 Hello. First, I want to thank everybody for coming. My name is Clark Murdoch. I'm a senior advisor here at the Center for Strategic and International Studies. My colleague to my left, Ryan Crotty, is a senior fellow here and a deputy director for the International Security Program. Angela Weaver, to my right, works for me as the program coordinator for the Defense and National Security Group and also as a research assistant. The three of us were the co-authors of this study that we're about to talk to you about called Building the 2021 Affordable Military, the cost-capped approach to a defense, deep defense drawdown. Thought I might explain, first of all, what I mean by cost cap. This was a concept I stole from defense appropriators who realized and struggling to deal with continued growth in acquisition programs and the inflation that would be chronicled every year and in terms of the cost inflation, said, okay, we're going to just cap the amount of dollars you get, say, for example, for F-22s. And we're not going to tell you how many F-22s you can buy with that, but we are going to tell you $35 billion is all you're going to get. We've captured cost on that. So we're taking this approach, as I said, originated in my mind with appropriators, both the Senate and the House side, and applied it to how do we think about the defense budget as a whole. Going to the next slide, this is a study that started over two years ago. It was for the first year called the defense drawdown study. It was a pro bono effort in the sense that I didn't have a funder at that time, but knew or believed that we were facing a drawdown that was considerably deeper than people were generally thinking about two years ago and that we needed to embrace budget realism and start thinking about how we do a deep one. After a year of effort at that time, we were able to get funding for a follow-on project that we called the affordable military, which is this is the military you could afford under the budgetary caps. We're taking his reality, the budget control act caps that were imposed by Congress, signed by the president in August of 2011, the first tranche of those caps were applied in the FY, started to be applied in the FY 12 budget. They mandated $487 billion in cuts over 10 years. Then there was a second tranche of cuts that were called the sequester cuts. Actually, it's a little bit of a disnomer. There are new budgetary caps that if they are violated trigger sequester. But that round is another $460 billion documented in the report itself. As I said, we had two working group meetings. Ryan and I've been part of the team for the full two-plus years. Angela joined us. I'm sorry. Yeah, Angela joined us. Kelly was where the first year Angela has joined us in the beginning of 2012. Next slide. Defense drawdowns compared. This is our first wheel indication as we started working on this in 2012. This was a chart that an earlier version of it first appeared in the work of David Briteau, one of my colleagues here. But Ryan was working on that one as well. And as you look at this chart, it becomes clear that while it looks like the drawdown in terms of relative percentage is about the same as previous drawdowns, what differentiates this one is that unlike previous ones, it's only going down to about $500 billion in real terms. All other drawdowns went down to $400 billion in real terms, constant dollars. Why? Because internal cost growth inside the department had drive up costs so much, you essentially could no longer afford to build up, and we didn't during the 9-11, post 9-11 buildup, buy lots more uniform personnel, salaries, benefits, medical costs had been going up so much that the buildup that occurred during the post 9-11 period consisted of increase of dollars, but not increase of uniform personnel. Those extra dollars largely went for civilians, went for contractors, and it went for the active duty pay for reservists who had been called up. But as you can see from that line that goes across, did not apply as well to the uniform military. Next slide. Impact of internal cost growth. What you see here is the first of what we develop, what we call OMI charts, that when you look at it, you say OMI because of, as several senior Department of Defense officials have, it shows how the impact of internal cost growth is hollowing out the defense budget from within. The top line is the top line that's mandated by the Budget Control Act. So that's the top-down pressure that most people have been focused on in terms of the projected defense drawdown. But when you look at internal cost growth, it is swallowing up the room in the defense budget and essentially forcing a very tough trade-off between modernization and personnel. Healthcare and military personnel look sort of constant, but they're not really because the amount of personnel is actually dropping about 140,000 at that time. This includes the first round of cuts to the Army and to the Marine force structure. So the only reason that they're not rising as well is the number of people are coming down. But the operations and maintenance budget and the acquisition cost growth have been going up and essentially eating available space from within. And one of the things that as we see on this chart that in order to restore this, the modernization accounts to this budget out in 2021, which is the last year of the Budget Control Act cuts, you have to essentially give up 166,000 people. If you give that up, you will get 32% of the budget for modernization, which is RDT&E and procurement. Next slide. The cost cap methodology is very straightforward. It's explained in the report and then implemented in the report. There's an annex in it that also describes how it evolved over these two years of the study. I doubt many of you will be interested in reading a detailed examination of how the methodology, the cost cap methodology evolved, but I have to admit I find it fascinating. I guess that's why I'm here. We accept the harsh fiscal reality and then we try to maximize the military utility of the force that is affordable with significantly through. So you have a pre-drawdown force, 2012 is our departure point. You apply the BCA caps. You then build the 2021 sequester force by essentially cutting the budget in the same way that the Budget Control Act mandates. That is across the board cuts to all programs and activities except for uniform personnel. We built the 2021 baseline force by essentially saying, look, we're going to adapt. The Department of Defense will adapt to a changing environment as the drawdown occurs. So you're going to see changes in the composition of forces that the department will have. So the 2021 force that we call the baseline force is an adapted sequester force to new strategic realities. Then we create more options by varying the force structure still within the cost caps and then we choose one. The first step next slide of the cost cap methodology is to redefine how we think about the defense budget and Ryan is the expert on that. Thanks Clark. So actually, Angela, if you want to go back one slide for a minute, the key to sort of starting to really develop this methodology and to execute it in a cost capped way was in fact to find the costs that you want to cap and the ones that you want to be able to trade against. So this involves sort of redefining and quantifying across the defense budget all the different costs that are sort of inherent in what we pay for. And then set them up in a way that you could manipulate them to demonstrate the tradeoffs that you would want to make to go from a point where you're looking at this baseline and sequester force that are based on inertia to really trading for strategic options. So in order to facilitate these tradeoffs, we developed an approach to break down that was targeted at essentially three things. First, to start with the building blocks that we wanted to work off of. So those were for structure and modernization. The procurement and R&D spending to to take those building blocks and apply the cost growth that would demonstrate sort of what the 2021 force really can be expected to cost. And finally, by combining these two pieces, look at a fully costed 2021 force that can then demonstrate the impact of the drawdown and these inflationary pressures inside the defense budget and the capabilities tradeoffs that are required under the cost caps in 2021. So with those sort of as the goals that we started with, we had essentially a four part methodology. One was to pull out the costs that we did not want to be trading against. These are the institutional generating costs for the entire force, which is not to say that they are unnecessary overhead, but they don't go to developing sort of combat capability. This is sort of what we call the institutional support functions. We wanted to be able to separate those out for two reasons. One, because we wanted to be trading against combat capabilities, as opposed to the entirety of the defense budget. This is sort of the not directly connected to manning, equipping, sustaining the force. But also because we wanted in this cost capped methodology to be able to actually try to bring institutional costs down. If the goal of the military is in fact to generate fighting forces, then I think one of the goals that you want to aim at and something Clark might want to talk to you, but it is to actually be able to hold those institutional costs down to get more bang for your buck. But then second to then after we've pulled out institutional support costs is to take what we call what's left, what's the operational force costs, the combat support, combat service support costs, those functions that are required for military operations, and divide them into pieces of force structure and modernization decisions, because those are the things, the big building blocks that generate military capability and capacity, and those are the things that need to be traded against in a real budget drawdown scenario when you need to decide what you need to execute your strategy. So then we need to apply the expected cost growth, which Clark mentioned earlier. This is the more realistic cost growth that we see the Congressional Budget Office talk about, what we can realistically expect going forward for the cost of health care, the cost of paying benefits, personnel, the cost of acquisition, which is a big one, as well as the always rapidly rising operation and maintenance costs to look at a realistic cost in 2021. So to go back to institutional support, these were across all budget components. There are elements in R&D, in personnel, in O&M, in procurement that we pulled off the table for trading against. The operational forces were modernization and force structure to trade against. Force structure was broken down by each service component, so both active and reserve for each of the services, and in the report there's a full breakdown of every force structure unit that was traded against. And once this was broken down, we applied our cost growth and we saw that we had to take $100 billion of force structure and modernization out of the force in 2021 just to reach back down to the budget gaps. So in Appendix D of the report, which is online now, you can see the probably overly detailed explanation of how each of these costs were developed, how we got to the point where we were trading against the core decisions of F-35s, of how many BCTs we should have, of how many carriers and battle groups we can afford, those sort of big questions. We can see how those costs trade against each other. But I know we want to get to the more exciting part, which is in fact how we made those decisions, what those decisions were, and how we executed those tradeoffs and for that I'll turn back to Clark. Thank you. On this, it's important to remember that we're talking about what we've called the double whammy effect on the budget. The top line because of the Budget Control Act is coming down 21% during the period 2012 to 2021, at physical year 2012 to 2021. The internal hollowing out effect is 15% and that's a conservative assumption. It could be as high as 20% or even higher than that, but that's the loss of purchasing power of the defense dollar in terms of the amount of capabilities you can buy with each dollar. Essentially, using economic terms, the defense dollar is getting weaker and weaker as time goes on because of cost inflation. So you'd have fewer dollars, 21% fewer dollars, that have 15% less purchasing power in FY 2021. Next slide, please. This is a summary of the methodology, institutional support, what we estimated, modernization, a wedge of modernization that's at the historical average of about 32%, 33% of the defense budget, which we then had accompanying modernization profiles for each one of our strategic options. As I said, the sequester force, which is a mindless approach to how you do a defense drawdown, nobody's going to do that. So we came up with a baseline force and then the alternatives that could be added to it. The purpose of this was not to say, you know, we ended up selecting the great power conflict as being the force to go to for reasons that I could explain. But the purpose of this is really to demonstrate the methodology, not so much to say everyone should go out and endorse the great power conflict alternative for the FY 2021 force. Next slide. These are an element of the building block that we used of the transition from the sequester force to the baseline force. We did a lot of work on the future security environment. Angela has an annex in there about the future security environment and the implications of the implications of that future security environment and changes in the evolution of warfare upon what kind of forces you're going to need. Essentially, we looked at three kinds of strategic realities in the 2020 and beyond time period. One is changes in the threat, changes in the opportunity, changes and challenges. The second was evolution in the nature of warfare, greater emphasis upon cyber. And the third was essentially preserving key American competencies. For example, situational awareness. We have world class ISR capabilities. We're going to seek to maintain that into 2021 and beyond. So we developed a cheat sheet essentially said that these are the things we're going to plus up from the sequester force level. These are the things we're going to keep it the same and everything else is a bill payer for those first two, which meant that our cuts came down disproportionately on those capabilities that we said we're not must have capabilities. In 2020 to 2030. Next slide. We built three alternatives. I've talked about those. The choice at that point then was to say which is the least bad option because I think it could be said that each of the options probably lack adequate capability to deal with the full spectrum of challenges you're going to face in a 2021 environment. That's the reason why we emphasize that you've got to prepare for a deep drawdown because under the normal or the traditional force planning structure as Secretary Gates and many other secretaries have emphasized. The United States wants to build the most robust force structure that they can so that they have capabilities that are flexible across the full spectrum of challenges. My argument is in a cost capped world, you can't afford to do that. So you have to look at the alternatives and say, okay, I'm even though I'd like to have some of this capability, I've got to put more of my capability into this basket. And I just am going to have, you know, less, you know, you're going to do less with less. It's not a question of doing more with less. Next slide. Final remarks. The digital question, as I said, is that planners, strategists tend to say let's talk about the strategy and ask how much is enough. And I think given the harsh budgetary realities that the Department of Defense faces in a 2021 environment, what they have to ask now is how much is affordable. And you have to start with balancing your ends and your means at the very beginning and make a decision. If this is an accurate force, maybe you come back and say maybe the sequester level cuts isn't such a good idea. We've got to figure out another way to solve this. People are saying that now, but they're saying it out of denial. They're not saying this is what it really means in terms of the forces that you're going to have in a 2021 environment. But it does explain one thing, and that's why the Department of Defense started complaining so vociferously after the passage of the Budget Control Act that this meat acts approach would have a disastrous impact upon U.S. security because they understand and are increasingly understanding. And you can see that clearly in the 2014 Quadrino Defense Review. And the follow-on report that talked about the impact of sequester level cuts on Department of Defense is that the combined effect of the top-down decrease and the internal hollowing out is having a real impact on the capabilities the United States will have in a 2021 timeframe. Anyway, I apologize for going on too long. Happy to take any questions. I know it's early in the morning. It's two days before a holiday. Please. Sure. Why don't you go back to slide seven so it's there? The Asia Pacific Rebalance obviously has a China component because of the rise of China. But it also has a component that's reassuring U.S. allies in the Asia Pacific. So what we did in this force is say this is an emphasis upon, yes, more capabilities that can counter China's growing anti-access area defense capabilities which themselves are growing, but also increased naval presence in the theater because that's been an element of the Asia Pacific Rebalance strategy from the beginning. And as you know, there's been a considerable debate over how much has that really changed our naval presence. I think recently the CNO said that over 10 years they expected to increase their assets in the Asia Pacific by 15%, I think was a figure that he used. Well, when we applied the sequester caps, I believe it took the carrier force down to seven, took the carrier force down to seven from where we are today. So we wanted to buy back carriers. Carriers are very expensive. And they also cost $3 billion a year to operate so that when you buy back carriers and buy back marine force structure to increase your presence in the Asia Pacific, it forces you to cut out a lot of your high-end capabilities. So one of the main differences between the force structure that goes with great power conflict, which is all about countering Russia and China at the high end, is that in that one we invested a lot more in monetization. We plus up the monetization accounts. We tried to stay ahead of the evolution of warfare. And so the real difference between those two capabilities is the Asia Pacific spends a lot more of its money just in the Asia Pacific and does a lot more to reassure U.S. allies in the Asia Pacific. And the great power conflict one is focused on the U.S. global competition with both China and Russia. And one of the reasons that our group recommended great power conflict, and that's just our recommendation out of the options, is that we think recent Russian activities in Eastern Europe and in the Ukraine bring a much more distinct adversarial component to U.S.-Russian relations. And the Chinese, you know, they're actually acting like very much a responsible stakeholder now in terms of the indisputable territorial claims that they're making in the South China Sea. And so we think, you know, while the allies might want us to increase our presence more, we think it's probably more important for global security, which includes allies, security, that we do a lot more to deal with those who are threatening everybody than to reassure those people who are being threatened by them. As I think the Japanese Prime Minister just demonstrated in recent emphasis, they are changing their military structure and philosophy and abandoning some of the principles of the pacifist attitude they had to increase their capabilities to deal with China. This is what we think all of our allies have to do. They have to do more in their own defense. We have fewer resources. We'll focus on the big guys. They can focus on protecting their own security. And if I could just add one thing. I think one of the things to keep in mind in this cost constrained environment is that a lot of what we are doing is subtracting less in the areas that are most important. And our colleague here, David Briteau, has often said that if we're moving to an Asia-Pacific rebalance that goes from 50-50 in Asia to 60-40, that is probably going to end up being more about subtracting the rest of the world than adding to Asia. I think that you see that in the China trade-offs that we had to make. I mean, if you're planning to look at an Asia-Pacific strategy where in fact there's one less carrier, that's the reality that we're sort of living in, that we would love to keep all of them. But if you want to be able to react to a lot of scenarios there, you have to subtract somewhere. Please. I can't remember what page it is. It is in the main body of the report. But one of our tables is on the cheat sheet that we used for adapting to 2020-plus strategic realities. So we increased ISR, we increased S&T, RDT, and E. We increased soft direct action because you're still going to have, we now have the Islamic State, we're still going to have global terrorism to deal with. We plused up Air Force long-range capabilities, that's the great power conflict aspect of it. And then Army Reserve components, why? We wanted to hedge because we're cutting so much Army active structure. We wanted to increase the Army Reserve components. But we also plused up Marine Force structure because they want the role, we gave them the role of being the United States crisis response force. We maintained at 2021 sequester force levels. And remember, this is a cut from where we are today. But what we maintain were space, ballistic missile defense, unmanned aerial systems, UASs, and the triad, essentially. Everything else was a bill payer, which means that when you look at the detailed force structure charts and you have one for each of the options, you will see how many F-35s we had to give up to pay for that. From my perspective, the F-35 as a short-legged system, pretty hard to use in a great power conflict kind of mode. Because that's how you bring U.S. vulnerabilities within the target range of your adversaries during that time. So for me, tactical aircraft are turning into presence reassurance aircraft that are used in relatively safe environments as opposed to trying to penetrate either with missiles or with the delivery system itself at the high end of the conflict. So that's pretty much it. Now, if you wanted precise, you know, how many F-35s that you have to give up in this world, in this world, it's all in there. Because what we did is a modernization profile. The modernization profile is not year-by-year the way force structure is, where we have a year-by-year inflationary effect. What we did was total all of the modernization dollars during the FY-12 to FY-21 period that equals $1.8 trillion. And then because annual buys vary so much, we were then able to take the profile of today's force and create the cost of that in $2021. And that created today's force in $2021 was about $140 billion, wasn't it? $140 billion over the budget cap. So then you apply the budget cap to bring it down. Both for force structure and for the modernization profile. Sure. And thank you. I have to admit, I'm a capabilities guy. And when you don't have many dollars, you don't have dollars to spend on keeping the defense industrial base healthy in order to be able to build capabilities that you can't afford to buy. That's the thing I think about dealing with the budget realities that we're in now. You have to focus your dollars on the must-have capabilities. And if you buy those, you'll keep that portion hopefully of the defense industrial base healthy. Although healthy will be a relative statement because dollars are going down during that time. So there is an industrial base problem during this time. We do not have the industrial base that we had during the Cold War. We don't have the industrial base today that we had 10 years after the Cold War because there's been a gradual decline in the purchasing power. And when there are fewer dollars being spent, people look elsewhere. That's why the Defense Department is having to become more adaptive and flexible and deriving its technological advances out of the private sector during that time. So when you have fewer dollars, it forces you into lots of economies of a strategic nature. And part of the point that we made very explicitly is that when we capped the dollars, we're not trying to say that the 2021 baseline force or any of its strategic alternatives are sufficient to meet the challenges that we're actually going to have in 2021. One of the purposes of this study is to strengthen the case for those who are advocating. And that's not enough. We have to have more capabilities for it. And my belief is that one of the ways you do that is by accepting the reality of what's in the law. And when I hear people from both sides of the aisle in Congress saying, sequester ain't going away, you know. And I look at the prospects for the midterms coming up and a couple more years of political paralysis there and then you start thinking through scenarios. Once it's in the law now, and it is in the law, the Budget Control Act is there. And people are saying, well, we didn't apply it the first couple of years. Well, yeah, we did actually because while the sequester level cuts were supposed to be about 50 to 52 billion dollars per year, there were some adjustments made so that in FY 14 it was only 35 billion. Well, that's still a cut. That's not an increase. We had planned increases at the end of the Gates, or secularized year of the Gates administration in the Department of Defense, for like a steady growth along with the rate of inflation. I think it was about 1.5%, something like that. Well, we're not in those days anymore.