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President Obama Hustles to Ease Health Reform Fears; Dems Set to Block President on Reform; Home Prices Go Up

Aired July 28, 2009 - 15:59   ET

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


WOLF BLITZER, CNN ANCHOR: Happening now, senior concerns. President Obama tries to ease worries about health care reform from the nation's seniors. But perhaps a bigger worry right now, dashed hopes for a House vote on reform this week.

Who's hurting the Republican Party the most? One Republican senator says southerners are hijacking his party. And George Voinovich partly blames the senator from South Carolina.

Senator Jim DeMint is here in THE SITUATION ROOM to respond to that and more.

And should California fix its money mess by letting people sell marijuana and forcing buyers to pay taxes when they buy pot?

I'm Wolf Blitzer in CNN's command center for breaking news, politics, and extraordinary reports from around the world.

You're in THE SITUATION ROOM.

President Obama is taking a fresh stab at convincing Americans the nation urgently needs health care reform. Today's pitch was posed to a very tough and worried audience -- the nation's seniors.

Meanwhile, another tough audience is all but certain to buck the president's hopes for a vote on reform this week. CNN's Dana Bash has more on that.

But let's go to our White House correspondent, Dan Lothian, with more on the president's message and appeal today -- Dan.

DAN LOTHIAN, CNN WHITE HOUSE CORRESPONDENT: That's right, Wolf. You know, I talked to a senior administration official who told me the president's trip to the AARP today to speak about health care reform was not meant solely to ease the concern of seniors, but he really wanted to present the facts. And as details are being debated up on Capitol Hill, seniors still have a lot of questions.

(BEGIN VIDEOTAPE)

LOTHIAN (voice-over): Eighty-six-year-old Army veteran Eugene Shetterford (ph) has no complaints about his health care coverage, but he does worry about what an overhaul will mean for his kids and grandchildren.

EUGENE SHETTERFORD (ph), ARMY VETERAN: The load that's going to be put on them financially, I'm not sure that they know what they're doing because they are not straightforward. That's all. I mean, some of these things are not said that should be said so people know what the truth is.

LOTHIAN: Other seniors are worried not only about their own children, but their own health care coverage. President Obama heard from some of them at an AARP tele-town hall meeting, including Caroline (ph) from Illinois.

UNIDENTIFIED FEMALE: For example, will there be fewer hip and knee replacements?

BARACK H. OBAMA, PRESIDENT OF THE UNITED STATES: My interest is not in getting between you and your doctor.

LOTHIAN: Margaret (ph) from Colorado wanted to know if under the overhaul, she would still be able to keep the good coverage she now enjoys.

OBAMA: Here's a guarantee that I'd made. If you have insurance that you like, then you will be able to keep that insurance.

LOTHIAN: But some seniors aren't buying those guarantees. On the Internet, concerns that cost and limits will leave them without the health care they need. Others are scared of a government-run plan.

President Obama urged seniors to pay close attention to the facts.

OBAMA: That's what Medicare is, is it's a government-run health care plan that people are very happy with. But I think that we've been so accustomed to hearing those phrases, that sometimes we can't sort out the myth from the reality.

(END VIDEOTAPE)

LOTHIAN: Now, the White House is blaming Congress for some of that confusion. Spokesman Robert Gibbs telling me that he believes that some in Congress are knowingly spreading inaccurate information in order to "hold up progress on health reform" -- Wolf.

BLITZER: Thanks very much, Dan Lothian.

The White House is also hustling to try to convince other Democrats of the urgency for reform, but those Democrats are not necessarily working on the president's schedule.

Let's go up to Capitol Hill. Our senior congressional correspondent, Dana Bash, is taking a look at the negotiations.

Where they stand right now, is there a sense of urgency, Dana, or are they saying to themselves, you know what, we can wait until we come back from the August recess?

DANA BASH, CNN SR. CONGRESSIONAL CORRESPONDENT: Well, on the House side, they are certainly hoping that they can still try to do it this week, but it is looking very unlikely. And in fact, as we speak, Wolf, the president's chief of staff is huddled with conservative Democrats in House Speaker Nancy Pelosi's office. And what he's doing -- Rahm Emanuel, that is -- is trying to calm the concerns of some in the rank and file who are, at this point, successfully delaying the president's top priority.

(BEGIN VIDEOTAPE)

BASH (voice-over): One after another, conservative House Democrats emerged from a strategy session determined not to let up on their rebellion against their own party's health care plan.

REP. BARON HILL (D), INDIANA: We're not there yet. And our biggest concern is making sure that we control costs, and we're not ready to support a bill yet.

BASH: That was the refrain of many in the 52-member conservative Blue Dog Coalition, a Democratic group big enough to dash their party leader hopes for a health care vote this week.

REP. STEPHANIE HERSETH SANDLIN (D), SOUTH DAKOTA: The members of the Blue Dog Coalition are more united than I've ever seen. And I think it's because health care reform goes to the heart of our core principle fiscal responsibility.

BASH: Meanwhile, Democratic senators who already gave up hope of passing a health care bill before summer recess are still struggling to find compromise, but they were upbeat after marathon closed-door negotiations.

SEN. JOHN KERRY (D), MASSACHUSETTS: I think we're really making progress, and I feel relatively confident that we're going to be able to come together.

BASH: In fact, Democratic senators say they are coalescing around John Kerry's idea for how to help pay for reform and control medical costs -- imposing a tax on insurance companies, the high-cost so-called Cadillac plans. Senators haven't settled on the details, but one possibility is taxing plans worth $25,000 or more which could generate $90 billion in revenue.

SEN. RON WYDEN (D), OREGON: It is a way as many of us have sought to do to make sure that this country stops subsidizing Cadillac coverage. I think it is wonderful that in a free country, you can buy as many designer smiles as you want, but you shouldn't be able to buy those designer smiles with tax-subsidized dollars.

(END VIDEOTAPE)

BASH: And senators in the room behind me continue to push forward on an idea that's been on the bipartisan negotiating table for some time, Wolf, and that is creating nonprofit cooperatives, or co- ops, instead of what the president wants. And that, of course, is a government-run insurance option is to compete with private insurers. Now, several Democratic senators told us today they agree with the president, they prefer a public option, but they also realize to get something through the Senate, they're going to have to compromise, and a so-called government-run insurance option may be that area where they're going to have to compromise -- Wolf.

BLITZER: We'll see if they do and we'll see the fallout.

Thanks very much, Dana.

Sonia Sotomayor, meanwhile, is one step closer to history. The Senate Judiciary Committee recommends she be seated on the United States Supreme Court. The vote today, 13 yes, 6 no. All the Democrats on the committee voted for Sotomayor and all the Republicans voted against her except for one. That would be the South Carolina Republican, Senator Lindsey Graham. The full Senate could vote to confirm Sotomayor next week.

Let's go to Jack Cafferty right now. He's got "The Cafferty File" -- Jack.

JACK CAFFERTY, CNN ANCHOR: Wolf, following the arrest of Harvard Professor Henry Louis Gates, and the fact that it spiraled into a national debate about race, President Obama is hoping to take things down a peg or two with a casual meeting at the White House. The president is scheduled to meet this Thursday evening with Professor Gates and the arresting officer, Sergeant James Crowley.

The White House says the meeting, which is set to happen at a picnic table outside the Oval Office, is about "having a beer and de- escalation." It's clearly to President Obama's advantage if he can take the heat away from this story, get it out of the news, and let the focus return to his priority, which is health care reform, which appears to be slipping away, at least to a degree at this point.

Mr. Obama has said that he hopes the incident in Cambridge can end up being a "teachable moment" for the country. The president acknowledged that he contributed to this whole thing by saying the police acted stupidly without knowing all the facts in the case.

Gates initially called himself the victim of a rogue officer and made allegations of racism, although Friday, he did say he looks forward now to meeting with the president and Crowley. Gates said he hopes the moment can help to improve racial relations.

Crowley, who has taught a course on racial profiling to other police officers for years, stands by his actions in this, and the Cambridge police, who had called on President Obama to apologize, have praised Crowley. So far, Obama has refused to apologize.

So, here is the question. Should President Obama meet at the White House with Professor gates and Officer Crowley?

Go to cnn.com/caffertyfile and post a comment on my blog.

I guess on the one hand it's a good idea. On the other hand, it just keeps it in the news, doesn't it?

BLITZER: It certainly does. Thursday, they will be having a beer or two over at the White House.

CAFFERTY: Yes, they will.

BLITZER: We'll watch it. Thank you.

CAFFERTY: All right.

BLITZER: How much is your home worth right now? Wait until you hear which cities actually have rising home prices and which cities are seeing home prices fall.

Pushing and shoving in the Middle East going on right now, with President Obama right in the middle of things. One of his key positions regarding Israel inflaming some anti-Obama Israeli protests.

And all that glitters could be your gold from Hollywood. Hard times in Tinseltown force a massive sale of some of the most famous pieces of movie history.

(COMMERCIAL BREAK)

BLITZER: There's another encouraging signal right now that the housing slump may -- repeat, may -- be on the upswing. Yesterday, a report showed sales of new homes rose more than expected in June. Today, we hear that home prices went up for the first time in three years.

Our Personal Finance Editor Gerri Willis is joining us with more on this new report.

Gerri, does this really mean that the housing market is turning the corner?

GERRI WILLIS, CNN PERSONAL FINANCE EDITOR: Well, it is very positive news, Wolf. This is the first time in three years that housing prices have actually gone up. It comes as very good news to consumers out there who own homes.

Let's take a look at some of those prices that have actually improved here. Cleveland, Dallas, Boston, San Francisco, those cities have actually seen price increases. That's according to S&P Case- Shiller data.

And you see here improvements in prices coming as a surprise to some, but what's going on here, these are stabilized markets. These are markets that are typically stabilized. They're winners.

Let's look at the losers for a second -- Las Vegas, a city that's really had a hard time; Phoenix, Miami, Seattle. The first three of those are sunbelt cities that really -- their prices really rose during the boom. Now they are getting creamed, and still getting creamed in this downturn. Now, the takeaway for so many of us out there is that the worst of the housing bust could well be behind us. You know, we've been looking for signals that things are improving. We got the new home sales data this week which showed an improvement, which was good news. Now we're getting this. I think consumers out there can take a little bit of optimism from today's numbers -- Wolf.

BLITZER: Are there any real signs that experts are looking for to show that the overall housing market is perking up?

WILLIS: Well, there are a couple of things that people are looking, they're going to keep an eye on. One is unemployment.

It's hard for the market to show real improvement over time without jobless rates going down. You want to see more people employed. That's the old-fashion way of driving prices down. People lose their jobs, they can't make their mortgage payments. They lose their house, they drive prices down. Those numbers need to improve.

We also have to get rid of some of this inventory. We've got almost 10 months of housing inventory out on the market. Those houses need to get sold, need to move so they can constrain supply so that more people want to buy homes, they have to pay up for them. But we're still waiting for that -- Wolf.

BLITZER: We're waiting indeed.

Gerri, thank you.

An anti-Obama demonstration in east Jerusalem signals the uphill battle ahead for the administration's bid to stop Israeli settlement construction in the West Bank.

CNN's Kevin Flower has details of the diplomatic full-court press that's already under way -- Kevin.

KEVIN FLOWER, CNN CORRESPONDENT: Wolf, today marked the end of three days of intensive American diplomacy by George Mitchell here in Israel and the West Bank aimed at bringing some form of progress to the Israeli/Palestinian conflict. But as evidenced by events on the ground, he's still got his work ahead of him.

(BEGIN VIDEOTAPE)

FLOWER (voice-over): For Palestinians, it's a sight that has become far too common, Israelis taking ownership of land in Arab neighborhoods of east Jerusalem. Here, where the decades-old conflict over land is often played out house by house, an assortment of Palestinians and international activists try to prevent what they see as an illegal Israeli land grab.

DIMITRI DILIANI, JERUSALEM FATAH SPOKESMAN: Settlers came in with a group of armed Israeli police force that used violence. They used their guns. They shot and pushed people around to make way for the equipment so that settlers (ph) can make changes to the home that they do not own. FLOWER: Under the watchful eye of Israeli police, the new Jewish occupants of the home display paperwork they say proves their rightful ownership.

ARIEH KING, ISRAEL LAND FOUNDATION: The only thing we are doing is we are coming and claiming our property that, again, for more than eight years belongs to us.

FLOWER: Such ownership disputes are becoming more common in east Jerusalem, and the American government is increasingly being drawn into the process.

UNIDENTIFIED MALE: Look. Look.

UNIDENTIFIED MALE: I'm here on behalf of the American government. OK? I need to come in.

I'm sorry, I'm here to observe. I'm not here to do anything. I just need to see. How do I get in?

FLOWER: It's scenes like these that illustrate the extreme difficulty the Obama administration faces in bridging the gap between Israelis and Palestinians over Israeli building in east Jerusalem and the occupied West Bank. Despite the diplomatic niceties this week, the American call for a halt to construction in both areas has thus far gone unheeded by the government of Prime Minister Benjamin Netanyahu. And right wing opposition to the American-led efforts appears to be increasing. Hundreds turning out for this anti-Obama protest in Jerusalem.

In the West Bank, settlers of all ages have pledged to erect more illegal outposts. These teens offering defiant words for the Obama administration.

SHLOMO KOENIGSBER, ISRAELI SETTLER: His idea is what we have already to destroy. So, instead of destroying, we want to expand and build more.

(END VIDEOTAPE)

FLOWER: The American demand to see an Israeli halt to construction in the West Bank and east Jerusalem is a hard sell here. And despite assurances from government leaders that "good progress" is being made on the issue, it's clear there is a long way to go -- Wolf.

BLITZER: Kevin Flower in Jerusalem.

He called out the president on health care, but a fellow Republican says southerners like Senator Jim DeMint are hurting the Republican Party. The South Carolina senator is here in THE SITUATION ROOM to respond.

And one way the recession is working in your favor. A Hollywood slump means you can now get your hands on a piece of movie history.

(COMMERCIAL BREAK) (NEWSBREAK)

BLITZER: From "The X-Files" to "Austin Powers," a massive auction is now under way after a warehouse of Hollywood props closes down shop.

Let's bring in our Internet reporter Abbi Tatton.

All right, Abbi. What can you buy?

ABBI TATTON, CNN INTERNET REPORTER: Well, you've got 90,000 pieces to choose from, basically.

This is a warehouse called 20th Century Props. It's in north Hollywood, and it's absolutely jam-packed with stuff that is now all up for auction. All of these -- and I think some of them you're going to recognize.

Remember "Austin Powers," when "Austin Powers" was cryogenically frozen? Well, that's the cryogenic chamber, if you need one for your living room.

We also found Dr. Evil's escape pod in there somewhere. If that's not your cup of tea, there's a nuclear warhead from the film "Broken Arrow," a nuclear warhead that was activated by John Travolta and then later killed him.

And then we've got one for you, Wolf. It's not just a Hollywood movie. We've got music videos as well. That is the champagne glass that Beyonce danced in. I thought you might be interested in bidding on that one.

BLITZER: How much do you think that could go for?

TATTON: Well, they really don't have any estimates right now, but the whole lot is insured for about $8 million.

BLITZER: Why are they doing this?

TATTON: It's part of the economic downturn, but also, in Hollywood, there's been a lot of production that's been moving out of Los Angeles. Harvey Schwartz is the owner of 20th Century Props, and he says he's just not able to rent all this stuff out as much anymore.

There's a slideshow of this stuff at CNN.com, so you can take your pick.

BLITZER: Some of this stuff -- they'll make money.

TATTON: They'll make a lot of money.

BLITZER: I want some of that.

TATTON: You've got to go to CNN.com.

BLITZER: Don't have $1 million for Austin Powers. TATTON: You didn't just do that?

BLITZER: No. Thank you.

He's a former secretary of state and a former Joint Chiefs chairman, but Colin Powell says even he is not immune to racial profiling, and he's sharing the details with CNN.

Plus, California going to pot? Why marijuana could be the savior. The cash-strapped state is looking.

(COMMERCIAL BREAK)

BLITZER: To our viewers, you're in THE SITUATION ROOM.

Happening now, an influx of stimulus money, this time to bolster police departments across the country. It's a billion-dollar infusion, but it's not enough for everyone. Who gets a check and who gets zero down (ph)?

Behind the wheel and staying in touch. Talking on the cell phone is distraction enough, but a new study says texting while driving is an even bigger recipe for disaster.

And drug agents and search warrants. Investigators search the Las Vegas home of Michael Jackson's personal doctor.

I'm Wolf Blitzer. You're in THE SITUATION ROOM.

He wants to break President Obama on health care, but is talk like that actually breaking Republicans? The senator who talked about the health care battle possibly becoming the president's Waterloo is explaining what he meant, explaining his party's hopes for health reform and defending against one Republican saying that southerners are hijacking the Republican party.

(BEGIN VIDEOTAPE)

BLITZER: And joining us now from Capitol Hill, Senator Jim DeMint, Republican of South Carolina. He's the author of a brand new book entitled "Saving Freedom: We Can Stop America's Slide Into Socialism."

We'll talk about that in a few moments, Senator DeMint. Thanks very much for joining us.

SEN. JIM DEMINT (R), SOUTH CAROLINA: Thank you, Wolf. It's good to be with you.

BLITZER: Why are you so afraid of a public option, a government- run health insurance company, if you will, that would compete with the private health insurance companies like Blue Cross and Blue Shield or Kaiser Permanente, or whatever?

DEMINT: Well, a couple of reasons, Wolf. First of all, I have yet to see a federal program that works effectively or anywhere close to the budgets that we talk about, but maybe the more important point is, if we really want competition between insurance companies, which I have been working for, for years, let's just allow interstate competition.

Right now, the federal government imposes a state-by-state monopoly essentially of insurance companies, where if I live in South Carolina, I can't buy a policy in Arizona. But if we allowed a national market where hundreds of insurance companies were competing for my business, we could lower costs, give people a lot more choices. But it's ridiculous to say that we need a government plan to have competition when we won't even allow people to shop outside their states.

BLITZER: Are you afraid, Senator, that a government-run plan would drive some of these private insurance companies out of business?

DEMINT: Well, I'm not just afraid of it. The Lewin Group and other outside analysts who have looked at this, nonpartisan groups, have said at least 80 million Americans will lose their private insurance if we have a government option.

BLITZER: Let me interrupt on that point...

DEMINT: Sure.

BLITZER: ... because I want you to listen to what President Obama says specifically on that point.

(BEGIN VIDEO CLIP)

OBAMA: Well, why would it drive private insurance out of business? If private insurers say that the marketplace provides the best quality health care, if they tell us that they are offering a good deal, then why is it that the government, which they say can't run anything, suddenly is going to drive them out of business? That's not logical.

(END VIDEO CLIP)

(LAUGHTER)

BLITZER: All right. You're smiling.

DEMINT: Well, Wolf, look what's happening now.

Medicare and Medicaid don't pay doctors enough to see patients. And that cost has shifted onto private insurance now. One of the reasons private insurance costs as much as it does today is because government is shifting the cost to them.

If we add a government plan for the -- those who were uninsured today, we are just going to make private policies more expensive, because the government can mandate what -- what is charged, and they can require physicians to accept payment that is below cost.

These government plans are not working now. They are -- they're heaping trillions of dollars of debt on our children. The part of health care that's working, even though not perfectly, is when somebody has their own health insurance policy, and they can pick their own doctors.

That's what we're trying to do as Republicans, is expand those who -- who have personal health insurance. And we can do that with interstate commerce and with just giving people fair treatment from the tax code.

This is a proposal I introduced about a month ago, and -- and I want to talk about it more, because I was in business for -- for 20 years myself. I worked with hospitals and physicians for years. I understand the health care industry, and I know that what's being proposed now is not going to help health care.

BLITZER: You're...

(CROSSTALK)

DEMINT: Excuse me. Go ahead.

BLITZER: Yes. I was going to point out, this column written that was in the state in your South Carolina newspaper today, it really goes after you. It says this.

It says: "There is not debate, not even for Mr. DeMint, about whether health care need reform. Yet, our junior senator seems more intent on using this crisis as a bludgeon for turning the political tables in Washington than on seizing this opportunity to improve Americans' lives."

A clear reference to that controversial comment you made the other day: "If we are able to stop Obama on this, it will be his Waterloo. It will break him."

DEMINT: If you read the rest of that sentence, Wolf, it said, if we can stop him on this, we can go on to real health care reform.

I have probably introduced more health care reform proposals in the Senate than any Democrat today. In fact, President Obama voted against the very proposals I was talking about of interstate commerce, personal deductibility, using HSAs to pay for a premium, small- business health plans. He voted against all of these things, Wolf, which -- which leads me to believe that it's -- it is not health insurance he wants people to have, but government control.

BLITZER: There is some concern among some national Republicans that the party, your party, is becoming a -- sort of a Southern base. That's where the Republicans have their stronghold.

George Voinovich, your Republican colleague from Ohio, is telling "The Columbus Dispatch" this: "We have got too many Jim DeMints and Tom Coburns. It is the Southerners. They get on TV and go, 'Errr, errrr.' People hear them and say, 'These people, they are Southerners. The party is being taken over by Southerners.'"

(LAUGHTER)

BLITZER: I wonder what you want to say to Senator George Voinovich.

DEMINT: Well, he is apparently very frustrated. And he has decided not -- not to run again. And I don't mind him taking out his frustrations on me.

But the fact is, if you look at the Southerners, a lot of our elected leadership, like Lamar Alexander, John Cornyn, I mean, these folks are Southerners. And -- and we have got the -- probably the most constructive working members of the Senate, Johnny Isakson, Saxby Chambliss.

You look at Richard Burr. These are all contributing people. They're certainly not hurting the people right now.

But, Wolf, the point I have been trying to make is, Maine doesn't have to be like South Carolina or like California.

If we really take a federalist approach where we're promoting freedom out across the country, these different states can have different solutions for health care or education or energy. And that's what we're supposed to be doing in Washington, is allowing states and individuals more freedom and not trying to create one-size- fits-all solutions here in Washington.

BLITZER: The book is entitled "Saving Freedom: We Can Stop America's Slide into Socialism" -- the author, Senator Jim DeMint of South Carolina.

Senator, thanks for joining us.

DEMINT: Wolf, great to be with you. Thanks.

BLITZER: And we will get a very different perspective in the next hour. Melody Barnes, President Obama's domestic policy adviser, will be joining us here THE SITUATION ROOM.

Let's bring in Gloria Borger right now, our senior political analyst.

Gloria, if the president caves on this public option, this government-run insurance company that would compete with the private insurance companies, what kind of reaction would he -- would he get from within -- within his own party?

GLORIA BORGER, CNN SENIOR POLITICAL ANALYST: Well, I think it depends, of course, on what he caves to.

If you end up with nonprofit cooperatives, that might make it very palatable for those conservative Democrats. But I will tell you, Wolf, I have been talking to some of the more liberal Democrats in the House, and I think he would face pretty much a full-scale revolt from those Democrats who say that the public option is the cornerstone of health care reform. So, he has to balance those two things. But, remember, Bill Clinton did that with welfare reform, and he got credit for passing that legislation.

BLITZER: It didn't...

BORGER: So far, the White House...

BLITZER: It didn't hurt him -- it didn't hurt him...

(CROSSTALK)

BLITZER: ... on welfare reform...

BORGER: It did not.

BLITZER: ... to go against the left.

BORGER: Exactly. You will see what Melody Barnes says later. But...

BLITZER: What -- what about the bipartisanship? How much bipartisanship does he really need?

BORGER: You know, with this kind of legislation, in a perfect world, a president really wants bipartisanship, like they had in 1935 with Social Security.

But it really depends on what the president is willing to give here. I mean, I was at a session with Rahm Emanuel, the White House chief of staff, on Friday, who went out of his day to praise those moderate Republicans in the Senate, saying that they are showing courage and a sense of public responsibility. So, it's clear they are trying to woo those Republicans in the Senate.

I don't think they feel they have much hope in the House.

BLITZER: That is probably a good assessment.

(LAUGHTER)

BLITZER: All right, thanks very much for that.

It's a huge California cash crop, but the strapped state reaps no benefit. Growing marijuana is illegal and, therefore, not taxable. But now there is one lawmaker who wants to change all of that.

And General Colin Powell offers his take on racial profiling, the professor and the police officer dispute, and what could have been done to defuse it. The former secretary of state says the professor may have overreacted.

And a U.S. soldier electrocuted in the shower in Iraq -- CNN's Abbie Boudreau investigates.

(COMMERCIAL BREAK) BLITZER: California is in the middle of a money mess. Today, the governor, Arnold Schwarzenegger, signed something he calls -- and I'm quoting now -- 'the good, the bad and the ugly."

The governor signed an $85 billion budget. It makes additional cuts to child welfare programs, medical care for the poor, and programs to help prevent AIDS. The governor admits they are ugly cuts, but says they are needed to try to balance the state's budget.

The governor says the budget package does include reforms and forces government to be more frugal, and all this amid a multibillion- dollar deficit.

Meanwhile, one state lawmaker has a controversial idea to help the state make some money.

Let's go to CNN's Dan Simon. He is from San Francisco. He has got the -- the details of this huge controversy -- Dan.

DAN SIMON, CNN CORRESPONDENT: Wolf, we are talking about the legalization of marijuana. It had never really been taken seriously in California.

But, now, with the state's budget problems, many people are giving it a second look. And Governor Schwarzenegger has said himself it ought to be studied.

(BEGIN VIDEOTAPE)

SIMON: Marijuana is California's biggest cash crop, valued at $14 billion, worth more than grapes and vegetables. But the state doesn't get a dime from it. State lawmaker Tom Ammiano wants to change that.

TOM AMMIANO (D), CALIFORNIA STATE ASSEMBLYMAN: There are a lot of very hard second looks now, particularly with the economy the way it is here in this state.

SIMON: Ammiano has sponsored a bill that would legalize, regulate and tax marijuana. According to the state tax board, legal pot to Californians 21 and older could bring the cash-strapped state nearly $1.4 billion in revenue.

AMMIANO: Well, I think, you know, you would have some kind of retail outlet, and it could be a -- it could be a Walgreens. I mean, it could be a hospital.

SIMON: The idea got a boost from Governor Schwarzenegger, who has spent months trying to avert a budget catastrophe.

GOV. ARNOLD SCHWARZENEGGER (R), CALIFORNIA: And I think that we ought to study very carefully on what other countries are doing that have legalized marijuana.

SIMON: Most lawmakers right now do not support broad legalization. So, advocates are also working toward a 2010 ballot initiative that would let voters decide.

And, according to a Field poll, 56 percent of Californians support legalization. On the local level, meanwhile, the easiest way to cash in is by taxing medical cannabis. Oakland last week became the first city to directly impose a tax on dispensaries.

City councils in Los Angeles, San Francisco, and Santa Cruz are discussing similar messages. It might seem odd for dispensaries to back the idea and want to pay more in taxes, but they welcome the chance to be seen as legitimate, valuable businesses.

Steve DeAngelo runs a dispensary in Oakland.

STEVE DEANGELO, CEO, HARBORSIDE HEALTH CENTER: Criminals don't pay taxes. Citizens do pay taxes. And our hope is that the movement will be seen as a group of citizens, rather than a group of criminals.

(END VIDEOTAPE)

SIMON: Well, given the political environment, if it gets on the ballot, it is possible you could see marijuana legalized in California as early as next year. But then the question becomes what -- what the federal government does. Of course, it doesn't even recognize medical cannabis right now -- Wolf.

BLITZER: Yes. What happens in California very often goes elsewhere as well. We will see what happens on marijuana in California.

Thanks, Dan, very much.

The case of the Harvard University professor vs. the police that has America and former National Security Adviser, the former Secretary of State Colin Powell talking about racial profiling.

(BEGIN VIDEO CLIP, "LARRY KING LIVE")

COLIN POWELL, FORMER U.S. SECRETARY OF STATE: It was inconceivable to him that a black guy could be the national security adviser.

LARRY KING, HOST, "LARRY KING LIVE": How do you deal with things like that?

POWELL: You just suck it -- what are you going to do? It was a teaching point for him: "Yes, I'm the national security adviser. I'm black. And watch. I can do the job."

(END VIDEO CLIP)

BLITZER: General Powell shares his personal story with CNN in an exclusive interview with our own Larry King, and the way he deals with the anger. That is coming up.

Plus, one billion reasons to keep more officers on the streets nationwide. (COMMERCIAL BREAK)

BLITZER: The arrest of Harvard University Professor Robert Louis Gates at his home by a white police officer has touched off fresh debate about racial profiling in the United States.

Tonight, in an exclusive interview on CNN's "LARRY KING LIVE," General Colin Powell talk about it with Larry. General Powell, as you know, is a former chairman of the Joint Chiefs, a former national security adviser, and a former secretary of state.

But he says even he is not immune.

(BEGIN VIDEO CLIP, "LARRY KING LIVE")

KING: Were you ever racially profiled?

POWELL: Yes, many times.

KING: And didn't you ever bring anger to it?

POWELL: Of course. But, you know, anger is best controlled. And, sure, I got mad. I got mad when I -- I -- as a national security adviser, with the president of the United States, I went down to meet somebody at Reagan National Airport.

And nobody recognized -- nobody -- nobody thought I could possibly be the national security adviser to the president. I was just a black guy at Reagan National Airport. And it was only when I went up to the counter and said, "Is my guest here who is waiting for me?" did somebody say, "Oh, you're General Powell."

It was inconceivable to him that a black guy could be the national security adviser.

KING: How do you deal with things like that?

POWELL: You just suck it -- what are you going to do? It was a teaching point for him: "Yes, I'm the national security adviser. I'm black. And watch. I can do the job."

So, you have this kind of -- there is no African-American in this country who has not been exposed to this kind of situation. Do you get angry? Yes. Do you manifest that anger? You protest. You try to get things fixed.

But it's kind of a better course of action to take it easy, and don't let your anger make the current situation worse.

(END VIDEO CLIP)

BLITZER: All right, let's talk about it and more in our "Strategy Session."

Joining us, the Democratic strategist and CNN political contributor Donna Brazile and the Republican strategist the former House Majority Leader Dick Armey.

Donna, I have asked so many black men who have been on this show and, also privately, very distinguished, have they ever been racially profiled? Almost every single one has an example just like General Powell.

Here is the question to you, an African-American woman. Have you been racially profiled?

DONNA BRAZILE, CNN POLITICAL ANALYST: Absolutely.

But I -- I thought what General Powell said tonight was -- was something that should be said. And, perhaps, when parents tonight are putting their kids to bed, they will remind them what General Powell said.

Look, when -- when confronted with any situation of that magnitude, remain calm. Remain, you know, together, and, hopefully, get to a phone right away, so that you can call your parents, especially if they are young kids.

But, yes, I have been. But, Wolf, I'm also an adult. And I think that what -- we should use this moment as a way to talk about it, but talk about it not to point fingers, not for recrimination and resentment, but really to teach the American people how we can improve race relations and relations between police and the minority communities.

BLITZER: It -- it is a very, very good conversation that the country is having right now; I assume you agree?

DICK ARMEY, FORMER REPUBLICAN HOUSE MAJORITY LEADER: Well, yes, of course.

But stereotypical thinking and reaction is always bad. And it doesn't just fall only on racial lines. So, the fact is, we need to teach people to be respectful of people for they're -- who they are as an individual.

Treat everybody -- if you start off with the proposition of respect -- my daddy told me years ago. He says, if -- if you have respect for other people, and you're well-mannered, it is going to be worth million bucks for you.

I hope someday to collect on that. But I won't collect on it if I'm rude, inconsiderate and I treat people on a stereotypical basis.

BLITZER: It's interesting you say that, because I'm going to play another clip from Larry's exclusive interview with Secretary Powell tonight. Listen to this exchange they have.

(BEGIN VIDEO CLIP, "LARRY KING LIVE")

(CROSSTALK)

KING: You're saying Gates was wrong? POWELL: I'm saying that Skip perhaps, in this instance, might have waited a while, come outside, talked to the officer, and that might have been the end of it.

I think he should have reflected on whether or not this was the time to make that big a deal. But he was just home from China, just home from New York. All he wanted to do is get to bed. His door was jammed. And, so, he was in a mood where he said something...

KING: What about those who say he brings the whole history into that body of a black movement?

POWELL: That may well be the case.

(CROSSTALK)

POWELL: But I still think that it might well have been resolved in a different matter, if we didn't have this verbal altercation between the two of them.

(END VIDEO CLIP)

BLITZER: I guess he is making the point that the president later made, that everybody made some mistakes in this incident.

BRAZILE: I think the president's beer -- and I hope it is a cold beer, because it's been quite hot in D.C. You and I would agree the beers need to be cold...

(CROSSTALK)

BLITZER: Really, really cold.

BRAZILE: ... not -- not room temperature.

I think this is a moment for the president to really just walk out with these two fine gentlemen. You know, you have -- here you have a police officer who teaches racial sensitivity to other police officers. And you have a -- a college professor who teaches racial reconciliation.

So, this is not some ordinary situation. This is -- this is quite important for us to learn from.

BLITZER: You are an economist. Let me make the turn to health care reform.

ARMEY: Mm-hmm.

BLITZER: Is it smart to tax employers' so-called Cadillac health care benefits, the top-of-the-line health care benefits for workers out there?

ARMEY: Well, I'm fascinated. I don't think this is -- this is a strategy. The president wants to put forward a -- a public-sector option and a private-sector option, but, ultimately, he wants everybody to move to the public sector. So, he says one way to do that...

BLITZER: He says, no, he doesn't. He says he doesn't.

ARMEY: Well...

BLITZER: He wants people who are happy with what they have...

ARMEY: No.

BLITZER: ... right now to keep doing what they have, but those who need a public sector...

(CROSSTALK)

ARMEY: I don't believe that.

BLITZER: Why don't you...

(CROSSTALK)

ARMEY: I have to tell you, I just don't believe that.

The goal and objective of what is euphemistically referred to as health care reform is for the federal government to take over health care in America, and to get everybody into a one-provider system, and that provider being the federal government.

Now, tax, then, the private-sector option, and you will move people out of that and into the public. So, I think it is a strategy. The president comes back to it time and time again, under the auspices of, well, it helps us to pay for this expensive program that we are going to make cheaper.

How do you have to -- why do you have to pay for an expensive program where you make things cheaper by raising...

(CROSSTALK)

ARMEY: ... additional taxes?

BLITZER: All right.

BRAZILE: Well, we can see that Mr. Armey has not changed his position in 16 years.

So, you are quite consistent. But that is not the goal. The goal is to reduce costs, provide quality, and ensure access.

And capping these tax-free employee plan over $25,000, that should be an option on the table to pay for this -- this massive overhaul of our health care system.

BLITZER: We will continue this debate down the road, guys. Lots to discuss. Thank you.

BRAZILE: Mm-hmm.

BLITZER: A highly decorated U.S. soldier killed in Iraq, but not on the battlefield. He was electrocuted in the shower. His family was told it was his fault. But the Defense Department is revealing who is really to blame.

The recurring -- the reoccurring word the president can't escape, why America seems to be stuck on that word, "stupidly."

(COMMERCIAL BREAK)

BLITZER: On our "Political Ticker": The New York mayor's poll position is threatened. Mayor Michael Bloomberg's reelection bid appears to be in a comfortable position, but his standing in one poll shrinks. Bloomberg now leads top Democratic challenger, the city comptroller, William Thompson, by 10 points. That's in a Quinnipiac University poll.

But Bloomberg was up 22 points in that same poll last month.

Today, on Capitol Hill, a portrait of former House Speaker Dennis Hastert's portrait is unveiled. His is the 51st portrait to be added to the collection, dating back to the inaugural Congress in 1789. The Illinois Republican succeeded Newt Gingrich and served from 1999 to 2007 when the Democratic Party regained the majority in the House.

Remember, for the latest political news any time, you can always check out CNNPolitics.com.

Let's go back to Jack for "The Cafferty File" -- Jack.

JACK CAFFERTY, CNN ANCHOR: Wolf, the question this hour, should President Obama meet this Thursday at the White House at a picnic table outside the Oval Office for a beer with Professor Gates and Officer Crowley?

D.J. in Florida writes: "Honestly, it seems to me like a waste of time. It seems this nation will always have racial tension of some sort. This is very small, in my opinion, compared to health care, where Obama should be focusing pretty much all of his energy. And I'm not being racist at all. I am a black man."

Esther in Virginia writes: "A man who had proved he was in his own home was arrested anyway by a policeman who didn't like his attitude. The arrested man has an exemplary record of service through books, public television series, and teaching. The policeman evidently has an exemplary record, as well. I applaud President Obama for reducing the whole mess to a beer at the White House. May all our tense confrontations end that way this hot summer. I'm not much of a drinker, but I will drink to that."

Yan writes: "Yes. And Obama should apologize to Officer Crowley in person and in public, if he does not want racism to be a part of his legacy. The whole race issue over the incident was stirred first by his friend Gates and then by the president himself.

Joe writes: "No. The media has played this into a huge incident. The parties involved probably feel it has become an important incident. The reality is, this is just a misunderstanding between two men. They both could have handled themselves a little better. But the bottom line is, it was a small incident. Nobody was hurt or killed. No shots were fired. No punches were thrown. The president has better things to do than insert himself into small disagreements."

Don writes: "Hey, maybe we should all get into a royal rumble with the police and fight it out. Then we can have a kegger at the White House."

And Craig in Arizona writes: "Well, I guess if Obama doesn't have anything more pressing. Maybe he could do it once a week. Pick out a couple of guys who have a dispute. Put it on daytime TV. Instead of 'Judge Judy,' we could call it 'Let's Have a Beer,' starring President Obama. The revenues from the show could pay for health care reform."

Can you tell it is August?

If you didn't see -- almost August -- if you didn't see your e- mail here, you can go to my blog, CNN.com/caffertyfile. Look for yours there.

We got a couple of thousand e-mails on this in about a half-an- hour, Wolf. It's a -- it's a hot-button issue, as they say.

BLITZER: Yes, wow. Wait until Thursday, when they have that beer...

CAFFERTY: Oh, yes.

BLITZER: .. at the White House.

CAFFERTY: We -- we may have to go back and revisit, as they say.

(LAUGHTER)

BLITZER: Good point.

All right, Jack, thank you.

To our viewers, you're in THE SITUATION ROOM.

Happening now: Michael Jackson death investigation. Federal agents and police search the Las Vegas home and office of the pop star's personal doctor in a possible manslaughter case. Stand by.

Is the Obama administration up to the task of handling nuclear North Korea? The former Secretary of State Colin Powell says the communist regime may be bizarre, but he calls its negotiators the world's toughest.

And a shocking new survey shows that, if you text while driving, you may be -- get this -- 23 times more likely to have an accident, and maybe even die.

I'm Wolf Blitzer. You're in THE SITUATION ROOM.

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