This is a rush transcript from "The Journal Editorial Report," April May 3, 2008.

PAUL GIGOT, HOST: Coming up next on the "Journal Editorial Report," Barack Obama and Hillary Clinton go head-to-head in Indiana and North Carolina. As new poll numbers show trouble for Obama with the Democratic voters he needs most. Will the Reverend Wright fallout further damage his campaign?

Ben Bernanke's bender. The Fed cuts interest rates again despite soaring gas and food prices. Will he finally kick the rate hike habit? Find out, after the headlines.

(NEWS BREAK)

GIGOT: Welcome to the "Journal Editorial Report." I'm Paul Gigot.

It may all come down to Tuesday. That's when Hillary Clinton and Barack Obama square off in Indiana and North Carolina in contests that could finally bring the Democratic primary fight to an end. But after a rough week for the Obama campaign it is uncertain whether he can deliver the knockout blow. New poll numbers show his lead slipping nationally especially with white working class Democrats.

Wall Street Journal columnist Kim Strassel just returned from Indiana where those very voters hold the key to victory Tuesday. Also joining the panel, Wall Street Journal columnist and deputy editor Dan Henninger, editorial board member Jason Riley and opinionjournal.com editor, James Taranto.

Kim, you were watching Senator Clinton follow her and Senator Obama in Indiana. How is Senator Clinton changing her campaign, if she is at all, to take advantage of Obama's weaknesses?

KIM STRASSEL, COLUMNIST: She is ramping it up. As you said, this is a fight over white working class voters. And it is all about the economy right now. So she is taking the themes that worked best for her in Pennsylvania. But she is actually — she sounds angrier on the campaign trail. She is bashing away at trade, promising to go after conditions that move jobs overseas. She has taken to going after gas prices, blaming it on rich oil companies, on OPEC, on market speculation. So she is trying to energize her voters, make them sort of unhappy about things and get them out to the polls.

GIGOT: Kim, how is Obama changing his campaign? I gather he is changing it in form a little and he is no longer giving huge, big arena rallies and instead going to smaller forums and talking about the economy. How is he trying to get the voters?

STRASSEL: That's right. He has moved to doing these kitchen table discussions with couples in Indiana everything to listen to their concerns and give them answers. He is doing a lot more of talking about how his proposals will help them with their bottom line. So you are hearing a renewed emphasis from him on his promise to middle-class tax cut but he is trying to — instead of as of about change and hope, he is trying to give them more definite answers. Although at the same time, he is being more careful about general election prospects effects.

GIGOT: Dan, let's talk about the gas tax dispute. John McCain and Hillary Clinton say we need a temporary moratorium on the 18 cent a gallon federal gas tax. Obama says, no, no, no, this will be temporary. Frankly, I agree with Obama on this in terms of the utility of cutting the tax is a small amount of money. It is only temporary. How effective politically can this be for Senator Clinton?

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: I think it's probably pretty effective. It fits into the game plan Kim described there. She is driving a hard core economic populist strategy. I thought it was pretty significant miscalculation for Obama to say...

GIGOT: To do the right thing?

(LAUGHTER)

HENNINGER: To do the right thing. Yes. No one is doing the right thing out there anymore.

JAMES RILEY, EDITORIAL BOARD MEMBER: It is interesting. Obama, I think Indiana is a big opportunity for Obama. He I has been out there claiming he can appeal to Independent voters and Republican voters. Indiana's primary is open. It will give him a chance to prove that.

GIGOT: To get Independents again.

RILEY: Yes.

GIGOT: James?

JAMES TARANTO, OPINIONJOURNAL.COM EDITOR: All of these candidates, including John McCain, say we have a terrible problem with global warming and burning less fuel. If they really believe that, they should call for raising gas taxes not lowering them.

GIGOT: Jason, with Obama falling in the polls. Some think it is about Reverend Wright. He spoke out this week about against Reverend Wright more definitively than ever. Did he do it strongly enough to maybe a difference and help him?

RILEY: I don't think he did. I think he has more explaining to do. Frankly this is a man who has been out there lecturing the country on a need to transcend race, saying he's the guy who's going to do it. But on Sundays, for 20 years on Sundays, he has belonged to a church that's steeped in racial thinking.

I want to know what Barack thinks about black liberation theology. What dogs he subscribe to? What does he not subscribe to? I would be interested in knowing this. I don't think it is a religious test. I think in our country, with its racial history, it is due diligence.

GIGOT: People look at what Wright said say it is over the top, so extreme that Obama can't agree with this. and they will look at that and say look, he may have gone to the church, but they don't agree on the sail thin and I will give Obama a pass on this.

TARANTO: We are supposed to believe it took Obama 20 years to figure out what Wright was about and then another six weeks to think about it. I don't think Obama believes America is responsible for 9/11 and these other nutty things Wright said. But the question is, what does Obama believe? Nobody knows that. The man is an ink blot. He got support early on because they projected their hopes on him. What this Wright kerfuffle shows us is that it is easy for people to put their fears onto him

GIGOT: Kim, how about you? How is this showing in the polls?

STRASSEL: I think it is in the polls. This is a problem that does not go away. The more immediate issue, think back to Iowa, it now feels like two years ago but it was only a couple months ago. This is a gay who came out and done well with white voters. The real suggestion of his campaign was that he do could transcend race. This is what his campaign is about. It is diverting away from his message and making some people question whether he is a change agent he says he is. This is his problem.

GIGOT: What happens, Dan, if Hillary Clinton wins Indiana, which she has a chance to do, and comes close enough in North Carolina — if she doesn't win but it makes it close when he was ahead by double digits a couple weeks ago? Will this be enough for her to say — to freeze the linebackers, in this case the superdelegates, and prevent them from going over to Obama?

HENNINGER: I don't think so. I think they are — they have a terrible dilemma. They have to stiff one candidate's supporters or the other and they are not going to that to Obama's black voters because if they don't turn out in states like Wisconsin, Michigan and Ohio in November, the Democrats will have a very hard time winning the election. I just don't think they will stiff the black base.

GIGOT: All right, Dan.

More on this battle for the Democratic nomination, when we come back, including the effect of the Supreme Court voters I.D. decision will have on folks in Indiana heading to the polls on Tuesday.

(COMMERCIAL BREAK)

GIGOT: Well, if you plan to vote in Indiana's Democratic primary on Tuesday make sure you bring a picture I.D. The Supreme Court ruled this week states can mandate photo identification at the polls without violating the Constitution. The 6-3 opinion upheld a 2005 Indiana law designed to stop voter fraud.

Jason, how significant is this Supreme Court decision. I would note it included John Paul Stevens the liberal.

RILEY: It did. It is quite significant. Opponents of the Indiana law made two essential points. One is that voter fraud is a myth. It doesn't really exist. Voter I.D. is a solution in search of a problem. That it amounts basically to a modern day poll tax. They also said voter I.D. disenfranchises voters.

So what's interesting about the decision is all nine justices rejected the first claim. They said state legislatures, states in general, have a vested interest, this is a real problem they should address it.

GIGOT: Legitimate interest in addressing it.

RILEY: They should address this problem and voter I.D. laws are the way to do it. Secondly, by a 6-3 margin, led by Justice Stevens, as you said, the Supreme Court said this is not an overly burdensome requirement. That people can show photo I.D. This isn't especially taxing it is not something that is counter to and constitution.

GIGOT: Will there be any impact on Tuesday from this rule? The law is in effect, right?

RILEY: Well the one impact, the one nice impact is that it could cut down on election eve lawsuits that people file trying to get election law to be changed. The court one of the nice things is the court deferred to the states to settle this issue.

GIGOT: Imagine that? The score, once every decade, differs.

RILEY: Yes.

GIGOT: The argument. Let's go back to the Democratic contest, Dan. The argument you are hearing from the Clinton campaign is that she is the stronger candidate in the fall. That's what they are saying to the superdelegates. If you look at state polls, Florida, for example, she is up by 8, 49-41 against John McCain. Obama is behind 44-43 in that crucial state. So they are staying to the superdelegates don't go with Obama. He is a loser in the fall.

HENNINGER: Yes. We have heard for nearly two years, from Democrats, Hillary was unelectable. What's that about?

In this week "Wall Street Journal" poll it was interesting. They do positive, negative and neutral. Voters are really locked in on Hillary and Obama. Hillary's neutral is 14 percent. Obama is 16 percent. John McCain's is 27 percent. What this tells me is that McCain has a large pool of voters to pull votes from. I think Obama has the ability to pull voters from the center pool. Hillary, however, cannot do that. She is always been locked at 44 percent. I think it will be very difficult for her to get over 50 percent in the general election.

RILEY: What Hillary can do is hurt Obama's ability to do that in November by staying in this race and pressing on, which is like the like the suggestion in your column this week that these two should get together, flip a coin to see who's at the top and take start concentrating on McCain.

TARANTO: You mentioned Florida. Let's look at another part of the country. Mrs. Clinton has to do well in the primaries in Appalachia, western Pennsylvania, eastern Ohio and Tennessee. We have primaries still to come in West Virginia and Kentucky, which she is certain to win big. If you look at four of the states, Ohio, Kentucky and Tennessee, West Virginia, Bill Clinton won them twice. George W. Bush won them twice. These are key swing states. Pennsylvania has gone Democratic every time, but it's been very close. So Mrs. Clinton does have strength in those key states.

GIGOT: Are you saying Obama doesn't have strengths in those states, at least within Democratic primaries, no but the general. Are you saying he cannot win those states?

TARANTO: He probably could win Ohio and Pennsylvania. But I think he is going to have a much tougher time.

GIGOT: Kim, let me ask you another point in the NBC-"Wall Street Journal" poll. Obama's negatives have risen by 9 points in a month to 37 percent. That still not as high as Senator Clintons, which are in the upper 40's but they are growing.

STRASSEL: Oh, yeah, this will help her as well. Look, I really think this is fallout from this Wright controversy. You have to almost admire her to an extent. What Dan said, she has a hard electability argument as well but she put the focus on him. And this Wright controversy is playing into her hand? She sort of statistics back and hoped some sort of mess would erupt for them, which it has, and this is really hurting him with the general public. She has done as well as she could.

GIGOT: We will see we are it shakes out on Tuesday.

Still ahead, been Bernanke's bender. The Fed's cut interest rates despite the news we may not be in a recession. Can he finally kick the habit? Find out when we come back.

(COMMERCIAL BREAK)

GIGOT: The Bernanke bender continues. The Federal Reserve cut interest rates again this week. Its seventh rate cut in 8 months. The Fed's decision came despite news the economy wasn't in recession the first quarter of the year after all.

Liz Ann Sonders is chief investment strategist for Charles Schwab Company and joins me from Stamford, Connecticut.

Liz Ann Sonders, welcome to the program.

LIZ ANN SONDERS, CHIEF INVESTMENT STRATEGIST, CHARLES SCHWAB COMPANY: Thank you for having me.

GIGOT: The Federal Reserve did cut rates again. Do you think they are done? Will they take a pause and will we be able to skirt a recession do you think?

SONDERS: I think they probably will take a pause. But this idea they try to show us their cards with their statement and their cards this time said we are going to pause, I think, is a little bit misguided. I think every day they are dealt a new deck of cards in terms of incoming economic data.

I think if the economy were to deteriorate significantly from here, I think the ability from the Fed to maintain this pause mode that we believe they are in now would be limited. So I think they are still at the mercy of incoming data. At this point, it does look like the best bet is for at least some period of pause.

GIGOT: One thing I hear from consumers, what they are angry about are prices, rising prices, especially gasoline, the $4-gallon gas we know about and food prices. Is there any relief?

SONDERS: I think we may already be seeing relief, certainly in oil prices, which is have come down a bit. Part of the benefit of the Fed assuming it is in pause mode is that as global growth slows other banks around the world may be forced to lower their interest rate, which would narrow the interest rate spread that has put pressure down on the dollar, which in turn has put upward pressure on commodity prices. There is also a lot of speculation in commodities and that type of money it turn quickly on a dime. We may be unwinding some of those speculative trades that had sort of chased economies on the upside on dollar on the downside. I think there is relief.

GIGOT: One place consumers are supposed to get relief are the tax rebate checks which started arriving in the mail. It can be upwards of $1200 for some families. How much are those going to help the economy?

SONDERS: It is hard to say. If you look back at the last time we had rebate checks at the part of a stimulus package, it was if 2001, 2003. More than half, close to two-thirds, went to pay down debt. That was an environment where our debt situation was not as dire as it is now.

My personal hope is a lot of it is goes to pay down debt that. That doesn't provide the near-term boost to GDP some are looking for, but it serves consumers better in the long term. A lot of it may go to purchases of none-discretionary things like the food bill, like the gas bill. We may see a greater portion going that way instead of the more fun, discretionary purposes.

GIGOT: The question of a recession — I know growth in the first quarter was 0.6 percent. It may not be a formal recession. It feels like one. Do think we're still going — we're going to be able now with the rebate checks coming up, will all the Fed easier money that's in the system, will we be able to avoid recession through 2008?

SONDERS: I think it is still somewhat unlikely. I think we are in one right now. And I want to remind viewers that the definition of a recession is note two quarters in a row of negative GDP. It is a much more comprehensive set of economic statistics the bureau that dates recessions looks at. In fact, the last recession he we had in 2001 was not two quarters in a row of negative GDP. So there are other things that we look at besides that.

I don't think two back-to-back quarters of .6 or 1 percent growth, remember it is highly subject to revision, necessarily suggests we are going to avoid a recession.

GIGOT: Looking ahead to 2009, the Bush tax cuts, investor tax cuts on capital gains and dividends expire after 2010 but everyone assumes Congress and the new president will do something about them in 2009. If the rates go up, how much damage will that do to the stock market do you think?

SONDERS: Well, it is hard to say. I am a believer at that part of the reason for the strength in the market that began in 2003 was a function of the lowering of dividend and capital gains tax rates. I think those are beneficial to the stock market. There would be risk to the market. Certainly if capital gains tax rates were raised and it sort of incentivizes people to make the sale in advance of the change.

I think the answer as to where they go is somewhere between here and back to the old rate. The path of least resistance for taxes is higher, regardless of who gets elected in November.

GIGOT: Almost regardless? Even though we're going to have a big tax debate.

All right, Liz Ann Sonders, thank you for being here.

SONDERS: My pleasure. Thanks for having me.

GIGOT: We have to take one more break. Our panel is back with their "Hits and Misses" of the week.

(COMMERCIAL BREAK)

GIGOT: Winners and losers, picks and pans, "Hits and Misses," it's our way to calling attention to the best and worst of the week.

Item one, think the country is headed to recession? Time to go on a hiring binge — Dan?

HENNINGER: One part of the economy is in the middle of a boom. The public sector. Now, in the first three months of the year, the private sector lost about 286,000 jobs. But in the first three months, according to the Bureau of Labor Statistics, the government hired nearly 77,000 people. The Federal government. It has close to 14,000 workers. At the local level 47,000 and for the states it was about 16,000 new workers.

My favorite is New York City, which is — its mayor just announced he may have to defer a property tax cut because of the deficit. They are hiring about 1300 new teachers. We have a sort of definition here of what it means to put your tax dollars at work.

GIGOT: Thanks, Dan.

Those who think there is not enough being spent on public education maybe should think again — Jason?

RILEY: This is a hit for two academics, William Howell of the University of Chicago and Martin West of Brown, who analyzed national survey data and they found that Americans underestimate how much we are spending on both teacher salaries and per pupil spending. Teacher salaries by about $14,000, we underestimate what the average teacher is paid. When it comes to per people spending, the average person thought it was around $42,000 a year. It is more than $10,000 a year.

This is an interesting finding. It shows why some politicians, who so inclined, can get away with calling for higher taxes to support higher education spending. It turns out most Americans don't realize how much has already been spent.

GIGOT: All right, Jason, thanks.

Finally, a Middle Eastern country appoints a new ambassador to the United States. Its choice may surprise you — James?

TARANTO: Paul, Nonoo is good news. Huda Nonoo is the new ambassador from this country. She a Jewish woman and she's not from Israel. She is from Bahrain, which is a small 700,000-population Arab kingdom in the Persian Gulf with a tiny Jewish community. I am giving a hit to Bahrain for showing an example of pluralism and tolerance that other regimes in the area could stand to follow.

GIGOT: Jason, on your point, another thing you see in polls is that most Americans think that their public schools are actually doing very, very well. It is everybody else's public schools that are really rotten. And that's also one reason you just can't get a lot of support for education reform.

That's it for this week's edition of the "Journal Editorial Report." Send your e-mails to jer@foxnews.com and visit us on the web at www.foxnews.com/journal.

Thanks to my panel and to all of you for watching.

I'm Paul Gigot. We hope to see you right here next week.

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