 My name is Mark O'Deal, I'm one of the faculty members here at the National Security College. I'd like to welcome you to the National Security College's public seminar for September titled End of an Era, US Economic Policy Challenges and the Implications for America's Asia-Pacific Strategy. But also I'd like to add a warm welcome to our audience who's not physically here this evening. Those listening in on the podcast and the podcast, which will be going up on the college's website. Welcome and thank you for your interest in the work of the NSC as well. Throughout history, economic strength has been a defining quality of great power. It has underpinned their ambitions, their influence, their diplomatic endeavours and their military strength. The question we pose tonight is does the ongoing financial difficulties being experienced in the US and changing power relativities in the Asia-Pacific Herald possible strategic change? And what are the implications of any possible strategic change for the US policy within our region? And we have two fine speakers tonight to address the questions posed by our seminar title. Firstly, Mr Mark Thurwall will address the economic and fiscal issues side of the question. Mark is the director of the International Economy Programme at the Lowy Institute for International Policy based in Sydney. He's been an economist in the Bank of England's international division and he also worked on structural economic issues in the UK with the same bank and their analysis division. He subsequently joined the firm J.P. Morgan as a vice president in the economic research department prior to emigrating to Australia. Initially when he came to Australia he worked for the export finance and investment corporation prior to taking up his position with the Lowy Institute. Following Mark, Professor Thomas G. Mancon will address the strategic policy implications of these changes. Tom is currently the Jeromey Levy chair of economic geography and national security at the US Naval War College in Rhode Island. He's also a visiting scholar at the Philip Merrill Center for Strategic Studies at the Johns Hopkins University's Paul H. Nitsy School of Advanced International Studies. Tom serves as the Deputy Assistant Secretary of Defense for Policy Planning from 2006 to 2009 working for both secretaries Rumsfeld and Gates. He was the primary author of a 2008 US National Defense Strategy and a contributing author to the 2006 US Quadrennial Defense Review. He's also a been a serving officer in the Navy and currently still serves as a Naval Reserve Officer in the United States Navy. Our format tonight's speaker will speak for between 20 and 25 minutes on their assigned topic and this will be followed by a plenary discussion where we'll explore in greater depth the themes presented and entertain questions from you the audience. As usual for National Security College events, even if we don't start on time, we will certainly finish on time and we will leave at 6.45 pm for you to pursue the rest of your evening. Prior to start too please, the usual disclaimers, please turn your phones to silent or off so that our presenters and our enjoyment of the seminar won't be disturbed. If anyone needs to leave in a hurry, the two emergency exits obviously the door through most of us came through down here to my left, your right. Similarly there is an exit to the rear right of the room as you sit and that is noted with the exits on. So ladies and gentlemen welcome and Mark I'd invite you to address the seminar. Thanks Mark for the introduction and to the college for the opportunity to be here and for you for turning up to listen to me. I'll begin with something in the confession. Most of my career has been looking at emerging markets rather than the big developed economies. Basically when I started off as a little baby economist you kind of had a choice if you were being an international macro guy in a way you took your career. The choice or route one was you looked at the big developed economies. The attraction was that these were the economies that basically drove the world economy. They were the things that were really important but the downside was that they were kind of dull. If you wanted to think about how you forecast those you sort of knew that they basically ground a lot roughly at the train road and you helped go down a little bit depending on where you were in the cycle and even recessions were kind of predictable because you looked at what the central bank was doing and waiting for it to tighten and then drove it slow. So the other option that you had in the path that I went down is that you could think about emerging markets or developing countries. We used to call them those days and there this was the trend was well not as important not as central to the world economy but just much more exciting. You have growth miracles you have takeoffs and you can also have all of the downsides as well. You have sovereign debt crises you have bank runs you can have ratings downgrades all the things that would never ever happen of course in a rich developed economy. Times have changed. In fact it's quite striking if you look at some of the economists who got it closest to right nobody got it right but got closest to right about what happened to the world economy in 2007, 2008, 2009 and a bunch of people who cut their teeth looking at emerging market crises particularly the Asian financial crisis and then took those lessons and applied them to the developed world. So things have kind of got interesting since then. Thinking about the US economic position and where we're at today it was sort of symptomatic I think of the concerns that people have was what we saw happening over June particularly July and August of this year. If you remember running up to right until the second of August there was sort of this debate amongst US policymakers about whether or not they were going to raise the debt ceiling and it was you know there was some kind of this issue about whether the United States was going to actually fall into technical defaults which for the rest of the world watching on in I think in amazement really it was like there was a serious public debate about whether you should take a gun and shoot yourself in the foot or not. It was kind of a stunning thing to watch and basically although it was it right at the last minute a deal was cobbled together it wasn't enough to stay off standard and pause on the fifth of August deciding that no longer was the United States worthy of being a triple A credit. We got that downgrade from triple A to double A plus. The way of course that this happened was damaging not just to the credibility of the United States but also to the credibility of standard and pause which turned out that they made a rather large error in their calculations as to the US fiscal position and the ratings agency credibility perhaps took a side. Another blow when what happened after they downgraded US debt was surprise surprise not a panic strike and run on the US Treasury market but instead everybody decided that in this new scary world where the US wasn't triple A rated by one of the two big rate what you should really do is go out and buy more US debt driving up the price and down the yield on US paper. But even so there was something fundamental about that about the statement that justified the downgrade you know a bit of the boilerplate was about the fiscal position but the kind of the other thing that's done in poor sight was that they basically thought the effectiveness the stability and the predictability of US or American economic policy making institutions more generally a bit weakened and basically after having watched the debacle it was the debate of the US debt ceiling discussion who could disagree with that and certainly it turns out that Americans themselves didn't disagree with it here's a chart looking at congressional approval tracking it over time and while as Gallup themselves point out America did never actually been that keen on Congress the average approval rating here kind of has been around the 30% 33% level bouncing around quite a bit and shortly after that debt debacle it was down at an all-time record low about 13% approval rate it's eaked up a little bit to 15% and you know the the response of people that Gallup asked about what did you think about the way that all of the institutions of the US government you know all the group together handled this and then sort of the adjectives were stupid disgusting ridiculous and it wasn't a good look for US economic policy and basically my thesis is going to be that the big fundamental challenge for the US a big economic policy challenge for the US is governance is getting the policies right i'm going to talk about what some of the economic policy challenges are but i think from an outside perspective they're all actually surmountable they're all manageable you can think of the policy tweaks that you can do some of them are harder than others some of them are easier than others but as long as you get the politics and the policy making part of it right then you can solve them the big question it seems to me is not an economics one in the end of this it's a sort of a political and social one about can the policy makers deliver um slightly different way of thinking about this and Mark touched on it i guess at the beginning is thinking about the US economy in relative perspective and you know it's clear that one of the reasons that we spend particularly strategic conversations we spend a lot of time thinking about the future of the US economy is this sense that it's in relative decline or relative economic decline um and that's true but it's not a new story um basically since about 1944 or 45 when the US share of world GDP peaked and i've got a guess here about 35 percent of the world economy on a purchasing power parity rate petered at the US dollar rate you shunt all of these lines quite sharply upwards so this is a conservative estimate of the US share of the world economy and basically since then it's been on a declining trend and that's not about the US economic failure though i think the crucial point there is it's about the rest of the world over time gradually gets attacked together so post the second world war europe and western europe first and then japan rebuild their economies from the rubble so you know US output peaks because it basically was extremely successful and didn't get smashed pieces during the second world war and then as other economies come on street it's relative share of world output starts to trend down and that is developing economies or emerging markets as we now call them gradually start to get their acts together start to industrialize start to do modern economic growth and get tanked off then their share of world output goes up and the US's share of world GDP comes down and from my perspective in the economy this is just kind of a natural process so if you care about relative gains as i guess strategic things have to then you sort of worry about this stuff but from an economic policy perspective this is how the world works it's not a symbol to me of US economic failure it's a symbol of other people's success and whether this trajectory continues or not and the striking point on this chart is that on the IFM numbers which is the swore of the two lines 2009 roughly for the first time since this before the second world war US share of world output dips below 20 percent and continues to trend very slowly downwards that will continue to happen assuming that the rest of the world particularly the big emerging markets continue to get their economic policies right if they don't get their economic policies right then that might be going to need to happen but if they do it will and pretty much nothing that the United States does in terms of economic policy will change that trajectory you know it's not the symbol of things going wrong at the United States it's a symbol of things so far going right from the rest of the world and two other little caveats that are things that are worth thinking about it's clear that those relative shifts concentrate the mind and make people think or worry about relative economic performance and I kind of dug out these two sets of opinion polls you know one is from January 2011 where Americans were asked by the air I think it's Pew who is the world's leading economic power and I think about 47 percent of them picked China significantly smaller than the pick the United States so there is that perception that there's been a shift in the amount of economic power in the world economy but it's sort of a just a gentle reminder here's the same question also asked back in January 1989 when Americans are even more convinced that Japan was the world's top economic power about 56 57 percent of those asked to pick Japan and a slightly smaller number picked the United States than picked the United States in 2011 of course this year when when the Americans were asked where's Japan only nine percent of them thought that Japan was the world's leading economic power perceptions can change pretty dramatically it's also true that the Chinese don't buy the Americans argument I think it was an April 2011 poll where the Chinese were asked who's the world's leading economic power about I think 50 percent of them still picked the United States 26 percent said China so the relativity question it's an interesting one and it colors the debate but it's also one that can be subject to quite rapid shifts and certainly if you're gaining if you're doing an analysis and thinking about countries with the economic problems for every economic problem that I can find that the United States has I can look at every other credible contender for world's leading economic power and find at least one of possibly two major economic policy challenges there too so that's also worth bearing in mind so that said with those caveats out of the way um what am I what what do I think are the big economic policy challenges aside from that government's challenge or that that government's challenge has to meet the United States going forward um I've started to pick four for this evening um and I'll focus mostly on the first two because I think they sit more closely with the current public debate but um but I'll have another two at the end as well so the four are firstly just getting out of current recession um the worst and the deepest economic downturn since the Great Depression of the 1930s and the second one is fiscal and financial fragility you know that stand was downgrade is kind of a symbol of that but it's also one when people think about US strategic power or US power in the world that they they focus back in on again and again what's happening with the US budget deficit what's happening with the explosion in the US debt so the sort of the first two the second two are um I think inequality and what's you know the sort of certainly the US press gets a lot of attention what's happening for the future of the American middle class I think understanding that part of the debate is maybe useful in understanding that policy issue at the beginning about the government's problems the government's issues and why the political environment has got so difficult and then I'll finally I'll talk about the financial crisis problem because it's partly a result of you know financial crisis issues partly why we are where we are here today and it's whether we're going to whether we've actually solved that or whether we're going to have a rerun so there before that I'll run through so the first one is just getting out of the getting out of the current recession getting out of the current hit for world economy um if you've seen already the IMF has just published its latest round of economic forecast for world economy and it's slashed its forecast for US GDP growth most of this year and from the x by a full percentage point um for an economy that already the growth forecast wasn't that exciting giving the depth of recession this is not the good news number it's pretty bad um basically as we all know the US output US economic production fell off a cliff as a result of the global financial crisis an output today is still not back to where it was in 2007 before the crisis hit it's a big challenge if you like is getting back to pre-priced output and then beyond in fact catching up all of that lost growth that lost output and we're just not doing it now there's a famous economic model um Milton Friedman came up there it was called the plucking model I just have to be careful when I say that so I say it's wrong it sounds like you can really worry about Milton's economic model um but the plucking model basically said economies are a bit like on a piece having a piece of string um when you pull it down on a say on a guitar something you put further you pull it down the quicker it snaps back so if you're typical US recession this is kind of my goes back to my old point about you know boring developed economy forecasting the big year initial recession the further you pull the pieces being down and the faster it snaps back up at the end of it you get these v shape patterns and deliveries and that was kind of how you used to forecast processions not just in the US but across much of the developed world in general um in terms of the kind of picture you get on that chart that would say on that line there that you've got the the deeper your recession the bigger your fall and output and the faster that you bounce back and you know the great but the great points on that past recession which fit reasonably okay with that model and the current episode is the point in red and it says that model really doesn't work for the current recession and the second one compares the same sort of recovery paths over time and again the current episode is more right at the bottom much worse than previous previous recovery recession facts um the thing is this shouldn't have been a surprise if you look at the sort of literature that was being written in 2007 2008 what we knew post the crisis was if you have the big financial crisis basically if you wreck your financial system and if this is global if this is transmitted globally so a lot of other economies go down at the same time then study the past historical examples tells us recovery it's going to be slow it's going to be painful it's going to be associated with a long period of unemployment with a large increase in government debt but people kind of forgot that in the sort of the period when you got the initial snapback once we'd still that well actually wasn't in the end after all the Fed had sort of saved us and that fiscal policy had worked a bit and we started to bounce back we you know the sort of the forgetting about these lessons unfortunately these lessons are now back with a sort of sobering reality that post these kind of crises it's a painful recovery process one crucial consequence of it being a slow and painful recovery process is that people don't get their jobs back very quickly um you know one of the striking facts about this U.S. recession and recovery path is that we still have nine percent unemployment rates in the united states we have these big falls in employment to population ratios we have a large number of americans out of work in even large another large number of disparities dropped out of the labor force and again if you think about sort of the political problems that were driving that government's issue at the beginning then this presumably is another contrary factor to that you know unemployed voters are not happy voters in general and politicians don't like unhappy voters again what's striking about this this kind of picture here is that once upon a time when the game when we put about those boring developed economy forecasts we thought unemployment rates or employment population rates were mean reverting in other words once they snapped away from their path they bounced back to it again over time um there's not an awful lot of sign of that in the current data so again one of the big challenges is how do you deal with this kind of recession and the sort of recovery that we've got which we saw a little bit in the past two downturns as well and a phrase that we're hearing a bit more of jobless recoveries you know how you know how do you get not only do you get growth back up but how do you get growth back up into whether it brings employment with it so one of the key economic policy challenges i think for the united states at the moment and not just for the united states but for a whole sway in the developed world in general is how do you pull yourself out of this truly nasty global this truly nasty down to and do it in a way that not only gets your economy back on track but gets your people back to work at the same time second and related challenge because one potential answer to the first one is what are you doing policy stimulus and the second related challenge is what are you doing business policy in the united states so policy stimulus would be monetary policy cut interest rates print money um well conventional monetary policy click interest rates gone as far as it can go so we've been trying long conventional monetary policy printing money to diminishing effect over time the other thing you can do is you can run budget deficits the government can try to chuck more demand into the economy constraint on that of course is that if you've been running large budget deficits already then the ability to keep doing that starts to get questioned over time and depending on how you look at the united states if you're a real pessimist you say that since around about the 1970s early 1980s um the united states has been congenitally incapable of running a fiscal surplus um that there's been a sort of a structural change in the US economy that means that revenues don't keep pace with spending but you keep getting budget deficit after budget deficit and that that means that there's a fiscal problem at the heart of the american economy and until you fix that you can't do much about fiscal policy that's kind of one view and a lot of people have it are not quite as pessimistic as that and if you look at that you'll see that from roughly 1998 to 2000 watts for about four years the US action ran quite sizable budget surpluses in fact you can go back to i think it's march 2001 and find a neat bit of testimony from Alan Greenspan to the US congress where he says that the real problem that the united states have is that the government's going to be running fiscal surpluses for too long and the federal government debt is going to disappear by the end of that decade and that the government's going to start buying of assets problem is not that the US can't run a bunch of surpluses it's being too effective in running budget surpluses so in other words US fiscal policy can adjust it can actually deliver fiscal surpluses and it did so up until about 2001 um so what went wrong well post 2001 we just we slumped back into those big deficits and basically you have serious big tax cuts um you know the second bush administration actually inherits a fairly large i think a couple hundred billion dollar fiscal surplus from the flinted administration but you get 2001 and 2003 large tax cuts two wars um which are bought mostly on credit so without trying to raise the revenue to do them and then a major financial crisis which involves things like tarp and bailouts and then the usual standard effects of recessions on budget deficits revenues go down spending goes up so you get a series of shocks and policy choices that basically drive this explosion in the budget deficit so my optimistic if you like or more optimistic take on this story is yes you can sort of look at that long term and say there is a long term issue about matching revenues expenditures but it can be done it's been done in the past there's no reason to believe that it's going to be done in the future and that there are just there's a series of events and policies that put us where we are today and that those policies can presumably be changed or adjusted the illustration of this is this is from the congressional budget office that looks at us deficits going forward and depending on what policies you choose that the brown bars are against the baseline scenarios the light blue is what happens if you maintain tax cuts in place basically if you strip those out if you take away some of those revenue cuts or do something if you use something on the revenue side then what looks on the baseline like this kind of quite scary us deficit profile suddenly starts looking more manageable so you can do that the challenge of course is short term how do you raise revenues or cut spending when you're still stuck in that nasty trying to recover from a recession environment and this gives you those sort of the conventional policy response it will give you the United States from outside the United States and people at the IMF which is the sort of the Augustinian approach to economic policy give me chase but not yet make me fiscal responsible but not yet do it down the track second constraint on all of this is what's happening to your debt policy if you run a very large budget deficits over time your deficits go up and we're now basically 2010 we have the highest level of debt gross federal government debt since the end of the second world war that gives you a new set of vulnerabilities and it gives you things like standard was raining down rates it also means something different interesting for around in strategic consequence which is a light blanched what us is increasingly dependent on the kindness of strangers back in 1960 about five percent of this debt was owned foreigners as of this year it's something like 50 percent of this debt of the public is owned foreigners of that three quarters of its own foreign governments and government and governmental institutions and about one five dollars loads over to China we might come back to any questions about what if anything that goes to where to constrain us policy bond market doesn't care as I said standard was that great in the US bond market's completely relaxed about process in fact your bond market's happy to give us government almost free money so there's no if you like market constraints short-term on your on the US debt burden on the other hand if you ask the IMF quote from the last IMF article four the US federal finances are an unsustainable trajectory basically on even on US official budget estimates by the end of 2030 US debt to GDP is about 90% net debt in public hands is about 90% IMF thinks it's going to be 95% by the end of this decade heading rapidly for 100 and then exploding onwards and onwards after that well fundamentally because getting old was expensive there's a difference between those short-term pressures and policy hits which I think explained the current deficit which I think are amenable to one set of policy adjustments and the media to longer-term strains which basically associated with an older population that's spending more and more on healthcare the two top lines there if you look at spending in the absence of aging and cost growth cost growth basically associated with healthcare costs fiscal problem is not so bad stick those in it starts to look scary the good news is you can fix this again with reasonably straightforward policy changes for example deal with effective aging increase retirement ages change the indexation social security pensions from wages to inflation or even modest tax increases vat introducing vat or a sales tax or end of the credit card tax you can raise you know revenue that and cover cover off this stuff it's stuff that you can do whether the whether the politics can deliver it or not because I'm blowing my climate so I just quickly talk about two other challenges which are not so much strategic debate which I think are interesting again feeling back to that overall question about the structure of the the governance issue and I guess the hyper partisanship of US policy at the moment political debate at the moment once just what's happened to us in equality and this is the the share of income of the top 10% of the US population basically inequality in the United States today is back to where it was in the war in 1920s you've seen a big shift in income distribution in the US what's behind that all sorts of reasons people argue about tax rates they argue about unionization and the decline they argue about different sorts of government policies it seems to me that a big driver is just what's happening in labor markets globally which is a squeezing in rich countries at the middle part of the labor market distribution and a rise in either end a low end in the high end take that transfer it through into economic policy and its income distribution when you get those kind of skewed income effects in the US why should we care a couple of reasons one is that the US is now pretty in the top of the wrong OECD league tables only turkey and mexico have higher rates of poverty and a bigger gap between rich and poor that might be okay because countries in the sense maybe willing to trade off higher inequality or bigger levels of poverty assuming you can not set out with higher levels of social mobility that's kind of what's being American argument if you churn if your population churns quite rapidly then if you've got a chance of being rich even if your parents weren't you can kind of live with that what's striking with that now in the United States is that not only do you have a much higher level of income inequality than the rest of the OECD you're starting to have a much lower level of social mobility than the rest of the OECD too so in other words if your parents are poor you're much more likely to be poor if your parents are rich you're much more likely to be rich that gives you that gives you an interesting again potentially political policy challenge final point if all Americans haven't been on average haven't been doing too well and the US census just told us that the average median household income in the United States this year is about set or sorry last year was about the same as it was in 1996 so yes it's already had its own last decade and then some one sector of course has done very well which is a sector that I used to work in for a while investment banking despite it being the the center of the crisis it's been very it hasn't done too badly and one key one key question going forward is have things like what Frank prevent it but only going to prevent is having a re a rerun of the financial crisis that we just had I'm skeptical about whether that's going to be the case so in other words you have one big question for me about US economic quality challenges going forward is what happens when we get the next major financial accidents well by and train economic year what I got from that was that there are some problems for in particular two more significant than others governance been the biggest one but things perhaps aren't that bad in the longer term however someone else owns a lot of this other money that the US owes so what does that mean focusing inwards on the governance trying to address the problems that mark is outlined well to consider it within the Asia Pacific strategic policy sense Tom's now going to address us and give us his thoughts well first off thanks thanks for inviting me here as someone who during my last stint in government tried to launch something very much like the national security college for the United States and and failed I've been following from a distance your your progress here and it's it's great to actually be able to to talk to you if you if you came here tonight thinking you were going to hear a debate I think you're going to be sorely disappointed because I mark and I basically agree and and among other things I think we agree on the fact that while there are you know the there are some economic some some some reasons to be pessimistic economically a lot of I think what we're seeing in the United States today reflects perceptions and sort of the way we're feeling about ourselves as much as it does the economic economic fundamentals but perceptions matter and politics matters politics rules as far as strategy is concerned so what I want to do is talk a little bit about the strategic consequences of of the economic situation strategy is all about bringing ends and means into balance that is it's all about achieving your aims given constrained resources and in fact it is axiomatic that states whether it's the united states or any other state that states faced constrained resources in trying to pursue their aims and certainly for the united states the political reality is that we will face increasingly constrained resources for defense and national security I emphasize political reality because defense spending is neither the cause of nor the solution to us economic problems you know defense spending has made a contribution to to the current economic situation on the other hand defense spending as I as I total up and try to evaluate the things that government spend money on and their their ability to stimulate the economy defense spending is towards the top of my list of government expenditures that actually stimulate the economy politically however as I say it's political reality politically however defense and national security spending is part of the discussion so what I'd like to do in the in the in the brief time that I have is first off talk about us aims and objectives us commitments particularly when it comes to Asia talk about resources and then talk about options for balancing commitments and and resources and I'll say up front that that these that these options are mainly theoretical that is that the the real range of choice for the united states today is actually fairly fairly constrained but I think actually constrained in a way that hopefully should should be heartening to to australians and to our allies and friends in the asia pacific region I'll get to that in a moment but let's let's talk about us objectives the united states I'd say as a government generally does a poor job of of outlining and clear declarative english sentences what our objectives and what our interests and what our commitments are fortunately I think the united states has a fairly consistent pattern of behavior going back in some cases to world war two in in other cases going back a century really there are five interests that that the united states has pursued in in in asia over over that time period first most basic responsibility of any government is protecting territory and so for the united states protecting us territory that includes not only the united the continental united states but also includes our our territory in the western pacific second defending allies australia japan south korea also our commitments to partners or quasi allies such as such as taiwan third protecting the commons protecting the free flow of goods technology resources enforcing freedom of navigation and and and so forth fourth preventing the emergence of of a hegemon on the eurasian continent the united states has repeatedly gone to war over the past century when it appeared that one country and was was becoming powerful and a threat to to world order and finally promoting the common good in terms of relieving suffering responding to disasters and so forth i would say these five objectives really represent a consensus a broad consensus across administrations the consensus may break down over say how much to allocate to promoting the common good and humanitarian concerns relative to other things it may break down as to well what you know what exactly a threat to world order would look like but on other areas certainly protecting us territory protect defending allies protecting commons there is there is a consensus and i think that's something that's good i think it's something that should be reassuring uh to our friends and allies in in asia but it also not come back to this minute it also means that there's not a lot of leeway there's not a lot of wiggle room when it comes to reducing us commitments we'll come back to that so the first variable has to do with our our commitments and our our aims the second variable has to do with resources the means that we have to to protect those interests every us administration faces the challenge of balancing resources against against commitments it's been institutionalized since the since the late 1990s in a process that congress demands the the administration carry out a quadrennial defense review uh most recent of which was was in 2010 the first of which was in 1997 every four years congress demands that the administration look ahead try to try to articulate its strategy and to try to figure out the resources that are needed to meet that strategy so the 2010 quadrennial defense review is the most recent attempt by the obama administration to balance aims against against means and as if that weren't enough this time around congress asked for a an independent panel quadrennial defense review independent panel to provide an outside look at at this at at the situation as well i had the the good fortune to service staff director for that for that panel what i would say is neither the administration's effort to to balance ends and means nor the independent congressional look contemplated the economic situation or the political climate that we face now both of those those efforts assumed continued growth in in defense spending and neither planned for the downward pressure that we now see on on defense now i will say uh and and i will i'll echo mark i think it's an extremely good thing uh that the u.s government is getting its economic house in order and however however untidy it may seem overseas because i was one of these people that and i was actually in australia as in the lead up to the uh the the deal um i was one of those people that thought that there was there's close to zero chance of the u.s defaulting what would you're seeing is the democratic process playing out in a very messy and public way so i think frankly that it's a it's a good thing that we are where we are today in terms of the political uh discussion in the united states because the united states government is now in a position to actually tackle some of the some of the policy issues that that mark outlined whereas that was not the case a year ago and it was not the case two years ago and if done well again with good policy choices um the u.s can will will wind up in a much stronger position back to all things being being relative the united states has a much better opportunity to put itself in a strong position than many other developed economies that are that are facing some some dire situations themselves okay but we do still face uh the the the prospect of of cutbacks in national security spending now there are there are really three theoretical options to to balance the books if you will between commitments and resources and i want to walk through them one by one first is to to reduce commitments right theoretically you could reduce commitments to match your resources second you could increase your resources to match your commitments um the third is essentially to tolerate a growing gap between commitments and resources that is to accept greater risk well let me let me walk through those uh each uh each for a couple minutes there certainly is a school of thought i would say it's a school of thought that's more more pronounced in academia that it is in government that the u.s should reduce its commitments and certainly um you know there are those who call for the united states to move to what's euphemistically called an offshore balancing strategy reduce our commitments our allies do more less less presence uh and and so forth so forth um i think it's a it's a uh it's a uh intriguing academic argument but i think it is not a realistic uh it's not a realistic option let's think back just a second to the to the menu of of of objectives that the united states has historically pursued protecting us territory i cannot envision this administration or any successor administration um not putting that as number one uh defending our allies similarly i cannot envision a u.s administration um being willing to abrogate our treaty treaty commitment to to our allies uh protecting the commons um i think that is that is a whole realm of activity that should be viewed not as a cost frankly but as a benefit in other words the united states and our allies and everybody else including not our allies benefit from the free flow of goods and information across the global comments it's what has made globalization possible uh so i think talking about reducing commitments is something that is easier said than done um increasing resources uh increasing national security spending i i happen to be one of these people that think that in in some areas uh the united states actually should do some more spending in when it comes to national security in some particular areas but i will admit that given the current political climate that is probably that is probably unrealistic so i think where we're going to go um is uh to accept greater risk um that is to to tolerate a growing gap between our commitments and our resources now i again i would not say that that's uh that that's desirable um but i think it is it is the most likely outcome well what do i when i say accept greater risk what do i mean what i what i mean is um by by drawing down some of our capabilities we're gonna have to accept greater risk when it comes to deterring aggression and also to reassuring allies greater risk in wartime translates into more lives lost and worse that go on for for longer now many of the things that we would normally do to reduce risk um are unattractive either unattractive politically uh or or expensive we could invest in in new capabilities for example including follow-on to some of the capabilities we now have that have actually saved lots of lives but we probably won't won't uh won't be able to do that um other ways that we've reduced risk in the past is is is through burden sharing i think for a whole bunch of reasons and individual reasons with with individual allies that's likely to uh to be to be problematic i would say though that i think one of one of the the best ways to to reduce risk is is through our alliances i think the united states is is fortunate uh for the the portfolio of alliances that we have particularly in in in asia and i think if we are smart and when i say we i mean the united states i mean our allies and us together i think we can we can do things that reduce risk and also deliver increasing increasing capabilities we can talk about that more in in in question and answer if you'd like um but what i really you know the things that concern me the most are things over the near term i'll say just the next five to ten years i think the challenge there is to uh keep robust keep us engaged in the region robustly uh to keep us closely tied in with our allies and to compete as we get our economic house in order in the far term if uh we tackle our our debt the u.s i think will be in an extremely strong position um if you look at demographics i think demography plays heavily to to the united states um and as mark said i think for every for every problem one can find in the u.s economy one can find two or three in many of the other other economies i'm one of these people that believes um you know you're you're you're generally uh on a firm a firm foundation if you bet with the market as opposed against the market and i think betting with the market in the long term is is betting with the united states but right now i think the concern is over the next five to ten years and i hope it's closer to five or ten uh getting through this uh this rough spot so hopefully i've said enough things that are provocative and so did mark that we can have a we can have a good a good discussion thank you very much for your attention hello ladies and gentlemen um due to both our speakers are sticking to the time requested we now have some 20 minutes to engage in a discussion and kill note could i ask that if you have a question you wait until the microphone uh that either ash or debbie will proffer gets to you because as i said earlier we are recording this for vodkast and podcast and we do want to hear what you have to say could i ask that you identify yourself identify if you have any particular affiliation uh that you care to share with us and also class you actually ask a question there are the venues where we can make articulatable statements or offer an extended opinion so with that in mind the floor is open and mark and tom will fill out your questions solid my name is david tucker department of defense this one is actually for mark probably i was interested in your treaties and why the market up why the economy isn't responding in the way it used to be um and i've also been hearing about the fact that a lot of wealth particularly in recent times is built around derivative products aren't actually backed by proper production um is that in your mind going to have some factor in is that going to factor in making harder for the us to do the productive face to redo the strength in their economy um it's kind of a there's a two part to that i mean one is this issue about how much of your economy is in production and there's kind of a long running debate about particularly rich developed economies about is it scary that we have we're so services driven nowadays and should we worry about that um and my program studies probably we shouldn't um that that's kind of how development plays out that there's sort of a stand you know reasonably standard path economic development you start off in agriculture you shouldn't have agriculture in the server into industry and then you go from industry to services in a relative in terms of a relative share of the economy and i think that's kind of a natural process we shouldn't worry too much about it however i think there's a a subset is a second part of the question which is which does worry me a little bit which is have certain economies us being one the uk possibly being another some other rich economies because of the way they've regulated and in effect implicitly subsidize the financial sector grown financial sectors that are too big and that have distorted if you like the structure of their economies and there i think there's at least some evidence that that's happened um and that's problematic but it has distorted the economy that it's had it's had some benefits but it's had some big costs you know not least of which has been the major crisis that we've just had so at a big picture level i'm kind of reasonably comfortable with structural change that happens i think that's how economies work but i think you can't find individual things to worry about about within the structures of some of those economies and one of the things they worry about is that financial sector share and you some as it not all that's bad but there are parts of it they're worried gentlemen in front uh matthew mollarine matthew mollarine no affiliation um my question goes to tom and you'll have to excuse me because i plead my ignorance in this area but both in australia and the us the government seems to pay a lot of attention or has the aim of continuously increasing defense spending yet if we go all the way back to say the art of war it mentions that the military is the tool of the state surely there are other tools as well and do you see it i mean you're arguing the case for increased spending is there not also an over reliance on one aspect of governance well part of the reason that you know that defense spending has been going up is that you know defense the military has been progressively taking on more and more tasks that are traditionally not standard military tasks and you know i have the pleasure of working for a for a defense secretary who was an ardent supporter of non defense national security spending uh he you know he testified repeatedly secretary gates testified repeatedly in favor of greater budgets for larger budgets for the state department and us a id um that hasn't happened and it hasn't happened uh for i guess an understandable political reasons uh which is for whatever whatever uh challenges the us defense department has with its committees in congress it's a much better relationship than state department and us a id have with their committees in congress um again for for understandable domestic political reasons uh you know defense translates into jobs state and a id translated into jobs so when um the state department formed the you know the um uh basically set up a scrs for for uh crisis stability stability operations and went to congress first time for for with its budget request it got slash 95 percent now i don't think that's right but again it is political reality and the political reality is you've had several secretaries of state who um uh both secretary rise and now secretary clinton who've been ardent advocates for for greater greater funding for non defense national security spending yet secretary gates who is an ardent ardent advocate in part because you know he was hoping that that that the military could could refocus more on purely military tasks that hasn't happened um and so as a result you know defense is bearing is bearing more of those let's say traditionally non defense costs i think one of the the unfortunate byproducts of the drawdown in defense spending is those you know those those expenditures are going to get cut as as the military gets back to who had back to basics so the whole of government response and whole of government approaches i think you're you're not going to find anybody arguing against it it makes perfect perfect sense but when you put it into a political context it's been something that's been exceedingly difficult to to actually implement and i won't even take the next step which is to talk about the the organizational challenges and the organizational cultural challenges of implementing some of those changes within those those different federal departments and agencies it's a different matter but just when it comes to funding uh easier said than done that question reminds me of a powerful statistic the secretary gates used to say that there were actually more members in bans in the u.s. military than they were foreign service officers which is uh makes you pause for thought gentlemen up the back please uh john gary uh defense intelligence i think my question is primarily to tom but uh mark may want to comment as well um given the ideological divide that exists within u.s. politics which i think is far more significant the ideological divide we have within australia what what what makes you so confident tom that the u.s. can sort of political differences out and not go to the crisis to the literally to the edge of crisis each time a matter such as the recent uh lifting of the deficit comes to a head in particular given the concerns that i heard for two years the united states about the growth in entitlement spending which mark we didn't deal with which is largely listed as the number one concern about where was the money going to come from although i think your last graph did start point to that what gives you confidence instead of the boiling frox syndrome where that we only get a crisis we only get a political solution when we get to a crisis point that we won't actually find ourselves with the water boiling over our heads before we realize as a political institution that the crisis has already passed well i guess the you know the the optimism if you want to call it that comes comes from i think that there is a realization that we are at a crisis point in the united states i mean you know uh i'll i'll i'll trust politicians to be politicians they pay attention to their approval ratings as as much as anybody uh and when you have congressional approval ratings down a at 15 percent and where you have a presidential approval rating that's right now at 41 percent uh heading down there's there's every motivation to uh you know to do something about it you know the the underlying challenge is i mean you said ideology i mean i'll okay i'll buy into that but you know the american system of government really is meant to to not a lot not permit large changes unless there's a consensus backing those changes there is not a consensus right now in in american politics so our system is working the way it was designed to work um but i do think you know there we are we are at a point where there is a realization that something needs to be done and um you know uh you know congress um well uh you know both both the president and uh and and his uh you know his his uh whoever his eventual opponent is in the presidential election will will both be running against congress so um and congressmen and women will have to run for their seats too so i that's that's why i say i mean my my sense even you know last summer was that a lot of this was was political theater and it was political theater that was aimed at domestic constituencies was was broadcast across across the world um and it was you know both sides bargained hard and they bargained to the end and they got to sort of the best uh the best uh uh position that they could going right up to the brink but again in a larger in a larger span of history we are now having discussions in the united states about issues that were that were not discussed earlier it was the boiling frog earlier and now the you know now that uh i think we're we're beyond that but i'd be interested in you know in mark's uh mark's perspective from uh from sydney can i take the economist away from his charts so you basically if you look at that depth profile you've got two two stages of the problem you've got the first one which was where we're currently at which is you know crisis recession past policies and that's part part of the problem then as i said you've got the next one which is the kind of getting old and having expensive health care um and at present you're there is no there is no policy that deals with that so when you look at all of those debt projections you know like the imf one as i say even the conservative um us presidential budget assessments basically these things just go on with an upward forever and so they're clearly unsustainable and as we know it's cliche economics something that's unsustainable will come to an end you can't do it so the question is how you fix it and you did either way you have a debt price so you do it by policy um my optimistic part of this is that i don't think the policies certainly this was social security by aren't that hard as i say you can tweak retirement ages you can change the way you index benefits you can even do it if you want to do tax increases i mean they wouldn't actually be that large to get social security back on track go to sales tax or something so you know my optimistic part of this is that the policy side of it you can do it and it's not that tough um my big unknown and i confess it is a completely unknown to me because i'm not a us political analyst is whether the political system will deliver it and i don't know whether it will is my his mind on a stanza i mean people have been talking about unsustainable debt trajectories in the united states apart from that brief blip when we have the four years of surplus during the clinton administration since i think 1974 or 73 so we knew that you know people know that this problem was coming for kind of a long time and none of those policies have yet been put in place so so far there's not a lot of sliders coming we know what they are we know that they're actually not that hard i'm i'm agnostic about how we're doing i i i guess in the end if you push me i'm going to think that yes they'll get delivered because in the end you know there was there was a lot of worried pre you know through the 80s for example by an unsustainable us physical position and when it starts to get really really bad we have three ways of tax increases uh during the first you know the elder bush presidency and then two under clinton and basically us fiscal finances will put back on an even keel and then that they sit down again it can be done whether it will be i mean the political scientists might be better placed once than the economists i think david thanks mark david connor from national security college and my question actually follows on from john's you both talked about the importance of politics to this one of we need to have a bit of a look at the influence of politics on america's strategic posture um if i can characterize really simply i was and very simplistically it seems like the democrats are more interested in what happens at home or what happens in the near region the republicans tend to be a little more global i'm wondering what impact the tea party might have on republican views and whether they might change that balance um i'll i'll i'll take a slightly different twist on it i mean i think i think you you have a basically an internationalist consensus across most of the american political spectrum except for the far left and the and and the far right where actually they actually it's one area where they actually agree is tend to have a more narrow kind of conception of of american uh of american power um i think you know um i'll just say a lot of the congressional freshman uh many who you know many of whom sort of are kind of aligned with the tea party i don't i actually don't think that meant they are um anti internationalist i just don't think that they've fought a lot about um international affairs and they're the reason that they were elected to congress was to get the economic house in order so i i don't i don't think that that's really an isolationist bloc or anything like that i just don't i think that they're uh they're folks who just haven't haven't really thought you know thought seriously about about international affairs i think that's actually tends to be true about um freshman in congress as a general rule uh and and you know and they get their concerns really are with the the economics so i think there's there's been a marginal uptick in uh you know in in in sort of isolation assessment but it's one of these things that you know again maybe i'll be proven proven wrong and you know ron paul will be the next president of the united states i don't think that's going to happen though uh and um you know that i think this this isolationist turn of the united states is something that's uh perennially people fret about but it just tends tends not to uh to to come about um and similarly i would say if you look at presidents i think it's very rare to see a president take office with a strong desire for an international agenda i think presidents by and large come to office wanting to be domestic presidents and then reality of one's sort of other swats them upside the head and they wind up uh you know uh being being concerned about international politics that that's just the way it goes again uh george hw bush was probably a an outlier there because of his because of his background but but by and large presidents are elected on a domestic agenda and they come come to office trying to carry out that agenda they can't help but be be uh deeply involved in international affairs but that's generally not the kind of the first part of general backlash uh George Paget um i don't have any on the one hand and maintaining um some sort of geopolitical uh stability in the in the region on the other i mean i would imagine that in post september 11 there's been more concern in amongst the u.s populace in terms of the non-state actors um by comparison with the geopolitical situation in the uh in the pacific and i wonder whether those competing aims are going to in some way affect the uh the the maintenance of u.s power in the pacific you know that's that's an excellent question i think one of the um one of the the biggest challenges that that at the defense department in particular phases is balancing um it's its resources and its attention um against these very different types of types of challenges um as you say on the one hand dealing with say al-qaeda and its associated movements um and on the other hand uh dealing with uh what i would call regional roads such as such as north korea with with nuclear weapons and then and then dealing with the challenge of of growing chinese chinese power um it's it's a it's a it's on the one hand and maintaining um some sort of um geopolitical uh stability in the in the region on the other i mean i would imagine that in post september 11 there's been more concern in amongst the u.s populace in terms of the non-state actors um by comparison with the geopolitical situation in the uh in the pacific and i wonder whether those competing aims are going to in some way affect the uh the the maintenance of uh u.s power in the pacific you know that's that's an excellent question i think one of the um one of the the biggest challenges that that at the defense department in particular phases is balancing um it's its resources and its attention um against these very different types of types of challenges um as you say on the one hand dealing with say al-qaeda and its associated movements um and on the other hand uh dealing with uh what i would call regional roads uh such as uh such as north korea with with nuclear weapons and then and then dealing with the challenge of of growing chinese chinese power um it's it's a it's a it's a particularly tricky balance and has been a particularly tricky balance because on the one hand um you've had american surface men and women in combat uh taking casualties uh in iraq and afghanistan balanced against uh arguably a you know some more consequential uh but less uh tangible um continuancies in the future and you know i think the the uh the the balance in recent years has been you know you know winning the wars that we're that we're fighting and that's hard to deny that as a priority that having been said as the u.s draws down in iraq and afghanistan i think you know you you see growing attention uh to to uh particularly uh concerns in in asian the pacific that having been said though if you actually look at what the u.s has done in terms of our force posture even even as we've been fighting in iraq and afghanistan uh you have seen uh an increasing presence in asian the pacific mean we now have more than half of our submarine force based in the pacific for example uh and when there's when there's talks about drawing down overseas presence um it generally tends to involve areas outside of asia asia and the pacific so i i think you know that there'll there'll be that there will be that tension but i think more and more and i think this is this has been something that's been consistent certainly since actually the 2001 quranial defense review is is the increasing importance of of of asia and the pacific um so i don't necessarily think that i think it'd be too strong to say that it'll be insulated or our force posture will be insulated from any cuts but i certainly think that that uh i would expect fewer cuts in in asia or in capabilities pertaining to asia than perhaps uh in in other areas and other other capability areas we have time for one more question and the privilege goes to the lady on my right quick one if you mind me no problem this is just a good one to follow on from the last i'm just wondering we heard a bit about the foreign death and reliance on china from the first speech so i was wondering in terms from tom how much is that of a growing concern how much is discussion is happening in sort of the upper military echelons as to what's happening with reliance on china especially with the talk of rise of china and the conflict between the us and china in the future um i well work i think i think that the the issue of of indebtedness is um you know is something that's that's widely discussed and i think the and i think mark put it into into a portion i mean the vast majority of u.s. debt is not held by by china it's held and so the the the concern i think says as much about the u.s. china relationship as it does indebtedness uh we don't worry about that portion of the debt that's held by britain or japan um the netherlands um and and you know and and it becomes a topic particularly when you know when chinese government raises it but i would say it is a two-way it's a two-way street right it's it's and it's the old economists uh anecdote about you know when when uh you know when i o u uh ten dollars you know there's leverage goes one way when i owe you a million dollars the leverage actually goes in the other way um and so i think you know history the historian in me says that you know economics politics trumps economics um and sorry i'm going to have to take a view from the dismal science but in other words you know that that the political relationship really really will will dominate um and that's both good and bad uh you know economic interdependence didn't prevent world war one for example britain and and germany were highly economically interdependent they still they still went to war with one another so there's the downside of it but on the other hand i think that you know this this idea of sort of an economic hostage taking for the same reason doesn't just doesn't wind up working and so um it's something that gets talked about i i don't see it as as being determinative but again i'll turn back to mark i i could be wrong 30 seconds in the economist no pressure it depends uh uk and sue is this kind of the one that everybody will that brings up as the example of if you have a dependent economic relationship i mean the united states was able to pull the plug on you know the last flurry of british post-war imperialism through financial might basically and there's a sort of a risk you know periodically people speculate whether the chinese would be able to do the same um they it's true that they certainly don't own anywhere near a majority of the fraction they own an large in a fraction that if they took the nuclear option decided dump it all on the market it would have hugely disruptive financial consequences it would also have huge disruptive consequences for china itself though so the only scenarios in which you see that happening are the scenarios where you know the relationships already in such terrible trouble it's this kind this is kind of collateral i think it complicates policymaking because that's a scenario that you have to think about but i'm not sure there's more than that i think before you push into that though i think it does have this kind of interesting implications it seems to me that if you think about soft power for example um when you're looking at the world if you're another economy are you more likely to respect the country that's in debt and has to borrow from other countries or do you respect or you more likely respect the country that's in charge of the money and it's lending it out i think that has some consequences i don't think they're necessarily huge but i think it kind of matters at the margin i mean you know the more the more financially secure you are i think that does feed through to parry it's not a it's another bit of economic giants not an all else equal scenario there are a whole sort of other stuff in here too but it i think i think there are consequences i think it does matter it maybe it doesn't matter as much as the the real pessimists put out there that you know trying to just have to flick its fingers and the US will have to run i mean i don't buy that at all but it's another complication that if you're at US strategic think i think you have to factor in that here's another lever that the Beijing can use to influence the united states thank you gentlemen for demonstration of the two lawyer syndrome a bit of calm a bit of calm mate ladies and gentlemen before i close i'll ask our deputy director david connery dr david connery to offer a vote of thanks to our two speakers mark thank you very much and it would have been easy tonight to stop title this the the dismal science of economics represented by mark meets the dismal art of strategy represented so ably by tom except it would be hard to characterize anything they said tonight as being dismal such upbeat interesting and precise uh presentations but before i get to thanking you more formally and fully um national security quality is really great to uh or really pleased to uh to see you come along and it's great to have you here again for many of you have started to recognize the number of faces for these seminars our next seminar will be on the 18th of october where we'll look at nuclear nuclear non-proliferation and regional security and professor ramesh thaker and dr rob floyd the director general of the australian safeguards and non-proliferation office will be presenting that seminar for us on some other advertisements uh applications now open for our graduate studies program uh for entry into 2012 we've really shaped this program slightly and i'd encourage anyone who's interested to have a look at the website uh to uh come up to date with what we're doing but again we're anticipating this week another exciting year in 2012 also we're hoping to be able to make a very exciting announcement about our phd program shortly so if you're thinking at all about phd studies here at the national security college watch the website but back to our speakers uh tom you're a great friend of australia you're a man who has a significant knowledge of what we do and it's great to have you uh in america who's able to explain australia australia situation so well equally it's great to have you come here uh to talk about america and that just for you tell by the intensity of the questions and the number of them uh people are very very interested in this particular topic uh for mark too great to welcome him back to the uh college we can we always get mark to come to talk to the college whenever we can and tonight you've uh you've certainly helped us to understand those key points in mark you put them forward so crisply i thank you both for that uh can i also congratulate mark and ash for uh putting the seminar together and also for the assistance they receive from uh from debbie rene and also sharon but lastly can i thank you for coming i look forward to seeing you again next time and can i ask you to once again thank our speakers for what was a really entertaining seminar