This is a rush transcript of "Special Report With Brit Hume" from July 31, 2008. This copy may not be in its final form and may be updated.

(BEGIN VIDEO CLIP)

SEN. BARACK OBAMA, (D) PRESIDENTIAL CANDIDATE: They're going to try to say that I'm a risky guy. They're going to try to say, well, you know, he's got a funny name, and he doesn't look like all the presidents on the dollar bills and the $5 bills.

(END VIDEO CLIP)

BRIT HUME, HOST: To which the John McCain campaign responded, and I quote, "Barack Obama has played the race card, and he played it from the bottom of the deck. It's divisive, negative, shameful, and wrong."

To which the Obama campaign responded, and I quote, "Barack Obama in no way believes that the McCain campaign is using race as an issue, but he does believe they are using the same old low-road politics to distract voters from the real issues."

That is where the debate on that stands at the moment on a day when the Gallup tracking poll had the race in a virtual tie — 45 Obama, 44 McCain. That's down from the nine-point lead Obama was said to be enjoying in the same poll just less than a week ago.

Some thoughts on all this business now from Fred Barnes, Executive Editor of The Weekly Standard, Mort Kondracke, same job at Roll Call, and the syndicated columnist Charles Krauthammer, all are FOX News contributors.

Well, Mort, what do you think about this little exchange?

MORT KONDRACKE, EXECUTIVE EDITOR, ROLL CALL: Look, Obama said, not once, but a couple of times, three times that we had in our report, that they say I don't look like the guys on the dollar bills. I don't know what that is a reference to.

HUME: All he is saying is that he alone doesn't have a powdered wig.

KONDRACKE: Yes, right. If that's not toying with the race card, I don't know what is.

What you can be sure that the Democrats will do is play the smear card, you know. Their going low against us, so we lost — Michael Dukakis lost because of Willie Horton; John Kerry lost because of swift-boating. It's always dirty politics that the Republicans are playing that they try to use on it.

They are real issues on this campaign. They are getting debated. Energy is a big issue. The surge was a big issue. Taxes is an issue. It's getting debated. If Barack Obama really wants a debate, he ought to agree to hold town meetings with John McCain.

There has been low-road stuff on both sides. When McCain said that Obama would rather, you know, win an election and lose a war, or whatever it was, and he said he would rather go play basketball than visit the wounded troops, I think that was a low blow.

But Obama has been doing low blow stuff, too, the 100-years war, and all that.

FRED BARNES, EXECUTIVE EDITOR, THE WEEKLY STANDARD: But race is a different category. Those other things don't amount to much. And this clearly was he was referring to race.

And the thing that really clinches it is what he said a month ago in Jacksonville, where it was the same rough argument, except he ended it a little bit differently, where he said they're going to try to make you afraid of me — he's young and inexperienced and he has a funny name, and did I mention he's black?

This time he changed it to say he doesn't look like the other presidents on the dollar. Clearly, that was a racial reference for a guy who is claiming to be someone who transcends race as the candidate and as a person.

And the McCain campaign — look, I have some McCain guy yelling at me on the phone about this and how they weren't going to stand for this, and so on. And they shouldn't have stood for it.

Brit, you left out-you had Obama's statement there saying that McCain is not playing race. That came out only after their lame earlier statement saying that this statement about Obama not looking like the other guys on the dollar bill, it wasn't a reference to race at all. It meant that he Obama just didn't have the same long record in Washington as those guys on the you $1 and $5 bill, a statement that was absolutely ludicrous.

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: Look, what's really bizarre about this is Obama is accusing the Republicans of something that they haven't done, or McCain of something he hasn't done, which is to say he doesn't look like the other presidents, when, a week ago, in front of 200,000 people in Berlin, it was Obama who addressed the world and said "I stand up here and I don't look like the other Americans who have been here."

So Obama is the one who said it. He said it himself. He said in it in public. He said it proudly, and now he pretends it is Republicans using it against him.

This all started with the McCain ad, with the Britney Spears ad, which I thought was, a, pretty legitimate, and, b, a tactical error. It is legitimate because it comes out of what happened in Berlin.

HUME: That's an ad, by the way, that had images of Britney Spears an Paris Hilton while saying that Obama was the biggest celebrity in the world, meaning transcending even those two dillies, right?

KRAUTHAMMER: And showing pictures of him in Berlin. And the question is what exactly-as people think about the Berlin event, it becomes more and more bizarre.

What exactly was all of that about. What was he doing standing in front of a crowd of German saying this is our moment, this is our time, standing in front of a column commemorating not one but three Prussian wars of aggression? What was that event about?

And the McCain ad was a way of saying it was an empty and inexplicable, as a lot of celebrities —

HUME: so why was it an error?

KRAUTHAMMER: It's a tactical error because the Berlin event was already having an effect on the press itself independent of McCain.

Dana Milbank had a piece in "The Post" talking about Obama not as the presumptive nominee but the presumptuous nominee. We had last night Letterman, who did the top ten reasons why Obama is grandiose.

It is becoming a meme in the media, and McCain ham-handedly steps all over it, and now Democrats will say, oh, it is just a talking point of McCain.

In fact, it was something starting on its own. If your opponent is committing suicide, get out of the way and let him do it on his own.

KONDRACKE: I think he was trying to pound it home and keep it going.

But the question of the campaign is the question that that ad asked — is he fit to lead? It is the entire campaign. It is what the campaign is all about.

I do think that McCain ought to be going on the positive a lot more than he is, but, still, to raise doubts and — you know, we had a "Wall Street Journal" poll about a week ago saying that 55 percent of the people think that Obama is the riskier candidate. So, you know, you would expect McCain to exploit it.

BARNES: The toughest things that have been about Obama have been written by some liberals, like Richard Cohen, saying he asked Democrats what has Obama ever accomplished. He couldn't come up with anything except a good speech.

HUME: Up next with the panel, today's economic news. Let's talk about that next.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

SEN. CHARLES SCHUMER, (D), NEW YORK: Any doubts that we're heading into a recession should be erased with today's employment report.

OBAMA: Our economy is teetering not just on the edge of recession, but potentially worse.

SEN. JOHN MCCAIN, (R) PRESIDENTIAL CANDIDATE: I believe we are in a recession. I think the numbers indicate that.

REP. NANCY PELOSI, (D) CALIFORNIA, SPEAKER OF THE HOUSE: We've seen it in the whites of the eyes of America's working families. They know, and they can tell the president clearly that we are in a recession in our country.

(END VIDEO CLIP)

HUME: That was Chuck Schumer in February, Barack Obama and John McCain in April, and Nancy Pelosi today. This, in the face of a report from the Commerce Department that said that the Gross Domestic Product, that is to say the economy, grew by 1.9 percent in the last quarter, the quarter that ended April through June quarter; this after 0.9 percent growth in the first quarter, and said the report that actually the economy contracted ever so slightly in the final quarter of last year.

So, folks, what are these politicians talking about? Charles?

KRAUTHAMMER: Well, the rule in Washington and the media is good economic news is no news; bad economic news is real news, and bad economic news under a Republican president is headline news, screaming urgent above the fold headline news.

And you've got a perfect storm. You've got an election year, an unpopular Republican, and middling economic news, and it's getting hyped. A two percent growth rate is not a recession, and what — technically, you have a panel of experts who years later will make a decision on recession based on a lot of numbers —

HUME: But a definition is two consecutive quarters of negative growth.

KRAUTHAMMER: It's a shorthand. The ultimate decision is by a committee in the future with a lot of numbers that will come in later, and it includes unemployment and other stuff.

But by any understanding that we have, and long before that committee will decide on the basis of numbers that nobody has seen yet, the answer is no, we're not in a recession. We're in a slowdown.

The slowdown is different. We had a mild recession after a dozen good years of Reagan and Bush, and we had a mild recession after eight good years of Clinton. And now we're having a mild slowdown after seven reasonably good years after 9/11.

That happens. Nobody has abolished the business cycle. And we are acting as if we are shocked that slowdowns actually happen in the face of two huge events, the collapse of housing and the oil shock.

Oil shocks alone in the '70's caused huge, devastating recessions, much worse than this. And here our economy is withstanding housing and oil at the same time.

KONDRACKE: The beltway boys have a public bet, ten dollars, that we will have a recession. I'm the one that said we would have a recession. I'm losing at the moment.

Look, 1.9 percent growth, even in the face of a stimulus, is very good. It might have been bigger, and especially in view of the torture that the economy is going through because of energy and the housing crisis and the credit crunches as well, I'm astounded that it's that high.

And, you know, not even 51 percent of — well, it was 67 percent of economists, according to "USA Today" survey said a couple months ago that we were going to have a recession, and only now 51 percent believe it. So it looks like we might avoid it.

BARNES: I always thought so. I still think so. This was a different category, though, Charles. This was relatively good news that a lot of people in the media tried to turn into bad news.

Look, the way it goes, the trajectory is a growing economy — minus a 0.2 percent growth in the fourth quarter up to 0.9 in the first, and now 1.9 percent. It's a going in the right direction.

And, as Mort and Charles said, that's in the face of this horrendous housing and credit crises and $4 gasoline, which I think was around for the whole second quarter, all that stuff, and the economy is still growing at two percent.

And the lame thing that some of these reporters would like to make a bad story. I was, like Mort, I was astounded. I didn't think it would be quite that good. They say, well, some people had predicted that it might be better than that.

HUME: They call it "disappointing news."

BARNES: It is not disappointing at all. I knew the stimulus package wasn't going to do much at all. Anybody should have known that. And some oaf on Wall Street thought otherwise, and I wouldn't hang my story —

HUME: You didn't think the stimulus package made any real difference?

BARNES: Not much. Maybe a little bit. Mainly we have huge exports, which, more than anything else, is probably holding up our economy, which is amazingly resilient.

HUME: Isn't that a function in part of the weak dollar?

BARNES: Yes. And in the short run, it can help a lot. In the long run, you'll get in trouble.

HUME: That is it for the panel.

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