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The economy charade
By ERNEST F. HOLLINGS, former U. S. senator

AUG. 31, 2010 -- The greatest off-Broadway show continues in the nation's capitol with the President and Congress engaged in a grand charade of creating jobs to revive the economy. The President's problem is that the overstimulation of public debt and household debt has converged with the hemorrhage of jobs to off-shoring, causing the economy to collapse. The confusion is that the problem of stimulation is being used as a solution, and the solution of getting into the trade war is being used as a problem to avoid.


Hollings

President Bush stimulated the economy by adding $7.5 trillion to the national debt while household debt increased or stimulated the economy $7 trillion during the same eight years. By the time Obama raised his hand to become President, the economy had been stimulated $14.5 trillion, and we were losing 799,000 jobs a month. President Obama has now stimulated the economy an additional $2.7 trillion, and we are still losing jobs. Stimulation is spent.

Real job creation will come and the economy will rebound when the United States engages in globalization or the trade war. Globalization is nothing more than a trade war with production looking for a cheaper country to produce. All countries save the United States compete fiercely, attracting investment, production -- even research. Bill Gates' Microsoft is in China, and China alters acquired technology, patents it, and with its volume market it becomes the article in world trade. Meanwhile, the United States acts like there is no need to manufacture and avoids the trade war with such "red herrings" as the need to educate, to innovate, calling for free trade, "don't start a trade war with protectionism." To understand our dilemma, the people must rid their minds of these demons.

The United States was born in a trade war. The Mother Country prohibited manufacture in the Colony and required the Colony's exports to be carried in English bottoms. Trade and manufacture were foremost in the minds of the forefathers. The founders couldn't agree on the four freedoms of the first amendment to the Constitution until 1791. But four years earlier, in 1787, Article I, Section 8, of the Constitution called on Congress to regulate foreign commerce. The first act of Congress in its history, on July 4, 1789, was for a protectionist tariff. We didn't pass the income tax until 1913. For over a hundred years we financed and built these United States into an industrial power that excelled the Mother Country with tariffs and protectionism. The Mother Country's insistence on free trade to continue its policy of colonization caused Senator Henry Clay to exclaim in 1832 about free trade: "It never existed; it never will exist…." Later, Teddy Roosevelt exclaimed: "Thank God, I'm not a Free Trader." It was TR who instituted the nation's industrial policy for domestic commerce with anti-trust measures, and Congress created an industrial policy for foreign commerce by enacting trade laws to protect our economy.

All agree that the more education and innovation the better. But the lack of education on jobs should be dispelled. Little South Carolina has enough education to attract over one hundred German industries and produces the "ultimate driving machine" for BMW and the most sophisticated technology, Boeing's "Dreamliner." Tom Friedman's innovation doesn't create jobs. The development of innovation creates jobs, and Andy Groves' best of innovation, Intel, is being developed in Ireland, China and Vietnam.

"Acting like we're not in the trade war jeopardizes the nation's security. Today we don't have enough helicopters to continue the war in Afghanistan. The Pentagon is begging Russia for helicopters. The only war we have won since World War II is Charlie Wilson's War."

-- Ernest F. Hollings

At the end of World War II we were the only industrial power in the free world and wisely enacted the Marshall Plan to spread capitalism against communism. But Japan started a trade war for market share. Japan closed its domestic market, subsidized its manufacture, sold its export at cost, and made up the profit in the closed market. It worked. Toyota is #1 as General Motors is in bankruptcy. Communist China embellished the trade war by closing its market for products domestically produced, controlling every facet of its market from banking to labor, and attracting on a limited basis foreign investment, research, technology, development and production. Corporate America for years avoided off-shoring its production and made attempt after attempt in Congress to have presidents enforce trade laws to protect its production. I worked with Corporate America to pass such trade bills that were vetoed by presidents of both parties because of the Cold War. Presidents allowed the violation of trade laws for the greater national interest of spreading capitalism against communism. When the Cold War was over, President Clinton sold out American production with NAFTA with Mexico, Permanent Normal Trade Relations with China, and sponsoring China's entry into the World Trade Organization in 2000. Under President Bush, the gradual off-shoring of production and jobs hemorrhaged. President Bush refused to enforce our trade laws, losing during his eight years almost a third of our manufacture and manufacturing jobs. Corporate America now calls for free trade to dump its subsidized off-shore production back into the United States.

President Obama should come in from the cold in the trade war as follows:

1. With the United States suffering $6 trillion in trade deficits in the last ten years, President Obama should institute a 10% surcharge on imports like President Nixon did in 1971 when our trade deficit was a fraction of what it is today.

2. Millions of jobs can be created by President Obama enforcing the War Production Act of 1950, which President Kennedy used to save the textile industry in l961. President Kennedy held Cabinet hearings to determine that textiles were important to our national security. He then promulgated his seven-point program, saving the industry. Today, the entire industry need not be saved. In globalization, we want foreign competition to keep our domestic industries competitive. The only textile items necessary to our national security that need to be saved are items such as camouflage, parachute cloth and composites for body armor.

3. Instead of waiting for a vital industry like automobiles to go bankrupt and needing a bailout, President Obama should move under Section 201 of the Trade Act when production is endangered. President Reagan threatened Japan under Section 201 on steel, autos, machine tools and semi-conductors, obtaining voluntary restraint agreements. This not only saved Intel, but President Reagan saved Harley-Davidson by imposing quotas on motorcycle imports. For those worried about "industrial policy," none other than President Reagan picked winners over losers on steel, autos, machine tools, semi-conductors, and motorcycles.

4. Green jobs are good, but long range. Brown jobs have an immediate impact and are needed. President Obama should jump-start the economy by calling on Congress to replace the corporate tax with a 5% VAT - actually increasing revenues by cutting taxes. A hundred and thirty-five countries compete in globalization with a value added tax that's rebated on export. The U. S. corporate tax is not rebated on export, not only putting domestic exports at a disadvantage but threatening the Obama policy for green jobs. Germany invades Charleston, S.C., with a windmill plant, using its 19% VAT to make a beachhead for green jobs in the United States. Manufacturing the parts in Germany, the 19% VAT is rebated at export to South Carolina, permitting Germany to produce windmills 15% cheaper than any domestic production. With a 3% shipping charge of the parts and highballing the cost of production in Germany to not pay more than 1% income tax in the U. S., Germany is already ahead of the curve on green jobs in the United States as President Obama politics for them. A 5% VAT to replace the corporate tax will immediately put the United States in the trade war. It eliminates our policy of favoring off-shoring and gives a tremendous boost to exports. A 5% VAT raises $600 billion. The corporate tax for 2010 is estimated at $156.7 billion, leaving $443.3 billion to stop borrowing from China and pay down the national debt. Corporate America would be put on notice that their domestic investment would be protected and off-shored production could come home. As Paul Craig Roberts, former Assistant Secretary of the Treasury for Ronald Reagan, states: "The only way that the United States will again have an economy is by bringing back the off-shored jobs."

Acting like we're not in the trade war jeopardizes the nation's security. Today we don't have enough helicopters to continue the war in Afghanistan. The Pentagon is begging Russia for helicopters. The only war we have won since World War II is Charlie Wilson's War. Victory was obtained by Congressman Wilson having Israel ship stinger missiles to Pakistan to be used in Afghanistan to shoot down Russian helicopters. All the Taliban has to do now is point to the Russian helicopters and say: "See, it's the same foreigners trying to change our culture." We create terrorism rather than eliminate it with Russian helicopters. It's a helluva note when the United States can't defend itself save the favor of some foreign country.

"The mystery is that the free press and TV pundits treat manufacture and the trade war "top secret." Perhaps the free press feels that globalization has scrambled the trade egg and to unscramble it will start a trade war. This ignores the trade war that rages today and, most importantly, there must be an egg to scramble."

-- Ernest F. Hollings

But the charade continues. If President Obama enforces our trade laws or Congress initiates a tax or trade measure to protect domestic manufacture, coming down on their heads in opposition will be Wall Street, the big banks, the Conference Board, The Business Roundtable, the National Federation of Independent Business, the National Retail Federation, the United States Chamber of Commerce and Corporate America. These entities will not only deny contributions to the President and Congress, but contribute to their defeat. Since money is the mother's milk of politics, the charade of doing nothing to get the contributions courses along. Manufacture, the engine of growth, and the trade war remain "top secret."

The mystery is that the free press and TV pundits treat manufacture and the trade war "top secret." Perhaps the free press feels that globalization has scrambled the trade egg and to unscramble it will start a trade war. This ignores the trade war that rages today and, most importantly, there must be an egg to scramble. We're now on course to losing the egg or nation by failing to get in the trade war. Schools are being closed; fire stations are being eliminated; roads are being plowed up so they won't need repair, and the United States is on course to becoming a colony again. Wall Street, Corporate America, and the idle rich insist that the President and Congress do nothing in order to protect their subsidized profits. The same crowd that caused our economic collapse with derivatives and credit default swaps is in charge insisting that Washington do nothing.

Thomas Jefferson remarked: "Were it left to me to decide whether we should have a government without newspapers, or newspapers without a government, I should not hesitate a moment to prefer the latter." Jefferson no doubt had in mind that the government would remain free so long as there was a free press to keep the government honest. In globalization today, the free press has become a co-conspirator of government doing nothing.

Senator Hollings of South Carolina served 38 years in the United States Senate, and for many years was Chairman of the Commerce, Space, Science & Transportation Committee. He is the author of the recently published book, Making Government Work (University of South Carolina Press, 2008).

© 2010, Ernest F. Hollings. All rights reserved. Contact us for republication permission.

About Fritz Hollings

Ernest F. Hollings served the public for 56 years -- 38 years in the United States Senate and as South Carolina's governor, lieutenant governor and a member of the S.C. House of Representatives.

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