unless we arrest and turnaround

the decline. this virtually guarantees that we would end up with a hollow force. a force unable to conduct its training, a force unable to maintain its equipment, and a force unable to fight. a force also unable to readily recover from the ravages of over a decade of war. my content today is not to point the finger, for i don't have enough fingers to point, nor to affix blame for there's plenty of that to go round. might urgent appeal is to get to the higher ground, and to do so sooner rather than later together. there will come a time when we try to kick the can, but we will find that the can will not budge. resolving this crisis will be a process that needs to start now. engaging it with determination will assure the prosperity of our children and our grandchildren. doing nothing will compromise

it. since i retired almost one year ago i visited many parts of our great country. i've not met one american citizen who is not extremely worried and who does not want this problem of our growing debt solved in a mature and foresight full way. i worry that the time to do so is actually shorter than we realize. we are steadily being drained of our great economic strength while our national security strength is being zapped as well. lastly, i worry that my generation, the boomers of the vietnam era, will for the first time in american history leave our precious country to those who follow us in worse shape than when we received it. this is a legacy for which we should all hang our heads. we are bigger and better than this. we are americans, and nothing is impossible. let me also just pick up on one

point that senator nunn mentioned in his opening comments, with respect to andrew's quotes. and that is the cost per soldier, sailor, airman and marine of our force, which has doubled to tripled depending on which figure you believe. this is been something that we have all participated in and strongly endorse since the mid '90s. and in doing that we invested in our people. and it is this actually less than 1%, a different one person comment. it is less than 1% who have borne the burdens of these last two wars, who have been too many cases paid the ultimate price by over 7000 or so, tens of thousands who have been wounded physically, visibly and invisibly. and hundreds of thousands who

bear other wounds of these wars. to the tune of over 2 million who have served in iraq and afghanistan, and over 2 million today who are making us proud. so as we take up this debate in terms of our future, and in particular with respect to defense, i've said many times, the thing we need to get right to ensure our military is in good shape for the future is make sure we get it right for our people and their families. that's not just a cost or a budget item. that is the strength of who we are as a military. and as a military, having fought two wars in this all-volunteer force for the first time, that we have a pretty healthy discussion about what that means coming out of these wars, even as we have 70,000 still exposed in afghanistan today. what that means for us as a

country, and what that means for us as a military as we look forward to the security requirements which seem to always be there, that will challenge us, both here at home as well as globally around the world. thank you again for the opportunity to speak to these critical issues. they touch the core of our future as a nation of greatness, and i believe that greatness can and must be sustained. and i also be grudgingly look forward to your questions. no, i'm kidding. thank you, sir. >> thank you very much, admiral mullen. [applause] >> for your powerful testimony and your continued service to our nation. i'm not informed as to whether secretary gates is available on satellite yet. can somebody inform me of that? not yet? okay.

the good and bad news is we can start asking you questions. [inaudible] [laughter] >> i'll just start with a question about very simple, what makes this unique? you've been through wars. you've been through career where we that the budget, defense budget going up and down after wars, as you've already observe. is there anything particularly unique about where we are right now, compared to previous periods of history? on the fiscal side. >> before i was chairman, i spent a lot of time in the navy in the money world so i grew up in that world intimately familiar with both the programming and the budget side of that. and right after the cole, just part of 9/11 i returned to the pentagon to be the navy's budget and program officer.

and part of what then vern clarke was the head of the navy was certainly counseling us on and what i focused on was the historic ups and downs of the defense budget and, in fact, if you go back and plot it to as early as 1935, you would see it goes up and down as a pretty steady pace over the course of 18, 19 years. through peace and war. so i sort as a budget officer, over 10 years ago, fully expected that we would tip the budget, the budget would tip over. what i didn't anticipate was that it would be at a time where the country was in such a fiscal crisis. so it makes it much more difficult from the defense standpoint to basically plan for the future. chairman, you know we typically do this about five years out, and it is historically it's a pretty good plan. oftentimes over programs, sometimes more hopeful in

certain areas but it's a long-term plan that looks at capabilities that we need. that is not done so in other portions of our government, and that just speaks to the degree of difficulty that other portions of our government will have if this, if this budget reduction happens as it appears to be slated to in january. so i think more than anything else, senator nunn, it's the intensity of this, the inability to plan for it. i'm enough of a budget guy to know that budget people love just to go to numbers. and so from a macro standpoint we are really focused on doing that without any thought or strategy, as soon as january comes around. i'm not as hopeful as others that we won't drive off this cliff. i'm worried sick about it, quite frankly.

and i certainly hope we don't. it already, and this goes to another quote from andrew, already the comptrollers in our government are pulling back. already there are plans, wherenever this axe may fall, to not spend money this year as we get to the end of fiscal 12 and get into 13. so probably more than anything else i think it would just be the intensity of it, and at a time when we have thought, and fought in iraq and come home and are still fighting in afghanistan. so from my perspective it's somewhat unique. >> thank you very much, admiral mullen. i've got good news. the secretary of defense is no longer awol. so he is coming, ready to come in on satellite so we'll come back to the question for both secretary gates as well as for admiral mullen. let me introduce secretary gates briefly and then we'll hear from

him, and this'll be a very abbreviated introduction that could go longtime talk about his record as well as of course admirable its record. on june 30, secretary gates retired after serving four and a years as secretary of defense under president george w. bush, as was president barack obama. doctor gates has served eight presidents and a number of leadership roles including director of central intelligence agency and deputy, national security advisor. doctor gates was sworn in as the 22nd secretary of defense. before beaming secretary of defense, dr. gates was the president of texas a&m university, the nation's seventh largest university. prior to assuming the texas a&m presidency, bob served as dean of the george bush school from 99-2001. dr. gates has been awarded the national security medal, the president citizens medal and has twice received the national

intelligence distinguished service medal and is three times received cia's highest award, the distinguished intelligence medal. on his last day in office, president obama awarded dr. gates the presidential medal of freedom, america's highest civilian honor. suffice it to say bob is the most honorable and effective public servants i have known, secretary gates, we are deeply indebted to you for being here and i'm told that you're about to appear on our screen. and admiral mullen has made a statement and we will have a few questions for both of you at the conclusion of yours. well -- [inaudible] [laughter]

>> now we see you, bob. we got the audio? >> i don't know whether you can hear me or not. can you hear me, secretary gates? okay, we're not getting volume. >> you can read his lips.

>> senator nunn, i hope that you can hear -- >> we are hearing you barely. let's see if we can turn up the volume now. >> a few technical problems out here on the western frontier. but i will proceed. >> okay, i think we are hearing you now. if you will speak a little bit louder so this volume can be turned up. >> am i ready to go? [inaudible] >> they have you on the screen. >> are they waiting for me to speak? all right. well, thank you for this opportunity to address the topic of immense importance for the

future of this country, and thanks also for the opportunity to be back in harness with my good friend and colleague, mike mullen. first, i'd like to share my personal perspective on how the american political system reached the current impasse, and second, i'd like to address the role of defense spending in the context of the countries wider fiscal troubles. no doubt the united states faces a serious fiscal predicament that could turn into a crisis of credit, confidence, of our position in the world if not addressed. at some point financial insolvency at home will turn into strategic insolvency abroad. we are not there yet, but the longer the united states government delays in getting with countries long-term fiscal problems, will only make dealing with them later more painful and potentially more risky in terms of national security. we will get a preview of how damaging this scenario could be at the end of december when hundreds of billions of dollars in mindless across the board

spending cuts will take effect for 2013. adding up to more than $1.2 trillion in reduced discretionary spending over the next decade. half of that coming from defense. the result would be grave damage to the u.s. military, homeland security, aviation safety, and virtually all other essential government operations. according to most experts, taking so much money out of the u.s. economy so soon and without any strategy, rationality, or prioritization would likely send the country back into recession, thus only worse earning the government's fiscal situation. in order to maintain strong institutions of national defense and international influence, the united states must get its government finances in order. doing so requires our country's political class to show leadership and make decisions

that may be unpopular in the short run, but will strengthen the country for the long haul. so far there appears to be little evidence that this is taking place. though american politics has always been a shrill and ugly business, going back to the founding fathers, as a result of several polarizing trends we have now lost the ability to execute even the most basic functions of government. much less solve the most difficult problems facing this country. there are a variety of reasons, some structural, some historical, some outside the control of government. first, the highly gerrymandered system of drawing congressional districts to create safe districts for both republican and democratic incumbents, leading most elected representatives being totally beholden to their parties most hard-core ideological base.

second, wave elections that sweep one party into power after another. each with ideological zeal and the ripeness of their agenda making it difficult to sustain policies and programs consistently over time. third, the decline of congressional power brokers, particularly the committee chairs, who might have been tough partisans but were also people who could make deals and enforce those agreements on their committees and their caucus. and fourth, a 24/7 digital media environment that provides a forum and wide dissemination for the most extreme vitriolic opinions, leading i believe to a coarsening and dumbing down of the national political dialogue. as a result of these and other polarizing factors, the moderate center, the foundation of our political system, is not holding.

moderation is now equated with lacking principles, compromise means selling out. so just at a time when this country needs bipartisan strategies they can and must be sustained through more than one presidency and more than one congress, to deal with their most serious long-term problems, most of the trends are pointing in the opposite direction. critical ideas and progress in our history often have come from thinkers and ideologues on both the left and the right. but the laws and policies that ultimately implemented the best of those ideas have come from the political center, usually as result of compromise. at a time when our country faces deep economic and other obstacles at home in the world that just keeps getting more complex and more dangerous, the inability of so many political leaders today, to step outside their ideological cocoons, or offend their most partisan supporters, has become a real threat to america's future. across the spectrum, too many of

our politicians seem more concerned with winning elections and scoring ideological points than with saving the country. my hope is that following the presidential election, whatever adults remain in the two political parties, will make the compromise as necessary to put this country back in order. doing so would remove the economic pull that hangs over the american economy at home, and american power and credibility overseas. now let me address the defense budget and what role it may play, or in my view, does not play. in addressing our country's fiscal challenges. as a starting point it's important to remember that defense expenditures are currently a lower share of our gross domestic product, than for most of the last 60 years. and a much lower percentage than during previous major wars. and lest anyone forgets, they're still at war going on in afghanistan.

consider that when president eisenhower warned of the military industrial complex in 1961, defense consume more than half of the federal budget. and a portion of the nation's economic output devoted to the military was about 9%. by comparison, the defense budget when i left the pentagon was $530 billion, a huge sum to be sure. yet that budget represented less than 15% of all federal spending, and equaled roughly 3.5% of gdp. a number that climbs to a little more than 4% when the war costs from afghanistan are included. seeing the bleak fiscal outlook ahead during my last years as defense secretary i sought to prepare the pentagon for the inevitable flattening and eventual decline of the defense budget. the first stage beginning in the spring of 2009 dealt with

procurement, and all told more than three defense modernization programs were canceled or capped. that if pursued to completion i was told could have cost the taxpayers $330 billion. the last budget i request, i submitted, in february of 2011 included nearly $80 billion in additional reductions to the five year defense program. than the budget control act signed later that year required nearly $490 billion more in defense cuts over a decade. so by around as i retired as secretary of defense in the summer of 2011, defense spending had already been cut by nearly $900 billion over the next 10 years. and that was before we have to deal with the nearly $600 billion in reduced defense spending authority that would result if sequestration takes place. in short, contrary to popular

concession, conception, the defense budget already has been cut, and substantially. what remains in our military modernization accounts are much-needed capabilities relating to air superiority and mobility, long range strike nuclear deterrence, maritime access, space and cyber warfare ground forces, intelligence, surveillance and reconnaissance, capabilities that our nation's leadership the absolute critical to the future. and while there's no equivalent of the former soviet union looming on the horizon, i do believe that threats america faces today and down the road are in many respects more dangerous for their complexity, variety, unpredictability, and likelihood. let me be clear. not every defense dollar is sacrosanct. one need only spend 10 minutes walking around the pentagon or

any major military headquarters to see excess and redundancy. that's why i initiated an effort in 2010 to bring $100 billion more in overhead efficiencies out of the department over four years. yet we should not fool ourselves a significant defense budget savings are possible. the kind that might put a dent in the annual federal deficit, without making substantial, and in the case of sequestration, very destructive cuts to the ability of our military to defend the united states and our vital interests around the world. consider also the wider fiscal picture. the defense budget may have to be on the table as a matter of political reality. but as a matter of simple math, it is not fundamentally the cause of the long-term debt problem. roughly two-thirds of all federal spending goes to entitlement. whose share of the budget is escalating rapidly given the changing demographics of the

u.s. population. reducing defense spending by, say, even 15 to 20% in the near term would reduce the current annual budget deficit by just one-tenth. the cuts on that scale would require dramatic reductions in the size, reduction, and overall, size, readiness, and overall capabilities of the u.s. military. and we need to be honest with the president, with the congress, with the american people and with ourselves about what those consequences are. that a smaller, less ready, less modernized military will be able to go fewer places and be able to do fewer things. and the risks to our men and women in uniform will only increase. if our elected officials and body politic conclude that they truly want a diminished role for the united states in the world,

then we can start paring back missions and ratcheting back the corresponding military investments and force structure. if future reductions cannot be avoided, they should be phased in slowly, methodically, and strategically. in a way that protects our core security interest, and does right by those in uniform. but the history of past defense drawdowns is not encouraging in this regard. we almost never get it right. because no matter how many times we say never again, particular kind of military operation, and america's adversaries will always have a vote, as will our future presidents. and if the history of the past century teaches us anything, it is that cutting defense too deeply, to quickly will lead ultimately to higher costs in blood and treasure later. since i entered government 45 years ago, i have shifted my views and changed my mind on a good many things as

circumstances, new information or logic dictated. but i've yet to see evidence that would dissuade me from this fundamental belief, that america does have a special position and set of responsibilities on this planet. this status provide enormous benefits for allies, partners, and others abroad to be sure. but in the final analysis greatest beneficiaries of american leadership in the world are the american people in terms are superiority, prosperity and our freedom. in closing, while my presentation today is no doubt sobering and at some point in dire, i still remain fundamentally optimistic about the future of this country. even though the united states faces enormous obstacles, most of them self-inflicted, we also

have the power and the means to overcome them, just as america has done in the past. think about the early years of the cold war in the late 1940s, an era in which politics was every bit as ugly and confrontational as this country has seen before or since. president harry truman was a loyal democrat and a tough partisan. in his 1940 acceptance speech at the democratic convention, truman referred to republicans as the quote common enemy who want to stick a knife in the backs of the poor. republicans called for truman's impeachment, or worse, on a regular basis. senator robert taft, a de facto republican leader in the senate said famously, the purpose of the opposition is to oppose, and he meant it. yet in the end it was that early, in the earlier hyper partisan environment, it was members of that opposition, republicans like senator vandenberg and representative richard nixon who, in the face of a war wary and skeptical american public, helped truman

pass the marshall plan to save western europe from soviet domination. republicans support was also critical to the passage of aid to greece, turkey, which first put the strategy of containment into action. to the creation of nato and virtually all the farsighted policies and institutions that have sustained americans security for the past seven decades. looking ahead, it is unrealistic to expect partisanship to disappear or even dissipate. so when push comes to shove, when the future of our country is at stake, ideological zeal and short-term political calculation on the part of both democrats and republicans must yield to patriotism and a long-term national interest. all told, whether the united states sustains our global economic, political and military preeminence will depend not on the action of other countries, but on what we choose to do.

the compromise as we forge, the sacrifices we accept, and the courage and unity we demonstrate. thank you. [applause] >> thank you very much, secretary gates, and i hope you can hear us. we heard all of your statement. it was loud and clear. you and admiral mullen have made two very powerful statements, that i hope will be heard throughout the country, and particularly by policymakers and elected officials. i'm going to turn to my colleague, pete domenici, for first question here and then we will rotate to the panel. >> first of all, let me thank you, senator nunn, for asking me to be your co-chair with you. i never thought that we would be

this far this quick in getting the issues formulated and out to the public, and i believe today is an excellent one of getting the true facts as to how bad off united states is, because of the lack of leadership, the lack of comedy, the lack of getting together and agreeing, the lack of in some way, the leaders of our bodies, legislative bodies and others in leadership positions don't quite get it. secretary gates said that if we wait for the adults to come back from campaigning, let us hope that those adults are from both parties. let's hope they're willing to give and to compromise in the best interest of this great country. i had a chance to talk to you, admiral mullen, before this

event, to seek strong as i could your from its of coming here today, and i can't, can't say it any other way but that it was absolutely imperative at your answer was yes, and that you came here today. between you and the secretary, we have heard the best evidence, in my opinion, on the need for adequately providing for our defense on the one hand, and on the other hand, for not enforcing the sequester which is upon defense and all of the other domestic programs of our country. so let me ask both of you a question. i would assume that both of you have had an opportunity to review the sequester and what its effects on the defense department and our people and personnel will be. is that a fair assessment that you are aware of? >> both of you are nodding yes. so let me say to just back up

your testimony. the sequester is across the board cut order of defense and other domestic programs from a given point. it is already a law, people should know that, it became a law by default and is that not correct, admiral mullen, when the supercommittee did not get its work done and the back of position was therefore we will get savings by a sequestered in this document was written and this document called sequester was passed by the senate, by the president as part of that package that encompasses the supercommittee. now, i would like you to answer it with as much, adding to it as you can and want. do you think we should render the sequester valueless, do you think they should be pulled? do you think that we should let

leaders of this country should take out now so that it will not become effective? i guess i'm saying, what will the effect be if this sequester is permitted to be carried out? would you answer that question, please? let's start with admiral. >> with respect to the damage of the sequester, specifically, and i don't know if it's widely known, certainly it is widely reported that the president both has the authority and would intend to exempt military personnel from sequestration. obviously, what it does is put the full burden of the amount on the remainder of the defense budget.

and going back to my times when i was the head of the navy, roughly 50, 60, 65% of my budget went to people, active, retired. benefits, et cetera. so, in fact, the full burden of sequestration would be put on roughly 50% of the entire defense budget, which makes its implementation that much more extreme. secondly, from my perspective it's really why i talked to a hollow force, because in execution which is what we would be in, it's very difficult to find monies, significant amount of monies which will be under contract already so you can't undo that. so you get to the operations and maintenance funds, if you will, which are significant, and you

start pulling the training money, the logistics money, the maintenance money because it's money you can get your hands on in the very near term. so the intensity of moving to what i would call -- despite the pentagon's strong desire to not go there, to move to a hollow force, is that much more significant. thirdly i would speak to just sequestration -- i would speak to just sequestration, the act itself, and many people know this, it was described by bob gates' successor to me as secretary panetta, as a neutron bomb. and the idea being that it would be something that would be unthinkable in any way, shape, or form so that a solution or a compromise would get generated. with respect to answering your question about whether it should

be pulled or not, i guess, i think about that in terms of motivation. i think we need to solve, to take steps to solve this problem now. i think sequestration and execution would be incredibly damaging to defense and our national security interests. that said if there isn't that hanging over their heads, and you would be much wiser in terms of reading this than i, what hangs over their heads to get them to a point where they would make the decision? i just don't know the answer to that. >> secretary gates, hope you are following this from your locale. pete's question is also to you, if you want to take a crack at it. >> sure. sequestration reminds me of the scene in blazing saddles, where the sheriff holds a gun to his own head and warns the crowd not to make him shoot. this is no way to run a

government. across the board cuts are the worst possible way to exercise budget discipline. even before sequestration, when mike and i were working together, my guidance was that if we had to deal with budget cuts or we needed to find more resources, we would never resort to across the board cuts. i referred to it as managerial cowarddess. ever visit to make choices and establish priorities. sequestration does all of that on steroids. and i think mike has spoken to the problems that we will face, but the realities are you are talking about pilots, fighter pilots who will have less time in the cockpit, less time flying, soldiers have less time to train and fewer bullets to train with.

these are the concrete realities. ships that have to stay in port because we can't afford to run them. and that's what i was referring to in my remarks when i said sequestration will increase the risk to the lives of our men and women in uniform. and again as mike has suggested, i don't know the right solution for getting out of sequestration mess, whether it is pulling it or trying to buy some time, or whatever. but what we do know is that the consequences for our military will be dire. and i think the administration, during this past week, has outlined what the other costs will be outside of the defense department in terms of air traffic control, in terms of the national parks, in terms of virtually everything the national government does.

and so, and they will be hit with the same kind of mindless lack of prioritization that everything takes a hit. the important and the unimportant. so it is a catastrophic way to deal with the deficit issue. and in some way needs to be found to do what mike has suggested, and that is how do you sustain the leverage on the members of congress and the president to come to the kind of agreements that are necessary to get our fiscal house in order, without threatening to shoot ourselves in the head. >> thank you, bob. bill gray, let me call on you first and then we will rotate. >> first of all let me just say i'm delighted to be here and

hear both admiral mullen's testimony as well as secretary gates. i have one question, which i hope you might be able to answer, and that is approximate $670 billion defense budget, what is the size of the first year cut in defense that each of you think is appropriate? and what is the implication over a five year basis of savings? >> i think secretary gates has pointed out very clearly that there have been significant reductions thus far, but obviously the 490 billion or so that are resident in the '13 budget that the president sent to congress, and other reductions that he took under his stewardship while he was secretary. i think if it executes as i recall, it will be upwards of 50 billion a year, or -- in sequestration if you will. and so that's notionally.

and if you pull the costs of afghanistan, of the wars overseas out, which i think people do and don't at their convenience, depending how they want to talk about this problem, but that's operations cost which i think we have to fund. so then particularly in the of execution, if you will, it just devastates the kind of accounts of both secretary gates and i were talking about in terms of training and maintenance. i mean, and i think we far underestimate how quickly we could get there, despite not wanting to get to a hollow force. there are some instinctive things inside defense that would put us there as well, just how we do things inside with how we execute.

because everybody fights, everybody fights for the money come if you will. but it would principally be executed there. i think clearly as quickly as the department could get to not issuing contracts, so we talked earlier about many programs which are over cost, and i understand that, and that is something that needs to be contained, although an awful lot of smart people try to figure this out in the last 10 to 20 and we haven't quite gotten there yet. but you would see actually more programs that you've been agreed or desire to keep, those costs would automatically go up because those contracts would get spread out over future years. so, in fact, we are trying to save money in fact the programs that you want you to have a pretty serious impact, very quickly on those kinds of things as well. and then lastly, i talked earlier just about the cost of people. i think clearly with these kind of cuts you have to go where the money is, and certainly half the money is with our people and i would just want to be careful. it doesn't mean we shouldn't take reduction because i think there's certainly an opportunity to that but i think we need to be careful about our people and

their families in which we have invested so much over the course of these two wars, so that on the right hand side of all this the force is very much in tact, can represent us globally as we've been asked to both in peace and in war, and also to be preventative in that regard and certainly prepared to go and when the circumstances warrant as well. >> [inaudible] >> what do you think, mr. secretary, is it an appropriate reduction given all of the things that you, as well as admiral mullen have talked about, avoiding sequestration but doing, what would be appropriate? do you have an idea of what amount that would be in the first year? and out years, five years? because i agree with you. i think it would be a disaster

to have sequestration occur in the defense department. and i think overall as you said in your presentation, it really boils down to a lack of management to make decisions, if we have sequestration across the board. do you have any idea in your mind as to what would be the maximum amount that you would reduce in the first year? and then five year approximation. >> well, one of my concerns in terms of talking to the congress and to the president before i left office was the reality that we were already looking at a $900 billion cut in defense over a ten-year period. that's already programmed in. $900 billion. i haven't heard anything like that on the domestic side in terms of specific programs, specific plans. but to pluck a number out of the air, i told the president and

the congress was math, not strategy. and i instituted before i left an approach that basically said before you make any specific decisions on that next size cut, that $490 billion that the president asked for, let's look at the strategy so that the president and the congress can make choices about what they don't want to do in the future. where do you want to cut the budget, that strategy was completed under mike and secretary panetta in the fall, and i think so that 490 billion is based on a look at strategic things rather than just doing it as a math problem. so when you asked how much i think the defense budget should be cut, for the next fiscal year, my argument first would be it's already been cut substantially. and the question is then to the president and congress, what do you want to stop doing?

it's not just a math problem. >> thank you, secretary gates. bill, let me turn to you. we've got about 10 or 12 more minutes so i think we have time for everybody to ask a question. bill. >> i think i'd like to get back to the question of the congress itself. you both mentioned issues. every one of us has served in the congress. every one of us can tell you countless numbers of members that we respect, honor their integrity, their patriotism, their willingness to work across party lines. there are people trying to do that today. i just would like to ask, this is such an obvious issue, what does a member say to you when you have this conversation with them, about these choices? how could they possibly give you a rational excuse for what they have done? [laughter]

>> most of the time what i get, when i got when i still in office, happily i've not had to testify since then, so my information's a little over a year old, but what they would say to me, for example, when i was trying to cut for cap the several dozen programs in 2009, everybody agrees on the importance of acquisition and procurement reform. everybody agrees that we need to do these cuts in a rational way. everybody agrees on the need for prioritization. but when it comes to specific votes on specific issues, they vote parochial interests. the f-22 had suppliers in 44 states. that's 88 senators. now, in that instance under a veto threat from the president, we were able to prevail in terms

of capping that program, which every secretary of defense since dick cheney had cut. so the question is how do you get the members of congress to forgo parochial interests in terms of what's doing in the best, what's in the best interest of the country as a whole? and i ran into this. mike and i ran into this on every single specific program that we wanted to do. everybody agrees, department of defense, health care costs are completely out of control. we will spend probably $60 billion on defense department health care. nobody wants to touch the health care that goes to our active force. but what mike and i proposed, what the president proposed was a very small increase in the health care premium, and fees

for military health care insurance for people between the ages of 45 and 60, working age people and yet the congress will not go along with that. it's absolute necessary. it has not been increase in those premiums in 15 years. people say well, we had a deal, and the government was always going to provide free medical care. that deal was off the table when the congress voted to impose a fee in the mid 1990s in the first place. and nobody ever promised at that time that that insurance the would never increase. so we were talking about the difference between $420 a year for family of four going up to something like $520 a year, which is one-sixth of what most federal employees pay. so even in an area like that where everybody in principle

agrees that something has to be done, the congress will not go along with it. so figuring out how to get these people to rise above their parochial interests, and, frankly, be willing to put their reelection at risk, to do the right thing for the country i think is what's critical. >> powerful answer. let me rotate -- >> could i just make -- >> sure. >> my own experience in that regard very similar. in fact, i testified five or six years for these modest increases in health care rates, if you will, and i think, actually i think, unless we finally, bob, after you left i think we finally got it through, but it really is modest and it's the first time. it does speak to the power of the veterans service organizations with respect to that, and the votes that are tied to that. but my own experience was this is four or five years ago, i

actually was at a small dinner with brand-new congressman from all over the country, and it was about a dozen, and this was in the winter, so they were five, six months into the first term, or maybe not even that far. so i said what strikes you? and the response to me was the power of the gavel. specifically. and from my perspective it gives to how that then translates to, certainly what i've seen, in terms of the power of the leaders. now bob gates in his statement talked about the chairman, the positions of chairman before, and their willingness to, despite partisanship of the, broker deals but that was a requirement. that's what they did. and the feedback i've gotten from members over a period of

time, goes right back to, including members of been there, a fair amount of time, goes right back to that comment at that congress can make me five or six years ago is the power of the gavel. and the message i get from them, individual is we want to solve these problems. there's not one that doesn't speak to that, but collectively, and then you speak to the leadership piece of this, the ability to move from the desire to execution is what does not appear to be there based on the solutions that haven't been generated so far. >> okay, tim roemer and then john tanner. give you the last question. >> thank you, senator. thanks again for the great representation up here on the panel. bob gates, mike mullen, thank you again for your superb service to our country. i've seen you work here domestically. i've been fortunate enough to

see you work abroad, and how efficient you are abroad your thank you for your valuable time today. i'd like to continue on the theme of the politics of this, and how do we try to get the politics right in order to solve this problem. bob, you gave a very eloquent litany of reasons why congress doesn't work very well. you talked about redistricting and the problems there. you talked about the decline of congressional power. you talked about wave elections. you talked about the media one of the things that you didn't mention or i didn't hear was the amount of money in campaigns today. and often times the effective fundraising is that members of congress are not doing the committee work. and getting rewards for doing good things up there. as mike said, they want to do good things. they intend to do good things, but often times there are forces pulling them away from those responsible positions. i'd like to ask you both as

really masters of how this system works, how do we put this compelling narrative together today, maybe it's a combination of nationbuilding at home and the national security abroad, how do we get our members on both parties to show the kind of leadership for positive reasons to make these decisions, which will result in fiscal responsibility at home so we can project this power abroad and take on the kind of threats that are coming at us, whether they be nuclear nonproliferation, whether they be afghanistan, whether they be threats on our embassies. what's that narrative? >> bob, do you want to go first? >> well, i think that the, it's a tough question. first of all, in terms of the impact of money, there was an effort to try to get control of that. supreme court overturned it.

so i don't know what the solution to that piece of it is. i would hope, the history of democracy, dealing with problems on the doorstep or on the horizon is not encouraging in this respect. most democracies seem to have to have a crisis before people rise above to do what is the right thing for the country. i think many of us would argue that the crisis is here. it's not on the doorstep and it's certainly not on the horizon but it is here and it is here now. and i think in some ways it's too abstract, and so one of the things that i found in dealing

with members of congress, but also in dealing with the public, that specifics in terms of consequences are more compelling than broad generalizations. so the reason that i referred to pilots not being able to fly as often, soldiers not having as many bullets. getting down to the specifics, for example, of what sequestration will mean in the daily lives of americans and in terms of what the federal government delivers, i think is one aspect that's important. i think having bipartisan leadership is very important as well. and with all due respect to the members of the panel, and, frankly, mike and myself as well, what's really important is having people who are in government today, on the hill and in the executive branch, talking about these consequences if they don't reach agreement, if this thing is not solved. it's all well and good for the

rest of us to talk, and george shultz and some others had a very compelling article, op-ed in "the wall street journal" this morning on the crisis that we are facing, but it seems to me that it's those who are still in government, still have the responsibility and, frankly, are the ones who will be taking the risks, for taking bold stands that have to speak out on these issues. >> thank you, bob. mike, we'll give you a shot at that question, and this is going to i think wind this up for the panel because we're going to run out of satellite time. bob, we thank you very much for coming in. appreciate your leadership. continue. >> and i actually just take a few seconds to say thanks to my old boss who was a great leader and a great friend and a very, very tough time. it's good to see you, bob. i guess the way i would

summarize it, i think bob has very eloquently hit the key points, but, you know, fundamental to me, that's why i was in the military for ever, he does the military had a way of putting me in leadership positions my whole life, and i loved that, thrive on it, and the challenges associated with that. so getting, and i don't know how to do this. i just think getting to a point where the leaders will reach across the boundaries, if you will, recognizing the severity and criticality of the crisis, because i think it's here as well, as bob said, more than anything else, and to his point, it is all well and good for us to raise the issues. i think that are important but we are not the only ones. and we don't have the direct responsibility now, and it's really for those that are in those positions to forge somehow the kind of solutions that make it better for america. and that fundamentally is tied i think to leadership from

everybody. every sector across the board, more than anything else. i think leadership really can solve this. >> thank you very much, mike. we are at the a position where i was told the panelists will need to press a little earpiece, somebody said to her, she was asked -- about to ask the last question, you have time to ask one more question and no more answers. [laughter] when you study second year, i don't think we have an answer that because we're about to run out of time. thank you very much, mr. chairman. something we have been in was a longtime time, and secretary gates mentioned as one of the first factors of the breakdown of the political metal, and i view sequestration a failure or

the result of failure of our collective national political will. and one of the questions that i think specifically we can address is a gerrymandered, but we will do that at a later date because i spoke at last time i was here. i guess i will the next time i'm here. thank you to. >> we are running right on time. mike mullen, thank you so much. bob gates, thank you so much. [applause] >> next, we are going to talk about some of the solutions. before you that we are going to have a little background with some charts, and we're going to ask steve bell who was the director of economic policy project at the bipartisan policy center, and bob bixby, executive director of the concord coalition, to sort of take the

podium at this stage. and then we'll go through a set of charts and will have simpson-bowles theoretically coming in on satellite at 2:15, and will have pete domenici and thousand of them who are already here. so that's the plan, and bob, thank you for your leadership. bob and steve have been instrumental in putting these forms together. and both have done a sterling job, and particularly in the last several years and months in working on both of these panels will hear from today that have tackled these issues in very specific ways. ..

>> is it unsustainable? so the first chart is, is the debt unsustainable. well, clearly it is. our debt to -- >> [inaudible] >> thank you. our debt to gdp ratio right now is higher than it's been anytime since the end of world war ii, and that is when it was coming down after that conflict. >> [inaudible] >> yes, sir. you do. take a look at it. 100% of gdp, we reached it during world war ii. the projection by the congressional budget office and gao is that we will now reach 00% -- 100% of debt held by the public sometime around 2020. now, that, at that point the debt is growing faster than the

gross domestic product of the united states. let's take a look at the next chart. interest costs on the public debt. the most direct consequence of the growing debt is the cost of servicing that debt, how bad is it really. right now we spend about $200 billion a year on servicing the public debt. we have exceptionally low interest rates to do that. however, we will probably see under normal interest rates that have prevailed at least for the ten-year note over the last 30 years a rising debt burden that at some point fairly soon will crowd out all other spending from the federal budget. so that by 2022 interest on the

public debt will be bigger than what we spend on all of our national defense put together. >> so the chart you're showing us now assumes what on interest rates? >> we assume that we gradually get back to about 4.75% as the ten-year note. >> and that occurs where, the 2016-'17 time frame? >> sir? >> i mean assumption. >> yes, sir. i used to work for mr. buffet. he said the quickest way to go bankrupt was to guess on interest rates. [laughter] somewhere around 2018, 2017. >> when you show the 2022 $900 billion in interest on debt per year, that is assuming we go back to the normalized interest rates. >> gradually that we do, not on a spike. >> right. >> which which is a question for others. let's take a look at the next

chart. this is about interest and entitlements. let me explain what entitlements are because some people get confused. social security, medicare, medicaid, interest on the debt, things that people are entitled to receive. sometimes because of deals that we've made called issuance of sovereign debt, sometimes because of court decisions that say that each if we don't have the money -- even if we don't have the money, these people are allowed to get this money. so even if we take a look at these entitlements, notice that in the about 15 yores they consume -- years they consume all federal revenues. that means transportation, scientific research, energy research, it means education. those things, in fact, will all have to be paid for out of new debt. let's go to the next one. >> steve, let me ask one

question on this one before you go to that next chart. >> all right, go back. >> okay. you're saying that that revenue line, the 100% revenue, is that assuming that the revenue is going to stay about historical average? >> yes, sir, about 18%. >> so, basically, this chart shows that social security, medicaid and medicare, if we keep an 18%, approximately 18% of gross national product as revenue, if we do that, then these three programs, um, and interest will eat up the entire budget. >> yes, sir, that's correct. >> and the rest of it would have to be borrowed. >> the rest would be borrowed, so everything for defense, everything for education, everything for transportation, all of our research, all of that are will come -- all of that will come from borrowed money. the things we think of as investments for the future. this chart more than anything, i

think, shows us how something like a sequester is an example of eating our own seeld corn. >> okay. >> let's go to the next one. so let's take a look at this chart and talk about what is discretionary spending. i've talked about entitlements. one way to think about discretionary spending for budget wonks is this way: when the congress passes every year their individual appropriation bills, spending bills, that is discretionary spending by and large. the congress has the discretion to pass those bills or not to pass those bills. they do not have the discretion to refuse to pay social security, medicare or medicaid. so discretionary spending which makes up a relatively small and slowly-growing part of the federal budget is going to take 100% of the hit if we go off the

fiscal cliff and sequester occurs. so you can see that that just doesn't make sense. less than a third of the budget taking 100% of the hit, and that third growing more slowly than almost any other part of the budget. >> i have a question. >> yes, sir. >> when graham-rudman-hollings was adopted and the first time sequester appeared in the language of the federal government budgeting, did they contemplate and pursue entitlements as their sequester, was it only these annual occurring expenditures? >> mostly were these annual occurring expenditures. we negotiated out 47 programs in the domestic area that were not subject to sequester, most of those were a variety of entitlements and --

>> those were negotiated, they were not the actual result of the knife -- >> no, sir. >> -- cut. >> that was the result of negotiation, and if you look at the budget control act of last august, more or less all of those exemptions remain in there. so this is very similar to the graham-rudman-hollings bill that was passed in '85 and the first sequester we had under president reagan in 1986. >> how much money was that? >> that was approximately $30 billion in budget authority. um, we -- without getting too much in the weeds, we did it backwards back then. we said we have to save this much money in outlays because we were talking about deficits, and then we kind of figured out how much budget authority that would yield. >> but even back then the sequesters were not of the magnitude imposed upon defense and domestic spending now 20 years after the adoption of that

so-called successful way to cut the budget according to senator graham from texas. >> that's correct. and i should add that one major sequester, only one occurred, and it very quickly became clear in two years that we were going to have to cut 36.5% out of defense in one year that perhaps this was not a good thing to do. >> okay. thank you, steve. bob bixby. >> thank you, senator. and thank you, steve. steve has talked about the growth of the major entitlement programs, social security, medicare and medicaid and identified that as a big problem, cost driver. i want to look at some of the factors why because they have to do with the solutions that would be adopted and the timing and the magnitude. so if we could see the first, the next slide, please. one of the factors driving the cost of those programs is simple demographics. that is to say we're going to have many more beneficiaries

because the population is aging. i feel that every day when i get out of bed. so there are a lot of us baby boomers who know what that's like. part of that is and, obviously, this is a good thing that people are living longer, and, of course, the baby boom generation is a fact that we need to deal with, there's not anything we can do about that factor. so demographics alone are going to add substantially to the cost of these programs, and, of course, it also has economic effects. i means that there are going to be fewer workers paying into the program social security and medicare relative to the number of beneficiaries. it means that the elderly population is going to be growing much faster than the working age population, and so those are things that are going to not only effect the budget, but the economy. let's look at the next slide, please. the other big factor is rising

health care costs. certainly, this effects medicare and medicaid, it effects the entire health care system, but in this country we have not found the magic cure for how to slow the growth of health care costs. we tend to spend much more per capita than other developed nations, nearly twice as much than our closest competitors. so we have two factors at work here; health care costs per capita, health care spending per capita growing faster than the economy and an aging population that is going to be drawing more and more on this health care system. those two factors will have a profound impact on the federal budget as we can see in the next slide. and when we see the next slide, we're going to see -- [laughter] a major impact. i want to explain, take a minute to explain this.

what this is showing is that the cost of the three major entitlement programs, social security, medicare and medicaid, will expand over the next couple of decades from about 10% of the economy to around 16% of the economy. now, in and of itself -- and it shows that the health care programs medicare and medicaid are much more of a factor than social security which is just affected by the demographics alone. growing by 6% of gdp might not sound like too much, and maybe this is not in the way it's presented the most dramatic chart one would ever see. but it is, in fact, quite a dramatic growth. if you're talking about gradually adding 6% of gdp to federal spending, consider a couple points. today the entire pentagon budget, the defense budget is around 4.3% of gdp. so we're talking about adding an annual amount to federal spending that's more than the

entire defense budget. if people were talking about gradually more than doubling the defense budget, that's what we'd be talking about. keep in mind, this is all happening on autopilot because these are entitlement programs as steve mentioned, so they don't go through the annual appropriations process. if you want to look at it on the tax side, think that federal income tax, individual income taxes are now about 7.2% of gdp. so if you're adding about 6%, that's, you know, you could pay for that by raising income taxes across the board by about 80%. so that's the magnitude of the federal budget challenge over the next couple of decades simply because of these factors, demographics and rising health care costs that are running on autopilot, and that's really the nub of our problem much more than waste, fraud and abuse or things that get so much more attention. could we see the next slide. so what do we do about it? well, one of the things you could do about it is, gee, maybe

we should cut that waste, fraud and abuse. let's get into those weeds on those discretionary programs and make them more efficient. how about eliminating them altogether? because that's, basically, what you would have to do in order to lay off the cost of these rising entitlement programs. and what this is showing is just a simple illustration of if you took all of the discretionary spending, including defense, and tried to pay for the rising costs of the entitlement programs by cutting other spending, you would get to implausibly low levels and eventually have to zero the whole thing out. there are some other ways you could deal with it. the next slide steve will pick up on. [laughter] >> thank you, bob. fantasy number two, can we raise taxes enough to pay for the projected growth in entitlements? well, you could do it theoretically. by 2030 federal income taxes would have to go up by 65%.

that sounds like a long way away, but it's within the lifetime of most of the people in this room, the working lifetime of most of the people in this room. that's a 65% increase. if we decided we wanted to limit the tax increases to the top 5% income earners, their income taxes would have to double. and if we limited it to the top 1%, their taxes would go up by 169%. our suspicion is that that would cause some political turmoil. [laughter] and that there would be somewhat less incentive for people to grow, and that -- to work, and it would have a very substantial negative impact on economic growth for the country. so when you hear people say we can raise taxes enough or we can cut spending enough, um, they probably need to go back to grade school and take arithmetic.

>> and steve and i will end up our presentation with the next slide which just shows what we are, what we need to confront. a realistic projection of budget deficits over the next ten years is about $10 trillion. that's the projection from the congressional budget office and, basically, what that's assuming is let's say we just fully kick the can down the road. let's just say that we extend all current policies and tax cuts, and we don't do the spending cuts that are programmed under current law. you'd get about $10 trillion worth of deficits over the next ten years. and so a calculation of an illustrative plan that would stabilize the debt to gdp ratio over the next ten years would save roughly $4 trillion.

so our illustrative line there is not any particular plan, it's just one that would save about, you know, $4 trillion in a way that would stabilize the debt to gdp ratio so the department is no longer growing faster than the economy. but keep in mind where that happens, where it would stabilize the debt to gdp ratio at today's level which is around 70% of gdp, a little bit more than that. very high above, almost double what it has been in the postworld war ii period. so for all of these changes that we're talking about the $4 trillion worth of savings and the plans that we'll hear about from our next panel is really just the first step because it goes, it would still leave accumulated deficits over the next ten years of about $6 trillion even if you save $4 trillion. and keep in mind that we're a long way from talking about anything like balancing the budget or, you know, reducing the debt to gdp ratio.

so a plan that has to deal with this really needs to be of sufficient magnitude, needs to be phased in properly and needs to be capable of producing long-term savings and not just for ten years. and so fortunately, senator nunn, i'll toss it back to you, and we have two good panels. >> that's the perfect segway. i'm told our friends alan simpson and erskine bowles are more than theoretically, but i'm informed they're on the line now. very brief introduction, i'm going to cut the introduction very short just because of the time. as we've seen, it's going to take a very big and substantial deficit reduction plan to even begin to address our fiscal challenges. we're very fortunate to have the leaders of two groups that were able to meet this challenge in a bipartisan way. they are, of course, alan simpson and erskine bowles who chaired the president's bipartisan fiscal commission and

my colleague here, pete do min chi and alice rivlin who cochaired the debt reduction task force. both groups spent nearly a year debating the issues and working out consensus solutions. each issued reports late in the year of 2010. both plans dealt with the deficit challenge in a comprehensive way. they put everything on the table. both of them required compromises between democrats and republicans, but they did it, and we'll hear more about that from them. i'm -- a lot of people are frustrated because they think these plans are no longer applicable. i don't agree with that. i think they're very much alive and well. i think there are a lot of people on capitol hill who understand that we have to deal with this in a comprehensive way. i think there are a lot of people that are now growing, there's a growing support for some emerging plan that would be very much like the plans we're going to be discussing. and we have the committee for

responsible federal budget led by maya mcgiven necessary that are helping organize some of the events that will happen after the election. so the plans are alive and well and so are our next guests, alan simpson and erskine bowles. so if we can find the technological genius to get them up on the line, and there, alan, you look just as good as ever, whatever that means. [laughter] >> i'm alive, whatever that means. [laughter] >> alan, we're delighted to hear from you today. so whatever statement you'd make, i got a glowing introduction, but just suffice it to say you and erskine have not only done tremendous work for our nation, but you're continuing to do so every day, and we're, indeed, grateful to you. alan simpson, senator from wyoming and imminent american. alan? >> before you proceed, might i say hello to him? hello, alan. >> how are you, peter? pete, sam -- >> thank you. nice to see you.

>> and err stick is out there -- erskine is out there in the vapors somewhere. [laughter] i usually let erskine go first -- >> okay, we've got to have some volume here, folks. >> can you hear me all right? a double sound coming back. you there? >> we hear you, alan. go ahead. >> [inaudible] >> hello? >> we hear you, alan. >> oh, you do? you were cutting out. >> we can hear you. >> you want me to go ahead? >> go ahead. >> yes. well, anyway, it's been a

remarkable long haul because we met all those months, took us three months to establish trust, just to establish trust, a lot of back biting, stabbing, terrible stuff. but we have five democrats, five republicans, one independent, 60% of the group voted for it. and a range and a remarkable range between dick durbin, i would consider a very liberal or progressive person and tom coburn a remarkable conservative, and they concurred. we had andy stern who did not vote for the final package, but certainly he and tom coburn put together a lot of our recommendations with regard to what to do with the defense budget. there are so many things that are just goofy. we thought the easiest thing to do would be to fix up social security, not to balance the budget on the backs of poor old seniors or, you know, throw old

ladies off of bridgings in their wheel -- bridges in their wheelchairs and all that jazz. we did that for it own sake. and what is going to happen to it if you do nothing? which, apparently, is the recommendation of the aarp and other senior groups, don't touch social security. well, so we won't, and in 21 years from now, 2033, you're going to waddle up to the window and get a check for 25% less. and you may not like that, and you say, wait a minute, i've got this little thing in the mail that says i get scheduled benefits, and i want those. well, the law, ladies and gentlemen, says you will not get scheduled benefits, you'll get payable benefits. and this baby is running short every month, every year, right now. and you're going to get payable benefits, and you can whine into the vapors, and that's the way it is. and then, of course, we said we can't let this happen.

so we'll do something with social security, we'll give the lowest 20% of poverty, give 'em 125% of poverty. that'll cost some bucks. then we take people 80-85, the older old and kick in an extra percent per year for them, 5% on the way up. do things with cost of living index, do things with the progressivity in the code, do these things that have to be done, raise the wages subject to the tax to get it to about, you know, up to where it should be, $190,000 instead of 110 now. and then we did a hideous thing, it was just ghastly to think that we suggested that the retirement age should go to 68 by the year 2050. now, don't forget it's going to go to 27 -- it's going to go to 67 in the year 1927, 2027.

and the howls from the senior groups would be like the keening wail of a coyote. so they are stalled again. we asked the aarp could you help? i mean, you've got 38 million members paying $12 dues, and you must have somewhere you rat hole the money. maybe you could help us here. well, we will. they never did. they never did a lick. if you look at their publications, a little thing appears in their columns along with the ads, of course, that says the things to do to strengthen social security. and guess what they are? just what we've been saying. and they don't support any of 'em. i said to the heavyweights up there, i said are there any patriots here or just marketers? that is all they are, they're a marketing agency. and the poor old young people have nothing except there's one group cooking now called the can kicks back, and i hope that can is about a 55-gallon drum when it m kicks back -- when it kicks

back because you can't win against these entrenched groups. the mailings that have come out from the aarp and the committee of social security and medicare and don't forget even in ryan's plan, which they all go crazy about. i'm not into politics, lord's sake, but even in his he says we're not touching anybody over 55. i had to testify a couple years ago with mike oxley who was doing some great work and a bipartisan panel. and the people from the committee to protect and medicare put on some 75-year-old flight attendant looked like the wreck of the he is plus. and they said this poor woman will fall over on her head any day now because of you cruel people. i turned to the executive director, and i said, you know this, it was barbara kennelly. i said, come on. she said, this is the way we do our business. well, it ain't the way i do my

business. so i could go on here, you're thinking i think he's going to. but take a look at that defense budge business. hollowing out america? you're hollowing out your brain. i mean, 750 billion or 740, it shifts around, that's ours. 740, 750 billion, that's our defense budget. and the defense budget of the other 15 top countries on earth including russia and china combined is 590 billion. 540 billion. now, you know, have one on me. and then we said to them how many, how many contractors do you have in this defense department? they said, well, it's quite a range. it's between a million and ten million. oh, we said, well, that is quite a range. no question. and then i think my pal asked for one of the dems on the committee asked for an audit. got an audit? kent conrad asked that.

no, you can't. we're an unauditable agency. anyway, i said does that include the guys who are in the military and then get out as a general and then they go to consult at 300 or 500 an hour? well, yes, it it does. eisenhower was correct when he said beware of the military industrial complex. man, they're always creating something new. and the worst one, i am a veteran. i was in the army of occupation in germany at the end of the second armored division, hell on wheels. you can't belief, if i'd stayed in the reserves another six or seven years, i would be a military retiree. nothing wrong with that, they've given up a lot, let's all admit that. the whole works. but for heaven sakes, only 2.2 million of them, many of them -- the majority never in a combat area or combat theater, and they have their own health care plans

called tricare. and the premium is $470 a year. and no co-pay. takes care of all dependents, costs you and me $53 billion a year. we have 61 department of defense schools in america, a bus ride from a public school, every one has a superintendent and the teachers. what's that about? no need for them. got bases in europe, 81 of them. i'm going to quit so you can ask me questions, and i hope i'll be able to hear them because something is going on here, and i don't want to go over my ten minutes. >> thank you very much, alan. [applause] i think you had to take on a few special interests as you went through your procedure. [laughter] erskine bowles -- >> change away my life membership. >> erskine has been our great

partner with alan. have we got erskine coming in? i hope so. i hope you can hear me. erskine, did you hear alan? alan went through a very analytical and detailed presentation. >> yeah, i heard parts of it. [laughter] >> erskine bowles, we hear you. >> thank you. i deeply appreciate what you're doing, senator. i also want to thank john for being there and senator do min chi along with alice rivlin for the great work they did on their panel, and i appreciate all of you being there today. i'm glad i'm getting a chance to talk to you, too, because i am really worried. i am afraid that if we can't get the members of congress and the administration to put this ultra

partisanship aside and to finally pull together rather than pull apart, we face the most predictable economic crisis in history. bob and steve did a good job of discussing it, but there's no question if you look at just the plain math, the fiscal path that the nation is on is simply not sustainable today. and for me, you know, these deficits are like a cancer. and i say that because they are going to destroy our country from within if we don't do something about it and do it very quickly. let me give you my one piece of math because i heard steve and bob talking about 20 years from now. but if you look at right now, if you look at the total income statement of a country and you look at every dollar of revenue that came into the country last year, every bit of it last year was spent on our mandatory spending and interest on the

debt. mandatory spending, as you all well know, is principally the money we spend on the entitlement programs of medicare, medicaid and social security. and what that means is every single dollar we spent last year on these two wars, on national security, homeland security, education, infrastructure, research, every single dollar was borrowed, and half of it was borrowed from foreign countries. that is a formula for failure in anybody's book. and what i want people to do and what allan and i have been -- alan and i have been going around the country talking to people about is, you know, we've got to face up to what the real challenges are. the real challenges aren't waste, fraud and abuse and foreign aid and nancy pelosi's airplane, but the real problems are there are really five of them, and i'll describe 'em

really quickly because lots of people have talked about it. but i think if we focus on these five, we could get this deficit under control. the first is health care. we do spend be twice as much as any developed country in the world on health care, and that's true, senators, if you talk about it as a percentage of gdp or on a per capita basis. and, you know, that might be all right if our outcomes were twice as good as anybody else's. but if you look at almost any outcome measures, you know, while we spend twice as much, we rank somewhere between 25th and 50th in things like infant mortality and life expectancy and preventable death. and anybody who doesn't believe those 32 million people who don't have health care insurance don't get health care, they're just wrong. they get health care today, they just get it through the emergency room at something like five to seven times the cost it'd be in the doctor's office.

and that cost doesn't disappear, it gets cost shifted, and it gets shift today the taxpayers in the form of higher insurance costs and higher taxes. you know, and you can see these results in the statistics that come out today. in the 1981 we spent about 10% of the budget on health care. today we spend about 25%. by the end of this decade, we'll be spending a third, and it won't be long before all of the money we have will be spent on taking care of a couple of old coots like me and al and buying a few tanks. so health care is literally the number one problem. number two is defense. you know, we spend more on national defense than the next 15 largest countries combined. that includes both china and russia. i personally think that we are bearing a disproportionate

responsibility for global world peace, and i don't think america can afford to be the world's policeman. and i think admiral mullen who you had testify was right, you know, when asked what he thought the biggest national security problem was, he thought it was the deficits because they will consume every single dollar of resources that we have. the third biggest problem we have, in my opinion, is our income tax code. you know, we have, i think, the most inefficient, ineffective, globally-anticompetitive income tax code that man could dream up. you know, we netted last year about $1.3 trillion in taxable income, and that was because we had $1.1 trillion of back door spending in the tax code. what we recommended was that we start off with a plan that wipes out all of the spending in the

tax code and uses about 90% of the money to reduce income tax rates and about 10% of the money to reduce the deficit. 10% of about a $1 trillion worth of spending would be about $100 billion a year, $100 billion over ten years would be $1 trillion that we could apply to reducing the deficits. what would happen to income tax rates under our plan? we could take rates to 8% up to $70,000; 14% up to $210,000 and have a maximum income tax rate of 23%. we could take the corporate rate to 26% and, therefore, be globally competitive, and we could pay for a territorial system so that $1.5 trillion that today is captured overseas could be brought back to this country to create jobs over here. now, some of my democrat friends

complain about that, they say all that money will be used to be dividended out or to buy in stock, and i say, so what? that's good. because that money will now be circulating in this country rather than staying overseas and creating jobs over there, it'll be creating jobs over here. the fourth biggest problem that we face is one that al's already dealt with, and, you know, we never talk about it in terms of deficit reduction, but we do need to make social security sustainably solvent. over the next decade, social security will be $900 billion cash deficit. our plan makes it solvent. fifth biggest problem is one that i heard i think steve or bob talk about, and that is simply interest on the debt. we are spending $250 billion a year on interest alone. to put that in some kind of

relative quotient, that's more than we spend at the department of commerce, the department of education, energy, home lan security, interior, justice and state combined. and if interest rates were at their median level they were in the 1990s or in the first decade of this year, we'd be spending over $650 billion a year on interest alone. and if we do nothing, we'll be spending over a trillion dollars on interest every year before you know it. and if you think about that, that's a trillion dollars we can't spend to educate our kids or to build infrastructure in this country so we can move our services and goods to the marketplace. and it's a trillion dollars we can't spend to perform research in this country so the next new thing is created here and making

that doubly bad is that's a trillion dollars that will be spent principally in foreign countries where we're borrowing most of this money from to educate their kids, to build their infrastructure and to do the high value-added research over there so the jobs of the future are there, not here. i think that is crazy. and, look, this is not a problem that we can slowly grow our way out of, it's not a problem that we can solely tax our way out, and it's certainly not a problem we can solely cut our way of without disrupting a very fragile economic recovery, without hurting the truly disadvantaged or without making cuts so deep in things like education, infrastructure and research that america's no longer competitive in what is today a knowledge-based, global economy. that's why we recommended a plan that was, hopefully, balanced,

reasonable, responsible, that was, that would reduce the deficit by $4 trillion over the next decade. people ask us all the time why $4 trillion? you know, did we make that number up? did we pick $4 trillion? because the number 4 bus passes on the street? the answer is, no. $4 trillion is not the maximum amount we need to reduce the deficit over the next ten years, it's not the ideal amount. $4 trillion is the minimum amount we need to reduce the deficit to stabilize the debt and get it on a downward path as a percent of gdp. we got a majority of republicans, a majority of democrats and a supermajority of our commission to vote for this. the breadth of support was truly amazing. of the six sitting u.s. senators on our commission, five voted yes. all three republicans, two out of the three democrats. it was everybody from dick

durbin, the liberal senator from illinois, voting yes to tom coburn, the conservative senator from oklahoma voting yes. be they did it -- and they did it because they thought it was the responsible thing to do, because they thought it was the right thing to do. i'm convinced that if we do this, the future of this country is very, very bright, and and we can compete with anybody, with the best and brightest wherever they are. and if we don't, we're well on our ways to becoming a second rate power. that can't happen, and that's why we continue to work on it so hard. thank you for giving me a chance to testify. >> thank you very much, erskine and alan. [applause] i think your effort is alive and well. thanks to your leadership and continuing explanations all over the country. we're going to hear from pete dominici and alice rivlin, and

we hope, erskine, you and alan can stay with us, and then we're going to have some questions and answers for all of you. pete's been well introduced, but let me give alice a brief introduction. everybody who's followed the budget knows alice. she is a senior fellow in the economic studies program at brookings and visiting professor at georgetown university. before returning to brookings, ms. rivlin served as vice chair of the federal reserve board, 1996-1999. she was director of the white house office of management and budget in the first clinton administration. in february 2010 alice rivlin was named by president obama to the commission on fiscal responsibility and reform. she also co-chaired with former senator pete.com chi the task force on debt reduction. and, alice, did i say that you also were head of cbo at one time? but you have done so many things, and alice is a well

known commentator on an awful lot of business programs, so we're delighted to have you. i don't know who's going to lead off, but we're delighted to have you and pete. we'll hear from you and then go to questions for all hour of you. >> thank you very much. thank you very much, senator nunn. excuse me a moment. we have an agreement among ourselves that i will speak first, she will speak second and answer all the questions. [laughter] you all don't know what a fortunate man i have been here in my, as i approach old age to be asked to join with alice rivlin in forming a task force to attempt to address the issue of the debt of the united states. it has been truly a pleasure working with her, and you will see in the next half hour why it's such a wonderful thing for

me. because since we're partners, that assumes that i don't have to learn anything that she knows, and she knows everything. [laughter] therefore, i have reached a point where i don't have to know anything, except i have to be there and assist her and back her up and make sure that everybody understands we really did have a totally bipartisan group. let me make sure that you all know that this group was appointed by the bipartisan policy center, and it was a group of 19, and it was split as close as you could get with one extra democrat that made up that assemblage. we worked on the proposition that i think as i listened to today's testimony and how tough it is to get things through, we worked on the opposition -- on the proposition that we wouldn't vote on specific issues. we would go through the issues, and everybody would understand

them, and then we'd package the whole thing and ask them whether they wanted to vote yes or no on all the work they had done as we went through each issue. and lo and behold, they all wanted to vote after they had done the work, but they didn't vote on each issue, and they voted rather handsomely -- in fact, i believe nobody entered a no vote, and we came out with a truly bipartisan budget. so what we have put forth is already bipartisan because the apartments were bipartisan. -- participants were bipartisan. the kind of people you would know, you would respect, you would understand. everywhere labor, industry, business, education and a significant number of politicians who were out there in the real world, democrat and republican. ..

and the only one that would be out of control, which i call the blue line that is up and away. that's health care. as you look at that and see if the charge than anything. i can tell you certainly, chairman, members and all listening. it means in order to solve the problem of the federal deficit we must bend that line. see that blue line? it cannot continue going that way because it by itself makes the budget unattainable. you cannot live with it so you must turn it at some point and costly to come from this kind of

mode upward to a balanced out approach, and that's exactly what we did. if you want to know whether that is doable, that is not an enormous cut in the programs that are health care. in fact, they grow enormously. it's just an approach that says we know how in we think it is easy to change that line and cause it to come downward. and when it does you don't have to change very much of the recent chance, very much of what they're getting, but you can't be first much is everybody wants. you have to have something to bring down. so i believe one of the most significant evidences of the problem we have is that. and if any of you as members can make into a small chart, your chart shows without fixing health care costs of the federal government under the programs we've already agreed to give, you can solve the budget problem. in addition to what we are

talking about, it's obvious that we learned an awful lot, we want to share with you but we don't want to take the whole afternoon. one of the principles was we couldn't pretend that growth and just tax increases or spending cuts alone would move us forward. so we concluded, tried each one, and it wouldn't work. you couldn't possibly survive. we don't have the numbers for you but you couldn't survive with taxes necessary. couldn't survive if you're going to take all the cuts out of discretionary which for those who know the budget, ordinary dance of the federal government obligations that occur each year, you want to solve the problem on that, you just don't have any budget left. and you don't have any in defense department either. if you just want to cut defense. so we went through, and none of them would do it alone. we concluded that all of them combined to do their fair share

and you might come up with something good. lo and behold, that's correct. discretionary bears its share somewhat like mr. bowles told you about, defense comes down there. discretionary, the rest of it comes out close. we were a little more generous on it and they were, and then we had medicare. we say we've got to save a certain amount, and then we are left over with one big monstrous in. if ever i saw in 36 years a united states senator, a rare opportunity to do two or three things this country desperately needs with one shot, it is to reform the tax code of the country. we did that. and i guarantee you that if you put together a package that can be voted on and ends up a package eventually in the legislature, the of the house or

the senate, and/or the senate, if you can do that where you put a package together and you vote on one package, they will vote for reforming the tax code. this congress and any congress will vote to change it dramatically. and i against the cumbersome anti-growth policies of the tax code of the united states. no doubt about it. any payment, in an attempt to get at this debt says reform the tax code simultaneously. i say to the medicare at the same time. i say do it all at the same time, and eventually find a method that can solve the problem of how do we do it. and i will tell you today, let me find exact part that want to read to you, because i'm letting this out because i have so much respecrespect for you and for ts assembly that it want us to talk about it today. you heard what i was thinking.

the opposite of what we're talking about in sequester in these details, congress has to vote on each item. obviously, they have devoted each item. now, there's no way to avoid. but we are going to be talking about developing a process that we're going to call and accelerated regular order. we just stand up and yell regular order when we want senators to behave. we say regular order, everybody understands. >> never worked. i know what it means. [laughter] >> they just moved to the back of the room and talked louder. >> regular order, they talk more. but we are talking about and accelerated regular order process that would enable a lame duck congress as excellent, to

put into law a structure that would allow the 113th congress, if he chooses, to actually reduce and pass a truly historic fiscal reform plan, including some of the bowles-simpson and some of ours, but the plan that would be like our idea would allow full participation of members of congress and all committees with full for consideration in both chambers, our idea would give authorizing committees clear path to reduction of goals and allow the full participation of membership to arriving at these fast, these cuts, but they would be fast tracked, fast tracked by operation of law. no longer would be passed in advance would make them fast tracked. that means there would be no filibuster, they would be limits agreed upon in advance, and all of it would be done with the idea that you will get a chance

to vote in your committees, but in the final analysis you vote on a package to save the country. i'm pretty convinced that we're smart enough people. you are two of them. no, including mr. bell as one of them, we have smart enough people to try to work this kind of thing out, and then understand from bowles and you'll understand from dr. rivlin that the two plans do, even though there two years late and would have to be adjusted for certain things, they do provide an opportunity to solve this debt problem. it is not an solvable. somebody why are all people like pete domenici involved one involved one ought to be members of congress? i would love it to be the members of congress. let them have some forums like this. i would be glad to do anything they desired in order to encourage them, one, that it is a big problem, big enough to

ruin us. second that it can be solved without wild things that have to occur that they're talking about in greece, as greece was trying to lure its debt. -- lower its debt. there are reasonable things that should be done. with that background i want to ask dr. rivlin, and let me one more time tell you how our understanding came to be. bipartisan policy committee asked me if i would like to co-chair with a democrat, task force to solve this, approach to how we can solve the stronger i said well, not just any democrat. i know a lot of them they would want to serve with me. i said if alice rivlin would do what i would be glad to. i had no idea somebody was asking a doctor britain, which you like to do this on a bipartisan basis with the republican? and she said not any republican,

the gdp to domenici to do it, and look at there. we were far away and we agreed that this should be the committee. so from that time on, we have had innumerable meetings. i am pleased to tell you that the plans are pretty close together. i will say i think that unlike our tax reform better, although i like their rates better but we can't get them down that low. and the rest of it, i like our approach to health care and health delivery increases. like ours better because we do insist that entitlement per se get reduced, get changed, get modified, and we have a system to do it. and so with that if you would let her explain some of the details, i think you understand where we have been working the last two years. >> thank you very much, pete. and doctor alice rivlin, we will hear from you. >> thank you, mr. chairman, and thank you, pete.

i'm honored to be the cleanup out in this extraordinary lineup of experienced and dedicated players. who care deeply about the future of the country. i don't think the problems facing us is mysterious or hard to understand. it's crystal clear. america faces two big challenges. we must grow the economy faster and spread the benefits of that growth more widely. and we must put our federal budget on a sustainable track so that the debt is no longer rising faster than the economy can grow. that's not very sophisticated. it's really obvious when you think about it. and getting this debt under control requires a bipartisan compromise on a grand bargain, as they say, to control the future of the debt.

these two challenges must be addressed simultaneously here we can't grow the economy without fiscal sustainability. and we can't have fiscal stability without growth. so we have to do these two things together. failure to address the looming death weakens the confidence of both consumers and savers, and inhibits fast recovery and job growth. but sharp, immediate cuts, as everyone has said in this lineup, sharp, immediate cuts in spending and increases in taxes, that is, going over the fiscal cliff, risks derailing the recovery now. in this fragile economy raising taxes for everyone, and remember that's part of what happens at the end of this calendar year if we do nothing, and making big senseless cuts in both domestic

and defense programs would be really stupid policy. and it would show that our democracy is too broken to function. this fiscal cliff wasn't supposed to happen. it was supposed to be so scary that elected leaders would do something more sensible. so now we've got to do something more sensible. our military colleagues have emphasized that the projected growth of the federal debt is an enormous threat to future american prosperity, and hence to our national security underworld leadership capacity. if we don't take immediate action to stabilize the future growth of debt we are going to be in real trouble. if we continue down this dangerous path, we will be using a growing part of our tax revenue, as the charged earlier showed, just to service the debt. we will be vulnerable to the demands of our foreign creditors. we will risk rapidly rising

interest rates, more rapidly and were shown in the chart actually, that could lead to a prolonged recession. and we could possibly experience a sovereign debt crisis like we are witnessing in europe. we used to say with great conference we are not greece. well, we're not portugal, we are not italy, we are not spain. we are not friends. wait a minute, this is getting to be a very long list of countries that are facing sovereign debt crisis, and we could be there but we don't have to be. the simpson-bowles commission and the domenici-rivlin task force, i got to serve on both of them, proved that republicans and democrats can engage in serious and civil dialogue about how to get the debt under control. even people currently serving in government, and most of the