BILL O'REILLY, HOST:  Now for the top story tonight. Arnold Schwarzenegger enters the no-spin zone. Here he is, from San Jose, California.

Appreciate you coming on. You know, you've got more courage than a lot of these career politicians who won't come on this program.

Video: O'Reilly Interviews Arnold

Now, my reading of the recall is that people in California, the people who signed a petition and the people who have said they want Gray Davis (search) out are just fed up with taxation. They just can't pay any more taxes and live in California. 

Is that your read on it?

ARNOLD SCHWARZENEGGER (R), CALIFORNIA GUBERNATORIAL CANDIDATE: Well, first of all, you're absolutely correct, 1.6 million people have signed the recall petition here in California. And what those people have basically have said is, "We are mad as hell, and we're not going to take it anymore."

And of course, the polls have reflected that. Fifty-five to 60 percent of the people in California want to have Gray Davis out. They're sick and tired of over-taxation, over-regulating and over-spending. We have to stop that, because the economy, the way it's going right now, it's spiraling downward and jobs are leaving, and businesses are leaving every day to other states and even to other countries. We want to create, again, a positive business environment here and make people happy.

O'REILLY:  All right.  And I hope you do, because if you create a positive business environment in California, that helps the rest of the country, because California, as the largest state, has a big impact on how the recession either goes down or up in the rest of the country.

Now, in order to get ...

SCHWARZENEGGER: Absolutely.

O'REILLY: In order to get control over the spending, which you have an $8 billion shortfall coming up next year. I don't know why you want this job, anyway. Give me a massive headache.

But anyway, in order to get control over the spending, you've got to cut. You've got to cut. You know where you're going to cut?

SCHWARZENEGGER: Well, the most important thing is, and it's the first thing I will do when I get into office, is to open up the books, do the auditing, look at the budget line by line and look at where the waste really is. Because right now, what no one really knows -- economists have told me that our budget deficit is anywhere between $5 and $9 billion. We really don't know.

But I think the people deserve to really look, what is underneath this rock? Let the sun shine in and let the people know what is really going on.

O'REILLY: So you're going to ...

SCHWARZENEGGER: So the bottom line is, is to take the waste out of there. There's a lot of waste in there.

O'REILLY: Yes. Sure there is.

SCHWARZENEGGER: A lot of corruption. A lot of corruption, a lot of waste today, especially with the workers' compensation and all those things. We can save money there. We can save money ...

O'REILLY: OK. But here's the problem.

(CROSSTALK)

SCHWARZENEGGER: We can go to the federal government and get some of the money back. Because right now, for each dollar that you spend on taxes, into the federal government, we only get 81 cents back. So I think there's a lot of room to negotiate for billions of dollars there.

O'REILLY: OK. But here's the problem. And if you bring in the auditors, all right, that's going to take them months to figure out who's stealing, who's wasting. It's going to take time. You've got to balance that budget by January.  You've got to come to some quick conclusions. If you don't, you're against the constitution of California. You have to balance the budget.

The second thing is that people are voting for you, Mr. Schwarzenegger, on trust. They're trusting you, because you're not telling them specifically what you're going to cut. You're basically saying, "Trust me." Isn't that right?

SCHWARZENEGGER: Well, Bill, first of all, as you know, this problem was not created in two weeks, nor can you solve the problem in two weeks. It takes thorough thinking, looking at the books. 

First of all, I don't think it would take that long. I think it would take a month to really figure out what's going on...

O'REILLY: Really?

SCHWARZENEGGER:  ... in those books. But the other thing that you have to understand is -- and I know you understand -- our problem is not that. Our problem is overspending. If he continues to be spending money that we don't have, and then what the politicians do is then they realize that they've spent too much money and they say, "Oops." They spent money that they didn't even have. Then they go out and start taxing people and raising the car tax to 300 percent and punish the people for their mistakes.

O'REILLY: Sure. But the reason they do that ...

(CROSSTALK)

SCHWARZENEGGER:  ... and get upset.

O'REILLY: The reason they did that, Gray Davis, was he bought votes. He bought the election by signing of -- giving bonuses, for example, to the prison guard union. You can't do anything about that. That contract's signed; they're going to get their perks. They're going to get their raises.  They're going to get their retirement. And you can't do anything about it.

Now, what you can do something about, by signing an executive order, is you can knock down the driver's fees, which drove this recall in the first place. You going to do that the first day you're in there?  Knock down those driver's fees?

SCHWARZENEGGER: I would -- absolutely, I would do that immediately, because it's ridiculous that there are people that are poor, that are living off $15,000 income a year, all of a sudden have an increase of 300 percent of car taxes.  I mean, why should they be punished for the mistakes that the politicians are making?

O'REILLY: All right. You're going to do that the first day.

(CROSSTALK)

SCHWARZENEGGER: But the other thing you have to do is put a spending cap on it. You have to stop the politicians from spending.

O'REILLY: Oh, absolutely.

SCHWARZENEGGER: Because it's what got us into this mess.

O'REILLY: But the special interests are going to hammer you, as they are now. Boy, if you cut that...

SCHWARZENEGGER: Let me say ...

O'REILLY: Mr. Schwarzenegger, if you cut the driver's tax down, that money was earmarked for local towns, all right? Like where you are now, San Jose, for the San Jose cops. You've got to find money to fund those local towns, because you're taking away the money that Davis, you know, raised by tripling the driver's fees. How are you going to do that?

SCHWARZENEGGER: Well, look, the first thing you have to understand is that the local towns are really upset, because the state has taken so much money away from them and is not supporting the cities. The cities want to find ways now to raise their own taxes or find revenues.  Because it's ridiculous what they have done with the money management.

We have, in this state, the worst money management in the country. It is absolutely disastrous the way it is. We have to find other ways of going about it, but not by punishing the people.  That is the key thing.

And you're talking about special interests. This is absolutely outrageous, what's going on in Sacramento right now. The special interests are financing the campaigns of Bustamante and of Davis. I mean, those are the twin Terminators of Sacramento.

O'REILLY:  Yes, yes.

(CROSSTALK)

SCHWARZENEGGER: They cannot represent the people anymore. When you go and start taking money from the Indian gaming, and you start taking money from the unions, how are you going to sit across the table from ...

(CROSSTALK)

O'REILLY: Yes, but people ...

SCHWARZENEGGER:  ... them and work in the public interest?

O'REILLY: All right. But these guys...

SCHWARZENEGGER: No, no.

(CROSSTALK)

O'REILLY: ... they've been doing this for years. But one more question and then we've got to take a break, and we'll come back.

SCHWARZENEGGER: But now -- but I just want to tell you. Now it's worse than ever.

O'REILLY: I know. I know. I mean, we all know. It's crazy. It's crazy, and that's why you're in the predicament you're in.

Now, listen. Bustamante says he's going to raise sin taxes, taxes on booze, taxes on cigarettes. You're going to raise any taxes?

SCHWARZENEGGER: No.

O'REILLY:  No taxes?

SCHWARZENEGGER: I won't raise taxes, because like I said, like I said, I do not want to punish the people for the politicians' mistakes. And it's all the answers they have, the Democrats. It's always the same thing. It's like as soon as they make a mistake, they want to go and raise taxes and punish the people.

O'REILLY:  OK.

SCHWARZENEGGER: I think it should go the other way. It's like the same thing when someone -- when I'm overweight, what do I do immediately? I stop eating food. I'm not going to go and supply myself with more food. The only way you reduce weight is by stop feeding the food. And we cannot continue feeding the government with money. We have to make them disciplined. Live off the money that they have, and I promise you, when I'm governor, I will not spend more money than the state takes in.

O'REILLY: All right. Now when we come back from commercial, I want to talk to you about illegal immigration and how you see it.

We'll have more with Mr. Schwarzenegger in a moment. Please stay tuned.

(COMMERCIAL BREAK)

O'REILLY: Continuing now with Arnold Schwarzenegger, who may become the next governor of California in October.

Incredibly, the state of California has about two million undocumented aliens running around, and Governor Davis just signed a bill that will give them driver's licenses. If you're elected, will you rescind that?

SCHWARZENEGGER: I definitely would rescind the driver's license, because I think it is unfair to the rest of the people of California. They have now driver's licensing required of people from all over the world that can come and get driver's licenses without any background check. I think it is ridiculous. It's unsafe for the state.  It creates big security problems here. The law enforcement community is against that.  The federal government is against that. The attorney general of California, Bill Lockyer, is against that, and I am definitely against it. I think, like I said, it will create serious security problems. 

O'REILLY: OK. Now, one of the reasons you have that problem to begin with is the border is a sieve from San Diego right out to Imperial County. People can come into California. Are you going to do anything about the border? If so, what?

SCHWARZENEGGER: Well, the first thing I would like to do is, is when I become governor, work together with other governors of neighboring states and of states that are next to Mexico to really work on those problems and immigration problems, you know, I think including New York.  Because I think if you talk to the federal government, we have to close the borders, make them tighter, especially...

(CROSSTALK)

O'REILLY: Yes, but how do you do that? I mean, it's been going on now for 20 years, how do you do it?

SCHWARZENEGGER: Negotiate with them. I think we have to get together as governors and really go there and lobby heavily and just really let them know that we cannot continue with this policy, because, you know, people will continue coming in. 

O'REILLY: Yes, I know, but do you have any ideas that you can offer the other governors or the president of the United States? All of them seem to be confused about the issue. Do you have any ideas on how you can control the borders?

SCHWARZENEGGER: I think we just have to -- I think we just have to bring leadership there and really make sure that the -- explain the case, that how bad it is for the state and how bad it is for the country to do that. Because it sends the wrong message to other people that are filing officially for immigration, to get their green cards and their visas here and all that stuff.

We have to work on those kind of issues together, the border states, because...

(CROSSTALK)

O'REILLY: Would you be opposed to militarizing the border, putting the National Guard in California down there, to back up the border patrol? Would you be opposed to that?

SCHWARZENEGGER: Well, I'm not opposed to that, but I'd really have to check it out and really become much more an expert on how to protect the borders in order to make the -- to stop that from happening.

But also, I think, there's a lot of money that we can get from the federal government to help us with the costs of the undocumented...

O'REILLY:  Maybe...

(CROSSTALK)

O'REILLY: They're broke too. They don't have any money either.

SCHWARZENEGGER: I know they're broke, but remember one thing, that during the last year they cut out $400 million from the after-school programs, the federal government. I went there and started negotiating and working with the White House and with the legislators, and we got the $400 million back.

O'REILLY: Yeah, you got it back.

(CROSSTALK)

O'REILLY: You've got to have a plan to ...

SCHWARZENEGGER: But Bill, let me tell you something, Bill, I never accept no for an answer.  It doesn't exist. Anything is possible. I am absolutely convinced that we can work together with the federal government and slow down the flow of illegal immigrants.

And the other thing we have to do is, we have to solve the problem with the visas. I think that people that are undocumented, we have to come up with a way, like John McCain just recently talked about a visa, you know, working permit of some sort, for foreign workers. They get a special permit to work...

O'REILLY: A guest worker permit, right?

SCHWARZENEGGER: Exactly. When you make it legitimate ...

(CROSSTALK)

O'REILLY: It's all possible ...

(CROSSTALK)

SCHWARZENEGGER: It needs leadership. It needs leadership.

O'REILLY: OK. But it also needs courage, because you have to stop the flow, and to stop the flow, you have to take, as you know, you used the word before, you have to have discipline.

Now, you were dis-invited to a Mexican-American parade because you're not -- you know, you're telling them stuff they don't want to hear. No licenses. Tough border policy. How did you think about getting dis-invited to that Mexican-American parade?

SCHWARZENEGGER:  Well, I think it hurt my feelings, that I was dis-invited. You know, it was -- politics got in the way of that. But you know what I did, I went the same day, a few miles away from that parade, I went to East Los Angeles and I worked on the inner-city games and after-school programs. I went to a softball game. I reached out to the Latino community and all that stuff, so it was no problem at all.

But my feelings were hurt by getting dis-invited. There's no two ways about that.

O'REILLY: Do you think Mexican-Americans in California will support you, or are they going to go the Democratic way?

SCHWARZENEGGER: I think that some of them will go, you know, with Bustamante and with the Democratic way and others will support me. For me, the key thing is just to let them know that I am not anti-immigration or anti- immigrant, that I am all for it. I am a true immigrant myself. I went through the struggles in the beginning coming here, trying to get a temporary working permit, then get a permanent working permit, then wait 10 years to get my citizenship, which this month is my 20-year anniversary to have my American citizenship.

So I went through all these struggles. I can relate to the whole thing, that people from around the world want to come here to California, because this is the Mecca. This is...

(CROSSTALK)

O'REILLY: But you came legally. 

SCHWARZENEGGER: It's the most beautiful place. 

O'REILLY: You came legally.

SCHWARZENEGGER: Yes, absolutely. I'm just saying, I can relate to immigration problems ...

O'REILLY: Yeah, I know.

SCHWARZENEGGER: And also to that people want to come here. We just have to encourage now people to do it the legitimate way.

O'REILLY: Would you cut entitlement spending to illegal immigrants in California?

SCHWARZENEGGER: That's an issue that has been addressed already by a federal judge. It was ruled unconstitutional. I want to stay with the law. I want to continue the way it is done right now, where people get services. 

O'REILLY: OK.  Now, when we come back, we'll talk about the media and whether they're giving you a fair shake.

We'll be back with Mr. Schwarzenegger after these announcements of interest.

(COMMERCIAL BREAK)

O'REILLY: The recall election in California will be held on October 7, and we continue now with a man who will be very busy up to that time, Arnold Schwarzenegger.

The L.A. Times has been very hard on you. They brought up your father again and his past, in World War II. They brought up the "Oui" magazine interview 25 years ago. Are you surprised that the L.A. Times and some other media, New York Times here to a lesser extent, have gone after you personally?

SCHWARZENEGGER: Well, not really, because I always knew that Davis knows how to run a negative campaign. All of the stories are fed by the campaign headquarters, I guarantee you that. And they just know how to run a negative campaign.

But they don't know how to run the state, that's the big problem there. You know, I have been told in the beginning, when I got into this race, people said to me, many times, they said, "Why do you do that? You know, you turn your back on a movie contract for millions of dollars, the great life you have. You know that the press is going to attack you and the campaign, you know, the way campaigns are run, they're negative. They're going to go after your character, try to tear down everything you stand for," and all those things.

And I said, "You know something? I take that chance, I take that risk, because I want to do something for California. I want to turn California around again, because I cannot stand any longer there and watch the politicians neglect the people and run this state down and chase businesses out of the state."

So, you know, I expected that to happen. Of course, you know, some things, there's just so much stuff that is out there that's being thrown at me, but I'm going to stand there, strong, and I'm going to take it, and I'm going to continue on with a positive campaign and to let the people know that if you like the way things are run today, if you like the economy is going in California, then go ahead, vote no on the recall. But if you want change, you want someone that can go to Sacramento without owing anyone anything, without being beholden to anyone, no special interest, I said, then vote for me, because I can make things change out there. I can bring leadership there.

O'REILLY: All right. If it's true, though, that the L.A. Times is taking their cues from the Davis campaign, why would a newspaper that's supposed to be objective do that?

SCHWARZENEGGER: Well, have you ever seen how many times they've put Davis on the cover and Bustamante on the cover, and I'm on page 12 or page 20 or something like that?

O'REILLY: Yes, I know what they're doing. 

SCHWARZENEGGER: It's very clear what they're doing. I mean, you know, and even the editor admitted it, that he's doing that. So, I mean, I'm not surprised at that. That's just the way it is, and I just have to reach out to the people, and that's why I'm traveling up and down the state.  That's why I'm here in San Jose. That's why I will be in a few days from now in San Diego.

O'REILLY: All right, I've got it.

SCHWARZENEGGER: I go up and down the state and reach out to the people.

O'REILLY: Now, listen, I don't care about what your father did in World War II and I don't care about your sex stuff, all right. It doesn't matter to me. You weren't -- you were a single guy. You weren't in any public office.

But you are -- you said you were big on the environment and all of that, and you drive a Hummer. How does that square?

O'REILLY: Well, I -- you know, I'm very proud of the Hummer, because I created that industry. I went to the Hummer factory and said we should make this Hummer not only a military car but a civilian car. Now we have to find ways how to create alternative, you know, fuel for them.

O'REILLY: Yeah.

SCHWARZENEGGER: I have my Hummer, for instance, right now, trying to see if we can change it, for instance, to try it out and see if it can be done, to have hydrogen fuel cell, hydrogen fuel energy. So there's many ways of going, and I think that's where the future of fuel will be going in this state and maybe in the rest of the country.

O'REILLY: All right, so you ...

SCHWARZENEGGER: But I'm all for the environment. I'm all for ...

(CROSSTALK)

O'REILLY: It just threw me, because I know you've been a big environmental guy, and then you're driving around with the Hummer that gets one mile to a gallon -- I'm going what's that all about.

SCHWARZENEGGER: No, no, no. Mine gets 14 miles to the gallon.

O'REILLY: Fourteen. But still, that's not great. You know what I'm talking about.

SCHWARZENEGGER: You're absolutely right. 

O'REILLY: I know you can't fit in a Volkswagen, but the Hummer is the other extreme.

All right, last question for you.

SCHWARZENEGGER: That's the way to go.

O'REILLY: Last question for you. This is just a vicious game. I mean, this makes acting and show business look like patty-cake, politics, and you said it, you're going to stand there and you're going to absorb the punishment. But it must hurt you. It must, as a human being. It must hurt you. It's just dirty, dirty, dirty.

SCHWARZENEGGER: It is dirty. It is sometimes painful. It's painful for my family and especially for the children. But like I said, for me, what is very important is, you know, I made this decision a month ago, that I will go into this race and I want to win, and I'm going to win, and I'm going to have a positive campaign and I'm not going to do the same thing to the other candidates.

O'REILLY: All right. Well, you made it through the no-spin zone there, and I hope you enjoyed it.

SCHWARZENEGGER: Well, thank you very much, and thank you. It was great to talk to you.  Thank you.

O'REILLY: It's a pleasure. And anytime you want to come back, you're welcome, Mr. Schwarzenegger. And we've extended invitations to Mr. Schwarzenegger's opponents as well.  We'll see if they step up. Thanks again.