I'm being pedantic, but wouldn't the Air be a more appropriate netbook comparison?

As for the sandpapered finger thing, I imagine that you're right, but at the time, I wouldn't necessarily think the sandpapered fingers comment was just blowing smoke.

I'd guess that Jobs was simply conveying his findings at the time. Obviously, this is purely speculation, but the in years leading up to the iPhone and iPad touchscreens and software weren't that great and users weren't familiar with them either. I'd wager that the testing that went into touch-target optimization led to results that made Apple/Jobs uncomfortable with releasing a 7-inch.