July 29 (Bloomberg) -- Democratic Senator Kent Conrad said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend, that lawmakers in Washington likely will be able to head off a government default, likely at the last minute on Aug. 2.
(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)
AL HUNT: We begin the program with Senate Budget Committee Chairman Kent Conrad of North Dakota, right in the middle of this chaos. Senator, thank you for being with us. Next Tuesday, default deadline, what are the probabilities that we’ll hit next Tuesday without doing something on the debt ceiling?
SENATOR KENT CONRAD: I don’t believe there will be a default. I think leaders on both sides are sufficiently responsible that they understand if there were a default it would be a disaster for this country. We’d see a spike in interest rates. We’d see a weakening of economic growth. It would be a very serious blow to the United States.
HUNT: All right, if there’s not, give us the contours of how we avoid it, what kind of resolution, how long and what would be the ingredients, what will be the ingredients?
CONRAD: I believe that the ingredients will be a compromise. Obviously Republicans control the house, Democrats control the Senate. There is a Democrat in the White House we’re going to have to work together. And I think the majority leader on the Senate side has already outlined the contours of a plan that could form the basis of a conclusion. That is only spending cuts, no revenue and a special congressional committee to complete the deficit savings after an initial down payment. I think those are the outlines of a compromise with an agreement on a balanced budget amendment vote, later in the year.
HUNT: And you would have this with - the debt ceiling then would go through 2012?
CONRAD: Yes, it does. You know I think it’s very important that we not have just a short-term extension. Market watchers are telling us that would be a serious mistake.
HUNT: Of course that gets you through a year and a half, but that doesn’t get to the long-term structural deficit that you have worried so much about. As I understand it, what you would like to do is have another commission, another committee, of the Congress and then have some kind of trigger if it doesn’t pass. Triggers haven’t worked in the past, senator, why would they work now?
CONRAD: Well, look, my preference would be to act now to do the Group of Six plan which is almost $4 trillion of savings -
HUNT: But you know that’s not very likely.
CONRAD: Not going to happen immediately. I believe it is going to happen with a special committee of Congress -
HUNT: In this Congress?
CONRAD: - because I don’t think there’s much of an alternative.
HUNT: Do you think it can happen in this Congress?
CONRAD: Yeah, I do. Not the final resolution because you know, fundamental tax reform is going to take longer than six weeks or six months. That’s going to take more than a year. But you could put in place the process with a default mechanism so if the savings were not realized there would be a mechanism to assure that we would get another $2 trillion of deficit reduction.
HUNT: And that would involve automatic spending cuts or automatic tax increases if you don’t achieve it, which you can’t bind one Congress to another, so how do you make a trigger effective?
CONRAD: What you could do is on the revenue side, use the alternative minimum tax as a mechanism for assuring revenue. That is that there would be an offset for reforming the alternative minimum tax, reform will cost $1.5 trillion. To replace that revenue is not considered a tax increase by most Republicans. So that could generate some revenue you would not otherwise have and you could couple that with automatic spending cuts to have an overall package that will assure you you’d get the savings that will otherwise not be assured.
HUNT: Would there be cuts in entitlement spending also?
CONRAD: It would depend on what’s included in the spending restraint package.
HUNT: What would be your preference?
CONRAD: My preference would be for the committee itself to function, but if it doesn’t to have a default mechanism that would have a balance.
HUNT: You know, Senator, that sounds very reasonable and you probably can get some Republicans in the Senate to go along with it, you can’t get any House Republicans, at this stage, to go along with it though. They don’t want anything like that.
CONRAD: Not at this hour, but I am hopeful as we move through that more of them will realize at the end of the day you cannot do this just on one side of the aisle. It simply will not work.
HUNT: Does the end of the day mean Aug. 2, I mean, that’s not very many days?
CONRAD: Well, that’s the first day.
CONRAD: As you know, there are many days on this play. And look, you’re going to have to have a revenue piece here to have a compromise and the revenue piece has to be something that they can argue is not a tax increase. Using the alternative minimum tax is the best way of doing that because we all know we’re not going to permit the alternative minimum tax to sweep up tens of millions of middle-class people. So if you reform it that loses money. If you replace that money with tax expenditure reform, which virtually everyone is for, you can argue there’s been no tax increase but there is revenue we would not otherwise have.
HUNT: To go back to the short term, when do you think you’ll finally reach a compromise with that Aug. 2 deadline, Monday night?
CONRAD: Aug. 2.
HUNT: Aug. 2, so it will happen - it’ll go right to the deadline.
CONRAD: You know - no, what’s it, Murphy’s Law, work expands to fill the time?
HUNT: It is. Right.
CONRAD: We certainly know that’s true here because you’ve got to have gridlock before you have breakthrough. One thing we know about this place is both sides have to be convinced they’re not going to get their way. They’re not going to prevail before they’re willing to really compromise.
HUNT: Do you wish the White House and the president had been more actively involved in the specifics of this?
CONRAD: I think the president, history will record, has done about as well as anyone could do --
HUNT: So he couldn’t do much more right now?
CONRAD: No, because any time he’s for something, there are elements of the other side that are automatically against it.
CONRAD: And look, he said, over and over and over, he wants to do the grand bargain. He’s willing to do entitlement reform, tax reforms, spending cuts, a $4 trillion package that’s what every bipartisan --
HUNT: You could get that through the Senate couldn’t you?
CONRAD: Yeah you could.
HUNT: Yeah. But the House says, absolutely no way. Let me - -
CONRAD: No, I think honestly, I think before we’re done, I believe if it’s properly constructed you could get people in the House, Democrats and Republicans, not all -
CONRAD: - you’d probably lose left and the right, but the solid center would hold and you could get this through.
HUNT: Do you think there will be a credit downgrade, and is it justified if there is?
CONRAD: I think there will be a credit downgrade unless we show credibly that we have a path to getting to the grand bargain.
HUNT: And when do you have to show that by?
CONRAD: Uh, they’ve told us 90 days.
HUNT: OK, and so therefore that doesn’t happen and you think there will be a credit downgrade?
CONRAD: I do. And that would be a very serious blow to the country. For every 1 percent increase in interest rates it adds $1.3 trillion to the debt.
HUNT: So let me ask you this, we’re talking about the debt, we’re talking about the deficit and at the same time the report came out Friday, this economy has stalled. I mean there is really no recovery right now and a lot of economists say; what we really need short term, next year or two is some added stimulus. Is that impossible in this environment?
CONRAD: It probably is, unfortunately so. Look, the thing to me that would make most sense is a boost in infrastructure investment in this country, roads, bridges, airports and the rest, in the range of $100 billion. But as part of an overall plan, that takes on this debt threat otherwise a 10-year plan that really would reduce our overall --
HUNT: But you don’t see any short-stimulus including the payroll tax, the extension of payroll tax over --
CONRAD: Ah, it might be possible as part of a final compromise to get on the tax side of the ledger. But really, that is not as effective as infrastructure investment would be because infrastructure spending, all of that would be right here in this country, all of it would go into the economy. If it’s on the tax side of the ledger part of that gets saved, doesn’t go into the economy. And those are all jobs here in America, plus it makes us more efficient in --
HUNT: But you’re not optimistic about being able to get that in this environment?
CONRAD: I’m not, although I tell you my constituency, conservative fiscally, state of North Dakota, when I do town-hall meetings and I talk about infrastructure investment, all the heads nod.
HUNT: You’re retiring next year, you’ve been here for a while, a member of The United States Senate, have you ever seen the situation worse than it is right now?
CONRAD: No, and I mean I must say that concerns me for the long term because, you know, in my 25 years here there has always been a strong bipartisan, reaching across the aisle, that still exists in the Senate but is much less so in the House.
CONRAD: We’ve got to restore that; it’s important for the country.
HUNT: OK. Senator Kent Conrad, thank you so much for being with us.
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