 Well, hey, good morning everybody This is the this is the first time when I when I look out and I could say roughly 45% of the audience should be at the table. Okay, everybody here. I mean, you know, we've got Partly that's because everybody here is so knowledgeable and partly because we kind of need everybody to try to understand this problem that we're looking at But we're really glad that you're here And I'm really counting on the kind of the very interactive nature of what I hope will be a good discussion today Well, we'll bring this out and try to help illuminate for all of us What I'll say for me is the most confusing time I've experienced I've been in Washington for 40 years which is I'm trying to figure out how that happens since I don't feel older than 25, but that's a and I've been in and around Politics and policy for 35 of these years and and I must confess I have never been more alarmed At the state that we're in than I am now And It's you know, there's been a long it's we're not the topic of today I'm perfectly happy to Pontificate on this at another time But I mean I think we've been seeing a long-term steady deterioration of the quality of politics in America But it is now come to in my mind, it's come to a crisis point now. I'm I'm not Anti-politics actually politics is essential good politics is essential. I mean there are only three ways that Nations make big decisions You know one is in the marketplace where people say I'm willing to try to produce something and sell it or price People want to buy it and the marketplace helps you decide what we're going to do That's one second is we establish a set of administrative procedures administrative legal procedures that kind of establish broad outlines of Acceptable and unacceptable activity in society and we have when we pre-establish a mechanism for dealing with that and when problems come up You can put it into that administrative Channel and the there's only the third way and that's politics Where you're setting you're sorting out The major choices that countries have to make and there isn't a framework either a marketplace or a framework to do It's you have to have politics politics is Essential politics is crucial But Politics is is always been coupled with governing Until now I'm afraid You know, it's always been the competition of the two parties To advance their interest by being better in better parties to run the government And better ideas to run the government but you know Ultimately, you know Run in the government is about compromise And we're now living in an era where politics is about not compromising I mean the the committee of 12 actually had a solution a month ago It all worked out the staff had worked out the solution the members had largely agreed to it it was worked out and Politics interrupted politics today needs the problem more than it needs the solution now You know it produced this Completely unstable outcome that we had from last summer. I mean we we had We had, you know The two parties each seeing an existential battle both of the minority parties now seeing an existential battle with each other you know came to grips with each other arm wrestling over the debt ceiling extension and All of a sudden we were facing the prospect of Default on America reaction what that'd be like. I mean look at the chaos that's going on in Europe now When they're talking about Greece defaulting for Christ's, you know 2% of the European economy and we were talking about America defaulting So to avoid that, you know, we come up with this process where we pick a committee of 12 and ask them to Resolve the problem and then we put this sequester thing on top of this discipline, you know Well, first of all the inherent problem with this with this was We took 25% of the problem and made it carry a hundred percent of the answer I mean discretionary spending at best only constitutes 25% of the deficit problem And yet it was the only thing that we grew up because Democrats took entitlements off the table Republicans took taxes off the table The only thing they could agree on was to let 25% carry a hundred percent of the answer. Well, obviously that's Unstable it's unstable because it's a crisis that doesn't solve the problem and then we take and say well if 535 members of Congress can't figure it out maybe 12 will figure it out You know and we put them in a fishbowl With everybody in the world looking at them and say you guys figure it out You know and of course it politics did to the committee of 12 what they did to themselves. I Mean we just this is this is no Does this matter? You know for a defense department. It sure as hell does matter This is the only department. I mean 90% of the rest of the government does one of two things write a check to a beneficiary or write a check to an employee We actually Build things we run things We invest in things We've managed 70 years worth of technology at any one point in time We're trying to keep B 52 is flying at the same time. We're trying to design an F 35 you know We major long-term resources, you know, we're running the largest daycare center in the world We've got the eighth largest grocery chain in the world. We've got the biggest school system in the world We've got 350,000 vehicles You know, I mean just massive enterprise we have to to run this thing We have to have a central integrating process To pull it together so it's coherent over time and it is coherent over time How do we know it's because when we have to fight a war in a week? We can have 800 combat aircraft in a in a distant theater with all the maps with the Ammunition with the fuel with the pilots with the war plans. We can do that in a week You know, we did you know people say well, how do you measure success? How do you measure management defenses? Well, we fight wars we win them and we can do that this process that we have Let's us have that kind of coherence and yet. I think this indecision is Putting this process seriously at risk because the centerpiece of it, of course is the programming process And I used to be the comptroller of course all comptrollers think the world revolves around them, you know and That the budgeting process is the most important part of the building It's not it's the programming process, you know, I mean I you know when I did a lot of budgets when I was there and you know building a budget is like Painting a portrait of the Mona Lisa with brushstrokes, but you're looking through a Microscope applying a brushstroke, you know because it's a you know Thousands of little decisions, you know, well you could step back and say jeez I got the nose on upside down You'd never know that in the budget process You'd never know the coherence Of your budget by just doing the budget the coherence comes from the programming process because that's where you establish your long-term planning trajectories that's where you connect your Sense of requirements your assessment of threat and risk and you bounce it against your your constraints And you develop long-term coherent plans in the programming review But what does the programming review require it requires a predictable top line Now the top line can change and we've seen some dramatic, but it requires a predictable environment for us to do this Now what do we have? We've got We're marching into a year where the law of the land says it'll be a sequester and Every politician says we're never going to do that you've all heard them, right? We're never going to do that the law of the land says we're going to do a sequester Now so what does that say to the department? How does the department? Run this do we say well? I don't care what the law of the land says we're never going to do that Of course not But does the department? Anticipate and foreclose the politics that still is unresolved and Take on itself Damaging cuts Well, I you know the You know the president says he will veto anybody that tries to change the sequester and the secretary of defense says the sequester will crush and Hurt American security Okay, I'm sorry those two don't reconcile very well and yet that's the path we're on and it is the consequences of this are Far bigger than just the gaming politics to get through the 2012 election You know the fundamental coherence of our long-term defense planning is at risk here I'm sorry. I know that sounds apocalyptic But I actually did several of these things and I and I know how crucial it is to have this work and that is what's at risk right now so part of our doing this is For the people in town look we all we all Love the politics of Washington. I mean that's But we all depend on the governing of Washington. We depend on this being a competent coherent Governing entity that produces good results for everybody in this country and that's now at risk So we got to do something about it. It's the one thing about America If you don't like where you're heading you can do something about it and that's what we're gonna try to do today So we've we've called from among us For fine intellects that have been in the middle of all of it They're only going to be the guys that start this conversation all of you are going to have to be the ones that continue it So I'd ask you to be very active and we're not going to be able to stop with just a one-off event to say okay Well, we got that out of our system, you know, I mean this this is a problem We're going to have to wrestle with all this year and everybody here is going to have to do it Okay, David, why don't you get everybody up here for real and let's have this thing started for real Apologize for my little sermonette, but I have to get it out of my system. Thanks for coming here today I think we recorded that So you'll be able to find it on the web You may want to play it for your friends Especially those who actually should be on the receiving end of the sermonette because I suspect most people in this room Have already got that part figured out I'm David Burto. I'm the director of the defense industrial initiatives group and the director of the international security program here at CSIS And I'm very very grateful to all of you for being here today Dr. Hammons, right? I look out at this audience and and this room is full of people who all should be up here on the platform However, there's not a room on the platform and you'll all have your opportunity I would remind you two things number one silence your electronic devices So that they won't interfere those of you who are Watching on the web you can play yours for all this worth because we can't hear you I also want to remind you this event is on the record So occasionally we tend to forget that when we're here in this enterprise, but particularly I want to remind my panelists of that I want to retrace a little bit of the events of November 21st to kind of set the stage and then I'll turn it over to my panel You know the the super committee announced on the 21st that they had failed to reach an agreement Which they could reveal to the public That implies Astonishingly that they reached an agreement that they could not reveal to the public We have been waiting for that agreement to emerge and and I think we wait in vain Not because it doesn't exist, but because in fact they couldn't conclude it The secretary defense issued a statement the same day reiterating a statement He had made many times before that should sequestration occur It would cause devastating effects on the Defense Department and his term was tear a scene in our national security capability The president issued a statement that Seemingly was from a different party and a different administration than his own secretary In which he said I will veto any attempt to change this now There is a common ground there. They both agree. We need to achieve the 1.2 trillion dollars in reductions It's just Pentagon says not in our package and sequestration says Au contraire half of it is yours now that half of course is not really 600 billion It's really about 492 billion because we do save some money on interest payments by taking 1.2 trillion out And the Pentagon doesn't have to pay that One week before the secretary defense had sent a letter which has been read by most of you letter to senator McCain and similar letter to senator Graham Explaining that devastating impact and had a nice three-page attachment Now those of you have been watching Pentagon alarm bells go off over the decades know that When the Pentagon feels threatened the thing they offer up as the consequence of that threat is exactly that which they will never do We're gonna kill the submarine. We're never gonna build the next generation bomber. We'll cancel the joint strike fighter Now these are the the kinds of myths that create an illusion of impact But the reality is that when it comes down to it the military departments actually know how to do this quite well In fact, their attitude many of you have in fact said something like this in your own lives You tell me what the number is and let me figure out how to reach it Because I know how to do that. Well, yeah, you do know how to do that But you know how to do it in such a way that it gambles on a future which is gonna be different than you're predicting You're hoping that in November the president who wins is gonna give you some of your money back Or that the Congress in its wisdom will wake up and say, oh, we made a mistake Defense you really do need money Now I step back and I say to myself we're in the defense business So we're looking at DoD and we're saying to ourselves, you know, you really ought to be doing a better job of planning for this Then you're doing the secretary said we're not gonna plan for it because we plan for it It'll become a self-manifesting outcome Just imagine if we were not in the defense business, but instead we're in the Education business or the agriculture business or the health and human services business If you think DoD's got a problem those guys have got a real problem DoD actually once it decides to plan for sequestration or future cuts, we'll know how to do it The rest of the government doesn't have a clue But that's not the purpose of today's Discussion What's it all mean? That's why we call this panel together here To my right Doug Holtz Aiken former counsel of economic advisors Director of the Congressional Budget Office. He's seen this from both the executive and legislative five in fact everybody up here has He's gonna start off with a big picture and narrow it down to what our options are Jim Dyer who has been through it from the only thing that really matters which is Appropriations because ultimately all the rest of this is just gobbledygook It's what kind of money you actually get at the end of the matters here We'll give his view interpretation of history Gordon Adams who actually has made a career of looking at these things from the impact on real national security and Then I'll wrap it up with a few thoughts on what does it mean for industry because ultimately as John Hamory said the Defense Department does do things But it does things by relying on industry to do it for them And we need to pay attention to the impact of that as we go forward is there so without any further delay I'm gonna start by a turn in the floor over to you can talk you can talk from that. That'd be fine Well, thank you for the chance to be here David asked me to talk about the big picture and The result is that I'm about to say unrelentingly negative things for about the next five minutes and I apologize in advance I mean, I'm a former director of the CBO. It is my job to stand up in public and say apocalyptic things about the budget outlook But it's even worse than than usual. So here's the problem in a nutshell If you look at the the president's budget that he put out Earlier this year it shows that we're running a deficit this year about 1.3 trillion dollars and That's you know Close to 9% of GDP And we have a gross debt to GDP ratio of 100% right now now historically Countries that have debt levels above 90% of GDP Have two characteristics. They number one pay a growth penalty of about a one percentage point a year So we're already feeling the effects of this and that lowers the total resources available for all the things We'd like to do in the United States and number two they have a higher probability of sovereign debt problems and The US has literally all the characteristics of countries to get in trouble. We have big debt levels We have a heavy reliance and short-term borrowing We have a new not well understood contingent liabilities to pop up all the time look at the FHA We're gonna have more housing problems look at the student loans We're gonna have student loan problems are sort of the state and local governments with their pensions These are these are all the characteristics of countries to get in trouble. That's the good news now the bad news Is that if you look forward over the next ten years? those deficits Do not narrow in fact you've got ten years under that budget at a time in 2021 when it is presumed we are fighting no overseas military operations when the memory of the the financial crisis is a distant one the economy is back to full employment and Ticking along and the president has been able to raise all the taxes that he's wanted to in his budget So revenues are now 19 and a half percent of GDP In that budget we are still running that set of 1.2 trillion dollars and That's almost 5% of GDP and 900 billion of it is interest on previous borrowing. We are in a debt spiral So that's that's that's the the situation in which we find ourselves And that's the situation that was true in August when the the the budget control act was passed And it and it claimed to have 917 billion dollars in cuts Remember those are our cuts that are basically things like saying Honest in 2018 we are going to spend less than we were before really this time We mean it like never before honest and then they signed so they nothing changed in August and then the super committee Came and went and failed and so we are now looking at a sequestration process To take off 1.2 trillion dollars and if it goes through as planned We will still have an enormous problem that will take care of roughly a quarter of the problem at best And we will be back at this again and again Now what is this that we should be doing well? It turns out there there are actually some lessons of history from this if you look at the countries who have had the US problem Which is big debt bad growth the lessons of history are that you should keep taxes low and reform them If at all possible to be more pro-growth and you have to cut spending But not all spending is created equal Those countries that have been successful preserve the spending in core functions of government national security Infrastructure basic research Education all the things that in the United States are located in the discretionary spending categories and they cut instead transfer programs Which the United States means entitlement programs the mandatory spending on so security Medicare Medicaid the new Affordable Care Act and so The the sour Aftertaste of bad politics is going to be bad policy in the United States We are going to use sequestration to go again at the discretionary accounts and leave out by and large the mandatory spending That is exactly the wrong thing to do from the lessons of both the history where we need to grow faster and and from the point of view of national defense and so I Don't have anything super great to report this morning Except that we we have a big problem. It's a problem. We control we control our destiny here This is not something hitting the United States on the outside, and we know we know what the right thing looks like Now we just have to get the politics to align with the lessons of the policy in the past And that's the challenge we face going to 2012 And one would hope that we will not see the sequestration take place as it's currently written But instead we'd make wiser cuts and bigger cuts that actually address the problems we have So I'll just close there and let someone who's got better news take over Thank You David and Doug and good morning everyone it's an honor for me to be with you this morning First I must say that being strategically placed to Doug's right and Gordon's left Should generate a number of confusing sentences out of my mouth And should place me strategically and the vital center of American history and In a position to virtually contradict everything everybody else has to say But we'll try to put some order into it I want to talk to you briefly about sequestration and David insists that I talk about appropriations and I will get there Because I am was born and bred around the Appropriations Committee I Have a healthy disrespect for virtually every tool in the budget act But I can't think of anything I have less respect for than the concept of a sequestration To me it's like a man who buys a chicken farm to raise a Better breed of chicken and then he proceeds to cut all the chickens heads off It just doesn't make sense and indeed I'm I am constrained to In doing a bit of research before appearing with you today. I Came across a great quote from former senator Phil Graham The author and the godfather of Graham Rudman Hollings which back in 1985 I believe it was or 86 gave us the concept of a sequestration and senator Graham as late as last month Said and I paraphrase him The sequestration was never meant to be anything more than a threat An encouragement a prod. I believe was the word he used To force policymakers To do things through regular processes That they should be doing all along And indeed if you view sequestration that way It gives you some hope that this is this this threat that basically hangs over the budget process Is is a little more than that a threat but also an invitation to uh to Congress to the executive branch and to policy makers To go back at it and try again I'm also critical of sequestration because I don't think it's been it has a terribly great track record in this country When it was put in place early on To the best of my recollection there were about five sequestrations that actually kicked in Two of them and this should give us great hope for the future were actually overturned by subsequent laws The third one was actually put in place by the act itself So we got a sequestration assumes we got graham rudman hollings But the fourth and fifth ones were the most fun and interesting of all One of them resulted as a result of a drafting error in my old committee And indeed once we fixed the drafting error the sequestration went away The third one had the fifth and final one and the final the last gasp of sequestration took place when one year we wrote a supplemental And the supplemental exceeded the budget cap So we did what we always do on appropriations. We take a trillion dollars and we cut it by point 000001 And we found that to get under the sequestration cap We cut 13 dollars for about every million dollars we had in the budget and somehow it worked out all right Now I also am constrained to remind you that this is the day these were the days when a billion dollars was a lot of money Unlike today and jug gave you the statistics of what we're dealing with We're now dealing with trillion dollar numbers And if you can't come up with trillions in savings, you really are not making a material contribution to our current to let dead problem Back in the day we're in the billions of dollars and the largest sequestration We ever got one written by a law was I believe about 11 billion dollars And everything else was reduced accordingly. So this has not proven itself to be An effective tool of budget reductions But it has proven itself to be basically what senator graham Its author said it would be which is a threat to prod the system into doing something now david Polluted to the fact that The defense department has and I believe this is true a great capacity to manage whatever they're given I have to say to you that one of the things that troubles me as a congress watcher is About next year and I firmly believe that A legislative adjustment will call it for the want of a better phrase is necessary here To obviate the effects of a sequester, but not just on the department of defense And I know this is not our area and I won't go too deep into it But if you look at the effects of a sequester on the non defense community Where virtually everything that is in Growth in this country has been taken off the table Then you can really get scared I wouldn't want to be sitting in the education department or the labor department And being confronted with the types of dollars That they are being confronted with so this is uh, this is a problem in our context in that if A decision was made by the powers that be in the congress to say look, let's try to solve this problem Let's do what the secretary of defense wants. Let's do what we want to do and let's see if we can fix this thing again The first thing you encounter is the natural blowback from the other side that says hey, what about us? You're going to try to fix us too. The answer is we have to so it It begs a follow-on question and every time I beg a question they give me questions become worse And that is if you couldn't do it in a non-election year What makes you think you can do it in an election year? Well, the answer to that is the threat The threat of the sort of damocles has really not been removed from your head It's just been put off and we all know that kicking a can down the road something we all learned as children Is a more than acceptable legislative tool and it's the type of thing that we do here all the time But it's the type of thing has to be revisited. I would argue that it has to be done What I can't argue right now with you is a the timing Or be the vehicle of whether or not it would be done There was some Movement if you will In the waning days of this congress to try to address the issue that movement has evaporated I think that's probably wise There are some other options next year and again, we're in an election year and remember we all hate each other Uh, we we are in an environment where we could Reactivate the budget act. It's been dormant now for three years and try to do something there We could do it as part of our beloved appropriations process We can't do that without the blessing of the leadership or we could do it as they walk out of town And give them one last present to the american people, which is that we have Saved a number of agencies and a number of programs from being taken down yet at the same time We've walked away from the most arguably the most important Economic problem facing the country So none of this is easy In fact, it gets progressively harder as the can gets kicked down the road But I would have to say to you again. I would harken back to the notion that this is uh With adversity comes opportunity here and I would hope that everybody would reflect on the origins of this whole concept Origin of the concept is to do what we Expect and what we believe that This leadership and this congress should do Which is to get back to the table and try this thing again You didn't talk about appropriations. I was hoping to get a little more time to think about what I was going to say That's trouble asking me to handing out appropriations to me is a really trouble um I want to make Let's uh, I want to build in a sense build on on on where uh jim left off, uh, and where dug holdsake and started um and I guess uh Well, I want to say several things first of all first off. I don't think a sequester will happen I completely agree with uh jim's interpretation of why sequester was designed and what it was intended to do um When the budget control act was passed on august 2nd I think it was august 3rd that I wrote a blog piece that said this is designed to fail Uh, I hate to tell you I was right. No, I don't really hate to tell you. I was right I was actually appreciated the fact that I was right Breathe the sigh of relief when the super committee failed But only because I expected it to fail It I don't think it was designed to succeed in the beginning Uh, and I think the crucial indicator to me that it was not designed to succeed was planting the actual Implementation of a sequester in january of 2013 When that date popped out of the legislation It was pretty clear that they were prepared to accommodate the fact that this might fail And that we would have a really wonderful time for the 12 months between its failure and the election Because strangely enough i'm shocked shocked learn this politics going on in this place Uh, as john hamry said the politics of this were about duking the issues out in the election campaign So we have been treated to what I would describe as I have described as an indonesian shadow play For the last three months and are likely to continue to watch this piece of theater And I do some theater around town as you may know, so i'm somewhat familiar with the concept of theater We will continue to have this theater going on for the next 12 months Right through the election campaign The only data points to me that ever mattered in the budget control act Were the caps for 2012 and 2013 those struck me at the time as real numbers They strike me in the process as a process has evolved as real numbers They sent a very clear message in the first case to the appropriators. I will mention the appropriators Which is don't you move a god damned inch over 684 billion dollars for these security agencies? That's a real cap. I was at omb for five years during caps know what that's like Not fun, but it's a cruel discipline, but you learn to live in it And it told the white house if you come up here in 2013 with a budget for these agencies that goes over 686 don't Think twice Come back with a budget that doesn't go over 686 now those two numbers. It struck me were very very hard Very real And the system is responding the regular routine business that john talked about is responding to those numbers and doing its business And we've had that kind of discipline before just as we've had sequesters before But the sequester part never struck me as terribly serious as an actual form for getting the budget down Uh, I I see it and I've always seen it much more in the context that phil graham described it, which jim has reiterated As a sort of sort of damocles over there saying you guys better behave get back to normal business and do your job The system just isn't ready to do its job as john was underlining It's not ready to do it yet, and we'd rather spend the next 10 or 12 months playing Running the indonesian shadow play if you don't know what that is by the way. It's a white curtain Backlit with people manipulating two dimensional puppets arms and legs And out in the audience looking at the screen It looks like people are fighting or making love or doing whatever it is that they're doing Although it's only two dimensional puppets that are being manipulated. That's why I use the image There's a lot of this that is imagery but not really yet The substance of what needs to be done We're not talking much about what a sequester would mean We're not talking aside from penetta's letter. We're not talking much about how it would actually happen. I'm intrigued But I think jim may be able to enlighten me a little bit about the applicability of this by something called section 2 us Code 907 c which happens to be part of the original gramm redmond hollings act Which actually allows the president to inform the congress in a sequester message That he is redistributing within 0 5 0 The allocation of sequester amounts And that it gets communicated to the congress hasn't happened We would get communicated to the congress and requires a joint resolution under expedited procedure and a five day kick out from the appropriators Because it's referred to the appropriators to allow the president to actually adjust in 0 5 0 The consequences of a sequester so the authors of grand redmond hollings weren't entirely stupid They appear to have written a partial backdoor in 0 5 0 which would say while that number would happen And it's about 52 billion dollars. It can happen in a variety of ways. The president has to make the case So even if we get to a sequester which I doubt there may be some greater flexibility than we think even then the secretary of defense has alleged Whether or not the shadow play continues This I think for me is the bottom line whether or not a shadow play continues whether or not we Have a cacophony over the next 10 or 12 months Of what's going to happen on capitol hill and in the election campaign by may it'll all be in the election campaign We are going to see the defense budget go down That's the bottom line to me the bottom line here is not really will there or won't there be a sequester It's to me an annoying net of politics that I brush aside whenever I can The real prospect here is the defense budgets are going down and in my judgment Going down more than the 450 billion dollars that the secretary of defense has talked about Uh and the reason I say that and I would argue that oh We'll get 10 years out from now and we'll look back and we'll look at that 2012 budget submission and its projection over 10 years and we will say holy cow We took a trillion to a trillion and a half dollars out of the 12 projection for 10 years I don't say we didn't notice we'll notice But we'll have done it year by year by year Not in one Fell swoop not in a 10 year plan that everybody sticks to because nobody in this town sticks to a 10 year plan Under any circumstances, right, but it will happen year by year. Why do I say that? Because we've been there done that even I've been there done that spent five years at omb being there doing that We have lived through build downs. In fact, I'm old enough to have lived through every build down We've done since the end of the second world war Now it's true. I was very young for the first one Right, but I was aware of Korea and I was quite aware after Vietnam and I was involved in the process After the end of the cold war So we have done this and every time we do this point to point over time We see a 30 reduction in do d resources From the first year to the 10th year. That's what happens The shape of that build down the size of the wedge are different between 85 and 98 the last build down we did Under the impact of deficit reduction was 1.6 trillion dollars Right and the force that resulted from that was different. We took 700,000 people out of the active duty force We took 300,000 people out of the civilian employment in the Pentagon The budget itself went down 36 percent in constant dollars. Excuse me over the 13 years And the procurement budget went down 50 percent Over the 13 years in constant dollars So we've been there and we've done that and the force that resulted was the force that used atom hussein as a speed bump in 2003 So you can manage a build down. We have managed build downs And you can manage a build down. Why do we have to put up with this? Well, the reality was around the edges of what john hamry said in kicking this off And it's really more on dug holes acons territory and anybody else is it's because other things have become more important Deficits debt jobs the economy education health If you do your gallup poll every month as they do you'll find national security is way down the list It's not a compelling issue And we're very concerned about the crisis that dug holes acon pointed to When we're concerned about that kind of fiscal and economic crisis In order to get agreement and gremlin hollings is the classic example You can't get a deal unless everything's on the table You can't get a deal. It doesn't work budgetarily It doesn't work politically So even if we get fixes to the sequester Process and I know that there's massive efforts to do it buck mckian wants to do it john mccain wants to do it Lindsay graham wants to do it. Everybody wants to fix the sequester to protect defense They can't pass it They can't pass it because everything has to be on the table. That's the nature of the beast If you want the votes Everything has to be on the table So all of the stovepipe effort that people may make in our community to try to protect defense Is not workable politically for those reasons As a consequence, whatever the fix is is going to as jim alleged have to involve The other elements that are handled under the sequester In order to fix the process or adjust the process So it won't happen. We've done it before And that's why it happens We can talk and probably should a lot have a lot of discussion in the q&a About what are the consequences here? We've done some numbers on this if you look at The administration's assumption Under the budget control act as it now exists and you project that over 10 years defense continues to grow 16.8 Percent in nominal dollars now that's below the rate of inflation slightly But it continues to grow If you take a sequester and accommodate that one-year plunge of 50 billion dollars or so In the out years the projections leave defense growing seven percent in nominal dollars It's way below the rate of inflation. That's a cut But it is not the end of western civilization as we know it It is a manageable process Now i've got some thoughts about where the management might happen what happens with people what's happens with procurement Uh, what happens on the management side? Let me just make one point about procurement just to keep us in a sort of context of perspective here I mean, I expect the force structure to go down. We can talk about that and park a lot in the reserves But on the procurement side and this has industry implications Um procurement in past build downs pays the price There's no question about it in the last build down. It was the heavy lifting of the last build down It was the procurement budget that took a holiday and we're being told today We can't afford a procurement holiday because we need to reset There's a lot of defense professionals in the room. So i'm using shorthand here for those of you who need a road map We'll talk afterwards, but we done a study russ rumble on our staff did a study a couple of months ago We put out saying what did we get for a trillion dollars over the last 10 years Did we spend all of that money? In the war in operations and maintenance. It's true 75 cents on on the supplemental dollar go to o and m because that's the big lifter when you're at war But we spent a trillion dollars on acquisition And what did the army get to focus on the big reset issue the army got every abrams through a modernization Every bradley through a modernization bought every striker it intended to buy put a whole bunch of humvees into up armoring Bought four times the ammunition for nine millimeter handguns intended to buy and so on and so on and so on in other words quite smartly The army seized some extra money and did its reset Right so we have to go very carefully into what the procurement issue is it's the next gen that is the generation That's the procurement issue. It's not reset It's not extra dollars So even the procurement issue has to be looked at fairly carefully to see what's required But the dollars will go down. There are other things we can talk about strategy issues What the review is doing and so on I don't want to go into that now except as you may want to talk about it in questions And answers in discussion. So I'll leave it there Basically, I don't think sequester will happen. There are ways to work with it. Build down is on the way It can be managed. We've done it before Thank you, gordon and thanks to each of you for uh for that. Let me make a couple of Broad points and then talk a little bit about the impact on on industry um I've got a chart up here andy. I don't know if you can scroll the camera over to it The folks uh on the web won't be able to see it because it's not set up for camera viewing But at least you'll know what you're looking for when you go to the website And it this chart actually starts with defense spending in 1989 pretty much at the end of the carter reagan build up These are in constant dollars f y 12 dollars. And so they have huge numbers on the left hand side that we didn't recognize at the time, right Um, and you'll see the build up in the aughts and it's mostly in oco That's the the reddish color at the top and you'll see the impact of the 2012 and 13 reductions of the budget control act That's the first two columns inside that dotted line box on the right hand side You've all got a copy of it to look at And you see the potential impact of sequestration, which is that little line at the bottom there It's still a lot of money At the end of the game, right? And if the defense department were a large corporate enterprise And its management were charged with finding that level of reductions They would likely be able to say yeah, I think we can figure that out Either that it would find different management All right, that's not been what this defense department's reaction has been In part because of some of the bureaucratic issues of how we would do this Now there's two Categories i'd like to describe there one has to do with timing We all know that the sequestration is set up to take place on january 2nd 2013 and we've talked about the year of fun and games we'll have between now and then actually 13 months Most of that fun and games will be focused around next november on the theory that we'll have a clear unambiguous direction for the country that will come out of the election I've been through a couple of these and it's never quite as clear and unambiguous as we thought it would be Even 1964 1972 which felt like real thumpings at the time turned out only had a lifespan of a few years but The reality is that if you're actually going to comply with the sequestration on january 2nd You don't wake up on the morning of january 2nd and comply with it Let's look at two issues One is in fact civilian personnel Now those of you who have managed know that in order to terminate civilian personnel You have a lead time of essentially about five months First of all you got to terminate them before they go off the payroll because you're going to be paying them on average about 90 days worth of leave So you don't save any money until they're finished Then you got to give 60 days notice of termination in advance of that So i'm now back to having two choices with civilian personnel if i'm the defense department I'm either going to put out an announcement Or maybe somewhere around july or august that i'm going to fire 90 000 people Or i'm going to wait until january 2nd to put out that announcement and i have to fire 200 000 because in order to meet my savings target I've got to reduce a lot more people because they're not going to be gone until may Now that's one data point at the same time the president under the law has the authority to exempt military pay from the sequestration Now the likelihood that he's not going to do so is zero Right he can't actually exercise that exemption until the trigger kicks in But he can certainly announce his intention to exercise that Exemption at the appropriate point in time When might that be well it might be connected to the campaign It might even be when he goes before the veterans of foreign wars to give his annual summer speech Honor about the same day that we issue the notice that 90 000 civilians are being terminated Will notify the military is not going to have any impact at all Now that's another dichotomy that's going to create an interesting dilemma publicly Much of this is in fact looks like we've punted But the ball will come down sooner than the play clock expects it to All right now the president also has under the law enormous additional authority Secretary Panetta's letter explaining the consequences of sequestration Takes the worst case scenario exactly the same percentage on every line item in the budget And if you read the law it gives the defense department and other agencies substantial authority to be more flexible in that regard They have to have a justification and rationale for it. They have to explain it. They have to document it They have to report on it But that flexibility is there greater than previous sequestrations if they want to exercise it We don't have any idea how to exercise it because that requires us to prioritize Who dies and who lives And the history of the defense department budget process is everybody lives just on a thinner diet Right and some will make it almost all will make it This is ideal From the point of view of day-to-day management in the military departments because it's almost impossible for central authority and control We tell them what to do Too many moving parts too little time to figure it out no strategic basis for prioritization So if you look back at secretary panetta's letter and the three pages at the end of all the dire consequences And you think to yourself well ultimately that's probably not what we're going to cut We're probably going to cut something else and this is regardless whether it's through sequestration or through some other deal That says we'll find another place to get down to that blue line on the right hand side there We don't have a basic framework in which to say how do we prioritize those We won't get it between now and then i'm not quite sure when we get it But if you think out to 2030 the military capability that we're going to have in 2030 is what we are buying right now The mid-career leadership that will be in place in 2030 is going through accessions right now The recruiting that we're about to cut by 80 because we have great enlistment today And i'm only predicting 80 because that's what we've done in the past when things were going well And we didn't have enough money Well in fact ignore the fact that we're recruiting a military that's not the kind of military we need to have A military that's not representative of america. So there's a whole host of issues that come into play What does it mean for industry though? Secretary's been very clear in this way. We are not planning for sequestration We are not going to build a budget that comes below the cuts that were mandated by the budget control act Don't do it is what he said to the pentagon Now put yourself in the position of a program manager You're going to know pretty soon what your fy 12 number is And you'll know pretty soon what your fy 13 budget number is And you'll know that it does not reflect that sequestration because the Pentagon it says we're not going to plan for that even though the president says i'll veto it if it doesn't happen But the program manager is going to say i think i need to be prudent here You know, maybe i'll slow down my solicitations in my announcements Maybe i'll slow down my awards. Maybe i'll be a little careful about exercising the next option Maybe i'll use competition competition is a great tool But sometimes competition for the sake of competition just buys me time and it'll take me an extra nine months Um, maybe i won't even be all that upset if somebody protests Of course, I could be flip here and say i'm not sure you could tell the difference if the pentagon We're deliberately trying to set up a potential for protest or accidentally doing so But the the uh, but the reality is I think you'll see a lot of slowing down on the procurement side on the services side The contracts are generally not top down managed. They're bottom up thousands of individual decisions on individual tasks by individual activities and sub activities across the department Much harder to slow that down. You can put a cap on spending You don't know you've reached that cap until after you're past it All right, so I actually think the hardware side of the business is going to see pretty dramatic impact in f y 12 As people go slow the services side a little less so because it's just harder to control centrally In addition, of course, I think you'll continue to see The second part of the slowdown, which is the policies that say we're not actually after your profit We're really just after your costs But the way we get after your cost is by going after your profit and That's a statement that the pentagon denies But the reality of the day-to-day management of the contracts are consistent with such a policy even if it's not what's being articulated That's the dynamic you'll operate in how do you get out of it? You get out of it when we get a deal when do we get a deal the votes aren't there The votes are certainly not there between now and november and the votes will only be there after november if something happens That's unexpected in november now. They will find some way out of this All right. I'm not smart enough to figure out what that is I am smart enough to think it's not going to be anytime soon and in the meantime Be alert for those notices in july With that I think I'm prepared to throw the floor open to questions and comments I think you all know the drill. We have microphones You raise your hand you wait for a mic Well, somebody'll say bring the mic to that person and you wait for the mic you identify who you are and your affiliation and then you're welcome to Make your comments and we'd like to keep them kind of short and hopefully there's a question mark somewhere near the end of them out there Any takers? Let's start over on the Hang on hang on for the mic, Dave Dave bulge and with aviation week, and I know this is Hardware related, but I just would like your best guess If if sequestration goes through Do you think that the choice will be then to cut the programs that are being worked on right now? Up in next generation bomber and they will decide to leap a generation of technology and and move on to more x47 like Programs or something in that order The the the question let me the mic didn't seem to kick in there. So let me uh Let me rephrase it or summarize it It's basically if sequestration Kicks in Would the decisions of where to cut be essentially cut existing programs and keep alive future technology My own sense is that would require a level of centralized guidance which will not exist Um, and I think it's going to be a program by program decision rather than an aggregate basis History says that we do Keep funding in r&d accounts a little. We don't cut them quite as fast as we cut procurement Um, it also says we tend to cut the r part of r&d a little more than we cut the d part of r&d Which I think is a mistake And and it's possible that from a budgetary point of view we might predict that But I don't think dave that that we have any basis for say in which programs go and which programs survive at this point in time Gordon you agree Uh, I I agree with that largely. It's interesting to me that in uh in 1989. It's important to remember that the last build down that we did Was in the majority carried out under the uh, george hw bush administration led by that notorious anti defense advocate dick cheney and colon powell And they took a powell to this day takes great pride in taking 500 000 people out of the active duty force structure and Cutting the budget 25 percent The the kickoff however interestingly and in a way we may have already given at the bank with what gates did is Was that uh, was that cheney? axed a bunch of programs And some of them were very small actual programs in production. Some of them were very large r&d programs Like the a12 people remember the a12 Um The and took great pride over those four years and saying he had done this to procurement It's very clear to come back to what I said earlier that procurement does carry a heavy burden in a build down It always does And the question where it will happen is is very apt My sense is the response in major defense acquisition programs in general generally, I agree with dave This will be programmed by program not as a blanket policy But the experience seems to be in major defense acquisition programs where you can you cut the buy and stretch the program So instead of buying 2300 you buy 2100 and you buy them at a slower rate Rather than terminate the program and we have so many contracts now that the price of Termination exceeds the the savings that you might generate in the program that that's likely to be true for mdaps The place to look in the procurement budget and it typically is looked at is the non mdaps It's not just other procurement. It's also smaller programs Uh, and that's 60 of the procurement budget So in that 60 of the procurement budget you tend to get a lot of attention to things like the trucks and the front end loaders And the ammunition supplies and all of the things that don't have quite the same visible level of visibility and constituency in washington and in the congress And can be worked hacked away at if you will can be drilled down and you'll see I think in all of the services A focus of attention on those Lesser procurement accounts that don't have quite the same visibility Yeah, thanks. I'm harlan oman. Thanks for A very somber assessment, which I think everybody would agree I want to back into the question. I want to ask it seems to me that if you Seek to find out what is the greatest threat facing us globally? I would argue. It's not global warming. It's not radical islam It's not proliferation on and on and on. It's bad governance And here at home. We have adequate proof of that Now it's easy to come up with very very dire apocalyptic views. I mean Doug is absolutely right. We have this debt going on forever the euro collapses, you know, that's going to be bad But what makes you think today is much more dangerous or much more serious than say 1938 or 1939 Or even 1975 76 we had a president who got thrown out. We came out of vietnam Licking our wounds and in those days people thought that the all volunteer force was going to be absolutely catastrophic We can't come up with solutions for the reasons you point out right now Because we're not going to get any kind of consensus. It could be done rationally, but that's probably not going to happen So my question really is why is today different? Why are we in more serious danger or not than we were in other periods in our history? So Let me just be clear about what what I intended to convey which is the scale of the challenge that faces us In the immediacy I think both of those are very real and the notion that somehow It isn't a large problem or that it's somewhere in the future both wrong. That doesn't mean we can't solve it And I actually believe we will I mean in the end Historically americans have turned out to be very pragmatic people. We always look like we're ideologically divided But we figure out a way to to sort this stuff out and and I actually am quite confident we will but It's going to require something better than what we saw over the past six months And I think we're fully capable of it and once we get past the election. We will do it So if I could follow up you're saying the situation today is not necessarily as serious it was in 38 or 39 or 75 and 76 I don't know how to rank them. I think these these are all these are all terribly serious circumstances what we I think what we know about our problem now is is Just daunting. I mean these We the parts we don't know could make it even worse, right? I mean that that's that's the situation we're in I mean right now we have the great virtue of being the best-looking horse in the glue factory and so But that could switch and that concerns me I also have to add to if I can add to that I pardon my suspicion about driving defense policy While wearing a pair of green eyeshades The issue of the threat The issue of us global commitments the issue of power projection all these are these are multiple issues We don't necessarily lend themselves to people to say oh, we have to take the budget down by 650 billion dollars more in the next 10 years one of the virtues I think Of working up around appropriations is you get to be a linear committee and you get to look at it one year at a time And you get to make the types of reductions and budgets that if I can make them in the first year I can build automatic savings in the second year Gordon alluded to it and even the third year if I'm smart, but if I'm also smart. I'm very suspicious of where The experts tell me I'm going to be in five to ten years because I just don't know the threat and I Tell me tell me five years ago if anybody in this room thought We would be in this position today and the answer is no we just don't know so we got to take it incrementally That's a great sake. I have to I have to sorry. Let me just jump in on one thing Because because jim raised the suspicions of planning defense around a green eye shade Bernard Brody who was one of the great strategic theorists of all time wrote back in 1959 a book on more largely on nuclear policy But he had a chapter in that I thought was intriguingly and intelligently entitled Which is strategy wears a dollar sign You think about the ambiguity of that statement But it's a necessary ambiguity that we always live with there is no way To spend enough money in the department of defense to guarantee that you have full knowledge About what you're able to do everywhere in the world and full knowledge It's you're defended against every potential challenge risk threat danger Whatever way you want to call it and historically outside of times of war strategy has always been Wearing a dollar sign The problem I think congress perpetuated this problem and asking the defense department to draw up a quadrennial defense review that was deliberately unhinged from resources Was that you get what we got in 2010? Which is a strategy that's just a an ihop a layer of pancakes every mission counts Right every mission is equal and Risk has to be reduced to zero in all of them, which is an open recipe for bad planning bad management and bad defense Resource limitations are real They will drive strategy in the same way that strategy drives resource limitations They are interactive. You can't get away from the impact of one on the other I would like to add one thing Ireland and I I think your your two historical periods of 38 39 75 Are are interesting and relevant um Clearly the kind of existential threat that we faced in 1939 is not the same as what we faced today There's no comparison But if you if you look at that chart of defense spending And if you superimposed on it the annual deficit It actually doesn't scale on the chart because the chart only goes up to about 800 billion and the deficit at 1.3 trillion and if you put on that chart The payment on the national debt each year the payment on interest It also the chart by the time you get to the right starts to lose its scale Because you go over there That is in fact not replicated of where we were in the mid 70s at all But the other element and I think this is really key is At its core the national security establishment in both of those time periods Knew what its number one priority threat was They knew who it was. They knew where it was They knew what they needed to be doing to get ready for it not completely not all that well And in fact it took a little extra time today We don't have any ground that we can stand on it says this is how we make our choices That's the scary thing Which was uh, greg keily csis. That was my question. It's about the ramifications of the of the loss of process David you were talking about how in mid 12 Next year we're going to start seeing this lead times for equipment The pending on planning process 13 they've ignored sequestration They'll be trying to plan all of 12 for 14 if they're going to ignore sequestration then to We're looking at two three four five years possibly of of no planning discipline But alone there hasn't been the last past decade. So the question is I mean how much longer Into the future are we going to have to deal with the ramifications of the problem If we've lost discipline Greg let me just say something to you that I find is personally interesting I understand full well the decision of the department of defense to prepare a 2013 budget independent of sequestration John hammer used the word politics. So I guess we get to use it in here It was a political decision and I understand it totally and I'm where I in their shoes I would probably make the same decision But look forward to next year. I'm going to take issue with everybody here says you can't fix sequestration I think you can't but but if you can't fix it You're going to spend the next year campaigning on it and talking about it And does anybody around here think that the issue of the number of lost jobs in and out of government? It's not going to be raised I can't believe that that's not going to be the case So the pentagon's posture is going to be it has to hunker down And at some point in time and you're all familiar with the planning processes to put the next budget together At some point in time somebody's going to have to develop an alternate scenario over there Of what happens if nothing works and we get hit and the question is how long does that alternate scenario stay out of the public eye? And when it hits the public eye, how does the public receive it and respond to it? I have always felt and I still feel If there is a glimmer of hope on Modifying sequestration It would have to come Not just from the likes of us, but it would have to come from some kind of public perception that National security may be threatened That this is not wise public policy That this is a potential election issue It would have to well up from someplace else after having been properly massaged by others But I I've always felt that would have to happen. And I think then Uh, maybe a lesson gets learned and and scenarios get developed and options get done but but the process, uh I'm sorry to say this, but I'm afraid the congress may be making a major contribution In weakening this process because as our processes in the congress decline In deuteriary to virtually nothing, which is where they are now any agency dependent upon The ability of the congress to send it information is not going to be able to plan. Let me give you the worst case scenario on the budget Last string we passed the 2011 appropriations bill, which we're based largely with some modifications on the 2010 numbers The 2012 numbers that we will pass Uh here, hopefully within two and a half weeks will be based upon baseline adjustments of the 2011 numbers Meanwhile, the Pentagon is preparing the 2013 budget We also have a threat of sequestration and we have a very dim prospect That the 2013 budget will be done in the next fiscal year So that'll give the pentagon the opportunity to prepare the 2014 budget Now we're into five years and we're still working off of a modified baseline of five years ago I don't know how anybody plans. I don't know how a business could plan that I don't know how a pentagon could plan that way But that is the dilemma we are forcing upon these people by the fact that we can't clean up our processes to make There's work and take a crack at some of that question because I think it's a very a very good question But let me start with where we are today and and what is acceptable I find it quite interesting to note that if we had had this conversation two years ago The concept that 450 billion dollars would disappear from the 10-year plan at dod Would have been shocking to people And one of the one of the natures of a build-down is that the the mental adjustment that everybody makes in their numbers about what's acceptable What panetta succeeded in accomplishing at the department of defense Is to bring everybody on board with the concept that what they thought they were going to have last year Over 10 years is going to be 450 billion dollars less, which by the way is only 8 percent But nonetheless 450 billion dollars less than what they thought they were going to have You know the change in expectations that as you go through a build-down is quite remarkable And it happens as jim is alleging year by year That adjust those adjustments happen year by year And we're going to have this shadow play in the middle of it this coming year of a sequester And you don't have it with a lot of strategic planning Helping you drive the train here as I say strategy wears a dollar sign so very often you don't have a lot of strategic planning Driving the train here. I swear to god if we had if dick cheney had said in 1989 10 years from now you're going to have 1.6 trillion dollars less than you thought you were going to have right now this year Somebody would have fired him The politics would have been uproarious, but that's what happened That is in fact what happens and it happens year by year now I'll say something here that I know will find the face of the expectations of a lot of people those of us who work in the defense stove pipe But in With the end of the war in iraq and with the gradual withdrawal from afghanistan, which I thoroughly expect is going to happen In a weird kind of way. We're in very secure position globally And while the rhetoric will tell us it's an increasingly dangerous world and there are threats all around us I simply don't believe that's an accurate analysis of the united states security situation in the world today We do not face an existential threat I agree with harland bad governance is probably a worse threat than anybody is facing in the world I don't want this to become a china panel. I was on one two days ago It was all about china, but the chinese capability right now is miniscule compared to our capability The technological lead we have is two or three generations ahead in every area of equipment Uh, we could just go on and on the security situation, you know, we're not going to invade every fragile state We're not going to invade pakistan. We could have a long discussion about strategy But the reality is for all the troubles in the world The united states has a very secure position a very dominant military capability A lot of problems it faces most of which are susceptible not to kinetic use but to non kinetic tools Which sadly go down even more than defense tools when you're in a build down And as a result in an odd kind of way It's one of those periods where we can buy a certain amount of strategic disjuncture Of uncertainty about exactly what the focus of national security planning ought to be or needs to be and we do have Some time to do that that said It's hard to read the tea leaves here on what the strategy review currently underway is going to come out with And many of you in the audience may know a great deal more about that than I do But my sense is they can't but confront the likelihood that we are going to Diminish the priority being given to coin and nation building and stabilization missions as part of a strategy review And that produces some opportunities for savings That they'll take another look at what the nuclear force design is going to be That they will focus surprise surprise on asia and the pacific as a region in which our security interests are long term seriously engaged Those are at least three areas where I expect people are doing some thinking about how strategy needs to relate to this And I'm sure that's being Briefed into the budget planning process that people are doing the budget planning process is also necessitating some of those choices Strategy wears a dollar sign. So there is an interactive relationship here Not quite sure where that's going to come out Some strategic thinking going on But I think we have a reasonably good period in history to think seriously about How we want to pivot our whole national security strategy I just have to add a point Gordon has said a couple of times strategy has price tag I agree with that It's a price tag we've paid We've done it I've been this town 40 years and I can't remember Under the general principle of contingency budgeting When our military or our country has had to involve ourselves in an activity overseas But they haven't sent the bills to the congress and the congress has paid them And I think and you know if you say oh gin that's not they're very significant trust me It is so significant that if you watch the congress on a daily basis You'll find that waving the budget act Often gets more attention than the act itself because they'll wave the budget act for anything And they will wave the budget act and they will go Through the roof if they have to to guarantee security strategy and I also have to say Um I'm always amused by people who say oh gosh, we have statutory caps. Isn't that wonderful? Well, it's it's Virtually a meaningless statement because we've had caps now since 1974 and the only time we've had the caps lifted Is one the joint leadership of the united states congress and the president has said lift the caps So we've been we've been working under these numbers Comfortably If they have to be taken up for contingency planning, absolutely Do we do them and we don't flinch we don't worry about it at all indeed One of the frustrations I think gordon shares this with me because we have some common interests about the 150 accounts and the budget about the Foreign assistance accounts if I could find a way To get the people who work on the 150 account to be as well received and well cared for on the hill as I could For the people who work in the o50 account I feel like I've done something good But there is There is a different standard and the standard that exists on the hill today as we take care of our troops But not only do we take care of our troops and our troops families and our troops education and our troops health And our troops rehabilitation, but we take care of the things necessary To protect them physically and to help them do their mission and and that has now That that type of budgeting that type of security planning on the hill has never really been a problem If if the agency plans for them and they talk about them, we'll pay those bills I'm not gonna offer a but although I have There is a lot of value in process for its outcomes and But there's also value in process for being able to sustain the capacity to do the process It may be that we don't really need a good planning process today Because The future we face in the near term We should be able to take care of america's defense interests pretty well for 500 billion dollars a year in constant dollars Almost everybody in this room would agree with that But if we lose the capability to actually match our resources and our capacity in a forward-looking way It's really hard to get it back I look at do d today and i'm concerned that by and large we've already lost that capability The number of general officers who've actually participated in building a fiscally disciplined future year defense program is remarkably small Because we haven't done it in quite a while And when you lose that capability, you don't even know what it is you've lost now Can we muddle through absolutely will will is america about to go under no way Right, will we do a lot of stupid things you bet and we'll do more of them as a result of that and of course, you know It should be that our goal actually there was a great headline in in one of the trade Papers a few weeks ago of an army three star giving new acquisition guidance to the community. It says Let's stop doing things that are stupid And that is great acquisition guidance And i firmly endorse it right But manifesting it is a little harder than just saying Let's see we got a I think I saw a hand in the back although it may be that that question is so irrelevant now that it's no longer That hand will no longer be going up. We've got one on the right here Terrence if you would bring the mic over there on my right you're left Thanks, uh, kate brandon defense news Do you think um the conflicting messages from secretary panetta and president obama is an effective strategy to get Congress to act or is it just confusing everybody? I think it's confusing secretary Secretary panetta came out of the box early and often and I think well actually the defense community applauded him He was followed on by the president's uh rather firm statement that he would Uh veto any tinkering of a sequester unless it was uh paid for by other offset activities Um, I think the message it sent to the hill and everybody else was a little confusing and Leads one to wonder What the administration's posture would be towards a fix? I think anybody who has listened to secretary panetta and who has read his writings knows where he is Uh, I the confusing part for me is I don't know if the president is I understand politically why the president would hold the line here, but I also think the president may be sending a message that This is not a free beat and that he the president has Reductions he wants to And that if you're going to do one thing you're going to have to do the other And maybe there's more consistency in the message at the end of the day than you might think but up front I thought it came out very confusing um, I I've forgotten who it was who who said and i'm going to get the paraphrase wrong but uh That uh Wisdom is being able to hold two completely contradictory thoughts in your head at the same time and still go on working Um, I I'm somewhat more cynical than than somebody who worked for many years on the appropriations committee which somewhat staggers me Um, but I but in this case, uh, I I read this as a classic good cop bad cop Um that there's one set of messages that has to come from the white house There's another set of messages that has to come from the pentagon And if you think those two parts of the government aren't talking to each other about the messages Got news for you stay in town a little while longer Um, they are I I don't know that this is a coordinated effort I can just tell you that this sounds to me like good cop bad cop and the president And this is I think a bottom line for me in this whole situation the president Has a bigger terrain of battle that he fights on than the secretary of defense So that the ultimate resolution here has to come from everything else being on the table One of the trigger points that I think is important to look towards after the election Is what happens to the expiring 2001 tax cuts because that's a card on the table And after the election depending on where the dust is it's a card that's certainly to to be dealt In some way But that's the terrain president's deal on president's deal on that bigger turf And so the signal that I think govama is sending has to be at this point Different from the signal the secretary is sending I would ask you just as a footnote to gordon's comments to think about January 1 of 2000 of calendar 2013 when the bush tax cuts expire and Taxes go up and trillions of revenue flow into the system And what is it january 2 or january 3? I can't remember which but that's the day the sequester kicks in the one we can't fix That's the one where the rift notices have to hit the street. That's the one where the contractors have to hunker down That's the one where the unemployment rate goes up. That's the one where everybody starts to worry again It's a nice way to start the new calendar year And it ought to give it ought to get that's right. Happy new year. I ought to give policy planners from the president on down a lot of thought About where they're going to kick off Whether it's this president or the next president's inaugural year because it all falls in the first two or three days Kate I I think there's another aspect to that question that we really haven't touched on much today Unlike any other drawdown we've faced any other time we've wrestled with this There's a big player lurking at the edge of the room that wasn't there before and that's the global financial markets And I think the president's comments and you can interpret some of secretary panetta's comments the same way Is as much a message to the ratings agencies as it is to the politics Because if you look at the impact of the super committee's failure It had zero impact from a global financial market point of view Why because ultimately the bottom line was going to come down exactly the same as if they had reached a deal Either they had a deal for 1.2 trillion or we were going to cut to 1.2 trillion The reason that you have to hold that is because the last thing the president wants in the middle of a re-election campaign Is for moodies to downgrade the us All right And that you know of all the messages you can't control as political Campaigner that's the one we've most got to maintain and I think it's the presence of those people in room They weren't there in 1938 and 39. I don't think franklin roosevelt ever got up in the morning and said Wow, I wonder if the radio agencies are going to downgrade us today They weren't there in 1975 jerryl ford. They weren't there in 1989 when dick cheney was starting down the road of we're going to cut They are there today and we can't ignore that I think we're getting close to the end of our time. I got perhaps time for one last question How about in the back auto auto question with national journal daily Would you like to hear the panel say what's the possibility of congress using the oco account Which they've done repeatedly in the past you know to to cover Things that they couldn't come up with in inside the base budget You know, is that a is that an avenue to kind of cover their their tails and in 12 and 13 Already already being done. Yeah, it's already being done. I would I would say to you It's been a that's been a constant in budgeting For some years now and indeed the pentagon has been a past master and they've had help in the congress From doing things especially for the army and the marines in the oco accounts That might not have passed the smell test of being in the base budget But if you look at those numbers, they're coming down. I think the um The oco account in defense That hopefully will pass here within the next two weeks probably going to be the neighborhood of about It's going down about 120 It's a 118 119. Yeah, and that's from a from a high of 400 So I think we're going south in that account I I think Long range you will not solve a lot of problems as long as you're Reducing your level of activity and in the middle east and the near east That bank's going to go away. I agree with what Jim said But until it goes away, we're going to use the heck out of it All right So I want to thank you all for your time and attention and presence this morning I want to thank those of you who joined us on the web As dr. Hamry mentioned, uh, this is not an issue that we put our feet up and say, okay, that's done now what? We'll be wrestling with this question both here and elsewhere in washington for the next year Perhaps for the next 10 years Perhaps for the rest of our lives most of them hope most of us hope that's longer than 10 years and uh