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Sen. Kent Conrad: 'The immediate threat is not the debt. It’s weak aggregate demand.'

Conrad10.jpgSen. Kent Conrad (D-N.D.) is chairman of the Senate Budget Committee and a well-known deficit hawk. So I called to ask him what could be done to stimulate the economy without increasing the deficit. A lightly edited transcript of our conversation follows.

Ezra Klein: Do we need more stimulus spending?

Kent Conrad: As I look at this economy, while we have averted the collapse which was a very real prospect in 2008, this recovery, which was moving along pretty well until the European debt crisis, [has stalled]. I’ve talked to probably 12 CEOs in the past four days, and all of them say the same thing: When the European debt crisis hit, it just froze everything. People making decisions became reluctant to make investments. So I’m very concerned about the reality that we confront at this moment. One in every six workers is un- or underemployed.

If you look back at the Recovery Act and put it in perspective, you’ll see that $787 billion is a lot of money, but the economy over those three years was roughly $40 trillion. Most economists would say if you were going to provide meaningful stimulus, you needed to be at 3 percent of GDP. That would’ve been $1.2 trillion. And the place where we did not do enough was infrastructure. Anyone who goes around America today can see, in every city and town, every state in the nation, that our infrastructure is lagging. We have gridlock in the air and on the ground. Our Metro system is having accidents because it’s not been maintained. There’s an economic cost to that. I argued strongly for $200 billion of stimulus spending for infrastructure which we didn’t get. People argued the lag would’ve been too great, but it turns out it would’ve been just the right time. It would’ve been hitting right now. So let’s go back and reconsider where we are.

The fight over the most recent round of unemployment benefit extensions demonstrated pretty clearly that the Republicans are not going to vote for further stimulus that adds to the deficit. So is there thinking about stimulus that would be deficit-neutral?

There’s been talk about it before. That’ll intensify now. One way to do additional infrastructure without having a significant deficit impact would be through Build America bonds. That’s the program Sen. Wyden put forward to provide bonding authority for states, with assistance from the federal government in terms of tax incentives, and the bonds get paid back with interest. So the cost is a fraction of each dollar spent for infrastructure. They’ve been very successful. They’ve been oversubscribed. So strengthen that program. Expand it.

What about stimulus ideas that would move quicker? Infrastructure investment is undoubtedly worthy, but it does have a lag, and the economy, as you say, is weak right now.

What you could do that would provide immediate stimulus is additional aid to states. One way to do that would be front-end the financing and then require additional payments from states later on. That’s what I advocated in terms of dealing with the problem with funding Medicaid. You don’t want to pay for it at the same time you’re providing it. That’s a dollar in for a dollar out. But provide more funding for Medicaid now paired with asking the states to share in the payback by having less-generous Medicaid funding when the recovery takes hold.

And what about the tax cuts? On the one hand, those increase the deficit. On the other hand, certain types of tax cuts could be implemented very quickly.

The immediate threat is not the debt. It’s weak aggregate demand. Sometimes it’s very hard for people to get their mind around two conflicting realities. What you need to do in the short term is diametrically opposed to what you need to do in the longer term. In the longer term, we need to bring down deficits and debt, but in the short term, we need more spending, and my judgment is that you don’t want to be raising taxes in a downturn. So continue tax relief, certainly to the middle class. And then, as the economy really recovers, we need to continue the task of bringing down our debt and deficit long-term. I hope the fiscal commission gives us that medium- to long-term strategy.

It’s long seemed that the right compromise is short-term spending mixed with long-term deficit reduction. You could balance spending now with cuts later if you’re using a five- or even 10-year budget window. But there’s not seemed to be much interest in that.

Well, that’s what I urged. But that advice was not adopted. I wanted that a year and a half ago. That would’ve indicated you recognize the weakness in the short-term and that the debt has to be dealt with longer-term. There’s still an opportunity, though.

Your Republican colleagues say that their concern is the deficit, not relief and stimulus itself. Do you believe them? That is to ask, if you come up with deficit-neutral programs, do you think there’ll be interest across the aisle?

I think some are sincere and some are not. Unfortunately, I think some, and I hate to say this, but some want Obama to fail, period. And unfortunately, Obama’s failure would be the country’s failure. In a way, some of them are rooting against the country. They want political power. I think there are others who’re absolutely genuine, who are very sincere and deeply concerned about the deficit -- as am I. But timing matters in economics. It’s just the wrong medicine to engage in fiscal austerity now. You can put the plan in place now, and that’s what the fiscal commission is about. It just can’t take effect right now. It has to take effect when the economy has more fully recovered.

By Ezra Klein  |  July 23, 2010; 3:16 PM ET
Categories:  Interviews  
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Whatever. He knows additional stimulus will never happen so he's free to act the frustrated Democrat.

Posted by: mattslavick | July 23, 2010 3:35 PM | Report abuse

Ezra, you are becoming 'tone deaf' and one of the ludicrious beltway 'villager'. (May be I am wrong, you were always like that and I like a fool failed for earlier posts....)

The whole point of talking with Sen. Conrad is asking him how is he justifying his tax cuts for rich folks (those about $209K per year) in the given situation? Not just the given recession, but how come 'tax cuts' for rich in any time; beyond a point? Why Pelosi is not right when she says these tax cuts for rich only created deficit but did not create jobs in sustainable manner.

To avoid that question - who is interested in reading all of his rest of the blather?

Posted by: umesh409 | July 23, 2010 3:43 PM | Report abuse

I believe the bannerhead for the Washington Post reports that the budget deficit for 2010 and 2011 is already forecast to be $1.4 trillion each year. That's all effectively stimulus, correct?

Posted by: jnc4p | July 23, 2010 3:49 PM | Report abuse

Conrad really gets it right here. And he didn't advocate keeping the tax cuts for the rich. He said "certainly [keep] the middle class" cuts. He is also willling to admiot that several GOPers are rooting for the country to fail. Considering he's a deficit hawk and fairly conservative, this is an admission that deserves wider play.

Posted by: Mimikatz | July 23, 2010 3:52 PM | Report abuse

The immediate threat is not the debt. It’s weak aggregate demand.

I'm pretty sure he doesn't know what that means.

Posted by: eRobin1 | July 23, 2010 5:08 PM | Report abuse

"The immediate threat is not the debt. It’s weak aggregate demand.

I'm pretty sure he doesn't know what that means."

Posted by: eRobin1

Close, eRobin1, but no cigar. It means that the good Senator has the symptom confused with the disease.

Posted by: bgmma50 | July 23, 2010 10:20 PM | Report abuse

He's treating a brain tumor with tylenol. Or maybe with a lobotomy. Choose your simile. But be quite certain of one thing. Debt is the problem.

Posted by: bgmma50 | July 23, 2010 10:24 PM | Report abuse

"But be quite certain of one thing. Debt is the problem." -

Posted by: bgmma50 | July 23, 2010 10:24 PM

THE problem? There are at least two problems - the long term structural debt problem and the short term underinvestment/unemployment/weak demand/deficit-due-to-tax-shortfall-and-social-security-payments problem.

Trouble is, you need more than one neuron to perceive more than one problem to enable you to begin to sensibly address the resulting timing and policy issues.

Posted by: AlanDownunder | July 24, 2010 12:43 AM | Report abuse

"But be quite certain of one thing. Debt is the problem." - Posted by: bgmma50 | July 23, 2010 10:24 PM

THE problem? Just one problem? There are at least two problems - the long term structural debt problem and the short term underinvestment/unemployment/weak demand/deficit-growth-due-to-tax-shortfall-and-social-security-payments problem.

Unless the pump is primed, the short term problem will only exacerbate the long term problem.

Trouble is, you need more than one neuron to perceive more than one problem to enable any kind of comprehension of the resulting timing and policy issues.

Posted by: AlanDownunder | July 24, 2010 12:55 AM | Report abuse


With projected deficits of 1.4 trillion for 2009 and 1.5 trillion for 2010, our short term debt problem IS our long term debt problem.

Senator Conrad is treating the headache and not the brain tumor.

Posted by: bgmma50 | July 24, 2010 10:36 AM | Report abuse

If debt is THE problem now, why are interest rates still so low?

THE problem now is clearly unemployment - low demand - that can only be resolved by raising the level of demand.

Posted by: cmccauley60 | July 24, 2010 11:08 AM | Report abuse

Kent Conrad is just plain wrong. The problem with aggregate demand over the last decade has been that there is too much of it for limited resources and for products imported from outside the US. Congress is marginally competent at best. They need to focus their limited capability on longer term problems and give the real economy the time it needs to work through the problems created by a history of bad government economic policies. The economy boomed in the 1990s with higher taxes. The Bush tax cuts helped promote an economic disaster. Long term a more balanced buget needs that tax revenue. Those like Kent Conrad who don't want to let these disasterous tax cuts lapse are the core of the irresponsible free lunch crowd who continually hope to kick our economic problems down the road and leave them for someone else to solve. The right idea came from Milton Friedman. It is that we need stable predictable government policies that create the money supply that our economy is able to absorb usefully. Congressmen who seem barely able to find their way around the block are certainly not able to provide short term direction for the economy. Their attempts to continually provide free lunches for their constituents leaves much of the economy either focused on speculative attempts to game their efforts or still recovering from the food poisoning of their earlier offerings.

Posted by: dnjake | July 24, 2010 12:07 PM | Report abuse

Lack of aggregate demand is the "disease" and not caused by government, but by concentration of wealth. If the right would only read Adam Smith's book "The Wealth of Nations" instead of confusing him with Jean Baptiste Say who invented Laizez Faire then they would know that Senator Conrad is right, even though his tax cut for the rich make things worse. Senator Tom Harkin explained it by saying "You can't feed the chickens by giving more oats to your horse" !we need money put in the working class in the form of jobs. Giving more money to the banks will never work.

Posted by: mccarthyclifton | July 24, 2010 1:55 PM | Report abuse

The lack of demand? Talk about stupid... We have been stimulating the heck out of consumption for years. Tell us Senator Genius, if stimulating demand worked, how do you explain poverty? Shouldn't poor people just spend their way back to prosperity?

Wait, wait... I know. We'll borrow our way out of debt, Ken. Man, you are a brain trust. Maybe you and Paul can get together and collaborate for a prize in economics - call it, "Stealing & Liberalism: Admitting You Are Corrupt & Still Doing The People A Service."

If I were Ezra I'd get in on this action before the Journolist conspiracy lawsuit sucks up all his assets and his freedom.

Tell us Ezra, was the President involved in the conspiracy? Why not go on the record now? We can use your answer in court to show what a credible guy you are and deserving of a lighter sentence.

Just give it all to us Ezra. Is it true that WaPo is talking to their in-house counsel about dropping you so they don't get sued too? Are you worth keeping, Ezra? Is there somewhere for you to hide outside our country where dirtbag criminals won't be extradited, Ezra?

Posted by: rainmaker1145 | July 24, 2010 4:09 PM | Report abuse

Does your conscience bother you Ezra when you lob softballs at this Dr. Evil clone ( and make him look reasonable? It certainly isn't journalism.

Posted by: bmull | July 24, 2010 11:00 PM | Report abuse

What about a deficit-neutral extension of most Bush tax cuts. Extend below $250K, but create a new higher tax bracket above $1M, and maybe another higher one above $5M or $10M. Seems like with current income distribution statistics, this could be made to work without increasing top marginal rate too high.

Similar principle could be used to extend estate tax at 2009 rates- create a new higher bracket above $50M or $100M to make it deficit neutral.

Posted by: soledad593 | July 25, 2010 2:55 PM | Report abuse

Lack of aggregate demand is caused by an American consumer who's home value has collapsed, right along with his 401K. He's deeply in debt, worried about his job, and he's not going to spend anything.

Our brilliant government has wasted enormous sums of money trying to reinflate his home value (not gonna happen). Ditto wasting enormous sums of money creating jobs...they only jobs they've saved have been the bloated wages and benefits of government workers. And the stock market is being pumped on on thin volume by high speed computers.

Until the massive overhang of debt in this country at all levels, individual, corporate, municipal, state, and federal is resolved one way or another, this economy is going nowhere. Just like Japan's.

Posted by: bgmma50 | July 25, 2010 7:21 PM | Report abuse

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