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CNBC EXCLUSIVE: CNBC TRANSCRIPT: REPUBLICAN PRESIDENTIAL CANDIDTATE RICK SANTORUM SPEAKS ONE-ON-ONE WITH CNBC’S JOHN HARWOOD TODAY

When: Today, Thursday, March 1st

Where: CNBC’s Business Day Programming

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Republican Presidential Candidate Rick Santorum today, Thursday, March 1st, airing throughout CNBC’s Business Day Programing beginning on "Power Lunch." All references must be sourced to CNBC.

Video: Rick Santorum’s Economic Plan

JOHN HARWOOD: Senator Rick Santorum, thanks so much for joining us.

Former Senator RICK SANTORUM: Pleasure.

HARWOOD: I can't fail to note at the beginning how remarkable it is that your little start-up campaign finds itself in this position against a Fortune 50 campaign of...

Sen. SANTORUM: Fortune 2.

HARWOOD: ...of Mitt Romney. Tell me how the position that you're in now compares with what you actually expected when you started this campaign?

Sen. SANTORUM: You know, I always felt that, you know, we were--I wouldn't run if I didn't think we were the best candidate to win this election. And I knew, not everybody in this race, but most of them in the race, and I knew their strengths and their weaknesses; and I felt like, well, we certainly have strengths and weakness. In a Republican primary, our strengths are stronger and our weaknesses are less. And that I felt that if we could get the chance to get out there and have our voice heard, big if, and--that we could do so. I always felt that our chance would be Iowa, and that, you know, the way Iowa operates and you know, going out and going to every little town and being able to build that, you know, from the grass roots up without resources and that's what we did, without resources, would give us a spark, give us the recognition and make us part of the debate. And I felt like once we would be part of the debate, we could stand up with anybody.

HARWOOD: Let me ask about your manufacturing agenda, 0 tax rate on manufacturers. I talked the other day to a Republican economist, not aligned with any campaign, he said it's one of those things that sounds good, but it's terrible policy because, A, it invests huge power in the government to figure out who qualifies; and, B, it encourages companies to game the system like crazy in order to get the 0 rate.

Sen. SANTORUM: Well, we already have a section of the code that deals with manufacturing activity. So it's--as someone who's done a little work on taxes, you have qualified manufacturing activity right now, and you do get preferences in law, right now, for qualified manufacturing activity, particularly if it's export-oriented. So--and I can tell you that as far as the gaming of the system's concerned, of course every, tax system is going to have some area of, quote, "gaming, whether whatever exclusion or deduction is. It's pretty hard to game a manufacturing activity. You're making something or you're not. And...

HARWOOD: Does McDonald's qualify under the existing?

Sen. SANTORUM: No. They're not a manufacturer. So the--you know, this is something you make a product. You create a product. And so I think that...

HARWOOD: But you've said you like to let markets work. Don't you worry that this would distort markets?

Sen. SANTORUM: Yeah, see, I think markets work, but you have to understand there are different competitive marketplaces out there and manufacturing is unique in that we have to compete against direct international competition. So it's not like you're creating a level playing field for, you know, for the airline industry. Yeah, they have to compete against--you know, they have to compete under the same rules here if they want to fly here or not fly here. So everybody's competing. You just compete on the same ground. If you want to fly internationally, everybody has to compete with the same rules flying internationally.

That's different in manufacturing. You have--you know, you have countries that desperately want to make things in their country because of the tremendous impact manufacturing has on wealth in a community, and the opportunities it has to employ its workers who are not necessarily, you know, the most highest educated. It certainly employs people are who highly educated, too, but it creates a ladder of success that really very few industries do and, at the same, time create good wages up through that process. So that's why we are on a playing field right now that we are not competitive. We are 20--according to the National Association of Manufacturers, if you compare our costs to our top nine trading partners for manufacturing, we are 20 percent higher, excluding labor costs, which means it's government policy and at taxation of regulation that is making American manufacturers uncompetitive and the reason we are losing jobs. If you say, `Well, you know, it's just too bad, that's just the way--you know, government has created this problem, and we're going to lose jobs as a result,' I don't accept that.

HARWOOD: Let me shift gears to tax and spending deficits. You've criticized Governor Romney for using Occupy Wall Street rhetoric when he says that he would pay for his tax cuts through people at the upper end of the scale.

Sen. SANTORUM: He--I think he used the term top 1 percent.

HARWOOD: Right. Now, from what I can understand that he said, he said simply that he was going to pay for the tax cuts by broadening the base and that the burden of that was not going to fall on some of the working class people that you are speaking for in the campaign. So what's wrong with that?

Sen. SANTORUM: Well, what he--what he does is shift the tax burden in a particular area of that, again, it sort of plays class warfare. Saying, well, the wealthy should pay more and not everybody--I'm for cutting taxes across the board. I'm for creating opportunities across the board. He is saying, `Well, we're going to shift, again, which is already being done, shift more tax burden to higher incomes.' He does in a way that's particularly damaging by eliminating the deductibility of certain things, particularly charitable deductions. As you know, John, this is one of the key parts of how America's been able to build a great society with limited government is through our nonprofit sector, through community and civic organizations that are funded, educational organizations, that are funded in large--in a lot of cases by people who are higher income re--you know, philanthropically giving back to the community and to the country what they've been able to reap out of the--out of the--out of the system. Now Governor Romney is, in a sense, undermining the very institutions that have to be growing if we're going to reduce the size of government. He is taking money away from the people that then organizations--they're going to have to replace this limited government. So he's creating a very difficult environment for America to continue to be prosperous if we limit government and limit the nonprofit organization.

HARWOOD: So your answer to him, then, if I take it, is not to pay for the tax cuts, the Committee for a Responsible Federal Budget said you'd add $4 1/2 trillion to the deficit over 10 years because the spending cuts you've talked about are too vague to be counted.

Sen. SANTORUM: Well, the--that committee is not a nonpartisan group. It certainly has its ideological bent. We've been very specific about the tax--the changes we will make in the entitlement program.

HARWOOD: But you don't mind short-term increase in deficits.

Sen. SANTORUM: I don't think there will be a short-term. This is a group that believes that the world is flat, that when you change the dynamism of the tax code and the regulatory environment, that businesses won't react and produce more jobs and create more economic activity. I don't--I don't buy that.

HARWOOD: Well, so does that mean that you would not increase short-term--you think you would not increase short-term deficits because of dynamic effects, not because of off-setting cuts or base broadening?

Sen. SANTORUM: It'll be--it'll be a combination of we'll see a dramatic increase in economic activity, which will result in lower transfer payments on means tested entitlement programs, combine that with the spending cuts that I've proposed, particularly entitlement programs that we've--we're going to take on. Throw on top of that the revenue gains that will come as a result of more business activity, and that will have a positive impact, I think, on the deficit.

HARWOOD: You said the other day that President Obama wasn't just incompetent on economic policy, but he actually wanted unemployment to be higher. That doesn't make any sense to me. Isn't it more likely that you and Republicans want unemployment to be higher right now so it's easier to beat him? Doesn't any president, because they want to win re-election, want lower unemployment?

Sen. SANTORUM: Well, what we've seen is the president dramatically increase the scale of dependency in this country with food stamps and other programs.

HARWOOD: Do you think that's purposeful?

Sen. SANTORUM: We almost have half the people in this country on some sort of government dependent program. This is a--this is a, you know, a reality that people who are dependent upon government programs, particularly if you're not paying taxes, I think that, you know, there's a--at least a question mark whether folks in that situation might be more likely to support someone who is helping them in these programs.

HARWOOD: So do you think he's doing this on purpose.

Sen. SANTORUM: I think the president doesn't believe in the private sector. I think he believes that government can create--creates jobs and economic opportunity. So, yes, I believe his policies are purposefully focusing his energy and his resources on government-oriented policies and government programs like, you know, whether it's Solyndra or all these government management of the economy as opposed to lowering the cost of--to business of regulations and taxes and which I believe creates economic opportunities. The president's policies are deliberate. Now, is he deliberately trying to raise the unemployment rate? No. But he's deliberately putting more people on entitlement programs. That is a deliberate thing that he is doing. He is punishing states who don't expand their Medicaid programs. He's punishing states that don't expand, you know, S-CHIP and other things. This is a president that wants to get more people on these programs. That's a deliberate policy. It's a deliberate policy to believe in the public sector's management of the economy, not the private sector. I think those two things lead to more dependency and higher rates of unemployment.

HARWOOD: Governor Romney said yesterday that you are an economic lightweight. Is--as an example of that, that you blamed the recession and financial crisis on gas prices when most of the experts you talk to say the housing crash began well before the gas price spikes in 2008.

Sen. SANTORUM: Well, as someone who was involved in the housing market and saw a house go down in value over the past few years, sure, there were--there were things going on in the housing market, and the housing market was starting to soften. But I don't think there's any question that the spike in gas prices had a horrible effect on the economy and led this to be a much, much deeper and harsher recession than otherwise would have been, and certainly had an impact on the housing market and the like. Whether it commenced it, OK, fine, I mean, certainly the--we had high gas prices, $3.50 was the price of gas when the recession started. That was record high prices back then, but it spiked even more and caused even more economic disruption after--I would agree--after the housing crisis and the recession started.

HARWOOD: You said the other day that the question about Mitt Romney was a matter of trust, given shifts in his political persona over time. A columnist the other day wrote a piece saying that his campaign was fundamentally dishonest. Do you think that's true?

Sen. SANTORUM: I think Governor Romney's positions have been all over the map and continue to move all over the map. And you look at just his tax proposal. Again, you know, critical of folks who want to do--to lower rates and all of a sudden now he's lowering rates. It's all reaction to what's politically is necessary to be able to get the votes that--to win. I think people are tired of that.

HARWOOD: Do you think he doesn't believe what he's saying?

Sen. SANTORUM: I think Governor Romney's a good man. And I think he's, you know, he has--he has good intentions, he thinks he can be good for the country. But as far as someone who has a record of having strong core convictions and understanding how this country works and what the greatness of our people is and what the values that are necessary for us to be successful, I think I have a much stronger record of showing that passion for the things that I think most Republicans believe in.

HARWOOD: As somebody who came from working class roots and invokes those on the trail, what did you think when Governor Romney, who has had some difficulty talking about wealth and that sort of issue, said in a debate a while back that he likes his father's old advice, you shouldn't run for office if you need the paycheck. What was your reaction to that?

Sen. SANTORUM: Well, I needed the paycheck. When I got elected to the Congress when I was 32 years old, I left my job, went out and knocked on doors, maxed out every credit card I had, as did my wife. We were newlyweds at the time. And I had to borrow some money from my folks after I won. You know, my wife and I were sort of at the end wondering whether we wanted to win or not because I could go back to work the next day if I lost, but if I didn't, if I won, then I'd have to go till the end of January to get to my first paycheck from November, and that was going to be harsh, and it was. It was hard. I mean, you know, we had...

HARWOOD: But do you resent a suggestion like that, that somebody who needs the paycheck may be motivated to be more political or act in ways that aren't honorable?

Sen. SANTORUM: I don't think that's how most Americans operate. I think most Americans love this country, and if they want to go and serve the country, they're going to do what they believe is in the best interests of the country, not because there's a--there's a paycheck or a promise of a paycheck. You know, I...

HARWOOD: Do you think he's got a problem connecting with average people because he's so successful?

Sen. SANTORUM: I think there are a lot of successful people in this country who connect amazingly well with the American people and have--and one of the reasons they are successful is because they connect well. I don't think that's the reason Governor Romney was successful is because he connected well with the American public. He was successful for other reasons. And it's hard sometimes to go from one sector or one area and transfer those skills into another area. And that's why you say, well, you know, I have business experience and that makes me the best person. There are certain skills that business people have that are--that are, in fact, helpful in--when it comes to being in a political leadership. But there are skills also that those who were involved in public life bring to the table that are also important skills to governing this country. And I would just suggest that Governor Romney, like every candidate, has flaws. I do. He does. And the question is, you know, who's the best person with the least amount of flaws and the most amount of strengths that can actually win this election and get this economy going after they win.

HARWOOD: A couple things before I let you go. The--you're known as a critic of American culture and someone who's concerned about the morality of the culture. When you look at corporate America and Wall Street, do you admire the culture of those parts of our country?

Sen. SANTORUM: Yeah, I actually wrote an article for the Templeton Foundation. I was asked by the foundation to write--to write an article about moral aspects of capitalism. And I made the argument that capitalism actually encourages morality because capitalism can't function well if people can't trust each other and people aren't honest, if a deal isn't a deal. So it--that's not to say that people don't do bad things and commit fraud and do other things, but the more moral the people are in their business dealings, the less paperwork you need, the more handshakes you can have, the more the wheels of capitalism work better because there's trust in the marketplace. And so I always make the argument that, you know, business ethics is not a joke, it's essential for American capitalism to be successful. And, in fact, I think most businesses that I've dealt with encourage exactly that type of behavior because they know that they have to be honest with their customers, they have to be honest with their vendors and the people that they deal with, and that if we don't have that, then capitalism doesn't work well.

HARWOOD: You've talked about markets working. There's some people who've been listening to you who may not have heard all of the explanations that you've given, who think that, on issues like contraception, church and state, JFK, college education, that you're challenging ideas that the marketplace of public opinion has long settled, and it's crazy.

Sen. SANTORUM: Oh, no, I don't think so at all. I don't think the marketplace of public opinion has settled at all on the issue of faith in the public square. We're seeing it now being greatly challenged by this president who believes he can impose his values on people of faith, something unprecedented, really, in the annals of the First Amendment. This is not a settled issue. And the reason that President Obama is now able to go this radical direction is because people have said, you know, people have faith should keep it to themselves and not have the right to freely exercise their religion. This is a very open issue on college campuses. You see...

HARWOOD: Contraception's pretty well settled.

Sen. SANTORUM: Well, I'm talking about religious liberty right now. Contraception settled, and I didn't question contraception. This is--you know, this is--this is the media trying to divert attention away from the central issues of the day, which is, you know, economic opportunity and freedom. And to go on and talk about my own personal religious beliefs as a--as a Catholic is, frankly, pretty offensive to say just because I have personal beliefs that somehow or another I'm to oppose them on everybody else when there's no record of me ever doing that. We're going to talk about big issues that are important to people, and yes, we're going to talk about religious liberty in this country and the government's intrusion upon religious liberty. That is, unfortunately, not a settled issue, particularly with this administration.

HARWOOD: Last question. A lot of people that you know in politics, especially after Romney won two contests on Tuesday, are saying we know he's going to be the nominee, just make this process stop to avoid hurting Republicans who campaign.

Sen. SANTORUM: Yeah. So we...

HARWOOD: What do you say to those people who say, `Make it stop'?

Sen. SANTORUM: Yeah, so we can nominate another moderate Republican. We've done really well when we've nominated a person whose turn it was who was a moderate--John McCain, Bob Dole, re-election of George H.W. Bush, Gerry Ford. All those folks have done great in a general election. Wrong.

HARWOOD: ...make it stop?

Sen. SANTORUM: This is--no, we're not going to make it stop because we're going to win. We're going to win this nomination. I have no doubt in my mind that we have--we have--we--when this race continues and evolves, we're going to do well on Super Tuesday. We're going to win some states. We're going to be one or two, I suspect, if not in every state, maybe every state but one we'll be first or second. This is--this is evolving into a two-person race, and then let the people in the Republican primaries going forward decide whether we want to nominate that the establishment feels comfortable with that is--that is more moderate or--and has less clear contrast with Barack Obama on the big issues of the day like health, care and bailouts and cap and trade and the role of government in people's lives, or we want someone who actually will do what Ronald Reagan did, make this about a choice. And I believe that Republican voters are going--are going to want a choice. They're not going to want just a little better than Obama.

HARWOOD: Senator, thanks so much.

Sen. SANTORUM: My pleasure. Thanks, John.

HARWOOD: Thank you.

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