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Sen. Fritz Hollings Headshot

Understanding Our Dilemma

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To understand our dilemma we must first dispel preconceived notions. A vote in the U.S. Senate for free trade today would probably secure 99 "yea" votes. Yet Henry Clay in 1836 said of free trade: "it never existed... It never will exist." Our founding fathers opted for controlled trade two years ahead of the Constitution with the enactment of the Tariff Act of 1787. Protectionism worked so well that Edmund Morris in Theodore Rex (p. 20) writes of the United States "this first year of the new century found her worth $25 billion more than her nearest rival Great Britain with a gross national product more than twice that of Germany and Russia." Abraham Lincoln was a protectionist and Teddy Roosevelt exclaimed "thank god I'm not a free trader." The forefathers instituted an industrial policy for the United States in 1787 and we have developed it with various trade laws to protect the economy.

The next preconceived notion is that The Declaration of Independence was a declaration against our government. On the contrary, the declaration was followed with a state system of government in the Articles of Confederation. After years of failure, the forefathers opted for a strong national government with the Constitution of the United States in 1789. We fought a bitter war against the imposition of state sovereignty to preserve the national government. Today national politics are divided: those for government and those against government. Those against caterwaul "the government is too big;" "regulations are killing the economy."

On the contrary, regulations or an industrial policy is necessary to save the economy. David Ricardo's Doctrine of Comparative Advantage has been taken over by the Doctrine of Government Advantage. China's controlled trade predominates in globalization. To sell in China you must produce in China. To produce in China you must surrender your technology to China. To succeed in China, you must research and innovate in China. China sets the competition in globalization and Corporate America offshores our economy to China to get into the soon-to-become largest market in the world. We Southern Governor's learned long ago how to carpetbag the north for industry. Now the federal government must carpetbag China to bring enough of Corporate America back home for a strong economy. This takes enforcing our trade laws and beefing up our industrial policy.

If President Obama would enforce the Defense Production Act of 1950 like President Kennedy in 1961, we wouldn't be begging Russia for helicopters for Afghanistan. If President Obama would enforce our trade laws like President Nixon in 1971 and impose a surcharge on car imports; we wouldn't have had to bailout Detroit. If President Obama would protect steel, motor vehicles, computers and machine tools like President Reagan in 1984, we would have 5 percent unemployment instead of 8.2 percent. Rather than continually threaten and talk about China devaluing its currency, Congress should act against this abuse. This would create millions of jobs.

Another preconceived notion is that tax reform closes loopholes and increases revenues. I've been through three tax reforms in my 38 years in the Senate and each time we've lost revenues. The Finance Committee conducts hearings and closes a few loopholes but the lobbyists won't allow the bill out of Committee until they've sneaked in additional loopholes. It took us six years to find the ethanol loophole.

Another preconceived notion is that Social Security and Medicare are broke. They are both in surplus. The government is broke. President Bush was given a balanced budget in 2001 but he cut taxes, waged wars, added prescription drugs to Medicare, bailed out and stimulated -- all without paying for them. President Bush increased the national debt or stimulated the economy $5 trillion in eight years. Now President Obama wages wars, cuts taxes, adds prescription drugs to Medicare, bailouts and stimulates without paying for them adding $5 trillion to the national debt in four years.

It took the United States over 200 years to reach a national debt of $1 trillion in 1981. Now we are adding 200 years of debt each year to the economy. The economy is overstimulated and on steroids. Paul Krugman's $600 billion in stimulation won't work. We need to get the government and economy off steroids.

The final misconception is that we can't do anything now to pay down the debt because the economy needs growth. Starting to pay for government will give growth. The Corporate Tax is not rebated on exports whereas the Value Added Tax is. The value added is not a percent of the sales price but a percent of the difference in the cost of parts and materials and the sale price of the finished product. 150 countries compete in globalization with a VAT. We should replace the 35 percent Corporate Tax with a 7 percent VAT. Seven percent is one half of the average global VAT and this four fifths tax cut immediately releases $2 trillion in offshore profits for Corporate America to invest tax free to create jobs in the United States. Since the VAT has no loopholes we have instant tax reform. Since the VAT is self-enforcing we can cut the size of government (IRS). Last year the Corporate Tax produced revenues of $181.1 billion. A 7 percent VAT for 2011 would have produced $872 billion in revenues. This tax cut produces billions to pay down the debt now, creates millions of jobs and jumpstarts the economy.