because of those things, we, I think, are going to have a lot of work to do in the next administration to restore that sense that America is that shining beacon on a hill.

LEHRER: Do you agree there's much to be done in a new administration to restore...

MCCAIN: But in the case of missile defense, Senator Obama said it had to be, quote, "proven." That wasn't proven when Ronald Reagan said we would do SDI, which is missile defense. And it was major -- a major factor in bringing about the end of the Cold War.

We seem to come full circle again. Senator Obama still doesn't quite understand -- or doesn't get it -- that if we fail in Iraq, it encourages al Qaeda. They would establish a base in Iraq.

The consequences of defeat, which would result from his plan of withdrawal and according to date certain, regardless of conditions, according to our military leaders, according to every expert, would lead to defeat -- possible defeat, loss of all the fragile sacrifice that we've made of American blood and treasure, which grieves us all.

All of that would be lost if we followed Senator Obama's plan to have specific dates with withdrawal, regardless of conditions on the ground.

And General Petraeus says we have had great success, but it's very fragile. And we can't do what Senator Obama wants to do.

That is the central issue of our time. And I think Americans will judge very seriously as to whether that's the right path or the wrong path and who should be the next president of the United States.

LEHRER: You see the same connections that Senator McCain does?

OBAMA2008: Oh, there's no doubt. Look, over the last eight years, this administration, along with Senator McCain, have been solely focused on Iraq. That has been their priority. That has been where all our resources have gone.

In the meantime, bin Laden is still out there. He is not captured. He is not killed. Al Qaeda is resurgent.

In the meantime, we've got challenges, for example, with China, where we are borrowing billions of dollars. They now hold a trillion dollars' worth of our debt. And they are active in countries like -- in regions like Latin America, and Asia, and Africa. They are -- the conspicuousness of their presence is only matched by our absence, because we've been focused on Iraq.

We have weakened our capacity to project power around the world because we have viewed everything through this single lens, not to mention, look at our economy. We are now spending $10 billion or more every month.

And that means we can't provide health care to people who need it. We can't invest in science and technology, which will determine whether or not we are going to be competitive in the long term.

There has never been a country on Earth that saw its economy decline and yet maintained its military superiority. So this is a national security issue.

We haven't adequately funded veterans' care. I sit on the Veterans Affairs Committee, and we've got -- I meet veterans all across the country who are trying to figure out, "How can I get disability payments? I've got post-traumatic stress disorder, and yet I can't get treatment."

So we have put all chips in, right there, and nobody is talking about losing this war. What we are talking about is recognizing that the next president has to have a broader strategic vision about all the challenges that we face.

That's been missing over the last eight years. That sense is something that I want to restore.

MCCAIN: I've been involved, as I mentioned to you before, in virtually every major national security challenge we've faced in the last 20-some years. There are some advantages to experience, and knowledge, and judgment.

And I -- and I honestly don't believe that Senator Obama has the knowledge or experience and has made the wrong judgments in a number of areas, including his initial reaction to Russian invasion -- aggression in Georgia, to his -- you know, we've seen this stubbornness before in this administration to cling to a belief that somehow the surge has not succeeded and failing to acknowledge that he was wrong about the surge is -- shows to me that we -- that -- that we need more flexibility in a president of the United States than that.

As far as our other issues that he brought up are concerned, I know the veterans. I know them well. And I know that they know that I'll take care of them. And I've been proud of their support and their recognition of my service to the veterans.

And I love them. And I'll take care of them. And they know that I'll take care of them. And that's going to be my job.

But, also, I have the ability, and the knowledge, and the background to make the right judgments, to keep this country safe and secure.

Reform, prosperity, and peace, these are major challenges to the United States of America. I don't think I need any on-the-job training. I'm ready to go at it right now.

OBAMA2008: Well, let me just make a closing point. You know, my father came from Kenya. That's where I get my name.

And in the '60s, he wrote letter after letter to come to college here in the United States because the notion was that there was no other country on Earth where you could make it if you tried. The ideals and the values of the United States inspired the entire world.

I don't think any of us can say that our standing in the world now, the way children around the world look at the United States, is the same.

And part of what we need to do, what the next president has to do -- and this is part of our judgment, this is part of how we're going to keep America safe -- is to -- to send a message to the world that we are going to invest in issues like education, we are going to invest in issues that -- that relate to how ordinary people are able to live out their dreams.

And that is something that I'm going to be committed to as president of the United States.

LEHRER: Few seconds. We're almost finished.

MCCAIN: Jim, when I came home from prison, I saw our veterans being very badly treated, and it made me sad. And I embarked on an effort to resolve the POW-MIA issue, which we did in a bipartisan fashion, and then I worked on normalization of relations between our two countries so that our veterans could come all the way home.

I guarantee you, as president of the United States, I know how to heal the wounds of war, I know how to deal with our adversaries, and I know how to deal with our friends.

LEHRER: And that ends this debate tonight.

On October 2, next Thursday, also at 9:00 p.m. Eastern time, the two vice presidential candidates will debate at Washington University in St. Louis. My PBS colleague, Gwen Ifill, will be the moderator.

For now, from Oxford, Mississippi, thank you, senators, both. I'm Jim Lehrer. Thank you, and good night.