Sen. Kent Conrad: 'The immediate threat is not the debt. It’s weak aggregate demand.'
Sen. 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.
July 23, 2010; 3:16 PM ET
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