OBAMA: Well, I think there are a whole host of areas where Republicans in some cases may have a better idea.

WALLACE: Such as?

OBAMA: Well, on issues of regulation. I think that back in the '60s and '70s a lot of the way we regulated industry was top-down command and control, we're going to tell businesses exactly how to do things.

And you know, I think that the Republican Party and people who thought about the markets came up with the notion that, “You know what? If you simply set some guidelines, some rules and incentives, for businesses — let them figure out how they're going to, for example, reduce pollution,” and a cap and trade system, for example is a smarter way of doing it, controlling pollution, than dictating every single rule that a company has to abide by, which creates a lot of bureaucracy and red tape and oftentimes is less efficient.

I think that on issues of education, I've been very clear about the fact — and sometimes I've gotten in trouble with the teachers' union on this — that we should be experimenting with charter schools. We should be experimenting with different ways of compensating teachers that…

WALLACE: You mean merit pay?

OBAMA: Well, merit pay, the way it's been designed, I think, is based on just a single standardized test — I think is a big mistake, because the way we measure performance may be skewed by whether or not the kids are coming into school already three years or four years behind.

But I think that having assessment tools and then saying, “You know what? Teachers who are on career paths to become better teachers, developing themselves professionally — that we should pay excellence more.” I think that's a good idea, so…