Bloomberg News

Santorum Picks Own ‘Winners and Losers’ Even as He Chides Obama

February 23, 2012

(For more campaign news, go to ELECT.)

Feb. 17 (Bloomberg) -- Republican presidential candidate Rick Santorum says he doesn’t believe the U.S. government should pick the economy’s “winners and losers.”

Except for manufacturers. And small businesses. And families.

Speaking in Detroit, the former Pennsylvania senator sketched a plan he said would balance the federal budget in five years, including rolling back non-defense spending on many programs to 2008 levels, while rejuvenating the good-paying factory jobs that once characterized the Motor City.

“We do need a strong economic platform to help the private sector compete,” he said in a luncheon speech yesterday to the Detroit Economic Club before the Feb. 28 Michigan primary.

As Santorum campaigns in the industrial heartland, he proposes eliminating the corporate income tax for manufacturers and halving the 35 percent rate for other companies. Even some Republican-leaning economists were skeptical about extending special help to one area of the economy such as manufacturing.

“It’s a bad idea to single out a particular sector that way,” said Alan Viard, a former economist in President George W. Bush’s administration who is now a scholar at the American Enterprise Institute in Washington. “Economists assume that, under normal conditions, markets will allocate resources efficiently,” he added. “So the tax system should be neutral.”

Vision for Future

Santorum, 53, says the help is needed to reverse the long- running erosion in manufacturing employment and buttress stable communities.

“This is an economic vision that doesn’t go back, but goes forward,” he said. “We’ll put America back to work.”

Although manufacturers have added 404,000 jobs since January 2010, there are still 5.5 million fewer factory jobs today than in July 2000. Yet manufacturing output is 2.2 percent greater today, according to the U.S. Federal Reserve.

Economists say the job losses are the result of more intense worldwide competition following the end of the Cold War and higher productivity because of automation.

“We can’t go overboard in thinking we can go back to the middle-class manufacturing jobs we had in the ‘50s and ‘60s when we didn’t have the global competition we have now,” said Jeffrey Bergstrand, a finance professor at the University of Notre Dame and a former Federal Reserve Bank of Boston economist.

Recalling Obama Pledge

Many major manufacturers already pay less than the statutory 35 percent tax rate, according to their Securities and Exchange Commission filings. Caterpillar Inc. pays an effective 27 percent rate while Boeing Co. pays 25.6 percent and Johnson & Johnson 21.5 percent.

Santorum’s hopes of reviving manufacturing employment are reminiscent of President Barack Obama’s election-year plan to “bring manufacturing back.” The president, who this week toured the Master Lock manufacturing site in Milwaukee, last month unveiled a six-pronged plan to eliminate tax incentives for companies to move offshore and create new lures for them to bring jobs home.

In recent months, several companies -- including General Electric Co. and Ford Motor Co. -- have announced plans to return work to the U.S. from overseas facilities. GE brought production of its energy-efficient water heaters to its Louisville, Kentucky, facility while Ford is shifting medium- duty truck production from Mexico to Avon Lake, Ohio, which will preserve 2,000 jobs there.

Repatriating Funds

Santorum also wants to use tax incentives to persuade multinational corporations to return some of the cash they have stockpiled abroad back to the U.S. He would allow corporations to bring their foreign profits to the U.S. on a tax-free basis, so long as they used the money to build new factories.

Corporations have $1.4 trillion overseas, according to J.P. Morgan Securities LLC. With existing factories operating well below capacity, lack of demand, not taxes, may explain why. The nation is using 77 percent of its manufacturing potential, less than during the low point of the 1990-91 recession, according to the Fed.

Emerson Electric Co., for example, has $5.9 billion parked in its non-U.S. subsidiaries, according to SEC filings. Chief Executive Officer David Farr told investors this week that rising labor costs in China meant the company would rely more on automated manufacturing there, rather than on low-cost labor.

On to Mexico

“We’re not about taking stuff and moving it back other places,” Farr told investors in a Feb. 14 conference call. “The place I’ll move it will be Mexico.”

Santorum also suggested that manufacturers are having trouble finding skilled workers because of extended unemployment benefits. With up to 99 weeks of jobless benefits available, “people can make choices they couldn’t otherwise make,” he said.

Santorum, who is leading former Massachusetts Governor Mitt Romney in Michigan polls, issued no new proposals yesterday. He reiterated his call for tilting the tax code to help families by tripling the current deduction, which Viard said would “increase still further the percentage of people who don’t pay any income tax.”

Santorum also vowed to roll back Obama administration regulations, which he said were hurting small businesses.

“Big business doesn’t mind big government,” he said. “It gives them a comparative advantage.”

Criticizing Bush

He criticized both the Bush and Obama administrations for bailing out the auto and financial industries, which he described as “picking winners and losers” and said the result of a greater government role in the economy “is not going to be a good one.”

Santorum said he wouldn’t have rescued General Motors Co. and Chrysler Group LLC because the automakers would have recovered without federal assistance.

The companies would be “alive and equally as well, or better off, than they are now,” he told the crowd of about 300. “The markets would have reacted to restructure it to be more competitive.”

GM yesterday said it earned $9.19 billion last year, the largest annual profit in the 103-year history of the company.

Santorum saved his harshest language for the president, whom he accused of “suffocating this economy.” While Obama has presided over the weakest economic recovery since the end of World War II, third-quarter corporate profits of $2 trillion were 19 percent higher than their pre-recession peak five years earlier, the Commerce Department said.

Spend Less

If elected president, Santorum said the federal government will spend less money every year en route to a balanced budget in the fifth year. Since 1948, government spending has increased every year except for 1954, 1955 and 1965, according to the Office of Management and Budget.

He pledged to tackle spending immediately on so-called entitlements. That includes accelerating Representative Paul Ryan’s proposed changes to Medicare, which would turn the government insurance program for the elderly into a voucher system, in which recipients would purchase private insurance.

Santorum’s tax plan would make the job of balancing the budget more difficult, reducing federal revenue in 2015 by $900 billion to $1.3 trillion, depending upon whether the Bush-era tax cuts were allowed to expire at the end of this year, according to the nonpartisan Tax Policy Center in Washington.

Wider Deficit

The White House projects a $610 billion deficit in 2015, meaning Santorum’s proposed tax cuts could as much as triple the amount of spending reduction required that year to eliminate the government’s red ink.

“It’s a really, really large tax cut relative even to full extension of the expiring tax cuts,” says Donald Marron, the center’s director and a former member of the White House Council of Economic Advisers under Republican George W. Bush. “It’s very hard to see how you’re able to pay for that.”

Santorum vows to cut $5 trillion from federal spending in five years, an unprecedented shrinkage in government outlays even as the U.S. population gets larger and older. One sign of the challenge: Between this year and 2015, Medicare will add more than 5 million new patients, according to the latest Medicare trustees’ report.

--Editors: Mark McQuillan, Jim Rubin.

To contact the reporter on this story: David J. Lynch in Washington at dlynch27@bloomberg.net;

To contact the editor responsible for this story: Jeanne Cummings at jcummings21@bloomberg.net


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